KRBL- The King of Basmati rice


(GreyFool) #22

I don’t think opening up of Iran mkt will be a big opportunity for KRBL. They had consciously exited that mkt some yrs back to cut down on geo-political risk. New product development also seems to not be in the works for now. What is interesting for me is that domestic sales now account for majority of turnover & is growing at 25-30% vs 5-10% for exports. We have to study more about how this change in mix will change the business model - working capital, margins overall growth etc.


(Rupesh Tatiya) #23

Jun’15 Quarterly results out:
Consolidated (YoY data)

Topline up by 26% (1022 Cr Vs. 807 Cr)
Cost of RM up by 22% (891 Cr Vs. 727 Cr.)
EBITDA up by 13% (133 Cr Vs. 117 Cr.)
Finance cost (17.7 Cr Vs. 29.1 Cr.)
NP up by 9% (80 Cr Vs. 72.9 Cr.)

Agri revenue up by 26% (1001 Cr Vs. 793 Cr.)
Energy revenue up by 45% (38 Cr. Vs. 25.4 Cr.)
Agri EBITDA flat (109.99 Cr. Vs. 109.92 Cr.)
Energy EBITDA up by 67% (14.99 Cr. Vs. 8.94 Cr.)

Domestic Agri sales down by 26% (317 Cr. Vs. 424 Cr.)
Exports Sales up by 85% (684 Cr. Vs. 370 Cr.)

Results Link:
http://www.moneycontrol.com/stocks/reports/krbl-financial-results-limited-review-report-for-june-30-2015-1307381.html

Moneycontrol Interview by management:

Summary

  • EBITDA margin are at ~14% (lower by 2.5% YoY), will not go below that.
  • Market is very bad, selling prices are down by 20-25%
  • Expect 15-20% topline growth for FY16

Thoughts

  • Happy that company provided segment wise revenue (unless it is mandatory), good transparency.
  • Need to figure out why India business has declined. Daawat/Amitabh effect? (Need to check competition’s results).
  • How do we view the company? In bad years, it is able to deliver good growth and competatively less hit on margins. Is that a sign of resilient business?

Views Invited.

Thanks,
Rupesh

Disc: Invested


(aditya yadav) #24

Hi Rupesh,
My sense is low-end products like mini mogra and others which are not Aged faced price decline due to prevailing low paddy prices

With premium products like India gate Classic, Dubar, Tibar , company has mantained the prices even after north of 40% fall in RM prices. Also, the management has guided for a 5% price hike in this segment .

Yes, even with a very bad year for basmati industry company has maintained margins and delivered growth

“Porter noted that powerful and sustainable competitive advantage is unlikely to arise from any one capability (e.g., having the best sales force in the industry or the best technology in the industry), but rather from a set of capabilities that both fit with one another (i.e., that don’t conflict with one another) and actually reinforce one another (i.e., that make each other stronger than they would be alone).”

Lafley, A.G… Playing to Win: How Strategy Really Works (Kindle Locations 1573-1576). Harvard Business Review Press. Kindle Edition.

In case of KRBL; well entrenched brands, procurement ,marketing,scale,focus, Bal.sheet strength are the capabilities giving it a stronghold in Basmati industry.

Hindustan Unilever tried to launch its brand ‘Gold Seal Indus Valley Premium Basmati Rice‘ in December 2013, hasn’t done so well and difficult to find it in the marketplace.

Also , see this tweet from an Indian investor residing in NZ

https://twitter.com/amitdipsite/status/627378222485782528
They are doing good in international markets they have entered, looking for developing new territories too .


(aditya yadav) #25

Also, check the video at the end of this link for a wonderful presentation on understanding KRBL’s business and the investment case .


(Rupesh Tatiya) #26

Thanks Aditya. The video is unavailable, please share any other link you might know.

Regarding pricing, I’m a little bit lost. Their topline increased by 27% and NP remained flat. And industry prices collapsed by ~25%. When I think about it like that - I see “where is the pricing power” that company keeps claiming.

Rupesh


(roysavio) #27

One of the links to an article (already posted in this thread) is:

http://www.businesstoday.in/magazine/cover-story/anil-mittal-krbl-played-key-role-in-changing-basmati-trade/story/201070.html

The last line reads:

That is a quote of the MD and promoter.

My question: India being the diabetes capital of the world, can this impact demand for rice going foward? Just wondering. Do diabetics really not get to eat much of rice?


(harryputtar) #28

The domestic sales declining by 26 odd percent is startling to me, there is no apparent reason for the same apart from consumers preferring brands with lower prices in the wake of a slump in prices. Can anybody confirm the same? Although only 35% of its business comes from domestic market, still it is a worrying sign.


(Chintan) #29

Rice has high glycemic index. Which means that the blood sugar level goes very high soon after eating rice. To control the sudden spurt, the body needs to produce more insulin (which puts a lot of stress on the endocrine system) and use the sugar in other ways also. If one eats rice and goes to sleep immediately, the sugar level remains high throughout the night - over time this takes its toll on the body. Indians are 3 times more genetically predisposed to diabetes.

But even if rice is one of the traditional foods having high glycemic index, its like nectar in comparision to modern day processed foods. And afaik, Jubilant foodworks is doing great. So this should not be a consideration for investment.


(roysavio) #30

Thanks for the clarification @chintans.


(Sandeep) #31

a great explanation, indeed!!

Thanks


(mukul aggarwal) #32

Hi All,

First of all happy independence day.

I am doing a deep dive into this co. and almost ready to take a plunge. IMHO, there are 3 main risks related to KRBL on which I would like to request people who have studied the co. deeply to share their thoughts

  1. Low profit to cash conversion: The co. is not able to generate cash in line with the profits. As it is a WC intensive business (as they have to keep the inventory for 12-18 months) so this is explainable. Also the inventory (rice) has no risk of obsolescence and can be liquidated fairly easily

  2. High D/E: Again as this is a WC intensive business so most of their debt is WC related. But still it is high around 1x. What is the co.'s intention regarding debt, do they want to reduce it or atleast mantain around 1x or they are open to leverage to fund growth?

  3. Expanding in low return Energy business: They co. is continuously making investments in the Energy business with the upcoming CAPEX will mostly go to create new power plants. The co. rational is that they are removing dependency on one single business (which is a right thing to do). But do they have a target in mind that how much they want to expand? As it is a low return and non-core business so it will not be a good sign if they keep on expanding in this business. Though I have noticed that in the past 6 years, Energy is just around 5% of the sales so it is not that significant

Requesting you all to please take sometime and address the above queries.

Thanks


(aditya yadav) #33

Hi Rupesh , sorry for the late reply…

There are two kinds of rice company is selling
A. Aged rice (aged for a period of 18-24 months)
B. Non-aged rice (ready to be sold after milling)

Their is visible pricing power with category A with company maintaining prices and also indicating for a price hike… E.g. Their premium brands Classic, Super ,Tibar, Dubar etc
With category B, its a commodity market, and they have to adjust prices according to market forces and , also there is no inventory loss as here the cash conversion cycle is short.


(aditya yadav) #34

Hi mukul,

  1. Cash conversion cycle is certainly long but such is the structure of business but profits are good, look at segmental data to understand ROCE on rice business.

2.they have stated, they would like to maintain it below 1X. Also, if you look at company’s bal. sheet from september perspective(when a season ends , and just before fresh paddy buying for next season ), mostly they are cash surplus

3.they will be reducing the capex intensity on energy this year, (from last concall) , and including benefits of accelerated depreciation, the IRR of capital spent on energy comes to be north of 20%,(Management Estimates) so money not down the drain exactly.


(mukul aggarwal) #35

Aditya,

Thanks very much for taking time to reply to my queries.

One thing that I have noticed since started tracking KRBL is their TV ads. I see a lot of Dawaat ads (Amitabh and Sanjeev Kapoor) but not much India Gate and this looks counter intuitive. They say that branded basmati is a FMCG business for them then why they are not spending that much effort in building the brand? We all know it is such a competitive market and it is really imp. for them to maintain their leading market share. Whenever I go to supermarket to buy Basmati rice, there are so many options available (all in nice packaging) and it becomes very difficult to decide which one to buy.

Any views what they are doing on this front? Also is their share of 25-30% in domestic basmati rice has been maintained consistently over the years?


(aditya yadav) #36

Hi Mukul,
Happy to connect.

Good point,although KRBL and LT foods are spending similar annual amounts on advertisement, their campaigns are much different in structure.
Lt foods has hired a well known brand ambassador and seeing lot of airtime on tv, With KRBL, you see them in tie-ups with various tv shows on lifestyle channels, some ads i have seen on english movie channels, they do lot of regional advertising too on radio etc, which we might not come across directly.

Secondly, typically spending in many fmcg products go upwards of 5-6% of sales also, but that is ‘push advertising’ . Here, the need is to build long term brand loyalty by relaying the message of top-notch quality of basmati and also delivering consistency with the product.

Finally, is there scope for a
A. bigger branding budget,
B. efficiency in the campaign, and
C. working towards linking ‘India gate’ in consumers mind with ‘aged, finest quality basmati grains’, What i have felt is brand recall for India gate is good, but the brand message is not very clear with consumers.

I certainly think so, and during second last concall i requested the management to raise the spending towards advertisement, as overall its been a bad year for the industry and they could consolidate their leadership position further.

Check out this beautiful Ad;


(mukul aggarwal) #37

Thanks Aditya for replying… Its a great learning opportunity for me to understand business more deeply by interacting with people like you who have deep understanding of the business…

I completely agree with you that “india gate” is the leading basmati brand with a very strong brand recall and comes first in mind…

But with the increased competition and improvin awareness by competitors i think they need to make their ad campaign more visible otherwise there are chances of losing market share ( that’s why i asked the market share question above to check if they have lost market share in past years)…

I agree with you that if they make their ad campaign more visible and efficient then with the strong brand recall they can actually increase their market share…There is big scope of improvement here…

I saw the above ad on “fox life” few days back but it is not that frequent… :smile:

On a completely different note, personally i like the look and feel of dawat packaging… Somehow it attracts me more…

Disc: invested


(Bravo) #38

My comment is about Amira (KRBL’s competition) and Basmati industry in general. Prescience Point did some comprehensive work on Amira and found some major irregularities. Those who are looking at KRBL might like to read Prescience’s work to understand the right questions to ask and also understand the industry.

Here is a quote from the report: “They [all] seem to say it’s common for companies in this business to inflate their turnover 25% to 30%. [Doing so] is necessary, they say, to obtain adequate financing.”

KRBL’s CFO confirmed fabricated report of Amira but backtracked from his comments when Prescience published the report on Amira. Amira’s stock has fallen more than 60% after the reports were published.

Here is the link for Prescience’s website: http://www.presciencepoint.com/

By no means I am implying any fraud at KRBL. I still think Prescience did a good job on covering industry trends and relevant metrics.


(mukul aggarwal) #39

Hi Bravo Alpha,

Thanks very much for sharing the link. After reading their report (http://www.presciencepoint.com/reports/ANFI_Report_2-9-2015.pdf), I am much more convinced that KRBL is not doing any fraud or overstating any numbers.

  1. On page 9, the report compares KRBL reported numbers with Industry body APEDA ( Agricultural and Processed Food Products Export Development Authority) published nos. and they both reconcile with each other

  2. On page 12-13, they have mentioned market share data published by AC Nielsen (a reputed third party market research co.) and it clearly shows KRBL as the market leader (in line with KRBL statistics).

But yes, we need to verify the claim made by some of the industry experts (grain traders, rice exporters) that “all Indian cos. inflate the turnover by 25-30% to get the funding”

@leon_lph any idea about the above claim?


(Bravo) #40

I spoke with about 30 rice mills (non-Basmati) across North India for some other purpose. It is a common practice to inflate revenues. I never asked for “by what percentage” though.

Also, Prescience has a lot more background it its first report. I would suggest that you read that as well.


(Rupesh Tatiya) #41

Some number crunching on Raw Materials cost:

The raw material cost as a percentage of net sales is higher for KRBL than both LT Foods and Kohinoor for Jun’15 Q. With 1.5-2 year old paddy coming online now and prices getting squeezed due to bad year in industry - KRBL’s bottomline got squeezed (it seems) as paddy prices were higher then. LT Foods and Kohinoor are responded well to paddy price changes it seems but does that also mean that they do not do ageing for as long as KRBL?

I talked to one of my relatives who is into rice trading and he said bad time/slow down for rice would at least be another year.

I also bought Daawat classic this time (Vs. India Gate classic as always) for home consumption and India Gate felt and tasted better. I intend to try different brands of KRBL Vs. LT Foods (premium/mid-range/low-range) over few months to get a feel for their products. (We are still debating whether I’m the right person to taste rice :smile:).

Thanks,
Rupesh