KRBL- The King of Basmati rice

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.

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Is pe treating happening due to 1.5 MSP by Modi govt? Or it’s just a correction due to ltcg + global factors. How 1.5 MSP and doubling of farm income affect this stock

I must respectfully disagree here. South Indians love their biriyani with short-grained seeraga samba rice. You can see it in the very famous Dindukkal Thalappakatti Biriyani and Junior Kuppanna Biriyani, Arcot and the famous Ambur Biryani for eg. in TN and its many variants (See I spelt it Biriyani and not Biryani), in the Donne Biryani and variants in Karnataka, Thalassery Biryani in Kerala with Jeera rice and so on. Only Hyderabadi biriyani uses basmati AFAIK in South India. I personally prefer the short-grained seeraga samba rice which absorbs flavour better when it comes to biryani.

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Yes. I agree. Seeraga Samba rice is superior in the sense it does not get soggy even if it absorbs a lot of water. Therefore it is easier for a cook to perfect biryani with samba rice than basmati. Samba rice is also a costly variant because it can be grown only once a year and the yield is generally less than normal varieties and has a distinct flavour. I personally prefer both basmati and Seeraga Samba rice but my mother only uses samba rice for cooking. I am from Tamilnadu.

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South Indian here and I agree. I have rarely seen Biriyanis cooked with Basmati in the South. I am from TN, but have lived for 2 years in Bangalore and visited Kerela often. The famous ones in South (Thalapakatti, Ambur, Donne and Thalassery) use other rice variants for their Biriyanis. Hyderabadi and some of the smaller brands, like Aasfie use Basmati if I am not wrong.

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Seeraga Samba rice is exclusively used in Biriyanis made in South India before the spread of Basmati culture in South India. Now things hv changed. Whlle Thalappakatti Biriyani and ambur
Biriyani still use Seeraga Samba, urban household cooking of Biriyanis, Pulav rice , Veg Biriyanis use basmati (India Gate). Lot of fake varieties of Seeraga Samba are in TN , genuine seeraga samba rice is expensive and not available in kirana outlets of TN while India gate is availablee in almost all urban kirana outlets.

My two cents on a quick Moat analysis of KRBL:

1.Intangible assets - KRBL enjoys a great brand recall, have superior quality and there is a competitive protection in a sense of GI and two years ageing capability. Pricing power due to superiority of the product.

  1. Switching cost - No

  2. Network effect - No

  3. Cost advantage -
    Distribution - yes
    Access to raw material - in a way they don’t have control over the crop yield and hence on raw material prices, even though they do contract farming.
    Location - No
    Relative Scale - one can argue on this as their plant capacities are at higher rate than competition.

Disc - invested recently after MP’s entry and accumulating aggressively on every 5% fall.

In addition to ticking two of the four economic moats, KRBL has reported consistent ROE and ROCE growth of 15% + and in words of Pat Dorsey in his little book “ if you can find any company that has any of the above four moats and a track record of 15% ROE and ROCE growth, you have found a multibagger “

Thank you sharing @dineshssairam.

I think you are missing Depreciation & Amortization in your FCF calculation from EBIT. Shouldn’t it be EBIT * (1 - t) + Dep and Amort - Reinvestment = FCFF. Please correct me if you already accounted for Dep in your FCF calculation.

Was trying to see how you got the terminal value of continuing business. I didn’t see any formula in your spreadsheet. Would be great if formulas were there to see the actual math.

Dinesh, thanks. I do hold KRBL from 440 level and have seen the entire gains wiped out in last few trading season… I live in US and as compared to LT, KRBL is less aggressive… I guess the PAtidar and Patels have LT brands… Reason, both the price and volume discount LT offers to them. I am from Dehradun and understand the value of basmati but majority of the folks here dont. I was in Middle east also, and as every one said it is a big market for KRBL and a big story might unfold that will help increase the volume… bty, would you shar the excel with the formulas in it

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@phreakv6 - thank you for educating me with the new “biriyani” knowledge! :smiley: So far my exposure has been limited to Hyderabadi biryani within southern biryanis.

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Oops… sorry, I missed that earlier. Anyway, along with your request and the request from @mukeshbhatt77 , I have made several changes in the excel itself to make it self-sustainable (The value changed a bit - I must have made a change somewhere, so a minor nitpick). I hope this is all the better now. If anyone wants to tell their own story about KRBL, feel free to use the template below. There are guiding points on what needs to be entered where (Typically only the yellow cells in the excel should be edited). The Value will adjust accordingly.

Disclaimer: The excel is not entirely mine, I learned a lot from Prof. Aswath Damodaran, used a lot of his models and adopted a simpler one for myself. And yes, the below one has all the formulas.

KRBL - Numbers and Narratives.xlsx (25.7 KB)

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non - operating assets will include inventory?

Thank you @dineshssairam! Can you please share your rationale for using risk-free rate as your discount rate? Why are you not factoring for the equity risk premium?

  1. Non Operating Assets should ideally include Inventory and Receivables. But I’ve ignored it here, just to be conservative. Even if you want to take it, take it at, say 75% of Book Value (Because Book Value may not be all that honest). In a perfect world, you’ll have to visit the inventory in person and understand its worth. For Receivables, you’ll need to understand the credit quality of the debtor. This is something retail investors will never be able to do. So it’s better to knock off a few percentage points from the Book Value of Inventory/Receivables and call it a day.

  2. I’ve used the Risk Free Rate because the valuation is already very conservative. You can either: a) Focus on projecting the Cash Flows perfectly/conservatively and then use the Risk Free Rate. b) Project optimistically and use the CAPM Cost of Capital. “Risk comes from not knowing what you’re doing.” - Warren Buffet. c) A midway approach is using the ‘Opportunity Cost’ (This is what’s included in the excel) - the returns you can realistically earn on your next best investment alternative.

  3. I have made changes to the excel again. Sorry to be making so many changes. I have updated the excel to include a few things: Option to calculate Cost of Capital using the CAPM Beta (Automatic), Option to calculate the Cost of Capital using the Bottom-up Beta (Automatic) and Company Details (Like a small note at the top). Here goes: KRBL - Numbers and Narratives.xlsx (26.9 KB)

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Thanks for posting your inputs? I was thinking of Patanjali which is gearing up very well when compared with other leading players. Can this be looked at threat?? We have seen its strategy in other products and its ads. It has given tough competition to some of the leading FMCG and continuing. Do share your thoughts!

Did some Basic Moat Analysis:

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Good work. Thanks a lot for sharing.

Few queries:

  1. Threat of substitutes - shud it not be low or medium cause its all to do with taste, for someone used to a certain type of taste is unlikely to change…and doesnt the long history of basmati rice bears testimony to the fact that its share in rice mkt has been increasing…
  2. Extent of pricing compttn - shud it not be low or medium if they hv been able to consistently have realisations higher by 20-30% over competition over last 5 yrs…showing huge pricing power across commodity cycle.
  3. Threat of concentrated buyers - shud it not be low due to sale in 75 countries, 6-7 lacs sale points or were u just looking at Gulf as a risk!!
  4. Threat of new entrants: If u say indy struc is Oligopoly then shud this not be low…also the fact that mkt share has been concentrated btwn 2-large players in Indian market and is increasing.

Thx
RR
Invested

ITC to enter branded rice segment by end this year.
ITC has a deep pocket, strong relationship with farmers, deep distribution and tremendous capacity to suffer pain to achieve long term gains.

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…

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

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