KRBL Limited (NSE: KRBL, BSE: 530813) is the world’s largest rice miller and Basmati rice exporter. It is India's first integrated rice company with an extensive supply chain and over 120-year history. The company commands 35% market share value in the Indian branded Basmati rice segment. KRBL has 14 brands under its belts and has presence in 82 countries.

What made KRBL The King of Basmati Rice?

Basmati rice as a product, although commodity, is slightly differentiated on account of the physical attributes of the grains like long length and distinct aroma. Since it commands a significant price premium over the regular rice varieties, it is consumed by discerning customers. This creates an opportunity to brand.

It is significant that basmati rice is a geographical indication (GI) product. In this context, the GI means that the basmati rice has been procured from India or Pakistan, the only two basmati rice producing countries in the world producing 70% and 30% of total basmati rice production in the world respectively. Domestically, the unorganized basmati rice market accounts for 50% of the total market, which presents a decent growth opportunity for organized players. About 40 to 50% of the production is exported. Gulf countries, Iran and Iraq account for about 80% of these exports.

KRBL’s operations are spread across the entire rice value chain, from the seed to grain. The company claims to be associated with more than 90,000 farmers operating in 250,000 acres of rice farms. Procurement of rice grain is done from these farmers through a contract-farming arrangement, after which the rice is milled in the in-house milling plants that have a capacity of 195 tones per hour, which is the largest in the world.  KRBL also has warehousing facilities to store 1.2 million tons of rice, which means it can store inventory required to support around 2 years of sales. Such large scale of operations lends KRBL cost efficiencies due to economies of scale and the ability to control its supply chain without worrying about supply shocks. Besides, the integrated operations of the company build strong entry barriers for new entrants.

KRBL’s flagship brand ‘India Gate’ is a well-known brand that has been around for years and enjoys leadership position in India, Lebanon, Bahrain, UAE, Australia and New Zealand. This leadership position and economies of scale has clearly manifested in the form of sustained operating margins and high return on capital. Both operating profit and net profit have grown at CAGR of 16.45% and 16.78% respectively over the period FY10-19.

	FY15	FY16	FY17	FY18	FY19
Operating Revenue (INR Cr.)	3,197.19	3,362.81	3,147.65	3,245.69	4,120.49
Operating Margin (%)	16.64	15.11	20.77	24.39	20.99
Net Margin (%)	10.04	8.56	12.65	13.31	12.16
ROCE (%)	18.63	17.16	20.92	22.17	20.83
ROE (%)	27.16	20.77	23.45	20.71	20.06
Cash EPS (INR)	15.91	14.57	19.58	21.33	24.11

Cumulative cash flows from operations aggregated to INR 1,259.24 Cr. in the past 10 years, which is a shadow of cumulative PAT of INR 2,654.60 Cr. Clearly, KRBL’s superior profitability has not manifested itself into impressive cash flows.

From the analysis, it is amply clear that profits earned by the company from FY15 to FY19 were utilized primarily for shoring up the fixed assets and inventory.

Particulars (INR Cr.)	FY15	FY19	Difference
Fixed Assets	639.57	932.89	293.32
Other Non-Current Assets	1.34	12.05	10.71
Inventories	1,859.67	3,129.39	1,269.72
Trade Receivables	339.98	397.29	57.31
Other Current Assets	32.22	22.7	-9.52

One of the reasons for KRBL’s ability to achieve excellent grain quality is the fact that it stores rice for a period of 12-24 months, which accentuates the attributes of the grain. The process is called ‘ageing’ and naturally requires plenty of working capital. KRBL’s average inventory holding period for last 5 years is around 225 days, which is enormous for any company.

	FY15	FY16	FY17	FY18	FY19
Receivable days	35.8	26.83	22.29	26.8	28.52
Inventory Days	202.58	198.37	221.23	251.99	247.68
Payable days	19.81	17.84	25.89	22.77	8.47
Cash Conversion Cycle	218.57	207.36	217.63	256.02	267.73

According to the investor presentation from FY15, company had a milling capacity of 195 MT/hour.  Surprisingly, the investor presentation from FY19 shows that the milling capacity has remained stagnant at 195 MT/hour. One has to also keep in mind that the company’s capacity utilization has been range bound between 43% to 56% in the last 5 years. Since the company already has the largest production capacity in the world, the management might not be planning to make any further capex in its core assets.

The company has increased its power generation capacity from 80.68 MW in FY14 to 146.90 MW. The energy business must have been set up the with the primary intention of using it as a captive unit and utilizing the byproducts of basmati business as inputs for generating power. However, in this regard, the company seems to have gone overboard by looking at energy as a diversification opportunity that would open up a new stream of revenue. Energy as a segment contributed to 4% and 2.83% of the total revenue in FY19 and 9MFY20 respectively. Assets of over INR 660 Cr. dedicated to the energy business generated a turnover of INR 214 Cr. in FY2019.

While the company has reduced its debt over the years, Asset turnover has been deteriorating. We have also seen the working capital-intensive nature of operations of the company in the above table. In light of the same, it becomes doubly hard to understand or justify the amount of money being spent wisely by the management towards developing energy assets.

KRBL faces intense competition from both organized and unorganized Indian players and also players from Pakistan. LT Foods is the second largest Indian organized player with a market share of 29% and ‘Daawat’ as the flagship brand, while Chaman Lal Setia is the third largest player with a market share of 8% and flagship brand called ‘Maharani’.

KRBL	FY15	FY16	FY17	FY18	FY19
ROCE (%)	18.63	17.16	20.92	22.17	20.83
ROE (%)	27.16	20.77	23.45	20.71	20.06
Operating Margin (%)	16.64	15.11	20.77	24.39	20.99
LT Foods	FY15	FY16	FY17	FY18	FY19
ROCE (%)	12.96	12.47	15.93	14.56	12.26
ROE (%)	17.97	14.56	21.63	15.88	10.97
Operating Margin (%)	11.3	12.2	12.52	11.46	10.83
Chaman Lal Setia	FY15	FY16	FY17	FY18	FY19
ROCE (%)	27.88	46.03	38.7	29.50	20.14
ROE (%)	26.67	39.37	29.93	24.36	16.39
Operating Margin (%)	7.64	13.16	13.63	9.61	8.41

Looking at the table, it is apparent that KRBL has consistently dominated its competitors in operating profitability. This performance testifies to the fact that KRBL possesses the power to price its products at a premium.

Recent Litigations

On the ongoing Enforcement Directorate (ED) case on money laundering linked to UPA-time defense deal with aircraft manufacturer Embrarer, the management has said that the exposure will be of only INR 15 Cr. While the ED has attached a land and rice mill located in Dhuri tehsil of Sangrur district in Punjab to the case, the company will be able to use the properties but not sell them.

The company has also been vindicated of the Income Tax demand case of INR 1270 Cr. The tax demand notice has now been reduced to INR 110 Cr.

Outlook

In the recent conference call, on the COVID-19 issue the management has hinted that given the current market condition buyback or a demerger of power business will be considered. If the management moves forward with a demerger, it can open up higher profitability to the company.

The management has also mentioned in its conference call that they have experienced a sudden increase in requirement in the retail channel, especially in the online channels to the extent of 2x than the usual. The modern retail formats have increased their volumes by almost 75% since post-lockdown and the management expects this trend to continue sharply. On the other hand, the institutional channel has witnessed a softness. This is the segment that sells to the hotels, restaurants & catering industry and naturally it is a reflection of the momentum in business.

Apart from COVID, Indian rice exports are also facing hurdles in market such as Iran and Europe. Indian basmati exports to Europe has taken a hit due to the restrictions of pesticide residue levels in the rice. The problem with Iran has been the availability of funds. Iran has been seriously affected by the pandemic and has also been facing U.S sanctions. However, the management is confident that these hit on demand can be recovered from the rise in demand from its other export markets. As on 9MFY20, exports contributed to 46.32% of the total revenue.

While Basmati rice is a premium product in India, the same is a staple in most of the key export markets of the company. Thus, demand for Basmati is expected to rise given the ongoing global lockdown.

The company is currently available at a CMP of INR 187.55 (as on May 14, 2020) at a PE of 8.07, which is well below its 5-year median PE of 17.43. Promoters held 59.13% stake in the company as of Dec 2019 which has increased from 58.81% from September 2019. The management has a history of buying back shares in market conditions like these.

For a long-term investor the current valuation provides an opportunity to get into a company that has not only defended its dominant position but also improved it in key markets. Overall, KRBL seems to be a company that does fairly well in terms of core business quality but flounders when it comes to capital allocation, at least so far. The management has done really well by shrewdly building the competitive strengths of the company over the years. KRBL clearly stands to be one of the few companies that has enjoyed some positive tailwinds during the COVID-19 pandemic.

Team 3C Capitals

Sources

• Value Research Online
• Blogs
• Investor Presentations
• Conference calls