LT Foods Initiating Coverage Research Report By Motilal Oswal

A CONSUMER STORY IN THE MAKING

LT Foods Ltd. (LTFL) is one of the leading basmati rice players in India having a strong foothold both in exports (55% of FY17 revenue) & domestic market (45%). Key brands include Daawat (leading brand in India), Royal (#1 brand in USA) and ecoLife (organic food).

With growing global demand for basmati and limited supply, we expect LTFL to witness steady volume growth with improving realizations on back of increased branded business.

We forecast 12.2%/25.7% revenue/adj. PAT CAGR over FY17-20E and an EBITDA margin improvement of 127bps to 12.5%.

We initiate coverage with a BUY rating valuing the stock at 12x FY20E EPS of INR10.4 with target price of INR125.

Domestic consumption to see continued demand growth:

Domestic market remains a key growth driver for the branded basmati rice players like LTFL as the Indian consumers move towards branded foods on the back of rising affluence.

The shift from unbranded basmati (~73% in FY17) to branded is expected to continue due to better quality. We expect LTFL to be one of the key beneficiaries of this changing industry dynamics owing to its strong brand positioning, diverse product portfolio catering varied price points and wide distribution network.

Global expansion – Augurs well to tap lucrative markets:

Recently LTFL set up a rice processing plant of 60,000 MT in Rotterdam (Netherlands) to tap the European market. In FY17, it acquired Gold Seal Indus Valley and Rozana brand from HUL in order to strengthen its footprint in lucrative Middle East.

Owing to healthy demand growth across regions viz. USA (strong brand recall), Europe (leadership position and new plant commercialization), Middle East (entry via brand acquisitions from HUL), we expect healthy revenue growth in exports.

Organic food and value added products- untapped potential:

LTFL has also diversified into value added products (saute sauces, Rice based snacks in JV with Kameda) and organic foods (brand ecoLife) which are high growth segments for the company. We expect growth to be largely driven by rising health awareness, changing lifestyle and limited competition.

Valuation: LTFL currently trades at 10.9x/8.5x on FY19/20 P/E. LTFL has shown consistent revenue growth and profitability improvement over years on account of rising share of branded business (resulting in stable margins), geographical expansion and product innovation (organic foods, value added products) leading to significant re-rating in its valuation.

Given LTFL’s increased focus on branded basmati rice and organic food business, we believe the company is becoming a strong consumer story in the making.

We initiate coverage with a BUY rating valuing the stock at 12x FY20E EPS with a target price of INR125.