KRBL- The King of Basmati rice

(1.5cr) #183

I personally feel that ITC arent going to focus on basmati rice. They will launch both basmati and non-basmati. Along with RTE rice items. This is going to be one of the many verticals that they cater to. In fact they may focus of non-basmati rice because it has a larger market. The mgmt. will leverage their distribution and keep launching new products to strengthen their fmcg business. If ITC really wanted to conquer the basmati rice business, they could just float a mega aquisition offer for krbl haha! Patanjali also sell rice and that does not affect krbl primarily due to their brand and high quality. Basmati is a premium product, and customers want the best. There is some aspirational value add as well I feel.
Nonetheless this is definately not good news for krbl and daawat…
My only worry with Krbl is can the margins sustain at 20%.

(rajput.delhi) #184

When ITC launched Aashirwaad atta there wasn’t any major brand…and atta didn’t hv any variants like in rice…so it was relatively easy for itc to build a brand in a relatively vacant space (shakti bhog, annapurna and pillsbury offered a very weak competition)…but ITC has not been able to do that in many other space e.g. juices…B Natural is having a tough time taking market share away from Real and Tropicana as these are well established and deeply entrenched brands esp in the minds of people…so ITC had to come up with a unique proposition which was ‘no use of concentrates’ and ‘unique flavours’ like Jamun, Kinnow, etc apart from usual ones like apple, etc and still it is struggling inspite of ITC’s huge cash power…therefore, building B Natural as a brand in juices has been a far more difficult journey than building Aashirwaad brand in atta. I would like to believe that in basmati rice ITC will face even bigger challenges than they are facing in juices…even though they will have the benefit of brand extn using already established brand equity of Aashirwaad but to make people connect with it will be far tougher than in non-basmati…I also feel ITC’s entry into basmati rice will make more investors see KRBL as an fmcg play much sooner than they wud hv seen without ITC…today no one can say Aashirwad atta is a commodity…it is a brand like colgate…so krbl is likely to be valued on same parameters as any other fmcg player with stability/visibility of cashflows…as more investors will be forced to study kbrl closely…and it is likely that no MF holding also will soon be a thing of past.
All the same, ITC is an institution in building fmcg brands and few can beat them in this game…but there have been smart players like Britannia who after ITC’s entry became smarter and did far better after ITC’s entry into biscuits…and the same could happen to KRBL…ITC’s threat could very likely regalvanise krbl mgmt into strengthening not just the brand but the overall business resulting in expanding the moat further.
ITC’s free money from cigarettes can literally kill businesses like eComm space is killing traditional retail…but its appears unlikely in basmati rice market due to the unique characteristics of basmati rice industry…also it took aashirwaad brand 13 yrs to cross 1k cr sales in a completely unorganised market…so over a much longer time ITC can replicate most of what krbl has achieved like build a brand, supply chain, warehousing, ageing of rice, hire experienced professionals, etc…but it will take a far bigger learning curve for them to replicate the 120 yrs of experience which krbl promoters have.

It appears to be a bad move by ITC…as they already have many struggling or nascent brands…it should concentrate more there than get into tougher categories…it seems to be suffering from the institutional imperative that affects most large diversified conglomerates…and from an investors standpoint it appears to be going from a concentrated to a confused mindset…

Invested in both, much more in ITC :slight_smile: and constantly re-evaluating :slight_smile:

(aditya yadav) #185

Hi, great feedback from your side.

Apart from Biriyani, which varieties of rice are preferred in southern india homes in middle income or higher income population group, say for daily use purpose, special occasions etc. I have heard sona masoori is also quite popular

Where do you see India Gate and other branded basmati sellers fitting in, in your part of the country.


(Parag) #186

I think ITC has an impressive capital allocation history (As per Latest AR total shareholder returns since 1996 is 23.6% CAGR). Although one can argue with their investments in Paper/Hotel/FMCG, Cigarette profit is providing ITC with a significant amount of cash to deploy in different segments, and they are venturing into different areas like Atta, Juices, Rice to name few.

On FMCG front, in my view, they are not keen to report a profit. Cigarettes have lit up their PAT, and it looks like it is not likely to change anytime soon. They are experimenting with various ideas as you have mentioned above. In some, they will succeed and other they may not make many inroads. But one thing, which looks highly probable to me, is that they will keep experimenting.

A competitor who is agile, experimental with deep pocket is most threatening as Amazon is (just an analogy).

In rice, Basmati is the profitable segment, so I think ITC will push towards more basmati brands. How much inroads it makes is to seen.

Does anyone know if ITC has a habit of introducing predatory pricing?

Disc- No investment in ITC. Invested in KRBL.

(1.5cr) #187

They will have to compete with not only daawat but chamanlal as well, let alone India gate. In the export market they will struggle against daawat and krbl. They may focus of RTE as that is a high margin business which has exisiting synergies with aashirvad. Basmati may not be their focus as I’m sure they full understand that it will be difficult to compete against krbl and lt foods.

(Parag) #188

Competition is not new to ITC. They are fighting with pretty much all FMCG players on their own turf- HUL, Britannia, Nestle etc…

The (good) side effect of this may bring best in KRBL management (and hopefully prevent further diversification) in addition to market looking to KRBL through the lenses of FMCG player as highlighted by @rajput_delhi.

One of the differentiating factors for KRBL is its direct relationship with a farmer. ITC also has a deeper relationship with farmers through eChoupals. In fact, they may already be dealing with farmers who produce basmati in raw form.

So the battle may play on two front. The cost of paddy may increase as more and more people would buy in the supply and on the sales side, ITC may introduce basmati rice at a lower price.

(rajput.delhi) #189

Thank your very much for sharing the other perspective…

I wish I could see ITC as another Amazon :slight_smile:…but I can’t…there are few similarities…very few…and the most important reason is missing…the unreasonable man…:slight_smile:

Also ITC doesn’t do predatory pricing at all…they mostly price their products higher than other competitors…and then give offers :slight_smile: in this they are smart :slight_smile: …u can call it camouflaged pricing…their MRP will be highest but post offer price to you will be the lowest in categories like juices…that’s why they wud sell the most around Diwali…as people buy more to give than to consume :slight_smile: So a gift pack of ITC will be 15-20% cheaper than Real or Tropicana.

As they mostly start with premium positioning they have to price their products higher like in Wills garments or Chocolates and if they succeed in branding the premium pricing helps…otherwise they start giving offers like in Wills does :slight_smile:

So yes they can launch basmati purely from positioning standpoint but as a shareholder I hope they don’t and maybe focus more on non-basmati.

I am betting that KRBL will become better like Britannia after ITC’s entry but whether ITC will be successful or even be able to carve out a niche successfully like they did in premium biscuits…i am not sure.

And in the institutional imperatives i was talking about - experimenting is one. A conglomerate will keep trying…even if they are losing money, their egos, image will prevent them from rational thinking…try making a list of the businesses they are in…and you will know…the next cash guzzler will be hospitals :slight_smile:

And I have learnt the hard way how not to use outliers (Amazon, FB, Apple, etc) for most comparisons…it is usually just comforting but not practical. And that’s when points like capacity to suffer :slight_smile: get used in wrong contexts taking us away from fundamentals of investing and valuations…like building businesses on investor’s money like Flipkart, Amazon, Jio…success of these businesses is predicated on Winner takes all and on decimating competition…they don’t experiment…and this is certainly not capacity to suffer…it is simply who’s got more cash and who can survive longer…they just throw more cash than any one else can…it is sheer ruthless bullying…if I saw any sign of ITC doing that in rice or anywhere else I would be willing to compare…but sadly their experiments are mostly based on many institutional compulsions and on chasing a target of 1 lac cr they hv set for themselves…i wish they had set a target for profitability too with some milestones thrown in :slight_smile: but thats tough and they won’t do that.

So this experimenting will hurt them, hurt their investors and hurt ‘some weak’ competitors. For now, from KRBL’s standpoint, I am thankful that ITC’s entry is not like Jio…far from it…as they wud be committing far fewer resources to rice…and that they are into so many businesses which will keep diverting their attention…and that they don’t hv access to huge investors’ money like Amazon.


(rupaniamit) #191

I heard in Q3FY16 conf call recording where management mentioned that Basmati Rice business requires a specialized process for having a quality final product. It’s difficult to maintain product consistency. Their years of experience is making huge difference. It made me curious to dig deeper when I heard from them that HLL, ITC, Pepsi, Cargill, etc tried their hands in basmati rice business but failed and exited.

Below sharing few interesting links that I found while digging deeper for KRBL:

  1. Multinationals like Cargill, Olam, Unilever, PepsiCo, ITC tried their hands years ago and decided to quit. Click here.

  2. Hindustan Unilever selling rice exports business to LT Foods in 2016. Click here.

  3. Marico exited branded rice segment in 2013. Click here.


Disc: invested in KRBL

(rajput.delhi) #192

Thanks for sharing.

This quote does warrant attention though:

Abneesh Roy, Associate Director, Edelweiss Securities, added, “Indian consumers will not pay a premium for rice as it is still perceived to be a commodity."

This one frivolous statement cud have costed someone a 20-bagger if he, based on his opinion then, decided to forego investment in KRBL. Is it called Authority Bias :slight_smile:

This is good learning as we do fall pray to such statements often!!

The others I remember are from the great Buffet on airlines and technology before he invested in airlines and IBM and then Apple.

PS: For all we know, Edelweiss could well have later come out with a buy reco on KRBL stating basmati rice is no longer a commodity as there is now a clear evidence of customers paying premium :slight_smile:


(rupaniamit) #193

@rajput_delhi - 100% agree with you on this.

(rupaniamit) #194

One need to ask simple things like what it took KRBL to get where they are today and how difficult it is to replicate if someone is going to start from scratch. Below are few things that come to my mind:

  1. Have businesses integration from basmati rice seed to consumer’s plate. Maintaining excellent quality for each and every grain in rice packet all year round. KRBL buys seeds, grows seed quality (in-house expertise), and then distributes it through commission agents and distributors to contract farmers.

  2. Relationship with 85,000 farmer and 2.4 lakh acres of land across the rice growing states of UP, Uttarakhand, Punjab, and Haryana. Company providing farmers access to competitive and modern technologies, there by improving crop quality and productivity.

  3. Build milling capacity that would have to be better than world’s #1 capacity of KRBL to gain similar economies of scale and operating leverage.

  4. Build storage warehousing capacity of 2 million+ sq. ft. to store basmati for ageing, storage of finished products, and storage of paddy.

  5. Have capability to have ~2000cr of basmati rice and paddy inventory all the time (tied working capital) and ability to bear the pain if basmati prices fall. And also ability to buy the falling knife if paddy prices are collapsing in the market.

  6. Build massive international distribution network and have pan-India presence enabling its product to reach the remotest corners of the country, a feat unmatched by any of the existing peers in the branded rice segment.

  7. Lastly, build a basmati brand for which consumer will pay-up for your brand and not buy unbranded basmati. If this doesn’t happen – all your investments in items 1-6 is gone.

All the above items are nothing but moats of KRBL and they are widening every year.

ITC or anyone can do all of the above things, but good odds that they won’t have the decades of experience that KRBL management brings to the table. They will also need an intelligent fanatic like Mr. Anil Kumar Mittal. :stuck_out_tongue_winking_eye:

While, there is no guarantee that KRBL will always dominate and maintain its leadership position but it will be an herculean task for anyone to replace them from current leadership position.

Disc: invested, views may be biased as I hold KRBL.

(Rushil) #195

Just recently started looking into this and this looks like a truly great company.

Just wanted to ask you guys what the total opportunity size for krbl is? Since there is only so much basmati rice produced in a year how big can this market get realistically?
What I want to know is are basmati yields improving or is the sown area increasing so that krbl can buy more rice and sell it assuming modest market share gains?

(phreak) #196

I see multiple things that can go right, either one at a time or in combination (lollapalooza anybody?).

  1. Basmati rice consumption as a percentage of total rice consumption could go up domestically due to shift in preferences. This is easier said than done though. I have seen my wife cringe seeing the India Gate ad where the kid eats basmati rice mixed with sambhar. That’s quite a large rice market and its not easy to break into. However South Indians (that’s a very large rice eating population) abroad have made peace with basmati because its more easily available (especially in the middle east). Any shift from kolam and sona masuri towards basmati in every day use will be interesting to follow.

  2. Any change in preferences along with more people being able to afford premium basmati due to increase in per capita income could increase the opportunity size significantly. I don’t want to make a fool of myself trying to put a number to it though. However I did notice that export:import ratio has changed from 65:35 to 47:53. So clearly the growth is coming from domestic and that’s very great news (although margins are lower in domestic, volumes could be much higher).

  3. Export volume could increase due to Iran and China.

  4. LT Foods may lose market share to KRBL in the premium segment. LT Foods seems to have walked a fine line in being a branded basmati player in capturing the unbranded rice market from the unorganised players while also trying to be premium to compete with KRBL. However, in trying to compete the premium segment, they have had problems with their balance sheet. I think their FY18 balance sheet will shed light on this aspect but its too early to say.

(1.5cr) #197

Lt foods has to be looked at differently in my opinion. Getting into the snacks business shows the mgmts intention to become a “fmcg” company from just a rice fmcg business. They do present value at a certain price. I believe that their margins could improve drastically if they are able to get the jv with Kameda going well. They are also open to inorganic growth and the mgmt seems to be ambitious. Both are different companies and should be viewed differently in my eyes.

(Praveen Gramle) #198

Dear Dinesh, The excel format is really good to understand the valuation…thx for sharing. Can you clarify from where you got the cash of 249.18Cr i couldnt not find? Also if you can share capital turnover calculation is it sales / working capital? pls clarify.

(Roy) #199

I’m a tamilian. Until 2 years ago, my wife used basmati rice only for making biriyani and fried rice. Two years ago, in a hotel called Benzz Park, my wife and I ordered white rice and fish curry. By default the restaurant provided basmati rice with the fish curry and we both liked the taste very much. Since then we’ve totally shifted from using medium grain ponni rice to long grain basmati rice.

As disposable incomes increase, I’m sure more and more people will shift to using basmati, not just for biriyani, but also along with all types of curries and stew. Basmati rice, although a lot more expensive, is healthier and (for some people) tastier than short grain and medium grain rice varieties.

Now coming to the moat India Gate brand enjoys, here’s another incident from my life. A couple of months ago, I noticed my wife picking up a 5 kg pouch of India gate from Big Bazaar. Right next to India gate was Daawat and the price of Daawat was lower compared to India Gate. Being a shareholder of LT Foods and because the price was lower, I suggested we try Daawat instead of India Gate. My wife said she did try Daawat in the past once (only for 1 meal) but the unique aroma that India Gate had was missing in Daawat.

Two months after this incident happened, the weightage of KRBL in my portfolio stands increased from 0% to 12%. :slight_smile:

As the market size for basmati rice increases, there will likely be new players entering this industry. I suspect this would be beneficial for KRBL and other existing players because more competition would mean better marketing which in turn will further increase the market size by getting more consumers to switch to using basmati rice. Although margins may fall, it will be more than offset by a huge increase in sales.

Disclosure: Invested in KRBL and LT Foods.

(Dinesh Sairam) #200
  1. If I remember correctly, it was their Bank Balance (Around ₹4 Cr) and their Mutual Fund investments (Around ₹200+ Cr). They have a bunch of direct investments in equity like MOIL and Coal India, which I didn’t consider for the valuation at all. The Cash amount isn’t going to move the value by much, honestly. It’s just a question of what Assets you feel the company can sell in short notice.

  2. Capital Turnover = Sales / (Equity + Reserves + Debt - Cash & Cash Equivalents). I think the excel itself shows this for the Base Year Capital Turnover. While calculating, ignore any extraordinary figures. You’ll find this is you value Eicher Motors. Basically some years back, Eicher was sitting on a ton of cash, but still managed to do well is terms of Sales. So their Capital Turnover looks crazy for those years (200+). If you ignore that and take a long term average, it comes close to 2.5-3, which is more reasonable.

(Deltaru) #201

What could be the impact of Govt. policy of double the farmer’s income by 2022 and MSP at KRBL or Lt foods?

(1.5cr) #202

As always any increase in price will be passed on to customers. And wealthier farmers means a better stronger economy. For all we know the farmers may start buying India gate rice products.

(suhagpatel) #203

Sarveshwar foods Ltd, another company engaged in business of processing and marketing of branded and un-branded basmati and non-basmati rice in the domestic and international markets will get listed tomorrow on NSE SME platform.

Even though it did not generate fancy like some of the recent SMEs IPO, it will be good to track it to see how market is evaluating companies in similar sector as KRBL.