KRBL- The King of Basmati rice


(phreak) #143

Maybe they don’t use the “basmati” word?

Came across this when I was looking up GI. Apparently MP is fighting to get inclusion.


(Kumar Saurabh) #144

Yes, I too ve read about this. Seems MP rice producers wanted this tag n were denied ,something of that sort.that reminds me another risk I think of taxation in krbl. Due to some absurd rule of brand patent filing krbl does not pay much tax postgat but if things r taken to logical conclusion , taxes may increase. I m not clearly well read on this but remember this particular stuff cropping up in news few months back. Need to tag such articles, u never know when u need them :slight_smile: Will dig more


(phreak) #145

You must be talking about this one.


(rupaniamit) #146

Yes, if that rice is not from GI location (mainly India or Pak), “basmati” tag cannot be used.

Below is the list of approved varieties of basmati from wikipedia:

One more link on GI tag approved states in India. http://www.business-standard.com/article/markets/gi-tag-for-basmati-rice-of-7-states-approved-116020501007_1.html

FY12 KRBL Annual Report:
Basmati, one of the most expensive varieties of rice in the world, is a premium long-grain fine-textured rice. A Geographical Indication (GI) product, this aromatic grain is grown only in certain parts of India and Pakistan due to conducive agro-climatic and soil conditions. It is estimated that 70% of global Basmati Rice is produced in India and the balance in Pakistan.


(Tolaha) #147

Wouldn’t this mean that anyone can introduce basmati rice in the market branding it as “India Gate”?

Regarding one of the point made earlier that the area under Basmati cannot be increased, the regions that currently qualify are: Punjab, Haryana, Himachal Pradesh, Uttarakhand, parts of Uttar Pradesh and Jammu & Kashmir. Along with Pakistan, these are huge, fertile regions. A small area in these regions currently grow basmati. So if at all price of basmati shoots up, we could expect farms shift towards basmati.


(Kumar Saurabh) #148

Few key risks which we should keep in mind

  1. During down cycle of rice , prices remain subdued n affects all companies to some extent based on brand power
  2. Import bans play demand supply mismatch and can lead to point no 1. Enough history available. Just google

(Dhwanil Desai) #149

@Yatharth,

What I have learnt from market in my limited experience and from some very smart practitioners of investing is that it always helps to Invert and figure out what market valuation implies in the first place?

If a business is trading at P/E of 3, it implies that market expects steady earning for 3 years and then the business will close down. P/E of 36 on the other hand will mean significant growth for next 5-7 years (upward of 20%) and market expects business to last for many years with some lower growth (terminal growth rate).

We can then figure out by studying businesses whether the underlying assumptions implied in market valuations are realistic, pessimistic or too optimistic.

Hence the key questions to ask IMHO are

  • Does KRBL have an opportunity to grow at decent rate for next few years given the industry that it is operating in? (we can think about overall opportunity size, penetration rate, shifting preferences, possible alternative products etc)
  • Does it have the capability to capture the growth if the opportunity exist and where does their core competence lie? ( we can think about key success factors for business, their past track record on the key success factors, management bandwidth, capital structure etc)
  • If they do capture the opportunity for growth - can they do profitable and capital efficient manner or not? (business dynamics, industry/competitive landscape, the competitive advantage of the company over peers, entry barriers for new players, switching cost, cost advantage etc)
  • Can this business survive business/economic/commodity cycle over next 15-20 years (disruptions, alternative products, changing tastes/preferences, obsolescence, competitive intensity etc)

Based on this we can take a good guess about quantum, quality, certainty and longevity of future cashflow. This will give of some clue as to what may be the intrinsic value range. One can then take advantage of market gyrations on both sides.

I personally do not think, sudden rerating means the market is over reacting (it may be but it is not a good predictor) as most of the businesses gets discovered by market at some point of time and re-rating takes place “suddenly”. Also, the business dynamics change, industry landscapes evolve, regulatory structures change, businesses attain critical mass, better quality management takes over and many other things that may warrant re-rating. Hence, it may be better to learn from past but look at future and evaluate the businesses in that context.

Discl: I do not have any exposure in KRBL nor have I done a deep dive yet but I am keen to explore the business.


(1.5cr) #150

I have a question for old investors. Why is krbl’s opm double of that of lt foods?
Is it solely due to operating leverage?
If so, then cant lt foods achieve the same opm?
Why cant lt foods achieve the same opm?


(phreak) #151

Basmati rice players range from traders - Who simply buy and sell in bulk and are just middlemen and their margins could be as low of 3% to branded players like KRBL who have far higher margins of 20% owing to few or all of the following.

  1. Brand value - India Gate is a better brand than Daawat or Kohinoor or anything else.

  2. Quality of grain - Not all basmati rice is created equal and KRBL is known for its quality of long, fluffy, aromatic and flavourful grain.

  3. A key value addition is ageing. I haven’t seen anyone other than KRBL do ageing. Ageing of basmati rice improves flavor and aroma. This requires large, safe, warehousing capability and of course more working capital being locked up in Inventory.

  4. LT Foods has double the receivables than KRBL consistently every year although their sales is less than KRBL. Clearly KRBL has better customer relationships and being able to better convert inventory to sales and receivables to cash and cash to inventory (when cost of building one is favourable) plays a big role in the margins.

  5. LT Foods has to borrow more build inventory when its working capital is stuck in receivables while KRBL’s debt is coming down. Again, better working capital management owing to better customer relationships makes for a much better D/E

  6. India Gate classic is a high margin product and in the super premium category rice market in GCC countries, it has 82% market share. This is the primary driver of margins IMHO. If 32% overall market share is good, a 82% market share in the high-margin premium product in a discerning market that consumes only basmati rice is nothing short of phenomenal.

  7. To continue on the pricing - I have noticed Daawat is most times priced 20% lower than India Gate and on top of it, they give a 25% extra volume as well. This is definitely a differentiating factor in the margins (At least in domestic markets. I am not sure if its applicable abroad too). I have bought Daawat a few times just because of the better deals (The cost-benefit analysis is done in a black-box in the brain where a number is assigned to the sacrifice in aroma, length and flavor. I fall for it sometimes.). What’s good for me as customer is clearly not good for the company.

  8. Better understanding of local markets abroad and localised branding in some markets also contributes to their “premium” standing - Take the Nur Jahan brand for example which does very well in the middle-east.

  9. Then of course is the operating leverage contribution from their Dhuri plant. It is expected to reach 80-85% capacity utilisation in FY19 from about 50% in FY17.

  10. Also, let’s not forget the pricing has been on an uptrend since late 2016 and has of course played a big part in realisations. I am listing this last since this factor is applicable to LT Foods as well but KRBL has capitalised on it better.


(Mridul) #153

If the utilizations are improving, means sales volume must be rising. If the sales volume are going up, why that isn’t reflecting in revenue (not growing from last 3 years)? It becomes even more confusing as basmati prices are on the rise from last few years (if i am not wrong). So, more volumes at improved utilization should result in higher revenues (margins are up by 600 bps in last 2 years). But things aren’t adding up. I am not following this story closely so may be i am missing some critical info. What’s your thought on this?


(phreak) #154

Rise in prices will help margins and decline will stifle it just like any business. The biggest risk comes into play when the inventory is built in a year when the prices were at a high and sold in a year when the prices are at a trough and the value-add + branding is not able to offset it. This is where the company will be tested and so far they seem to have done well for themselves. That doesn’t mean they can’t mess up in the future. Their current inventory is definitely lower cost and prices are in an uptrend so at least in the near-term we are good is my understanding.

Future growth plans - I think they want to build some more high margin products in launching the Quinoa product as well as relaunching the brown rice - with more focused targeting at the health conscious this time. Other than this, they plan to simply continue what they have been doing so well - in branding, scaling and operational efficiencies and continuing to be a premium player. One more thing is they seem to want to focus on building the relationships with the farmers to ensure they have a good contract-farming base for ensuring quality. This reminded me of what Avanti Feeds has been doing with its farmer base.

Some more info from the AR relevant here.

54%20PM

Utilisation are improving but that goes towards building the inventory. Utilisation that we are talking about here is the milling capacity utilisation. Export volumes have been flat in the last two years.

04%20PM

Profit growth has come out of margin expansion via reduction in interest, reduction in power expenses and lower cost of RM. This is why even though the sales has reduced between FY16 and FY17, the profits have grown. The volume de-growth correlates with the sales de-growth and the chart above. In essence, it all comes down to building the inventory smartly at a lower cost. If and when volumes pick-up (Maybe due to Iran recommencing imports or due to China importing), along with rise in basmati prices, it will be two factors acting in favour. When things don’t go in favour, the lesser leverage (only WC is leveraged), better branding should help it survive bad years better than peers.


(Parag) #155

@rupaniamit

In my earlier comments, I meant to say that the product (e.g India Gate) has a substitute. Let me elaborate this further.

Assume that I am a big fan of “India Gate” brand and Kohinoor ‘s basmati rice started giving 25 % discount or more quantity. Would I buy Kohinoor Basmati or I will keep buying “India Gate?”.

Here I am not indicating changing from basmati to non-basmati rice; I am just referring to buying a different brand – “product substitution”. Based on what I have seen people around me, it is common to buy basmati rice which is offering better value. Of course, some people would love to buy the same product and will not buy other products at any price. I understand from your comments that your family buy the unbranded one from the market and age it your self. Considering this IMHO KRBL does not tick the box of “the product has no close substitute.”

Thank you for your recommendation. I have been trying to figure find out latest conference call, which I did not find. However, I will go through the earlier conference call. If you a link to the latest con call(if it has happened), I would appreciate if you could share it.

Thanks @phreakv6 for sharing you detail analysis, it is very informative. Hats off !!


(Parag) #156

If anyone can introduce the basmati rice as “India Gate”, then it is not a brand.

In a similar vein, can “Micomax” make a phone and brand it as “Apple”?
My answer is no, they cannot if the brand is well protected.


#157

Interesting article on KRBL, as an investor, good to know the different view points. Most of it is “Noise” though.

Disclosure:Invested at sub 440 levels.


(Kumar Saurabh) #158

I think there is some amount of effort which goes in creating a successful product brand whichever company it is. A few which we can highlight about KRBL which closest competitor have not been able to do is R&D with pusa institute . The resultant of R&D has been some highly successful varieties .


(1.5cr) #159

Doesnt Lt foods present superior value? The scope of margin expansion is there.
Their finance cost will fall via qip. They have anyway decreased debt from some 2.5-1.26.
Branded sales are increasing as % of revenue. If their margins were to expand to somewhere close to krbl’s then in that case they look very cheap. They have a JV with Kameda Seika for rice based snacks and test run has recieved wonderful response. That should drive up margins too.
They have aquired a number of brands from hul. Mgmt seem ambitious and they may turn into a pretty solid fmcg company with rice as their core product.


(rupaniamit) #160

@paragbharambe - you’re welcome!

Your “product substitution” is purely competition driven. Buying lower price Kohinoor instead of premium India Gate OR unbranded basmati instead of India Gate; both decisions are driven by lower price. End of the day, both are buying Basmati. And my point of basmati having no substitute goes more into nonbasmati cannot substitute rice. I see unbranded basmati and branded basmati as competitors and not substitutes.

Will a biryani lover make their biryani with non-basmati rice? There are very high odds that biryani will always be cooked with basmati rice. Hence, IMHO Kohinoor and unbranded basmati are competition of KRBL and not substitutes for basmati rice.

Why will Arabs never eat Jasmine (sticky rice) and Chinese never eat Basmati? Because both basmati and jasmine are unique in their own ways. Both are being consumed for generations and its part of the culture and the way traditional local food is made. BTW - I’m not counting on China as big opportunity for Basmati as they will never leave Jasmine. It’s basmati eaters (folks from India, Pak, Middle East) in China will be eating basmati which is being smuggled today from Hong Kong into China.

Haven’t we heard from great investors that evaluating businesses is more of an art than science. In KRBL’s case - it becomes very important to understand the psychology and behavior patterns of basmati consumers. My personal experience is that basmati consumers are very loyal and don’t mind paying up (versus non-basmati) for better taste and aroma that basmati provides.

Let’s look at single malt scotch versus blended scotch. Both are scotch but different products with different consumers. Per our topic - single malt is premium basmati and blended scotch is non-basmati. Single malt more expensive than blended. A single malt drinker will not drink blended, if given an option between two. Because single malt is smoother than blended.

On a separate note - Basmati’s business model is very similar to premium scotch or premium wine (especially regional as @phreakv6 gave an example of cognac or some French wines which can be grown only in that region to use the trademark name) were aging plays a critical role. And these businesses have got unique and exclusive products for which supply is limited and have growing demand from loyal & unique consumers which may outpace the available supply.

Basmati rice currently accounts for only ~1% of the total global consumption of rice. Just imagine how high the premium can go if total global consumption of basmati rice becomes 2% (difficult to happen but possible in few years with growing Indian middle class with higher disposable incomes).

Researching and analyzing Basmati businesses has been challenging because it brings so many qualitative aspects to the table. Numbers and valuations are important but understanding the business from qualitative side is equally important. But it has been fun so far to get better on “art” side of the equation than “science” with the help of digging for KRBL. Sorry for long post. Thanks.


(Dinesh Sairam) #161

Here is my take on the KRBL story. I did not track the stock seriously before doing this (I am now). I did an impromptu research for about a day and came up with the story and a number attached to the story. So take this with a pinch of salt. I am interested in discussing about the holes in my story and how that would fit into my valuation. Thank you!

KRBL - Numbers and Narratives.xlsx (25.7 KB)

(i.e. Rs. 542 is the Value. Rs. 460 could be a decent entry price. If you need a Margin of Safety, anything between Rs. 378 to Rs. 460 would suffice.)

P.S. The excel has been changed a bit to accommodate more formulas. Click here for the final version.


Avenue Supermart: a compounding machine?
(nil_71) #162

As I was reading the interesting discussions, one thing coming to my mind that Kenneth Andrade espouses in commodities, has anyone any idea,

what is approximate Supply of Basmati Rice from India and Pakistan since this rice with GI Tag cannot be produced by any other country ? Mr. Andrade, always says, we cannot predict the demand but only the supply. Now in case of commodities, if there is an increasing trend , where Supply is limited, naturally, KRBL with Aging expertise will benefit over a long time. That is a moat

Also another point, this rice cannot be grown everywhere in india. WB , India’s highest Rice Producer, cannot grow this. So there is an inherent moat built already.

Also one important point - those who are putting forward Unorganized to Organized, here are my points

  1. In India, major rice eating states on daily basis, don’t take Basmati Rice. eg West Benagal, Souther States. People from West Bengal uses Basmati or a variant of that occassionally

  2. People from Southern states - how many of them uses Basmati on regular basis.


(phreak) #163

These are some things I noticed for LT Foods.

  1. While KRBL has reduced its debt from 1090 Crores to 272 Crores as per half-yearly balance sheet, LT Foods debt had only gone down from 1611 Crores to 1433 Crores (Sept 2017 BS). To buy more inventory during the Oct-Dec season, they should have borrowed more.

  2. For margin expansion to happen for LT Foods, they have to capture more of the super-premium market share. LT Foods doesn’t have a competitive product in the super-premium segment. To put it in perspective, one must look at 82% market share KRBL enjoys in this segment in GCC countries.

  3. Why doesn’t LT Foods have a competitive super-premium product? I think the answer is in their AR where they mention that in addition to what they procure via contract farming route, they get more from the open markets. They don’t seem to be keen to change this either as they mention outsourcing some of the activities and going “asset-light”. I think this is where the KRBL’s product obsession makes the difference. KRBL seems very keen on maintaining product quality and that is apparent on many pages in their AR and one of the risks they mention is maintaining it in the years ahead. They clearly know what differentiates them.

40%20AM

There is good scope for KRBL to capture even more market share if LT Foods is not able to raise money enough to build inventory. The poor cash conversion cycle should sooner or later come back to haunt LT Foods.