KRBL- The King of Basmati rice

(aditya yadav) #1


KRBL, is Indiaâs leading exporter of branded basmati rice and owner of the largest rice milling capacities, has consistently outperformed peers in past few years. A strong brand and an efficient wcap mgmt have enabled KRBL to tap growth in Basmati rice industry.

Domestically also, the demand for basmati rice has been growing at healthy rates ,12-15% CAGR for past ten years and the trend is expected to continue with increasing disposable income .


Both the basmati and non-basmati sectors present the organised players with tremendous opportunities since organised players have a low presence in both the segments. The former is a high margin export oriented segment while the latter provides the alternative of value-added products derived while processing. The fragmented players lack the technology and expertise in procurement process required for these high end activities. Hence, the large players have the scope to take up the advantage and capture the market.

There are more than 139,000 rice processing mills in India processing about 132 mn tonnes of paddy. Out of this, a little over 25% (35,000) are classified as modernised rice mills.

**Effective procurement: **Quality is the most important characteristic for maintaining brand recognition in the market. This requires effective procurement process for paddy. Large players can procure the bulk volume through upfront payments to farmers and middlemen

-product/ service Usage (essential or lifestyle)

Lifestyle product , better taste , prices vary widely depending on brands , starting form Rs 80-90/kg

-Product/Service type (brand or commodity )

The market for basmati rice is moving towards a more organised one with consumer preference increasing towards branded choices

**-**In last two years in India , production of paddy(basmati variety) has not shown growth pushing up prices by north of 20% and yet the demand has been solid.

**Understanding the supply **

-Export of Basmati in 2013 4.02 Mn tonnes ( volume )

4.5 Bn USD ( value)

)- Company has 30% share in the organized domestic market and 25% share in the branded basmati rice exports market

Raw Material

Paddy is the main raw material for the company and is the main component of costs for the company(`80% of sales)

The prices of paddy vary season to season based on production which is a function of weather, area under cultivation , plantation techniques, hybrid varieties etc

Industry Structure and competitors

Basmati exports industry has 5-6 big players enjoying majority of the sales. And, major competitors are KRBL, REI agro, Kohinoor, LT overseas


The company enjoys a huge scale advantage in terms of procurement, distribution, advertising and R&D.

KRBL ties up directly with the farmers for procurement of paddy, providing them technical expertise leading to better yields , reduction in risk by providing good value without involving intermediaries .

Contract farming forms 80% of the raw material purchase of the company. And ensures timely availability and quality of grains for the company .

The company has 2,40,000 acres under contract farming.

Pan-India distribution network with presence at 6,40,000 retail outlets across 28 states

KRBL has highest milling capacity of 195 MT/hr which is significantly ahead of nearest peer REI agro (118 MT/hr).


Company took a positive step in converting long-term debt into WC loans since this amount is mostly utilized for stocking of grains(Basmati rice needs to be stored for a year atleast) and also the company is slowly deleveraging itself with D/E ratio going down from 1.4 in 2011 to 1.0 in 2014

-Tax rate [email protected] % to remain stable

)- Ratio of export sales to domestic is 1:1. Domestic market has shown higher growth in recent past

)- Margin triggers going forward(sales mix, op . leverage ,economies of scale,cost efficiencies ). The company is expecting to raise capacity utilization levels at Dhuri plant from 40% to 65%

)- Capital efficiency triggers going forward (reducing WC requirements etc). the company has shown huge improvement in working capital days from 389 in 2008 to 277 in 2013.

One big positive with KRBL, which also shows companyâs brand strength is advances it receives from customers. (2013 figure : 176 cr)

)- Company doesnât require any major capex going forward 2-3 years as it already has enough capacity on board.



The company took a wise decision of buying back its own shares owing to depressed prices of companyâ stock and in twelve months leading to Feb 2014 , bought back 77,22,048 equity shares

at an average price of Rs 23.58 per share

-Promoter holding stands at 58.65% after buyback

)- Promoter compensation(as a % of net Profits ) is 7.5%, which is on the higher side .


As on 09 May 2014 , the companyâs market cap is 1464 crs with Last year FY2013-14 profits of 255.11 crs ,quoting at a p/e of 5.7

If the company is able to increase profits moderately at 20-25% CAGR over next 3-4 years and with the help of a slight p/e expansion, we can have a good upside in this stock


)- Geo-political Risk

The middle east is the biggest importer for Indian Basmati rice and accounts for almost 35% of KRBL revenues. KRBL mostly exports to Saudi Arabia ,UAE, Iraq Kuwait . Any political turmoil in this region may adversely impact exports,

We had already seen in 2011-12 ,UN imposed sanction on Iran and it adversely affected company sales and profits showed a negative growth of ~30%.Since then, company is consciously trying to reduce exposure to Iran.

)- Movement in foreign currency

)- Fluctuations in raw material prices

)- Regulatory changes


Q. They say they command a significant price premium over other brands, but why is it not leading to superior return on capital ?

The coming times should be better for the company as now many things seem to be falling in place.

-better financial structure


-better capacity utilization

-sales growth

-efficient mgmt. of Wcap

It should show improvement in ROIC in coming times.

Q. do they have inventory risk, since rice needs to be stored for a year atleast to distill its quality ? does food inflation over a longer term mitigate this risk ?

Q. which are leading consumption geographies,demand drivers ,demand growth patterns ?

)- domestic demand

)- export demand mainly from middle east

-EU(mainly UK), China are opening up as new markets for Basmati exporters

Q. The company had negative growth in profits and margin contraction in 2011-12. Why ?

2011-12 was a bad year for the company and basmati export industry as a whole.

UN imposed sanctions on Iran, Dollar payments couldnât be made and later a rupee payment mechanism was established.

Q. Company follows the strategy of serving all price segments from rs 30/kg to rs 150/kg. Why all segments ?

Since penetration of organized sector is low in non âbasmati segments and also seeing it as a scalable, company is serving lower-priced segments also. Although, non-basmati rice are a very small proportion of total sales of the company.

Q. Is it a structurally bad business by nature, since it has huge WC requirements (Basmati needs to be stored for a year).

Company has shown in recent past that better financial management and efficient capacity utilization can bring improvement in ROIC.

Q. why companies like ITC, HUL, etc who are betting big on food would not be interested in this space. And if they are, then does KRBL have the firepower to fight them.

yes, valid point and since ITC already has reach and scale , it wont take them long to cause damage .not much aware about HUL in this space

Q. Should it get auditing done by a more reputed firm, present auditors; Vinod Kumar bindal & co.

Diclosure : Initiated position at 59-60 levels

I would love to have feedback from you guys and spare the editing part(i am new to this site).

(Akshay Jain) #2

Hi Aditya

Good Write-up…To me this stock can have a significant upside if it turns from a commodity player to a branded food player, simply because the way these 2 businesses are valued completely different. Along with that turn in nature of business things like ROE, Margins, Pricing power etc automatically improves…The best thing about this business is that there is a geographical competitive advantage, which ensures no Global competition (besides Pakistan)…Being the largest player, if the economics of the category improves, it will be the biggest beneficiary…Also as Indians get richer, they would want better quality of food which should naturally give Basmati consumption a boost

Now coming to some challenges

1). This entire thing of best quality end product, ageing the paddy etc etc which the company keeps talking about - is the consumer aware about this and its benefits, besides all players would claim the same benefits. Also doing some groundwork, it seems people are not very choosy of their brand of rice. Only thing they are choosy about is wanting basmati rice. And they often just go with what is available in the nearby kirana store. Kohinoor, daawat, indiagate, lal mahal etc mean little difference in their minds currently (obviously this can change in the future)

2). Are there examples of food staples converting to brands? In my mind it is the end product made by using these food ingredients that is sold as brands

3). Large portion of its business is exports - this can be a double edged sword - positive being that there will always be demand for basmati rice. The negative is that any marketing effort the company puts in to create some differentiation has to be communicated in every market it is present in. How will the company do that??

I think when the company bought back the stock, it was really cheap. But now I see a further re-rating if the branding initiatives are successful. Besides things like dependence on monsoon, paddy prices, debt requirements cause of ageing etc will always be a concern

(aditya yadav) #3




ITC or HUL won’t come into this, as Procuring paddy, grading & processing would itself require a great expertise. As a product can’t charge premium for Brand while selling rice.

There’s no a really top brand in non-basmati rice although allover India it is consumed. Bcoz non-Basmati is mostly a local play & the industry is majorly govt controlled, yearly govt deciding how much rice had to be supplied to FCI mandatorly. Each region will have it’s own local variety of rice which is preferred.

(aditya yadav) #5

Hi Akshay,

sorry for the late reply…had been travelling…

Thanks for your detailed response.

1.Basmati rice volumes domestically have started picking up from last 5-7 years . As the adaptation increases , people tend to appreciate finer qualities.

A little fact that shows company’s branding efforts are the price premium it commands in domestic as well as export markets. Expect the premium to be in 10-15% from average industry realisations.

P.s More scuttlebutt is required on this and i would urge you as well as others to participate.

The company has huge scale advantage over its peers in terms of distribution and advertising which creates differentiation over time.

2). I think Basmati rice should not be considered as a staple. you would hardly find anyone who have completely replaced normal varieties of rice in their staple diet with basmati.

3). The company does promotion in export markets by providing various schemes to distributors .

some other points you mentioned :

Dependence on monsoon: KRBL does almost 80% of its procurement through contract farming. the company said in its recent concall that pusa1121 and pusa1509 varieties require less water and hence through efficient farm managemnt ,not much dependency on raingods. Again, some scuttlebutt and first hand conversation with farmers would provide better insight on this.

Debt requirements:Debt is employed in inventory which can be easily converted to cash as demand stays strong. You should look at the company’s balance sheet from october perspective , when it shows significant amount of cash on its books

(SHON) #6


I understand from your analysis that REI Agro is the on the second position compared to KRBL, but this vast difference in the price? Is it only because of the debt REI has on its balance sheet? Any Idea about its product quality.

Below i have uploaded the comparios of various parameters between REI, KRBL, LT & Kohinoor.

If debt is the only issue and all other industry level analysis which is true for KRBL can also be applied to REI, then even REI can be called attractive at current price point.

I am totally new to this, just try to learn stock analysis…

Let me know your thoughts…

KRBL-Comparison.xlsx (11.8 KB)

(Nelson) #7

Very nice comparison. Can anybody Explain why KoHFOO is valued so highly in spite of having very weak numbers.

(Sagar Saxena) #8

KRBL came out with an excellent set of numbers.The management has said that their focus is not so much on increasing Topline,but more so,on the Margin front.They are confident of maintaining the current EBITDA margins.The demand also,continues to be strong…KRBL has booked 1200 T of ‘Bemisaal’ rice for Sale on the 15th of Aug.,to Big Bazaar.They expect realisations to go down in Q4Fy15/Fy16.This will be mitigated by higher Volume/Sales.
The realisations for Q1 were up more than 30% to Rs. 55,279/Tonne.India Gate Classic is the World’s most expensive brand & the quality is unparalleled.They hold 30% market share in the Branded Rice segment in the Indian markets.The targets for FY15 are: 375,000 T for Domestic mkts.,160,000 T for Exports & a topline of Rs. 3500cr.Middle East forms the major chunk of Export markets.

All in all,given their size,the company is still available quiet cheap.I am quiet confident on the company’s prospects going forward.Experienced management gives the edge.

Disc. Invested.

(Akshay Jain) #9

Why has the cash flow from operations not grown over all these years? Also debt levels (primarily due to ageing of rice) seem very high (debt/equity 1:1). Will these come down in the future?? Branded FMCG player’s usually have great balance sheets

(Sagar Saxena) #10

What I could understand was,that cash conversion cycles are a bit high in the Rice biz.KRBL takes loans to build up inventory,when Paddy prices are low.So that,they can enhance low cost inventory.KRBL usually sells ‘old rice’,i.e.,since new rice isn’t edible,they sell it after 18 months.Thus,the quality is superior to peers.
Akshay,I feel these things are well known in the markets.The Return ratios are looking quiet decent now,but skepticism continues.KRBL has the best in class EBITDA margins & for its huge size & reach alone,it should trade at something like 10x TTM earnings.The performance should continue through the coming quarters as well.The div. payouts are also quiet decent.

(Akshay Jain) #11

Sagar, even if the cash conversion cycle is longer, should it not reflect over the longer term?? Like take the example of the lat 4 years, If you were to add up the numbers, it would appear that on a net basis the company has not received any cash. Here are the consolidated OCF numbers (as they appear on Mar 11 = -186cr, Mar12 = 145cr, Mar13 = 189cr, Mar14 = -158 cr . So the net is a negative number…What does this mean?

I get the point on debt. In fact, in their latest conf call, the company mentions exactly what you say that they borrow money to stock up when prices seem favorable. KRBL seems to have a good moat and more branded product that gets sold, better will be the margins. But why does their advantage not reflect in the operating cash history??

(Sagar Saxena) #12

You are quiet right.I am also unable to come to terms with the -ve OCF.Interestingly,the dividends have been on the rise.What do you say,we write in to the ‘Investor Relations’ of KRBL? Q2 concall is quiet a few months away.

(aditya yadav) #13

Hi Akshay and Sagar, just putting in my perspective …

A business requires two kinds of investments FA + WC … This one is a very working cap intensive business( you buy your inventory requirements for whole year in almost one shot , during oct-nov when crop arrives),WCap is almost 70% of total assets …Now, for the business to grow, you require growth capex in these two areas and my understanding says,that during years of high basmati prices usually a lot of cash goes into inventory causing negative OCF…

(shiva) #14

Basmati export is soaring. Management is conservative, customer friendly. The product quality is excellent.

Was available less than book value few months back. Now stock price has gone up considerably.

But how to value this company? can we put a value based on kohinoor and bush food stake sale few years back? should get better valuation than kohinoor.

looks like a long term story.

Please see the link below.

(disc: invested)

(Nikhil Jain) #15

Apologise to put a dampener, but basmati exports are going to take a hit this quarter at least with Iran hiking duty on import to 40% from 22%. Iran counts for more than third of Indian basmati exports. So you all might want to reconsider, if you have high expectations from exports.

Disc : not invested. keeping an eye on this sector but not this particular stock

(Sagar Saxena) #17

Nikhil, Hardly 3% of KRBL’s revenues come from Iran.Impact will be next to nil.Company has clarified this a lot of times in the past too. Regarding negative OCF,KRBL has a few other businesses too: wind being one of them(highly capital intemsive) Thus,it might be putting a pressure at the net level.

(Rohit Balakrishnan) #18

Hi All,

I have been reading on this company, over the last few days and the growth prospects look exciting. I am unable to understand couple of things on the capital allocation/cash flow.

The company generated OCF of 201 Cr over the last 10 years; It has generated an FCF of -595 Crores in the same time. Now I understand that the business is growing and hence may not be be able to generate FCF, which is fine. But if we look a bit closely, then a large portion of this capex it seems has gone to the energy business, which the company got into in FY06.Majority of capex that the company has put over the last 3-4 years is in the power business. Segmental assets in the power biz have grown from 39 Cr in FY07 to 321 Cr in FY14; this is very low ROCE business less than 5%.

Given the fact that rice in itself is such a capital intensive business, how should one view management’s act of getting into an equally capital intensive business.

(Rupesh Tatiya) #19

I had listened to management con call a while ago. Updating the summary today.

  • Paddy Procurement
    Last year prices were 39k-45k per tonne and this year it is 22k-32k per tonne for rest of the industry.
    We have methodical program and procurement is happening at 25k per tonne.
    This year’s paddy prices will be decided based on crop details in Oct 15.

  • Paraboiled Rice Segment

Last year prices went down from 1500$ to 1000$ in international markets. Our prices were reduced only by 10%. We might have to reduce prices this quarter more to respond to market price decline.

  • Other Expenses

Other expenses went up from 160 Cr to 215 Cr mainly on account of 30 Cr as advertising expense.

  • Other Income (Operating?)

We have fully owned subsidiary in Dubai which earned 45 Cr and we account for it only on EOY. They mainly trade non-basmati rice and doing pretty well. This income will continue to show up going forward.

  • Solar Business

Loan of 21 Cr, entire term loan is for solar segment. We are going to bid for Solar project in MP (diworsification?)

  • FY16 Guidance

Revenue: 20-24%
EBIDTA: 20-24%
3800-3900 Cr Topline forecast (Entire sales into branded, non-branded margins are 2-3% and company is not interested in them)
Good Q1FY16 expected
Fast growth in domestic market, exports growth would be flat.

Views Invited.

Disc: Invested, already a 2-bagger for me, looking to hold further and add on declines

(Rupesh Tatiya) #20

Finally, after two weeks - I am ready with the first version of KRBL Business Quality Sheet. Please find it below. I request senior members and everybody else to help me improve it.

Some parts in the numbers section is missing and I intend to update it when screener is up (It is down right now).

I would also like to thank @Donald for encouraging me to do my first BQ sheet. I have also tried to capture the data present in this thread and thanks for that as well.


KRBL-BQ.xlsx (43.0 KB)

(Rupesh Tatiya) #21

Just ran the sheet by one of my friend who is an Equity Analyst. His comments are in yellow.
I’ll keep them for now before we consolidate/summarize.

I have also added some of the missing calculations and EPA/Sales is negative and RoIC numbers are high single digits. I’m not very confident if these numbers are correct (I have used one of the older sheets provided by @Donald on APL). The calculation sheet is also attached. If someone can cross verify them, I will really be grateful.

I don’t really understand the full meaning of EPA numbers. I’ll go through the threads at VP to understand it fully.

Till then, Views invited.


KRBL Ltd-2.xlsx (38.2 KB)

KRBL-BQ.xlsx (44.6 KB)