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What is the Business?

KRBL is a Basmati Rice player present in rice milling and retailing of rice as well as exports. KRBL has well-established brands in India as well as international markets like Saudi Arabia, UAE, Qatar, Kuwait, Oman etc

Industry Background and Structure

• Basmati rice is only produced in India and Pakistan – aromatic rice cultivated in the plains fed by Himalayan Rivers.
• Basmati being a patented product and thus cannot be produced by anyone/anywhere else.
• There are other high-quality rice varieties all across India viz. – Sona Masoori in the South, Ambemohar in Maharashtra etc, but Basmati is considered the best amongst all.
• Major Rice eating areas of the world include – South East Asia, Indian sub-continent, Middle East, North Africa. The rice eaten by each of the regions has its own distinct flavours. However, Basmati is the premium sought after variety especially by people of the Indian sub-continent and the Middle East regions.
• The largest Basmati Rice consuming nations are Saudi Arabia, UAE, Kuwait, Iran, Qatar.
• Basmati Rice consumption in India is also growing fast (15-20% over 5 yrs CAGR) due to changing lifestyles and higher income levels. Also, demand for branded packed basmati in India is increasing especially due to modern trade.
• Organized players consist of only about 40% of the basmati market share in India

More about KRBL

By far the largest branded Basmati player in India across traditional as well as modern retail

Well-established brands in major export markets – UAE, Qatar, Bahrain, Saudi Arabia, Kuwait and Oman. Presence in North & South Africa, Scandinavia, Australia, Singapore, China

Financials (10-year record)

• KRBL has maintained healthy Return on Equity over the last 10 years
• Debt to Equity Ratio has reduced from 2.1 to 0.6
• Margins have improved as share of branded rice sales has increased in the overall mix

Risks in the Basmati Rice Business

• Production of Basmati rice is largely dependent on the rain Gods.
  Progress has been made with the introduction of high yielding varieties of Basmati viz. Pusa-1121 in 2006 and Pusa-1509 in 2015 which requires lesser water.

• Ageing of rice significantly enhances the desirability of rice by the consumers
  This means large amounts of capital are blocked in inventory and this makes KRBL a highly capital intensive business.
  KRBL has generated negative free cash flow (FCF) in the last 10 years
  Part of the reason for negative Free Cash Flow is also because they have chosen to invest approx Rs 700 Crs in developing wind and solar generation assets.
  Till 2017, government had major subsidies for wind energy – they would buy 100% power, at prices which guaranteed profit for power producer (for the next 15 years) and benefit of accelerated depreciation which meant lower taxes now for KRBL

• Prices of paddy (rice produce) vary significantly year-on-year
  Fluctuations in market prices can and does lead to inventory losses from time-to-time. KRBL has consciously shifted most volumes (both in domestic as well as export markets) to branded/packaged sales. This means KRBL does enjoy some pricing power and can effectively pass-on price increases to the end-consumer.

Success story of Basmati Rice and KRBL in particular

• Padma Shri Vijay Pal Singh made the Pusa 1121 basmati variety and released it for commercial cultivation in 2005. Pusa 1121 being a better quality and higher yielding seed variety over Pakistan’s Super Indian Basmati export market share increased from 28% in 2007 to 60% in 2014 overtaking Pakistan.
• In 2014-15, largest basmati exporter REI Agro started having debt trouble. Also around the same period Kohinoor had a fall-out with its JV with McCormick (US company) and is fighting a bitter arbitration battles.
• Prudent financial management, long rice market experience, goodwill with farmers due to contact farming, strategy to develop own brands in India and other major world markets meant that KRBL has today become the dominant Basmati Rice player in the world.

What next for KRBL?

• KRBL has come out with several value-added products like brown rice, organic basmati, brown brain booster rice to adapt to the changing rice eating preferences of the health-conscious consumers.
• KRBL has also launched other products like Quinoa (a high-protein, high-fibre) food typically cultivated in South America, Chiaseed, Flaxseed – thus KRBL is no longer just a basmati rice company

Concerns/red flags or what can go wrong?

• Basmati rice business is a highly competitive business with several branded as well as unbranded players
  Consumption of rice is not rising almost anywhere in the world, though due to economic development, basmati rice consumption is rising in India

• KRBL has taken interest free loans (why?) of Rs 55 Crs from directors of the company and the loan amounts are increasing since 2015. Total Debt of the company is Rs 1090 Crs (including short-term credit)
  This is a red flag – does it mean that bankers are not lending money to the company for the increasing requirement of higher working capital.

• One of the ex-independent directors of the company Mr. Gautam Khaitan (lawyer) has been accused of being involved in money laundering activities related to the VVIP Chopper scam (Augusta Westland) of 2010.
  After being arrested and questioned by the CBI (Central Bureau of Investigation) in Feb-13, Mr Gautam Khaitan ceased to be a director in KRBL from Apr-13. Media reports suggest that the money was laundered through one of the step-down subsidiaries of KRBL which was incorporated in the UAE.
  Prima Facie there seems to be no connection of KRBL with the money laundering activities.

Comparison with other Basmati Rice players

Amongst peers, KRBL has the best operating margins and Return on Equity (ROE) profile. Chamanlal Setia comes close to KRBL on financial parameters but is a much smaller company and its brands are not as established as KRBL. Also, operating cash flow generation profile for Chamanlal Setia is not very encouraging – negative for 5 out of last 10 years.

Valuations

Current Market Price – Rs 323
Market Cap =Rs 7,606
Inventory* = 2460 Crs
Debt = 1090 Crs
Enterprise Value = 6236 Crs
*For KRBL, inventory will have to be considered like cash on books since the business model requires ageing of rice which will consequently be sold and cash will be realized

• Over the last 10 years, KRBL has concentrated heavily on branding – PAT margins have increased from 6% to 13%. The profit margins seem to have peaked and may not grow in the future. More sales through the branded channel (rather than bulk) would mean more stability and sustainability to the business rather than improving profits margins.
• Also, sales growth over the last 10 years is 14% which is not very high.
• Operating margins at 24% do not look sustainable as the big FMCG companies like P&G, Marico, Colgate, HUL, Dabur, Godrej Consumer don’t make such high margins.
• Assuming 20% to be a sustainable level for operating margins, at the current stock price of Rs 323, the stock market does not expect KRBL to not grow at all in the future.
• Rs 323 is a bargain price to buy this stock at.