Please provide your views on the company as well as the research. I and a friend of mine have taken value investing over the last 5-6 months and this is one of the first reports I have made
LT Foods
LTF, established in 1990, mills, processes and markets rice (largely basmati). The company has established brands such as Daawat, Royal, Devaaya, Rozana, Heritage, and Chef’s Secretz, varying from basic to premium quality, both in the domestic and overseas markets. It has facilities in Haryana, Punjab, and Madhya Pradesh, with combined milling capacity of 106 tonne per hour (tph) and individual capacity of 58 tph
Date of report: | 16-05-2024 | Competitor PE | 11 (KRBL), 9 (Chamanlal) | Sector | Consumer foods |
---|---|---|---|---|---|
CMP: | 229 | Current PE | 13.9 | No of Years | 34 |
Market Cap: | 7936 | Highest PE | 20.8 (2018) | Key Products | Basmati Rice |
ROCE / ROE | 17% / 17% | Lowest PE | 2 (2012) | Key Competitor | KRBL, C Sethia, Sarveshwar, GRM |
Business Model and Industry Analysis
Overview:
Company produces Basmati and other speciality rice (Contributing 81% of FY23 sales). They have 2 more segments, viz. Organic foods and ingredient (11% of FY23) and Ready to heat segment (2%)
Core business is working capital intensive (220-230 days is normal working capital), as rice must be purchased and aged for 1-2 years before sales. It also exposes company to price risk since rice purchased in up-cycle might be sold in down-cycle. Company appears to have managed both the risks well over time, given margin consistency and expansion
New business segments are in line with company’s current strengths and weaknesses. They use existing distribution network and cash flows to build the brand while removing cyclicity of paddy prices with branded products. Further, with increasing trend of health-conscious eating and ready to heat/cook foods with both partners working, the two segments can get good growth according to us.
Industry Growth:
India produced ~134 MnT rice in 22-23, of which 9.5 MnT was Basmati rice. 4.6 MnT Basmati was exported. Indian Basmati exports have grown by 7% over last 10 years. Iran, Iraq, UAE, Yemen and US are the top 5 consumers of Indian rice. Pakistan is the only other Basmati producing country (Owing to GI protection)
Domestic Basmati rice market is expected to grow at 1% CAGR over next 5 years, while international at 2.7%. Currently, 40% Indian market consumes Basmati (19% consumes packaged Basmati rice)
Basmati rice prices are not growing linearly, with all value growth coming from volume
Indian Basmati Export Market
Year | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
INR/Kg | 74 | 70 | 65 | 67 | 83 |
Exports (MnT) | 4.4 | 4.5 | 4.6 | 3.9 | 4.6 |
Value (INR Cr) | 32671 | 31185 | 30095 | 26452 | 37840 |
Capacity Utilisation:
The company has 14 facilities in India, USA, Uganda and Netherlands engaged in rice production (5), rice packaging (6), Organic foods production (2) and Ready-to-heat products (1). Its capacity utilization for FY23: 80%; FY22: 65.3%; FY21: 65.1%. Utilization is expected to go up in FY24 for rice products, given consistent increase in topline despite volatile prices. Organic facility will show drop in utilization in FY24 due to ADD in US
Opportunities:
Company is expected to grow Organic products segment (Currently contributing 11% to sales) and ready to heat segment. Both segments appear to be in correct direction, and we will monitor their execution. Further, they have mentioned no capacity expansion plans currently, and strengthening only distribution and brand in FY23 reports as well as con-calls. It seems prudent given 80% cap utilization currently
Risk:
- Policy risk – India banned non-basmati rice exports (15% of total revenue). Similarly, US also imposed ADD on soya products from India. While ban didn’t impact the sales much, and ADD was mitigated with a facility in Uganda, company is still exposed to policy risk
- Geopolitical risk – Middle East is the largest market of Basmati rice globally. Currently, it contributes 5% of total sales but the company has future expansion plans in the region, which will be impacted owing to the ongoing wars. Also, increased freight costs have impacted profitability (Given India and Pak are the only Basmati rice producers, this impacts all players)
- Business model risk – Bulk of RM are commodities (Melamine, phenol, ethanol, kraft paper, coal, acrylic). They also carry significant rice inventory (200-220 days) and hence are exposed to rice price cycles. Concerning pt is somehow they have managed to maintain 10-12% OPM over 10-12 years. KRBL, C Setia have both shown OPM fluctuations, which is expected in agro-product company where both RM and Sales are commodity prices, and 1-2 year inventory holding period is also present
- Exchange rate risk – Since company is export oriented with bulk of paddy procured from India, currently it is not exposed to significant forex risk. However, company hedges its open exposures using derivatives
Future Expansion:
No major capacity expansion plans currently. In terms of margin expansion, target is to expand EBITDA% by 1.5% over the next 5 years
Competion:
KRBL is the biggest domestic player, followed by LT Foods. KRBL competes only in Basmati rice. Chamanlal Setia, Sarveshwar foods and GRM Overseas are other major competitors. LT Foods enjoys dominant position against all of them in exports, and it is catching up in domestic as well. Given Basmati industry’s domestic and global growth rates, it is clear LTF is capturing market share
Basmati and other rice products (Core operating segment)
Growth Rate | Particulars | FY23 | FY22 | FY21 | FY20 | FY19 |
---|---|---|---|---|---|---|
18% | LTF - Domestic | 1829 | 1442 | 1143 | 986 | 947 |
16% | LTF - International | 3812 | 2841 | 2740 | 2322 | 2103 |
17% | LTF Total | 5641 | 4283 | 3883 | 3308 | 3050 |
12% | KRBL - Domestic | 3335 | 2647 | 1992 | 2285 | 2142 |
1% | KRBL - International | 1931 | 1451 | 1896 | 2084 | 1843 |
7% | KRBL Total | 5266 | 4098 | 3888 | 4369 | 3985 |
Management:
- Management is clear and genuine on communication. Further, their acquisitions are all on point, and fit well in overall story.
- Positives: Salary in line with profits, no anti-minority shareholder decisions, RPT (LTF has <1% of sales and purchases from RPT), resignations, family and succession planning, excessive salaries and other extravagant spends, civil/criminal cases, fraud/scam involvement, royalty/brand fees/other means to defraud minority holders, complex business models, unnecessarily complex/flowery language in communications, large number of subsidiaries with no operating presence (Company has large number of subsidiaries (20+), however given span of their business, it might be possible that most of them are operating
- Concerning points: Constant margin maintained, despite no rice price hedges and no explanation. No trend matching between KRBL and LT Foods’ OPM
Institutional Investor:
FII and DII continue to hold 18% (Including 9% of Saudi Arabian quasi-govt investment)
Historical Data and Financials
Profit N Loss Account:
- Sales have historically grown at 12% over last 10 years and at 19% over the last 3 years
- Margins are constant b/w 10-12%
- Ready-to-heat is currently making loss and is expected to grow profitable with increased utilization
Balance Sheet:
- LTF has been consistently reducing debt for the last 5 years. Their current liabilities were upgraded by CARE recently; Interest coverage 10
- Inventories & receivables are constant. Inventory turnover is improving slowly from 2.0 to 2.6 over last 8 years
Cash Flow:
- CFO/PAT good (140%) over long term, although given such huge WC requirement, I am not sure how they are managing this
- Company has managed to convert 66% of its PAT into FCF post capex over last 10 years
Valuation and future potential:
Particular | Current | 52W High | 52W Low | Historical High | Historical Low | Industry Median |
---|---|---|---|---|---|---|
Price | 216 | 235 (12/2023) | 106 (5/2023) | 235 (12/2023) | 2.8 (2009) | - |
PE Ratio | 13 | 15.1 | 10 | 15.1 | - | 12 |
EPS | 16.5 | 15.2 | 12.3 | 15.2 | - | - |
Price/Book | 2.4 | 2.6 | 1.7 | 2.6 | - | 1.6 |
EV/EBITDA | 8.4 | 9.5 | 7.1 | 9.5 | - | 7 |
ROCE | 17% | - | - | - | - | 19% |
Industry median is calculated from LT Foods, KRBL, Chamanlal Setia and Sarveshwar Foods
Valuation:
- Company is growing revenue (19% CAGR over last 3 years) and profits (29% CAGR over last 3 years) at good rate, however, it is still valued at a PE of 14, which signifies good scope of re-rating
- Risk for this band being company might revert to mean-valuation of 10 (Last 3 years) which presents a downside of 25-30%
- In a scenario where company does fall to PE <= 10, expected EPS growth of > 20% will prevent significant downside
- In my opinion, company appears to be valued so for being in RM industry, but given the strong and good quality earnings growth company has delivered and expected to do in future, there is a good scope of re-rating
Future Potential:
- Company is expected to do hit 10.4k Cr revenue by FY26 in an optimistic scenario and 9.8k Cr in base scenario, while gaining 1.5% EBITDA margin (Management goal for next 5 years)
- At current valuation, there is a scope for re-rating as well from PE = 14 to PE of ~ 20-22
Soft factors for consideration:
- Company has good management and has executed capex well in past
- Geographically, it’s operations are concentrated in US and India
- ~85% revenue comes from rice, and company can expect re-rating as FMCG if the other two segments kick in
- Debt reduction is key focus for management. Business is WC intensive however, and is open to commodity price risks since there is ~1.5-2 years gap b/w buying paddy and selling rice
- Company has prudently used inorganic acquisitions to grow (However their cost of acquisition is not public and hence, IRR can’t be commented upon)
- Good part of the growth has come from price growth, and to a lesser extent from volume growth. When basmati and non-basmati rice prices fell down from 2014-2017, company still managed to increase revenue by ~10% CAGR. Given that currently Basmati rice prices are at a peak, there is a chance it can fall down. However, going by past track record, good chances of management able to manage this
Disclaimer: This is a study report, not for any decision making or investment advisory.
Date:16th May 2024
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