Growth recipe

PENNY WISE

Rice company KRBL should do well given the growth in basmati exports and domestic branded sales, and its thrust on the non-basmati rice segment.

Rice is the staple food which feeds more then half of the world's population. India is one of the largest producers and exporters of basmati rice.

KRBL Ltd, a leading rice player, is expected to benefit from the increased emphasis on exports and better product mix.

Besides, its strategy to enter into value added products and cash in on the growing domestic demand for the packaged food augur well.

From the investment perspective the stock is trading at an attractive price. After the recent sell-off in the equity market, the stock tumbled down to Rs 99.25 and recovered to the current Rs 109.50. The stock is still down by 55 per cent compared to its 52-week high of Rs 243.90.

KRBL has an 11 per cent market share with an export turnover of Rs 387 crore in FY06. With its brands like India Gate, Doon, Bemisal and Lotus, it has generated a strong recall in exports as well as domestic markets.

The company supplies its products in all the traditional basmati markets such as Saudi Arabia, Kuwait, UAE and the US. And its branded products are stocked in some of the known retail chains like Costco, Kroger, Kmart, Wal-Mart and Sam's Club. It has a US FDA approval for its shipment to enter the country.

Export market
The global basmati rice export is dominated by India and Pakistan. India alone produces about 25 per cent of the total rice production of the world and exports 15 per cent of the total global demand.

Being the largest producer and exporter of basmati rice, India has an edge due to its higher quality and lower prices. As the popularity for Indian long grain rice is increasing, KRBL is aggressively eyeing lucrative markets like Africa and South East Asia, and newer markets in Europe.

Beyond basmati
Besides the dominant presence in the basmati market, KRBL is also expanding into the non-basmati segment. The company will use different varieties of rice grown in the south Indian region of the country.

These varieties of rice such as 'Sorna Masuri', a well-known variety grown and used in Andhra Pradesh, Karnataka and in Tamil Nadu, which will be exported to target South Indians living abroad.

The company is targeting exports of over 40,000 tonne from the non-basmati segment and expects higher contribution to its turnover in the coming years.

In FY06, it exported 78,450 tonne of basmati rice at an average realisation of Rs 30 per kg. KRBL will also make its presence in products such as rice flour, rice crackers, puffed rice and ready to cook rice assortments.

Domestic growth
The domestic market promises an equal opportunity. Branded rice sales have taken off in recent years, growing at 15 per cent a year compared with 5 per cent in unbranded rice.

Rising income level, growing preference for packaged and branded food and increasing health and quality consciousness among consumers are the positive factors driving growth in the industry. KRBL has a market share of about 10 per cent in the domestic market for basmati rice.

To give a further fillip to its products and ensure a higher availability, the company has tied up with a number of retail chains and food outlets such as Big Bazaar and Reliance Retail.

Capacity expansion
To meet the growing demand for its products in the domestic and export market, KRBL has acquired a rice mill from Oswal Agro in Dhuri Punjab at a cost of Rs 15.8 crore.

It has further invested a total of Rs 100 crore in the mill including land acquisition, expanding refining capacity and adding railway lines near the plant. The commissioning of new capacity will take its present capacity to 195 tonne per hour (TPH).

The Dhuri facility will also help the company to manufacture different by-products. KRBL has invested in technologies that will reprocess bran and husk (by-products of rice processing) into value-added products for a range of consumer and industrial products such as bran oil.

The bran oil capacity would be used to produce around 42 tonne bran oil per day and its refined oil would carry a price tag of around Rs 85-90 per litre. This along with other products such as furfural, an industrial chemical, is expected to generate revenues of Rs 52 crore in FY08 and Rs 72 crore in FY09.

The Dhuri plant will also generate 10.5 mw of power from husk. KRBL intends to use about 50 per cent of the power for captive consumption while the remaining will be sold to the Punjab Electricity Board at Rs 3.49 per unit.

This will bring an additional revenue of Rs 5-6 crore from the beginning of FY08. Besides, KRBL has wind power generation capacity of 12.5 mw in Maharashtra. This is expected to fetch another Rs 10 crore to the top line of the company.

Overall, the impact of the revenue from power, by-products and increasing sale of packaged food will be seen in the improved margins and profitability of the company. The current margin of 10.63 per cent in the year 2006 is expected to go up 400 basis points by FY09. 
 

ON A BOIL
Company	KRBL	L T  Overseas	REI  Agro	Kohinoor  Foods
Capacity (TPH)	197.0	30.0	49.0	40.0
Net Sales (Rs cr)	724.8	400.8	957.8	539.9
PAT (Rs cr)	32.0	11.3	66.0	20.8
Book Value (Rs)	112.7	84.3	73.6	62.2
Price/Book value (x)	1.0	0.6	2.7	1.1
PBIDT(%)	12.6	8.0	15.7	9.6
RONW (%)	15.9	20.3	32.0	18.3
Mcap/Sales (x)	0.5	0.3	0.7	0.3
CMP (Rs)	107.3	46.2	195.0	68.9
P/E(x)	4.8	10.5	11.2	6.0
TPH: Tonnes per hour

Valuations
KRBL will benefit from continued thrust on exports, strong brand value and diversification into non-basmati segment. It is expected to grow at around 20-25 per cent over the next two years.

However, the net profit growth is expected to be higher at about 40-50 per cent on the back of improved margins. Based on the trailing four quarter EPS of Rs 22.92, the stock is trading at a price earning multiple of 4.77 times and 3 times to its estimated FY08 earnings.

In terms of valuations, KRBL has the lowest price to earning ratio in the industry making it a safer bet.