KRBL- The King of Basmati rice

Sharing my notes on KRBL

Negatives

1. Brand – India Gate cannot be compared to FMCG brands. It offers 20% margins to retailers which means it cannot be compared with FMCG players.
2. Market Share of Competitor – Dawaat is equally penetrating brand in India. Both companies share roughly equal market share in branded Basmati rice. KRBL is not a clear leader here.
3. Ageing Rice – KRBL talks about aging rice and comparing it with wine. But fact is that India is mass market with price conscious customers, happy to buy cost effective products. This also shows up in krbl numbers for India, where only 10% volume comes from India gate classic , its most valued product.
4. Exports – During last few years, there is always one reason or other for exports not working out in the middle east. It may be distributor issue in Saudi or sanctions in Iran
5. Legal cases by ED in scams – This is well known to all and has been a drag for the stock during last few years.
6. Management Over-optimism – MY read based on management concalls is that management has track record of over commitment and under delivery.
7. Distributers – In middle east which is highest margin geography for KRBL, distributors are very powerful. They command there own brands and ask for exclusive distribution in entire country. KRBL is facing multiple issues to appoint Saudi distributor for retail and HoReCa since last many years.
8. Selling price of branded rice is not independent on ongoing paddy prices for current year espically among price conscious customers.
9. Growth – Pace of growth will not be very fast, as migration of people to branded rice is gradual and takes time. CAGR of 8% probably is optimistic.
10. In inflationary environment, Indian cost conscious customers, trade down. Basmati is not a mass market product in that sense.

Positives

1. Negligible debt / Strong balance sheet in capital intensive industry, that needs inventory built up during 6 months in a year is a feet in itself
2. Buyback (350 Cr) during depressed stock price.
3. Long term trend – Migration to branded rice is a long term trend in India that will be exploited in this industry by only two players.
4. Adjacencies – Plans to grow by tapping adjacencies like regional branded rice, and investing in the same.
5. Customer stickiness to brands, once they start using it, they dont shift to other brands easily.
6. Focused on Margins – Runs operations focusing on margins, not on volumes.
7. Branded Exports is more profitable than domestic business but unpredictable. KRBL does have grip here but it is not able to perform during last few years.
8. Threat from FMCG players – No other FMCG company able to crack branded rice industry. Everyone has tried their hands and moved on.
9. Paddy buying – Cash rich balance sheet allows KRBL to buy paddy at opportune price with minimal debt.
10. Processing plant – KRBL has Largest rice processing plant in the world currently running at 50% capacity. Economies of scale will kick in at higher capacity. Difficult for anyone to compete on this parameter.
11. Unity, Horeca brand, for biryani scaled up very well, which now commands 750 Cr revenue.
12. Pricing power – Though perceived as commodity, KRBL does have some pricing power
13. FSSAI & GST – Introduction of FSSAI standards for basmati and introduction of GST on non branded basmati, are positive for KRBL in long run.
14. Advertising costs as a percent of sales is miniscule, its difficult for new player to compete without burning money.
15. Competitor – LT foods looks to ME as low margin (EBITDA 9% vs KRBL 18%) and debt laden company. Its competition with KRBL is in India. KRBL commands 35% of its revenues from Middle east where LT Foods has negligible presence. At the same time LT foods generates 35% of its revenues from USA (Royal Brand) where KRBL is very weak.

Facts

1. 10% Basmati produced in India is sold by KRBL
2. KRBL holds a ~25% market share in the branded Basmati exports from India and a ~30% share in the branded Basmati sale in the domestic market.
3. India rice consumption is 92 million ton, out if which 2 million ton is basmati consumption

Points to ponder

Growth will command investing in inventory, which means profits will be plowed back in inventory. Generally speaking, inventory is the easiest place to bury all frauds. If investor trust the inventory numbers that company claims, then business produces good ROCE on incremental investments.