Lakshmi Energy & Foods

Stock Opportunities
1

http://hitstocks.blogspot.com/2010/08/lakshmi-energy-and-foods-contra-buy.html

Hiteshbhai aka hit2710 the prolific stock idea generator & wealth creator @theequitdesk has now started his own blog where he shares his stock ideas. Anyone who has followed him knows what an uncanny knack he has of landing at the right stock idea at the right time! You will be well-advised to follow him and his blog.

Reproduced below is his take on Lakshmi Energy & Foods, for us to take it further,…

LAKSHMI ENERGY AND FOODS – contra buy

LAKSHMI ENERGY AND FOODScmp 95, fv Rs 2, market cap around 600 crores.

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The company is the biggest processor of non-basmati rice in India and has a lot of value addition during the processing. It generates biomass power from husk of rice.

WHAT HAS GONE WRONG THIS QUARTER

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During the third quarter ended June 2010 (year ending September 2010) the company reported excellent sales figures amounting to 338 crores compared to 178 crores for June 09.This showed a growth of 90% y-o-y and 40% q-o-q.

PUSA Basmati contributed 70% to net sales with robust sales in domestic as well as export markets.

The margins took a strong beating in this quarter because the company decided to reprocess unsold finshed goods inventory and sell it. This inventory was at a higher price due to higher rice prices which subsequently fell from around 62 per kg to 48 per kg. This lead to higher raw material cost. Going forward, company is likely to procure raw material at lower prices and sell it at normal margins.

Energy division showed sales of 27 crores which was up around 70% q-on -q because of higher realisation of 6.38 per unit of electricity. For 9M ended June 2010, the avg realisation was around Rs 5.64 per unit.Going forward, realisation of power division is likely to stabilise at higher levels witnessed in June qtr.

For nine months ended June 2010, company posted sales of 782 crores compared to 505 crores for 9M ended June 2009.Net profits were at 64.7 cr as compared to around 62 crores for 9M ended june09.EPS for 9M ended June 10 was around 10 per share.

WHAT CAN IMPROVE

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1.Company plans to launch rice in retail segment under its brand Lakshmi Foods, beginning with Delhi and ultimately covering metros and a total of 7-8 cities by end of FY 10.

2.There could be margin improvement in last quarter (which is usually the best quarter every year) due to lower raw material prices and stable power realisations.

3.Launch of retail brand could reduce dependence on FCI offtake of its products and hence reduce volatility in its earnings.

4.Conservative estimates would lead to eps of around 15-16 per share with possibility of upside surprises, unless something goes wrong drastically**. Sales for fy 10 ended Sep are projected as 1100-1150 crores and net profits in range of 90-100 crores**. (source: reports of edelweiss and crisil)

INVESTMENT ARGUMENT:

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Looking at the above projections,here there is a company available with a very good business model, passing through a rough patch and still delivering a PAT of around 90 crores minimum with a market cap of 600 crores.And there seem to be better times to come with its retail launch of products set to take place sooner or later.

RISKS:

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Delay in retail launch could derail the calculations to some extent

Raw material prices theoretically could play spoilsport.

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disc: I have a position in the stock.

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PS I had posted the synopsis on TED in June 09 when the price was around 75-80. The company had a good few quarters after this and the stock reached a high of around 175 and has subsequently fallen to the current levels of around 90-100, where it seems to be consolidating.

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TECHNICAL VIEW:

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The stock has seen a strong run up from around 63 where it formed a bottom to around 175 and has subsequently fallen to around 95 levels currently. It seems to be consolidating in the 90-100 range currently. If things fall into place fundamentally, we may be looking at wave 3 up in the medium term which is usually quick in terms of value and time. (I am no expert in elliot wave analysis but this is how the picture looks to an optimistic amateur analyst)

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**link: **http://www.theequitydesk.com/forum/forum_posts.asp?TID=2206

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The stock has corrected based on the 3Q results, and there is probably an opportunity for a 50% upside in 12 months or so, given the current situation.

However what intrigued me most is the 5/5 valuation rating by CRISIL on the stock which cites a 46% CAGR revenue growth for next 2 years. So I downloaded the CRISIL report by registering herehttp://www.crisil.com/research/research-ier-download.jsp

Looks like this is a stock for the long run. The management is transforming from family-run to professional, de-risking business by entering premium basmati segment, generating power from rice husk that’s further de-risked and led it to become the rice player with the best Operating Margin record, couple this with aggressive capex plans, and a valuation of PE 6.6! Also might be available at or below BV, FY09 BV =88. Lakshmi Energy & Foods financial year end is Sep btw.

3

Looking at the recent qtr, yes growth is coming in and the potential seem to be there but one will have to work quite indepth to make any big positions on this one. The reason I’m saying is - I have often come across this company but have most of the time avoided it caus - it is a perfect commodity business.

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The company has de-risked its business model and moved on from being a commodity business: extract primarily from the CRISIL reports

1). Entry into Basmati rice segment -from a pure play in normal rice to a basmati play.

Basmati rice faces much lower regulation and govt interference due to premium prices, it enjoys strong export growth. this segment has grown. Basmati revenues registered y-o-y growth of more than 200% in Q3FY10. This strong growth in basmati rice resulted in the company registering a 59% growth in 9mFY10 overall revenues. This segment contributed to 37% of revenues in FY09.

2). Rice Husk-based green power plant adds to bottom line

The management hasbeen visionary in setting up a 30-MW husk-based power plant.The power unit enjoys a 10-year tax holiday, and is exempted fromcentral excise duty on equipment purchase and can claim depreciation of 80% onpower generation equipments during the first year. As per Annual Report FY09, theEnergy division contributedRs.1221.32 million which is about 18% of the total revenue(lower than normal agri business revenues in FY10).The CRISIL reports estimates the power business is likely to contributemore than 15% to the bottom line and 7% to the top line in FY11 . The power business alone is estimated to have a DCF value of Rs. 44 per share.

3). Establishing a retail “Lakshmi” brand

In FY09, Lakshmi exported 55.1% of the total basmati volumes to Iran and UAE. As

basmati is a branded play, the company has appointed advertising agency Percept/H to

create a brand image for Lakshmi. In line with the industry, Lakshmi intends to straddle

the population pyramid by introducing brands across various price points. It is likely to

offer 28 varieties of self-owned packaged rice including ‘tukra’ rice, parboiled rice,

basmati and other superior varieties across the spectrum in the existing markets (India

and Middle East) over the next two years. It also plans to enter new geographies like

the USA and Europe. The company plans to build the aLakshmia brand from scratch with

an annual budget of Rs 300 mn in FY10.

As per this Management Meet Reportfrom Fullerton Securities, thecompany plans to reduce its dependency on Government business to 30% ofrevenues over the medium term.

Let’s dig more. Many seniors seem to agree this is a good business affected by temporary bad news - with the company having taken lots of steps to de-risk. The downsides are pretty much limited from here, but the upsides can be big!

5

http://lakshmigroup.in/Update%20on%20the%20companyas%20new%20project.htm

15 Dec 2009 - The company has announced further expansions in renewable energy by way of setting up biomass based Power Plant of 60 MW next to its existing state of the art food grain processing factory and 30MW biomass based power plant at Chandigarh-Ludhiana National Highway, Khamano, Punjab. The foundation stone laying ceremony of aforesaid biomass based Power Plant of 60 MW was performed on 15thDecember 2009 by Dr.Farooq Abdullah, Honable Union Minister for New and Renewable Energy, Government of India, Sardar Prakash Singh Badal, Honable Chief Minister of Punjab and S. Adesh Partap Singh Kairon, Cabinet Minister, Food and Civil Supplies, Punjab.

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I haven’t really looked in detail but this article http://blogs.wsj.com/indiarealtime/2010/08/27/india-missing-out-on-bumper-rice-prices/?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+wsj%2Findiarealtime%2Ffeed+(WSJ.com%3A+India+Real+Time)

caught my attention. If Lakshmi Energy still gets majority of its revenue from Non -Basmati Rice this could be a negative.

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For the quarter ended June 2010, almost 70% revenues were from basmati–pusa rice.

Regarding non basmati rice, company is just a processor, which procures paddy from farmers, processes it, meanwhile does some value addition, making nakku, rice bran oil, deoiled cakes, power, etc and finally make around 67 kg rice from 100 kg paddy and sell the rice to govt based on Minimum support price. The company suffered during fy 09 due to full godowns of fci because of good monsoons and hence its sales suffered. Part of this was offset due to good revenues from the power division for which it got very good rates till oct 09 after which it has been supplying power to the powergrid/(state grid?) at lower prices as mentioned earlier but now the power realisations seem to be stabilising.

Here the bet is on a few things:

successful launch of the retail brand which will help it to reduce the commodity like business it currently has

Higher revenues from PUSA rice especially exports-- company seems to be on good footing here.

So any delay/failure to make headway in the retail venture will be negative. Non basmati rice will chug along at a slow rate.

Lakshmi is a pure contra bet where markets have beaten down the stock due to poor margins shown in june qtr. Now if one tries to look into the reasons for poor results and can be confident about the company good results in next few quarters, then this looks like a moderate risk high return stock.

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Since Pakistan is a major competitor in rice exports what impact the devastating floods would have on rice , cotton yarn & sugar companies of India?

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Hitesh,

The stock has corrected by over 10% since I last checked when it quoted at ~100. Its quoting at ~89 today.

I was thinking there isn’t much downsides left. Any recent newsflow? Any idea on how well placed is their Retail steps. They were to make some announcements in Sep?

Good for contrarians like us to buy more, or wait to check if there is further downsides??

-Donald

1 Like
10

Hi Donald,

I feel you have hit the nail on the head. At around 89-90, risk reward looks exceedingly favourable. I have been accumulating this one now since it was around 97 with every few rupees decline.

Regarding retail foray, announcement should be there soon because they were supposed to launch the retail foods division in september and consultants for the same were also appointed.

Next trigger could be sep ending results-- year ending for lakshmi is september. If the scenario as described in the write up unfolds as expected, then there could be good times ahead.

My conclusion is that if someone is ready to hold for around 8-12 months, a 50% return looks easily achievable from these levels with low level of risk.

regards

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1 Like
11

On 13 Sep IDFC small and mid cap equity fund purchased 10 lakh shares in LEAF taking their share in paid up equity capital to 5.57% from earlier 4.19% (25 lakh shares). Total shares now 35 lakhs. Average purchase price ~94

Hiteshbhai, stock has corrected 10% to again hit 86-87 levels! I plan to accumulate more next week at these levels. Downsides can be pretty limited, while upsides can be high?This is a contrarian buy at every dip like this.Any inputs from your technical screens?

Any newsflow/developments that we are not aware of??

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12

Hi donald,

IDFC bought the shares sold by some fii. Technically, the stock seems to be forming newer bottoms which might not be too comforting, but I am not too worried because fundamentally I think it is at a quite attractive level. At this price, it seems markets have written off this company, and that’s where a contra opportunity lies.

If its any comfort, there is a technique called wolfewaves and by that method, the targets of lakshmi within next 3-4 months comes to 135-140… Dont know how accurate this method is but I have registered with a google group of wolfewave and according to the expert technician, these are the targets achievable.

An interesting pick of his based on his charts is bajaj hindustan which he says can go up to 600 plus levels within next 3-5 years. Sugar will have to start tasting bitter if that is to happen, but anything can happen, after all these are cyclicals.

1 Like
13

Wondering whether this will have any impact : http://www.business-standard.com/india/news/high-moisture-content-cause-low-paddy-arrival-in-punjab-haryana/110868/on

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The stock touches a new low of Rs.70! thats 30% down from when this stock discussion started.

Time for a serious review?? When are the Q2 results coming out??

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no idea about when the results are going to come out. Usually company comes out with results around oct end for the full year ended september. The way it has been battered I think markets are expecting some bad results from sep quarter which is usually the best quarter for the company.

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A friend told me Lakshmi brand of rice advertisements were shown in Star plus?? The retail venture is kick-started

looked at results quickly; impressive jump in revenues, equally big drop in margins!! Need to find out whats going on!

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From whatever I could make of the results, raw materials again played spoilsport. Now the retail venture needs to be watched and if it can establish itself well with the consumers, things could turn real interesting. Investing here is all about bearing the pains of restructuring. Here at least the management seems to be taking the right steps to re align its business and remove the uncertainties of govt policy on the business. I saw the ads on tv and they are focusing on the health aspect of their rice. PUSA rice is claimed to be good for diabetics and cardiovascular patients although how valid the claims are is a matter of debate. If the retail venture succeeds, then margins would improve. But I guess it will take a couple of quarters before one can take a call. Power division is a disappointment currently which also needs to improve.

Technically it has formed a bottom around 70 levels which is higher than earlier bottom of around 63. It is crucial for the stock to hold the bottom of 70 established recently and not violate it.

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Lakshmi Energy & Foods plans to hive off power business
Press Trust of India / ChandigarhNovember 18, 2010, 19:30 IST

http://www.business-standard.com/india/news/lakshmi-energyfoods-plans-to-hive-off-power-business/116457/on

Leading agri-food processing company Lakshmi Energy and Foods Limited (LEF) has said that it plans to hive off its energy business by floating a wholly owned subsidiary company to unlock the value of its green power business.

Besides, the company has also set ambitious plans to emerge as a strong player in basmati rice export by exploring new overseas markets to achieve Rs 500 crore of shipments in sync with its strategy to touch a Rs 1,500 crore total business mark by September 2011. The company follows October-September period.

"We have plans to hive off our green energy business and put it into a new subsidiary company which will be wholly owned by LEF," company's Executive Director I S Gumber told PTI here.

The decision regarding floating of a new subsidiary is expected to be taken next month by the Board of Directors.

After launching a new subsidiary, the company may bring in fresh funds into energy business by diluting promoters' stake to leading energy fund houses, he said. "The fresh funds will be used in expanding our green energy business," he said.

LEF, a listed entity, ventured into biomass-based energy business in 2008 by setting up 30 MW of power plant, using husk as fuel, at its factory premises located at Khamano in Punjab. It had even entered into a power purchase agreement with Power Trading Corporation for selling power.

LEF has aggressive plans to raise its power generation capacity to 105 MW in 3 years. Currently, the total asset size of the power business of LEF stands close to Rs 150 crore.

Unveiling its plans to strengthen its basmati export business, Gumber said the company is exploring new overseas markets, including the US, Europe and a few far East countries and intends to achieve basmati export of Rs 500 crore against last year's export of Rs 200 crore. "We have set up a new office in Singapore in order to consolidate our export business," he said.

Currently, the company exports basmati rice to Iran, UAE, Kuwait, Saudi Arabia and some other countries.

To meet its growing demand for basmati rice in foreign and domestic markets, the company has also decided to raise process capacity of basmati paddy (PUSA 1121 variety) from one lakh tonne to 4 lakh tonne this year.

LEF is aiming to garner total turnover of Rs 1,500 crore by September 2011 against sales of Rs 1,100 crore in the corresponding period. "We are eyeing Rs 500 crore from export, Rs 400 crore from retail, Rs 100 crore from power, Rs 150 crore from by products and Rs. 350 crore from non-basmati processing business," he said.

It is already in the process of investing Rs 200-250 crore on raising paddy processing capacity by 2.4 lakh tonne, setting up solvent extraction plant and building 2 lakh tonne of food grain storage capacities. The company currently has installed capacity of one million tonne of paddy processing.

The company had already announced its entry into retail operations with the launch of branded basmati rice in domestic market.

1 Like
19

I think management is running after expansions without getting their house in order first. First they need to stabilise their margins and then only run after expansions. These capacity expansions are going to put pressure on balance sheet which has a reasonable amount of debt. The demerger of power division may be a trigger in the short term.

1 Like
20

You are right Hitesh. Stabilising margins were atleast 2 quarters away. To me it looks like that is receding further with more expansions.

Market seems to be aware of this bent in Lakshmi Energy. I had kept averaging down so far, but will now look to make a full exit at the next upmove from these levels.