Lt foods (daawat)

Stock Opportunities
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I would not mind a bit even if you questioned my statement . Anybody can go wrong and there is no reason that I cannot. Infact identifying flaws in reasoning or beliefs can help us become better investors. Anyway, coming to the point I have never heard negative publicity of promoters unlike what I heard about KRBL promoters. This is partly the reason I chose LT foods over KRBL. Apart from this, I tend to observe what promoters said in the past and whether the results actually matched with their talk. Most of the time, I see they said something and they did it. They also acknowledge factors beyond their control and give a realistic view of the business.

A dishonest management would overcommit and always talk unrealistic things and miss out of what they committed last time. Having said that I would also love to hear if anybody has negative views about them.

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Thanks. I have heard Ashwani Arora couple of times and he seems a genuine guy. He may not come across as flamboyant or smooth but demonstrates a clear focus. He is clearly on a mission to transform LT Foods from a rice company into a FMCG brand and the company under his leadership so far has had more than decent success on that.

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Please provide your views on the company as well as the research. I and a friend of mine have taken value investing over the last 5-6 months and this is one of the first reports I have made

LT Foods

LTF, established in 1990, mills, processes and markets rice (largely basmati). The company has established brands such as Daawat, Royal, Devaaya, Rozana, Heritage, and Chef’s Secretz, varying from basic to premium quality, both in the domestic and overseas markets. It has facilities in Haryana, Punjab, and Madhya Pradesh, with combined milling capacity of 106 tonne per hour (tph) and individual capacity of 58 tph

Date of report: 16-05-2024 Competitor PE 11 (KRBL), 9 (Chamanlal) Sector Consumer foods
CMP: 229 Current PE 13.9 No of Years 34
Market Cap: 7936 Highest PE 20.8 (2018) Key Products Basmati Rice
ROCE / ROE 17% / 17% Lowest PE 2 (2012) Key Competitor KRBL, C Sethia, Sarveshwar, GRM

Business Model and Industry Analysis

Overview:

Company produces Basmati and other speciality rice (Contributing 81% of FY23 sales). They have 2 more segments, viz. Organic foods and ingredient (11% of FY23) and Ready to heat segment (2%)

Core business is working capital intensive (220-230 days is normal working capital), as rice must be purchased and aged for 1-2 years before sales. It also exposes company to price risk since rice purchased in up-cycle might be sold in down-cycle. Company appears to have managed both the risks well over time, given margin consistency and expansion

New business segments are in line with company’s current strengths and weaknesses. They use existing distribution network and cash flows to build the brand while removing cyclicity of paddy prices with branded products. Further, with increasing trend of health-conscious eating and ready to heat/cook foods with both partners working, the two segments can get good growth according to us.

Industry Growth:

India produced ~134 MnT rice in 22-23, of which 9.5 MnT was Basmati rice. 4.6 MnT Basmati was exported. Indian Basmati exports have grown by 7% over last 10 years. Iran, Iraq, UAE, Yemen and US are the top 5 consumers of Indian rice. Pakistan is the only other Basmati producing country (Owing to GI protection)
Domestic Basmati rice market is expected to grow at 1% CAGR over next 5 years, while international at 2.7%. Currently, 40% Indian market consumes Basmati (19% consumes packaged Basmati rice)

Basmati rice prices are not growing linearly, with all value growth coming from volume

Indian Basmati Export Market

Year FY19 FY20 FY21 FY22 FY23
INR/Kg 74 70 65 67 83
Exports (MnT) 4.4 4.5 4.6 3.9 4.6
Value (INR Cr) 32671 31185 30095 26452 37840

Capacity Utilisation:

The company has 14 facilities in India, USA, Uganda and Netherlands engaged in rice production (5), rice packaging (6), Organic foods production (2) and Ready-to-heat products (1). Its capacity utilization for FY23: 80%; FY22: 65.3%; FY21: 65.1%. Utilization is expected to go up in FY24 for rice products, given consistent increase in topline despite volatile prices. Organic facility will show drop in utilization in FY24 due to ADD in US

Opportunities:

Company is expected to grow Organic products segment (Currently contributing 11% to sales) and ready to heat segment. Both segments appear to be in correct direction, and we will monitor their execution. Further, they have mentioned no capacity expansion plans currently, and strengthening only distribution and brand in FY23 reports as well as con-calls. It seems prudent given 80% cap utilization currently

Risk:

  • Policy risk – India banned non-basmati rice exports (15% of total revenue). Similarly, US also imposed ADD on soya products from India. While ban didn’t impact the sales much, and ADD was mitigated with a facility in Uganda, company is still exposed to policy risk
  • Geopolitical risk – Middle East is the largest market of Basmati rice globally. Currently, it contributes 5% of total sales but the company has future expansion plans in the region, which will be impacted owing to the ongoing wars. Also, increased freight costs have impacted profitability (Given India and Pak are the only Basmati rice producers, this impacts all players)
  • Business model risk – Bulk of RM are commodities (Melamine, phenol, ethanol, kraft paper, coal, acrylic). They also carry significant rice inventory (200-220 days) and hence are exposed to rice price cycles. Concerning pt is somehow they have managed to maintain 10-12% OPM over 10-12 years. KRBL, C Setia have both shown OPM fluctuations, which is expected in agro-product company where both RM and Sales are commodity prices, and 1-2 year inventory holding period is also present
  • Exchange rate risk – Since company is export oriented with bulk of paddy procured from India, currently it is not exposed to significant forex risk. However, company hedges its open exposures using derivatives

Future Expansion:

No major capacity expansion plans currently. In terms of margin expansion, target is to expand EBITDA% by 1.5% over the next 5 years

Competion:

KRBL is the biggest domestic player, followed by LT Foods. KRBL competes only in Basmati rice. Chamanlal Setia, Sarveshwar foods and GRM Overseas are other major competitors. LT Foods enjoys dominant position against all of them in exports, and it is catching up in domestic as well. Given Basmati industry’s domestic and global growth rates, it is clear LTF is capturing market share

Basmati and other rice products (Core operating segment)

Growth Rate Particulars FY23 FY22 FY21 FY20 FY19
18% LTF - Domestic 1829 1442 1143 986 947
16% LTF - International 3812 2841 2740 2322 2103
17% LTF Total 5641 4283 3883 3308 3050
12% KRBL - Domestic 3335 2647 1992 2285 2142
1% KRBL - International 1931 1451 1896 2084 1843
7% KRBL Total 5266 4098 3888 4369 3985

Management:

  • Management is clear and genuine on communication. Further, their acquisitions are all on point, and fit well in overall story.
  • Positives: Salary in line with profits, no anti-minority shareholder decisions, RPT (LTF has <1% of sales and purchases from RPT), resignations, family and succession planning, excessive salaries and other extravagant spends, civil/criminal cases, fraud/scam involvement, royalty/brand fees/other means to defraud minority holders, complex business models, unnecessarily complex/flowery language in communications, large number of subsidiaries with no operating presence (Company has large number of subsidiaries (20+), however given span of their business, it might be possible that most of them are operating
  • Concerning points: Constant margin maintained, despite no rice price hedges and no explanation. No trend matching between KRBL and LT Foods’ OPM

Institutional Investor:

FII and DII continue to hold 18% (Including 9% of Saudi Arabian quasi-govt investment)

Historical Data and Financials

Profit N Loss Account:

  • Sales have historically grown at 12% over last 10 years and at 19% over the last 3 years
  • Margins are constant b/w 10-12%
  • Ready-to-heat is currently making loss and is expected to grow profitable with increased utilization

Balance Sheet:

  • LTF has been consistently reducing debt for the last 5 years. Their current liabilities were upgraded by CARE recently; Interest coverage 10
  • Inventories & receivables are constant. Inventory turnover is improving slowly from 2.0 to 2.6 over last 8 years

Cash Flow:

  • CFO/PAT good (140%) over long term, although given such huge WC requirement, I am not sure how they are managing this
  • Company has managed to convert 66% of its PAT into FCF post capex over last 10 years

Valuation and future potential:

Particular Current 52W High 52W Low Historical High Historical Low Industry Median
Price 216 235 (12/2023) 106 (5/2023) 235 (12/2023) 2.8 (2009) -
PE Ratio 13 15.1 10 15.1 - 12
EPS 16.5 15.2 12.3 15.2 - -
Price/Book 2.4 2.6 1.7 2.6 - 1.6
EV/EBITDA 8.4 9.5 7.1 9.5 - 7
ROCE 17% - - - - 19%

Industry median is calculated from LT Foods, KRBL, Chamanlal Setia and Sarveshwar Foods

Valuation:

  • Company is growing revenue (19% CAGR over last 3 years) and profits (29% CAGR over last 3 years) at good rate, however, it is still valued at a PE of 14, which signifies good scope of re-rating
  • Risk for this band being company might revert to mean-valuation of 10 (Last 3 years) which presents a downside of 25-30%
  • In a scenario where company does fall to PE <= 10, expected EPS growth of > 20% will prevent significant downside
  • In my opinion, company appears to be valued so for being in RM industry, but given the strong and good quality earnings growth company has delivered and expected to do in future, there is a good scope of re-rating

Future Potential:

  • Company is expected to do hit 10.4k Cr revenue by FY26 in an optimistic scenario and 9.8k Cr in base scenario, while gaining 1.5% EBITDA margin (Management goal for next 5 years)
  • At current valuation, there is a scope for re-rating as well from PE = 14 to PE of ~ 20-22

Soft factors for consideration:

  • Company has good management and has executed capex well in past
  • Geographically, it’s operations are concentrated in US and India
  • ~85% revenue comes from rice, and company can expect re-rating as FMCG if the other two segments kick in
  • Debt reduction is key focus for management. Business is WC intensive however, and is open to commodity price risks since there is ~1.5-2 years gap b/w buying paddy and selling rice
  • Company has prudently used inorganic acquisitions to grow (However their cost of acquisition is not public and hence, IRR can’t be commented upon)
  • Good part of the growth has come from price growth, and to a lesser extent from volume growth. When basmati and non-basmati rice prices fell down from 2014-2017, company still managed to increase revenue by ~10% CAGR. Given that currently Basmati rice prices are at a peak, there is a chance it can fall down. However, going by past track record, good chances of management able to manage this

Disclaimer: This is a study report, not for any decision making or investment advisory.

Date:16th May 2024

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Especially walk on talk and not giving any over hipe and cautious when giving statement and executing what they have committed to investors. One point for that is they have committed to investors they will maintain debt /EBITA levels 2-3 times BY FY2025. if u check the metrics they have achieved a year back. that’s what the stand and they are doing quality acquisition and expanding the brand and specifically their distribution network in USA and Europe is different and thats why their margins are little less but customer relationship is very good… they have 50% market share in USA and 30% in Europe and dedicated packing plant at Europe. and they are expanding to middle east and now at 7% market share and India above 30%. one important point to note is " THEY ARE TRANSOFMRING BUSINESS FROM COMMODITY TO FMCG COMPANY". no false commitments and inventing new products with association of one university team ( i forgot name ). Once upon a time is 100% basmati rice company and now it’s not…as a investors that’s what we have to look into.

That’s why I believe the management.

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Court has rejected oriental insurance stay application. Ltfoods will receive the amount 161cr along with 6% interest.

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Hey guys
I am new to valuepickr

I am invested in lt foods since its pre split days
Invested when debt to equity was 3.5
Mgmt is super honest

I have seen fall from 120 to 13

You can ask me any query you want

Disc : i hold 30% of my portfolio and bought ar multiple levels already a 7 bagger for me

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@aadesh_chhajed
Whats your view on their PE? It has always been trading at low PE and whats the scope of PE expansion in your view?

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@singhi08

It traded at low pe because of below reasons

1 its commodity buisness rice selling and people were absolutely clueless where they operate
When there were iran sanctions lt foods tanked by 6% where actually they do absolutely 0 revenue

  1. KRBL was sector leader and much better balance sheet and debt to equity of lt foods was significantly higher

  2. Kari kari and other value added products are now gaining traction

  3. There was one major pesticide issue in europe w.r.t indian rice so it created a kind of uncertainty

Now i belive its time has come for re rating
I believe results will be good but some pressure on Profir will be there because of red sea issue
Per month 3cr extra what its impacting management said

Also cuppa rice they once got order from indian railway , it didnt get again but such random triggers are there

Stock is gaining good traction and company also making inroads in saudi market , co incidently KRBL ran into issue with distributor in saudi which is impacting its sales so i believe saudi market gains will be massive and salic is there to help:D

But overall i m positive and havent sold a single share in last 7 years ,

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There is massive difference between domestic and international realisation

Regarding chaman lal they have advatage only in maharani brand whose market is smaller

Krbl traded growth against margins as startegy before 2017 , sacrificing growth for margins
Now they are facing pressure as lt foods is eating there market shares and also iran regulations impact there buisness so margin fluctuations but these happened only in recent years before 2016 see krbl was maintaining very very healthy margins

Regarding ltf , company doesn’t immediately hikes price when cost goes up they maintain average ( e.g read last qtr concall when Mr arora addressed red sea issue)

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Can you give your opinion about TAM and opportunities in scalability of their business…?!

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To be honest my opinion is biased as i have invested significantly and its been already a rewarding journey

I would like to give my investment rationale which will cover opportunities and scalability and why i am holding

1.Shift from unbranded to branded: This is numero uno reason , there is huge shift ,we have moved from traditional kirana stores to d mart ,amazon ,blinkit however this is only in tier 1 cities but soon it will move to t2 and t3 cities , only branded groceries sold in these hypermarkets and e commerce,i mean yes loose is sold but branded takes a significantly higher chunk so there is going to be huge demand

  1. Eating market share of KRBL - no need to explain

3.value added products : they have tried umpteen products and finally fix with current line , ( i remember they launched saute sauces which nowhere is to be seen ) , kari kari is getting good response and now they started exporting to aus and dubai , this product is high margin product
There biryani kit also making good progress with RTH line is seeing good response

  1. EU market dominace :They are no 1 in EU with factory in rotterdam ,EU has very strict fda rules with very strict numbers limit for pesticide so its difficul to make inroad in market , this will serve as entry barrier

  2. Entry in Middle east : This was completely unexpected and perhaps will be most rewarding too because middle east is completely dominated by KRBL and high margin as compared to EU .With salic holding significant stake , i expect lt foods to replace krbl ,also krbl’s distributor issues is going from long time .And they didnt give satisfactory answer in con call last qtr (Dont know latest status)

6.Unexpexted trigger :They randomly got order 3 years back for cuppa rice from indian railway if something like this happens on large scale it will have huge impact

You can combine above points and gauge opportunities ,I blv broader picture and TAM is very high

Also management is absolutely superb with next generation also there,i have beeen part of umpteenth con call and Till date arora ji has walked the talk , he gave us assurance in con call when debt to equity was 3.5 that we will reduce debt,did product launches as per timelines ,gave clear picture on things which are not working, i strongly blv this can become fmcg company provided RTH and kari kari grows

Also one important point is organic buisness was growing 60 70% before 2022 now showing de growth of 40 50% because of some duty on soya by USA,eventually some thing will work out,these kind of restrictions genrally are short time period so once thats is lifted we will again see growth in organic

Also somebody in thread talked about government control on export, Government bans only broken rice and parboiled rice in which lt foods doesnt deal , also there was some minimum order restriction prev year which got revised immediately after protest

Disc : more thw than 30% of portfolio is invested from 6 7 years so biased :smiley:

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That was very helpful… to tell my experience with stock i had taken position from 18 to 30 to ,60 by doing upward average and sold all at 120…
Since then expecting correction which I didn’t get(:joy:)…and now built position at 180 level to 205 and planning to hold for minimum five years (may never sell also).

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aadesh_chhajed

This is quite helpful. The company is delivering good results and management is also quite good. I am only concerned that it usually trades at low PE. I guess if there is some rerating and some Institutional investors get in there is a chance of PE expansion.

Disclaimer: Invested (decent share of my portfolio is in LT Foods)

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Abakkuus entered
And dsp small cap fund also holds and company regularly conduct investor meets
Check on bse disclosure
I personally believe as pe rating is not in our hand just stay invested a slow compounder is much better than a wealth destroyer :smile:

Those who think i am bluffing about this about longg hold please find attached report which i wrote in circa 2017

AR - LTF_17.docx (1.8 MB)

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another investore meet scheduled with quantum MF
arora ji really taking efforts :smiley:

I Just hope kari kari and RTH shows exponential growth in that case we are sitting on goldmine , particularly old timers :smiley: , slow but steady wins the race

Please find below KRBL Conference call, KRBL accepted that “Competitor has occupied shelf space” in Saudi and still distributor issue going on , Its a good read :slight_smile:

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Dear @aadesh_chhajed

Please confirm whether SALIC still holds a 9.2% stake in LTFoods. I have read somewhere that LTFoods has repurchased a stake in the Salic Saudi Arabia partnership

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i checked latest SHP , i can see SALIC name ,
can you share link where you have read ?

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it’s an old link, I might have got confused, it is referring to LT foods buying back DAWAT from SALIC. :slight_smile:

I didn’t understand clearly, please clarify if possible.

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‘Daawat Foods’ is subsidiary :slight_smile:
’ LT Foods will purchase a 29.52% equity stake in subsidiary, Daawat Foods Ltd., for ₹175.8 crore from SALIC which was acquired in February 2020’

Lt foods holds 100 % in daawat foods
salic holds approx 9 % in lt foods

i hope its clear now :slight_smile:

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it is clear, now :slight_smile: thank you :

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