SUMMER PROJECT REPORT
BASMATI RICE INDUSTRY
Made by: Vinamra Bansal Infinity Business School EXECUTIVE SUMMARY
The following research report relates to the basmati rice industry of India. India is the second largest producer of rice in the world. But the contribution of Basmati rice in the overall rice production is very minute. India and Pakistan are the only two countries that hold the patent to produce Basmati rice in the world. Basmati rice is known for its aroma and nutlike flavour. When cooked, it swells only lengthwise, resulting in long slender grains that are dry, separate and fluffy. The production process of Basmati rice is the most critical part because if the rice gets broken it will not command premium price in the export market. Therefore, utmost care has to be taken while producing it so that the grain is long enough to command premium price. For this a company needs to have state of o f the art production facilities in place. The maturity period also plays a key role because if the maturity period is long the rice produced will be of a superior quality. The demand and supply of Basmati rice is constantly increasing over the last few years. With With the the intr introd oduc ucti tion on of PUSA PUSA 1121 1121 to the the Basm Basmat atii rice rice fami family ly,, favo favour urab able le demographics of India and demand for new markets such as China and Mexico it will increase further in the coming years. On the other hand more realizations from producing Basmati rice to farmers, increasing awareness and increase in demand from the foreign countries will result in increase in the supply as well. The top four players in the organized market are REI Agro, LT Foods, KRBL and Kohinoor. REI Agro follows fully integrated model whereby it does all the operations from procurement of paddy to ultimately selling it to the final consumer. On the other hand the rest three players besides producing rice also rely on a bit of trading. These players concentrate more on branding br anding unlike REI Agro who is more of a volume player. Both the models have their pros and cons and it’s ultimately the decision of the player to follow whichever model he likes. Basmati Basmati rice industry is still in a very nascent stage and so a lot of opportuniti opportunities es exist in the following industry.
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The following research report relates to the basmati rice industry of India. India is the second largest producer of rice in the world. But the contribution of Basmati rice in the overall rice production is very minute. India and Pakistan are the only two countries that hold the patent to produce Basmati rice in the world. Basmati rice is known for its aroma and nutlike flavour. When cooked, it swells only lengthwise, resulting in long slender grains that are dry, separate and fluffy. The production process of Basmati rice is the most critical part because if the rice gets broken it will not command premium price in the export market. Therefore, utmost care has to be taken while producing it so that the grain is long enough to command premium price. For this a company needs to have state of o f the art production facilities in place. The maturity period also plays a key role because if the maturity period is long the rice produced will be of a superior quality. The demand and supply of Basmati rice is constantly increasing over the last few years. With With the the intr introd oduc ucti tion on of PUSA PUSA 1121 1121 to the the Basm Basmat atii rice rice fami family ly,, favo favour urab able le demographics of India and demand for new markets such as China and Mexico it will increase further in the coming years. On the other hand more realizations from producing Basmati rice to farmers, increasing awareness and increase in demand from the foreign countries will result in increase in the supply as well. The top four players in the organized market are REI Agro, LT Foods, KRBL and Kohinoor. REI Agro follows fully integrated model whereby it does all the operations from procurement of paddy to ultimately selling it to the final consumer. On the other hand the rest three players besides producing rice also rely on a bit of trading. These players concentrate more on branding br anding unlike REI Agro who is more of a volume player. Both the models have their pros and cons and it’s ultimately the decision of the player to follow whichever model he likes. Basmati Basmati rice industry is still in a very nascent stage and so a lot of opportuniti opportunities es exist in the following industry.
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TABLE OF CONTENTS Sno.
Particulars
Page no.
1
Global rice industry
4
2
International trade of rice
5
3
Indian rice industry
6
4
Basmati rice patent
6 -7
5
Basmati rice industry
7 -8
6
How is Basmati rice produced?
8-10
7
Industry drivers
10 - 12
8
Supply side of Basmati rice
12 - 13
9
Positives for the industry
13
10
SWOT analysis
14
11
Pusa 1121
12
New markets
13
Future outlook of the industry
15 - 16
14
REI Agro
17 - 19
15
Kohinoor Foods
20 - 22
16
KRBL
23 - 24
17
LT Foods
25 - 26
18
Value chain
27 - 28
19
Analysis
29 - 34
20
Conclusion
35 - 36
14 - 15 15
Global Rice industry
4
Global paddy production over the 2009 season has been lifted by nearly 10 million tonnes to 678 million tones (454 mn/t on milled basis), the second highest production on record. World rice production is expected to increase by 4% to 710 million tons (474 mn/t on milled basis) in 2010 (Source: FAO). Mn Tonnes 700 600 500 400 300 200 100 0 2005 China
2006 India
Indonesia
2007 Bangladesh
2008 Vietnam
2009 Others
Source: FAO
Global Rice Price
Global rice price have increased at a CAGR of 16% from $173/t in 2001 to $570/t in 2009. The major reasons behind increase in global rice price during 2007 to 2009 were: 1. Temporary export bans and restriction implemented by several major and mid-level rice exporters, 2. Weather related problem in specific growing areas, 3. A sharp decline in the value of dollar in fall 2007 and winter 2008, 4. A shift of fund into commodities from stocks and real estate in 2007 and early 2008 that added to price volatility and may have temporarily boosted price.
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World Rice Price (US$/t) 700 600 500 400 300 200 100 0 Source: IRRI, Note: 5% broken rice price
International Trade of rice
The current forecast for international rice trade in the calendar year 2010, at 31.2 million tonnes, points to a 2.7 percent, or 800 000 tonnes, increase from the 2009 estimate and much higher than forecast last June. The revision reflects larger import requirements by those countries that faced important crop losses in recent months. If confirmed, trade next year would be the second largest after 2007.
Source: FAO
Much of the expected growth is expected to be driven by larger imports by Asian countries, which are foreseen to reach 14.8 million tonnes on aggregate, almost 7 percent more than last year. Part of the increase would stem from increased purchases by Near East Asian countries, in particular Iraq, Saudi Arabia and the United Arab Emirates, 6
while rice flows into the Islamic Republic of Iran may be depressed by large domestic availabilities and a recent increase in the basmati rice tariff. Among countries in the Far East, imports by Bangladesh, Nepal and especially the Philippines are forecast to rise to offset recent losses from natural disasters.
Source: FAO
Indian Rice Industry Rice is one of the most important food crop of India and 2nd of the world. It feeds more than 50 % of the world population. Agriculture is the main source of income for families in India. Farms cover over half the land and almost 1/3rd is used to grow the two major grains i.e. Rice and Wheat. India is the second leading producer of rice in the entire world, preceded only by China. Current production of Rice in India is 87.5 mn tones. In 2010, the total area under rice in India was 43mn hectares. Rice Production has increased at a CAGR of 2.9% from 71mn tones in 2003 to 87.5mn tones in 2010. It is expected to grow at 99mn/t in 2011(Source: USDA). With an ever increasing population, demand of rice has been increasing in the country. Thereafter, various efforts such as use of High Yielding Varieties of rice, Hybrid rice, System of Rice Intensification (SRI) method, responsive to high dose of fertilizers coupled with improved package of practices have been made to increase the production & productivity in the country through various centrally sponsored schemes
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Rice production & yield trend
120 100
2078
2103
2131
2202
22
1744
80 60
1984
8 . 1 7
5 . 8 8
1 . 3 8
8 . 1 9
4 . 3 9
7 . 6 9
2 . 9 9
2013 6 . 7 8
40 20 0 Source: CMIE
Basmati Rice
Rice production ( Mn. Tonnes)
Rice yield (Kg/hectare)
The name Basmati comes from the Hindi language, meaning 'Queen of Fragrance'. Basmati Rice has been grown in the foothills of the Himalayas for thousands of years. Its perfume, nutlike flavour and aroma can be attributed to the fact that the grain is aged to decrease its moisture content. When cooked, it swells only lengthwise, resulting in long slender grains that are dry, separate and fluffy. Due to the high amount of starch clinging to the rice grains, Basmati rice should always be washed before being cooked. Basmati rice is known as the queen of rice. It is long grained, non glutinous and particularly good for formal rice cooking. Basmati Rice is a simple grain yet throughout history it has been on royal menus of various cultures as the main dish.
The Basmati Rice Patent
Basmati rice was developed by Indian farmers over hundreds of years, but in September 1997 a Texas-based company, RiceTec Inc., won a controversial US patent for a cross breed with American long-grain rice. This company was granted a patent to call the aromatic rice grown outside India `Basmati'. RiceTec was granted the patent on the basis of aroma, elongation of the grain on cooking and chalkiness. Many have felt that the patent should not be granted since basmati is Indian property. India contested the patent for Basmati rice acquired by Rice Tec Inc, which had been challenged by the Agriculture 8
and Processed Food Products Export Development Authority (APEDA). The US Patent and Trademarks office accepted the petition and had re-examined its legitimacy. Contrary to misinformation in some sections of the media, India did not lose the Basmati Patent Challenge. India has actually won and not lost the Basmati patent battle. In its original patent on 'Basmati rice lines and grains' - granted by the USPTO on September 2, 1997 - Rice Tec had made as many as 20 claims. Extensive documentation was submitted to establish that the various Basmati varieties cultivated over the centuries in the subcontinent contained all the 'novel' grain attributes mentioned in the patent. As a result of a worldwide citizen campaign against RiceTec Basmati patents, on Aug 14th 2001 the U.S. Patent and Trademark Office struck down large sections of the Basmati patent. In other words, the withdrawal of the grain-specific claims ensured that Rice Tec would not be able to block the country's Basmati rice export to US; it could, however, produce 'similar or superior grains' outside India. Basmati rice industry
As mentioned above India and Pakistan are the only producers of Basmati rice in the world. The total production in the year 2009-10 was around 4 million metric tones (mmt) of which India produced 75% and the rest 25% was produced by Pakistan. Out of the production of 3 mmt in India, around 1.8 mmt was exported and 1.2 mmt was consumed domestically.
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Global Rice
Other Varieties
Basmati Rice
India (75%) Domestic (40%)
Full Grain
Pakistan (25%) Mostly Exports
Exports (60%)
Middle East (75%)
Broken
USA/UK (10%)
ROW (15%)
Source: Company Presentation
Trade in coarse rice is spread in several countries, mainly located in Asia, with first five importers making 25% of overall rice trade in 2007. Basmati rice trade is rather concentrated. In 2007, the first five clients of India had a share of 84.9% and those of Pakistan 68.5% of respective Basmati export (India: 616.7 million USD; Pakistan: 556 million USD). India mainly exports Basmati to Saudi Arabia, European Union, Kuwait, UAE and USA, whereas Pakistan does the same with UAE, Iran, Oman, European Union and Yemen.
Basmati export (MMTPA) Particulars India
Quantity Value (Mn $)
2003
2004
2005
2006
2007
2008
2009
0.71
0.77
1.16
1.17
1.05
1.18
1.56
415.80
433.70
628.50
687.30
616.70
1079.10
1958.1
0.72
0.82
0.81
0.84
0.91
1.27
267.7
308.4
439.2
479.6
556.3
1068.9
Pakistan
Quantity Value (Mn $)
Source: APEDA (Agricultural & Processed Food Products Export Development Authority)
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Basmati trade is also concentrated by demand side. The first five importers made 44.5% of overall market in 2007. Main importers are almost located in Middle East, although European Union is the third importer. Market Share in 2007-08(% of total Export) 2%
13%
3% 46% 4%
6%
10% 16% Saudi A rabia Yemen Republic
UA E USA
Kuwait Netherland
United Kindom Others
Source: APEDA
How is Basmati Rice produced?
The first and foremost step for the industry player to produce good quality Basmati rice is to procure the best quality of paddy from the mandis. In India there are a total number of 220 mandis, which are highly diversified. Therefore the procurement skills of the industry players play a significant role and make a vital difference among the counterparts. There is a particular process by which paddy is purchased from the mandis. It consists of the farmer’s (seller’s) commission agent (Kaccha aratya) and the company’s (buyer’s) commission agent (Pakka aratya).
Farmer’s
Commission agent Kaccha aratya (Farmer’s agent)
Trade Take place
Commission agent Pakka aratya (Companies agent)
Organized & Unorganized players
The company’s agent goes and buys paddy from the farmer’s agent. The company’s agent needs to possess the required skills to determine whether the quality of paddy is good or not. If he has a fair idea of the quality of paddy he will quote his price to the
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farmer’s agent and the trade will take place. To develop good procurement skills one needs a learning curve which comes through a lot of experience. Maturing
The key ingredient to produce full grain Basmati rice is the maturing period of the rice. To have good quality Basmati rice it needs to be properly matured. A good maturing period is generally from 12-14 months. For maturing of the rice proper infrastructure and maintenance is required throughout the maturing process. There are a number of risks involved in the maturing process of Basmati rice. •
The biggest challenge of maturing Basmati rice is the money involved in it. As the companies are operating at very high inventory days of almost a year the working capital needs of a company is very high. Therefore a lot of capital is required in this business.
•
Besides the challenge of working capital there are a lot of risks associated with the insects that can hamper Basmati rice when it is stored in the godowns for about a year. Insects, rodents, mites and fungi cause considerable damage to stored rice. There are a total of 18 species of insects that infest stored rice in India. Some of them are lesser grain borer, rice weevil and rice moth.
To overcome the challenges in maturing Basmati rice one can go to the intermediaries who keep the rice for a particular period of time. But it increases the cost of funding for the company. This will also result in increase in the price of Basmati rice and lower margins to the companies as the intermediaries would eat out the margins of the companies. Milling
The processing and milling of rice is another important aspect of producing good quality Basmati rice. The process of milling involves De-husking and grading which are the most critical processes.
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De-husking
This is one of the most critical processes of Basmati rice production because it decides the price and the length of the Basmati rice. The full grain Basmati rice commands the best price in the export and domestic market which is the ultimate focus of every company. Grading
When the paddy is processed we get various sizes of Basmati rice. Full grain, half grain, three-fourth grain and so on. But the number of varieties of Basmati rice that we get from the processing depends on the processing facilities used by the company. If the company has a good processing facility it will get more varieties of rice, while if the company has a sub standard processing facility the quality of rice will also be substandard. One can also outsource the milling process but the disadvantage of it is the handling. But then one does not have any control on the milling process. Moreover, the person to whom one has outsourced might not have the facilities which grade rice in a number of different varieties and this will result in less realization for the company. Selling and Distribution
All the processes become irrelevant if the product does not reach the ultimate consumer. Therefore like every business the distribution channels play a vital role in this business. Different companies follow different types of distribution channels to reach their customers. REI Agro mainly supplies its products through wholesalers and its retail arm Six Ten domestically. While on the other hand when we talk about the export market it supplies its products through its owned brand and also through the brands of the companies located in the foreign markets. On the other hand the other companies such as Kohinoor Ltd., KRBL and LT Foods supply their products through the branded route domestically as well as internationally. Domestically they supply their products through kirana shops, wholesalers, retail chains
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such as Reliance retail, Big Bazaar etc. These three companies are more into the branding business as compared to REI Agro which is more into the private labeling segment. In this regard Kohinoor Ltd., KRBL and LT Foods have an advantage that they have an established brand which commands higher price in the markets as compared to REI Agro. But due to the higher working capital cost and higher procurement costs, the margins of these three companies are lower as compared to REI Agro.
Basmati Rice Industry Drivers Domestic Drivers
India is one of the fastest growing economies of the world. With the advantage of the demographics, India is poised to become one of the developed economies in the next 2 decades. The following are the reasons which will drive the growth of Basmati rice industry in India: Increasing affordability
India is the fifth largest country in purchasing power parity and the tenth largest in sheer quantum terms. In year 2008-09 India’s per capita income was estimated to be more than $653 and is expected to rise to $2000 by the year 2016-17 (Source CSO). The average household disposable income would reach Rs 3, 18,869 by the year 2025 at a CAGR of 5.3% resulting in an increased demand for Basmati. The average Indian is earning higher than ever before. The estimated cumulative liquid wealth of the Indian affluent class is poised to grow at 50% over the next three years. Rising consumerism
India is expected to graduate from the 12th largest in the year 2007 to world’s fifth largest by the year 2025 among consumer markets. There is a subtle shift occurring in the Indian spending habit. Expenditure in life style and premium goods, rather than spending on necessities, is projected to account for 70% of all consumers spending by the year 2025. 14
(Source Mckinsey report) By 2020, urban consumers are likely to represent 37% of the population and still account for 62% of consumption.
Urban population in India, % of Total 45% 40% 35% 30% 25% 20% Source: Company presentation
Change in taste & preference
The rise in per capita income has also resulted in increase in the demand for Basmati rice. This is because more people can now afford to buy Basmati rice. The domestic consumption of Basmati rice has increased from 0.35mn/t in 2003 to 0.78mn/t in 2009 at a CAGR of 14.3%. The expansion of retail stores and hyper markets has significantly contributed to the increase in the demand for Basmati rice. The share of branded Basmati rice in total basmati consumption has seen an exceptional rise. With the increase in the standard of living, consumers are shifting towards packaged rice and becoming brand selective. Some brands of Basmati rice which have become household names are Kohinoor, Daawat, Lal Quila and Charminar etc. The branded rice category is expected to grow significantly over the next few years. Increasing availability
The production of Basmati rice has more than doubled from around 1 mn/t in 2003 to 2.3 mn/t in 2009 respectively. This will continue to grow as the demand from both domestic and international markets is constantly increasing. Moreover, the farmers are increasing the production of Basmati rice, because the production cost of Basmati rice is marginally higher compared to production cost of non-Basmati rice. But the realization from Basmati rice is higher compared to non-Basmati rice. Moreover, it is a premium variety 15
of rice, which generally sells at premium prices in the domestic as well as international markets. Basmati rice paddy sells at around Rs 28-32 per kg, while the normal rice paddy sells at around Rs 10-13 per kg. But there is a huge difference in the selling price of Basmati rice (average Rs.70-75/Kg) and normal rice (Average Rs.25-30/Kg), which is forcing the farmers to increase the production of Basmati rice.
Global market drivers
Basmati rice can only be produced by 2 countries in the world i.e. India and Pakistan. No other country can produce Basmati rice as these 2 countries hold the patent to produce Basmati rice. The following are the reasons which will drive the growth of Basmati rice industry globally: Increasing affordability
The Middle East accounts for 75% of exports of Basmati rice from India. Due to the better quality of rice, aroma, flavor and taste there is a huge demand of Basmati rice globally. Theses countries are developed and cash rich, therefore they are able to pay the premium for Basmati rice over the non basmati rice. The realization on exports of Basmati rice is more than the domestic sales, so it is incentive to export Basmati rice. Moreover India and Pakistan enjoy a kind of monopoly in this business which further helps them to command a greater price from the global market.
Supply side of Basmati rice
Increasing farmer awareness
Nowadays, with the help of the various social campaigns and advertisements from the fertilizer and seed companies, farmers are shifting towards high yielding production methods. Some of the techniques like High yielding variety (HYV) of seeds, hybrid rice and various new methods such as system of rice intensification (SRI) are being used by the farmers to produce high yielding rice. The production cost of Basmati rice is marginally higher compared to non-Basmati rice. But there is a huge difference in the
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selling price (average Rs.70-75/Kg) of Basmati rice and normal rice (Average Rs.2530/Kg), which is forcing the farmers to increase the production of Basmati rice. Due to the awareness of the various production techniques farmers will make more profits by producing it. So a farmer is shifting his focus from the production of non-Basmati rice to the production of Basmati rice.
Assured off take of Basmati rice
The demand for Basmati rice is constantly increasing in both domestic as well as international markets. On YoY basis the exports of Basmati rice have increased tremendously. It is evident from the fact that in the last 10 years the exports of Basmati rice have never reduced. The export market of Basmati rice has increased tremendously over the last few years. Similarly the domestic consumption is also increasing because more and more people are shifting towards Basmati rice due to its quality, aroma, flavor and taste. Players in both organized and unorganized market are increasing the procurement of Basmati rice, as the demand in both domestic and international markets is increasing. Indian basmati rice will shortly enter the kitchens in China and Mexico. At present, basmati is exported to over 130 countries, and the government hopes to tap the huge markets of China and Mexico in a couple of years. Therefore the farmers are assured that whatever they will produce will be consumed either domestically or internationally.
Positives for the Basmati industry •
The major paddy growing states of Punjab, Haryana and Uttar Pradesh, are likely to see 20-25 percent decline in non-basmati rice production this kharif season on account of decrease in the crop sowing area due to low rain and shift towards basmati rice, an Assocham survey said.
•
In 2008-09 - Basmati Rice Production 35 lacs Tons and In 2009 - There was 50 percent increase in the basmati rice area in Punjab and Haryana, the study said. Moreover, it was observed that a large proportion of cultivation area has been shifted from non-
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basmati rice sowing to basmati rice sowing (PUSA 1121 variety of basmati rice) in Punjab and Haryana. •
It is the inclusion of the PUSA 1121 variety in basmati rice category which gives better returns as it yields about Rs 65,000 per acre against Rs 30,000-35,000 per acre that one garners from the non-basmati varieties.
•
A tremendous demand for basmati rice in the international markets has seen the country's basmati rice exports increased from about USD 470 million in 2000-2001 to about USD 1900 million during 2008-09.
•
Owing to the government of India's decision to reduce the minimum export price (MEP) of basmati rice, the country's basmati rice exports are expected to surge by a whooping 33% during the season starting October. India's Food and Agriculture Minister Sharad Pawar had announced lowering of MEP of basmati to $ 900 PMT from the level of $ 1,100 PMT.
•
In the new season starting October, almost half of the 2.5 million tonnes labeled basmati leaving India will reach Iran. When 50% of your eggs are in one basket, you tend to watch it rather carefully. That is what Indian industry is doing.
•
Iran also pays top-notch prices for India’s Pusa Rice 1121. Who ever imagined that the variety Pusa 1121, fetching around $200/t.
•
Saudi Arabia still buys up to 750,000 tonnes basmati from India, it is a tough bargainer.
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SWOT analysis of Indian Basmati Rice industry
Strengths
Our global dist. network consists of both exclusive and non exclusive distributors Our portfolio consists of all kinds of Basmati rice Advanced survey technologies help us in optimizing our procurement process
Weaknesses
Lower net margins due to little differentiation High working capital requirement, reducing return on capital High dependence on monsoons High dependence on Middle East
Opportunities
Consumer’s Ability and willingness to pay for better quality products Increased domestic consumptionto drive due to favourable demographics Greater access to global markets
Threats
Emergence of low cost substitutes by Pakistan exporters Improved performance by Pakistan exports Significant change in govt. policies could disrupt the business
PUSA 1121 – New addition to the Basmati rice family
Pusa 1121 is an evolved variety of Pusa Basmati rice developed by Indian scientists. This variety of rice is known for its extra ordinary length and after cooking elongation. It has a milder aroma, but scores equally, if not more, on other basmati traits. Having yield of 13.7 quintals per acre, it possesses extra long slender grains with good cooking quality and it has longest cooked rice length among all the aromatic rice varieties. The length of grain of Pusa 1121 rice can be as long as 9.5mm. The area under cultivation of Pusa 1121 is the maximum in the states of Punjab and Haryana. In the year 2009, an estimated one million hectares was sown under Pusa-1121 in Punjab and Haryana alone – more than twice the area in 2008. During 2009-10, the country exported around 2.6 mt of basmati rice, of which 1.3 mt is believed to have been constituted by Pusa-1121. The export realizations averaged $1,100 a tonne for parboiled and $ 1,400 for white rice, translating
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into revenues of over $ 1.5 billion from a single variety. Besides the 1.3 mt exports, roughly 0.15 of Pusa-1121 was also consumed within the country. But that was still insufficient in relation to the sheer size of the produce. Most of the people related to the industry are talking about the ill effects on traditional basmati rice due to higher production of Pusa 1121. Even the farmers are switching towards Pusa 1121 because of its higher yields and lower cost. Industry is also expecting the production of Pusa 1121 to be roughly around 1.6 mt by the year FY11. As Pusa 1121 had been accorded Basmati status by the centre and state government last year, the overall basmati production (including Pusa) will increase in future. Currently the average selling price of traditional basmati rice is around Rs 70-75 per kg which is higher compared to average selling price of Pusa which is around Rs 45-50 per kg. Due to higher production and supply in the market at a reasonable price domestic consumption of Pusa will increase in the future from current level of 0.15 mt. So going ahead we might see a pricing pressure in the branded segment which will affect the overall profitability of the players like REI Agro, Kohinoor, KRBL and LT Foods. But we believe it will benefit the industry in the long term. New markets New markets
China
Mexico
Japan
Australia
State run Agricultural and Processed Food Products Export Development Authority (APFPEDA) said that Mexico has contracted for the basmati rice and China is expected to open a market for premium rice soon. Existing buyers are aiming to raise their purchases. The South Asian nation is also aiming to push sales in relatively new markets such as Japan and Australia. Currently, the United Arab Emirates, Saudi Arabia, Iran and the U.K. are the top four buyers of the premium rice from India. 20
Future outlook of the industry
Exports of Basmati rice from India is likely to rise this year with production slated to increase by at least 10 lakh tonne. According to industry estimates, export of Basmati rice this fiscal is likely to touch 20 lakh tonne against 16-17 lakh tonne last fiscal. Export of Basmati rice from India has been growing at a rate of 50-60%, according to estimates. Production of Basmati rice in the country is likely to go up to 50 lakh tonne this year from 40 lakh tonne last year, pulling down procurement price of the crop. Faced with competition from the Super variety of rice from Pakistan, Indian Basmati prices in the international market have also come down. The prices of Pusa 1121 this year is between $1,100 and $1,300 per tonne. Super variety of Basmati, which tastes similar to Pusa (a lower variety) from India, has a price of $1000 per tonne. Last year, India exported 8 lakh tonne of Basmati rice to the country after which Iran suddenly put restrictions on Indian exports on alleged presence of heavy metals in the Indian crop. Earlier, Iran used to buy rice from Thailand and Pakistan before shifting to the Indian crop a few years ago after 1121 was introduced in the country. Moreover India will get the advantage of its demographic changes. Presently the Basmati rice consumption domestically is very low because of the premium prices. But with the addition of the low price Pusa 1121 variety to the Basmati rice family the consumption of Basmati rice will increase in the domestic market. As shown in the graph below the maximum growth of population will take place in the age group of 15-64 i.e. the working class. As the working population of the country will grow, changes are bound to occur in the standard of living and taste and preferences of the people. Therefore, the demand for Basmati rice is poised to increase in the next few years.
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Population in millons 1600 1400 1200 1000 800 600 400 200 0 Source: Indian Demographics Scenario, 2025
Age 0-14
Age 15-64
Age 65+
All ages
Source: NCAER
REI Agro Company background
REI Agro was established in the year 1994 by Mr. Sundip Jhunjhunwala. The company was formed with a vision to consolidate the fragmented basmati rice industry. In a short span of time it has risen to the position of an undisputed leadership in the industry. A unique business model, out of the box approach of the management, and the goodwill of the customers have enabled the company to consolidate on its leadership position. In the 22
beginning the company focused more on processing rice rather than the sale of branded basmati rice. But as the company has comfortably established itself in the industry it has started sale of branded basmati rice as well. Lately the company has entered in wind power generation as well with a total generation capacity of 46MW wind farms, located in Rajasthan, Maharashtra, Tamil Nadu and Gujarat. The company processes rice with the state of the art rice processing unit supplied by the world leaders in food processing equipments. Today the company caters to the domestic and international markets through its branded and indirect sales. Brands
REI Agro offers a wide range of brands in Basamati rice. It offers various brands under 3 heads namely Premium, Midrange and Economy.
Brands
Premium
Mid-range
Kasauti
Mr. Miller, Hungama
Economy
Hansraj, Raindrop
6Ten Retail
REI Agro launched 6Ten chain of retail outlets in the last quarter of the fiscal of 2006-07. Currently 6Ten is operating 344 stores in the NCR, Chandigarh, Mohali, Panchkula, Jalandhar, Ambala etc. Some part of domestic sales of Basmati rice is done by 6Ten though it is a separate company from REI Agro. Production and capacity utilization trend
REI has increased its processing capacity on YoY basis over the last few years with the total processing capacity of 902280mn/t p.a. The capacity utilization of the company has increased from 62.5 % in the year 2003 to 75 % in 2009. The production has also
23
increased from 194000mn/t to 430000mn/t in the same period. There was a fall in the capacity utilization in the year 2007 due to substantial capacity ramp up during the year but after that it has only increased and touched new highs.
Production and Capacity utilization tren 500 450 400
66.8
74.3
77.6
74.
62.5 59.8
350
9 . 7 9 3
300 250 200 150 100
75
4 9 1
7 0 2
50
7 . 0 3 2
6 . 5 6 2
9 . 9 2 4
8 8 2
Source: Company financial statements
Production of Basmati rice at REI (in 000 MT) utilization in % REI Agro processes BasmatiProduction rice to make it excel for theCapacity quality conscious market. The
production of Basmati rice goes through a series of processes: •
Procurement of Paddy
The first and foremost step in producing good quality Basmati rice is the procurement of the best quality of paddy. The quality of paddy will ultimately determine the premium it will command. REI’s huge presence in 170 mandis out of 220 mandis in Northern India gives the company first mover advantage and allows it to procure the best quality of paddy for the production of Basmati rice. Due to the huge presence REI procures around 17% of the total basmati rice paddy produced in India. •
Processing and maturing
There’s a common saying for Wine that “the older it is, the better it is” and therefore it commands a premium price over the other wines. The same holds for Basmati rice as well. At REI before starting with the processing of Rice, paddy is kept for around 18
24
months which is the longest ageing period of any company in the industry. The matured paddy is then processed with the help of the state of the art facilities at the company. Utmost care is taken by the experts who make sure that each grain of rice produced conforms to strict corporate policy. •
Distribution and consumption
REI Agro has a huge network of distribution with around 500 distributors across the country. The company also supplies to its subsidiary company Six Ten which is an alternative vehicle to access the domestic customers. The sorting of rice is done at 6 different points which gives the company an advantage to offer Basmati rice at various price-points with various varieties. This helps in increasing the revenues for the company.
Maturity period 20 18 16 h t n 14 o m 12 (
g n i e g A
10 8 6 4
Source: Company Presentation
On YoY basis the company has increased its maturing period of the basmati rice by holding more inventory than the previous period. This has helped the company in getting a higher yield of the full grain rice from paddy. Due to the higher yield of the full grain rice the margin and head rice yield of the company has substantially increased over the last 5 years.The following is being represented by the EBITDA margins of the company which have increased from 8% to 18% over the last 5 years. But higher maturing period also increased the company’s financial leverage ratio.
25
Head Rice yield
As the company has increased its maturing period of rice to around 18 months it has enabled to produce more of full grain rice, which will definitely command a premium over other rice. Over the last 7-8 years the company’s yield of head rice has increased from 30% to around 54%. The other players in the industry are still operating at 40% head rice which gives an enormous advantage to the company. Head Rice yield 120 100 80
33
33
33
33
33
33
33
33
24
20
18
18
13
31
28
43
47
49
49
54
36
39
60 37 40 20
30
Source: Company Presentation
Kohinoor Foods
Head rice %
Broken rice %
Others %
Company background
Kohinoor Foods Ltd. embarked upon its journey in 1989. Since then it has been treating every milestone achieved as a stepping stone to go past another one. Today, in India and in over 60 countries, consumer's lives have been touched by not only some of the finest basmati rice brands, but also a wide assortment of food products that includes Basmati Rice, Ready to Eat products, Cook-in Sauces and Cooking Pastes to Spices, Seasonings and Frozen Food. It’s a feat that Kohinoor Foods Ltd. pulled off by spreading the authentic India flavour abroad. To be a globally competitive organization, Kohinoor Foods Ltd. has strategic bases in US, UK and the Middle East. The company has two 100% fully owned subsidiaries – SOL Inc., operating from New Jersey, USA that looks after the North American and 26
Canadian markets, and Indo European Food Limited, in the UK with headquarters in London, that looks after the European markets. The joint-venture company Rich Rice Raisers Factory LLC operating from Dubai, UAE takes care of the markets in the Middle East. Even in India, Kohinoor Foods Ltd. has a wide-spread presence that boasts of an extensive and unmatched distribution network with more than 200 thousand retail outlets, 100 super distributors and 600 stockists.
Brands
Kohinoor Foods Ltd. is more into the branded segment so it offers a wide range of brands in Basmati rice. Some of the leading brands are as follows:
Kohinoor Super Kohinoor Platinum
365
Brands
Kohinoor Gold
Charminar Kohinoor Silver
Production capacity
The rice factory at Murthal, Haryana is one of the largest in the country with an unbelievable milling capacity – 50 metric tonnes per hour. Not only that, the plant is ISO 9001:2000, HACCP and BRC certified along with being EUFSA and USFDA compliant. Fully automated through the entire chain of processing and final packaging, the factory
27
uses the world’s best technologies and equipment for churning out rice grains that can only be described as impeccable. Also, the manufacturing facility has a strong scientific procurement system. The company has contract farming to ensure consistency of agri produce and control on the entire value chain of basmati. In addition to that, an able, technical team of procurement personnel takes care of what is sourced for produce. The entire chain is documented to the minutest detail ensuring 100% traceability as per international norms. Facts about the Rice Factory:
Area of about 36 acres with a production capacity of 1000 metric ton per day.
One of the largest storage capacities – 20,000 metric ton of rice; 50,000 metric ton of paddy
5 milling lines with milling capacity of 6 metric ton per hour
Mechanical Dryers with paddy drying capacity of 1000 metric ton per day
Silos attached with dryers for safe storage of paddy (8 silos with 300 metric ton capacity and 3 silos with 500 metric ton capacity)
Parboiling capacity of 500 metric ton per day
Semi-automated packing plant with imported metal detectors and check weigher systems
Most versatile packaging offered, ranging from Jute & Cotton Bags to Laminate Pouches, Pet Jars, Paper & Tyvek Bags to Non-Woven Fabric Bags
Paddy Procurement
Kohinoor Foods Limited does the procurement of paddy in a very scientific way, with a lot of research work behind it. The company gives the farmers all the help they need in bringing up their crop with good vigor and health. R&D teams regularly visit the farms and advise the farmers with the status of their crop and remedies of diseases, if any. This is done right from sowing to transplanting and harvesting of the crop. Before the harvesting happens, Kohinoor Foods Limited draws samples from different zones and tests them in the laboratory. They are tested under various parameters of the company. The zones that conform to the quality standard norms of the company are 28
selected for the procurement of the paddy. The paddy is received and stored in controlled atmosphere with tight pest control measures.
Source: Company, FQ Research
Organic Basmati rice
Looking at the stressful life and heightened awareness of health among the consumers, Kohinoor Foods Limited conducts contract farming for growing Organic Basmati Rice. This is done in Dehradun, India – one of the places where Basmati Rice originated. The company procures Organic Basmati Rice by coming in direct contact with the farmers, helping them in production and by using the required technology. The company’s ‘Organic Basmati Program’ is in collaboration with Uttarrakhand Government of India under their ‘Organic Basmati Export Program’. Kohinoor Foods Limited has contracts with 8 big groups of farmers comprising a total of 1128 farmers. What started with a small area of about 110 hectare in 2005 is today extended to around 750 hectare. The total area of farming Organic Basmati Rice is intended to cross a target of 1200 hectares soon.
29
KRBL Company Background
India's first integrated rice company, they are also the world's largest Basmati rice exporters and leaders in innovation across the value chain, from seed development and multiplication (QSDIP program) to contact farming and marketing. KRBL is the largest exporter of Basmati rice in India (Basmati sales account for 85% of KRBL's total revenues) & its packaged Basmati products have gained a brand image of their own. Today, the Company holds 11 % market share of the total Basmati exports from the country and has strong presence internationally in markets like Saudi Arabia, Kuwait, US & Middle East, which account for 80-85% of KRBL's total export revenues.
Energy Division
10.5 MW power plant in Punjab
3.5 MW plant in Ghaziabad
12.5 MW plant in Maharashtra
Energy Division
The Company has three power plants as shown above. In 2008-09, the Company's energy division constituted 0.56% of the total revenues. The total divisional sales accounted for Rs. 740 lacs. Manufacturing Capacity
KRBL acquired an integrated rice processing plant at Dhuri (in the state of Punjab) in FY06 at a cost of Rs. 1,580 lacs. With this acquisition, KRBL became the largest rice miller in the world with a total capacity of 195 MT/hr, including 150 MT/hr capacities at Dhuri & existing 45 MT/hr capacities at Ghaziabad. The plant also has rice bran oil capacity of 42 MT/day. The Dhuri facility is expected to be a major catalyst for future growth of KRBL. The facility also enjoys mandi tax exemption (4% tax exemption upto August 2015) that could enable it to market its produce at a more competitive price. Also,
30
most of the paddy requirement for this plant would be met by procuring it from Punjab, thus leading to savings in the logistics cost. The Ghaziabad plant is currently working on 90% capacity utilization. The Company is in the process of commissioning a state-of-the-art packaging plant, with hands-free, imported machines, at an investment of Rs. 1,500 lacs. Focusing on extensive health and hygiene, the high-end packaging plant caters to the needs of modern retail in US, Europe. Both the Ghaziabad and Dhuri units have world-class milling facilities that enable the Company to produce quality rice and better head rice quantity. The Delhi-based Grading plant separates milled rice (mixture of different sizes: whole grain, head rice and broken rice).
Expansion plans
Going ahead, the Company plans to earmark investments to the tune of more than Rs. 7,500 lacs in capital assets during fiscal 2009-10, mainly in storage, packaging and finishing of rice for exports. Revenue Model
Source: Company, FQ Research
Value added products make a difference
KRBL has achieved significant success in deriving and marketing of by- products from the milling of rice. KRBL is has also set up a husk fire power plant. The company will 31
use husk to generate power at very low cost. Approximately 50 % power will be used for internal consumption thus reducing the power cost substantially. The balance will be sold. Ash from the process will be converted into amorphous silica used in cosmetics & cement industry. All these activities will help the company to improve on its bottom line.
Source: FQ Research
LT Foods Company background
In 1965, Bhikiwind, in a little village in Amritsar (Punjab, India); Shri Raghunath Arora started a small trading company which grew from being a commissioning agent to a partnership firm by 1977, as Lalchand Tirathram Rice Mills. In 1978 Mr. V.K.Arora joined the family business with his father, with a clear vision of taking his company to a global
level.
In
1980,
the
company
started
exporting
Premium
Rice.
Simultaneously, the company decided to face the challenges in domestic markets by setting up a modern, state-of-the-art rice factory in Sonepat, Haryana in 1984. Unorganized players with inconsistent quality products were crowding the market. In this scenario, Mr. V K Arora felt the need to promote branded and packaged products. In line with this vision, the company started the business of milling, processing and marketing of branded basmati rice and manufacturing of rice food products in the domestic and overseas market.
32
About the Company
The milling capacity of the capacity as on July, 2008 was 50 million tonne per hour. The company exports Basmati rice to almost 40 countries worldwide. The exports contributed around 48% to the total revenues of Rs. 695 crores in FY 2007-08. Exports are growing at a CAGR of 15% over the last 4 years.
LT Foods is ranked among the top 10 food processing companies in Northern India. It is ranked among the top 50 companies by Dun and Bradstreet 8th Edition of India’s Top 500 companies 2007. Daawat is registered as one of the premium and top basmati rice brands in the country.
It bought US based $20-million Kusha Inc. in Dec 2007, post which Daawat group’s share in the US retail market increased from 7% to about 51%, making it the largest basmati rice retailer in the country. First time in the Industry, an Indian rice player had acquired a US Company.
In the last two years Country’s top line has grown by 20% while net profit has gone up by 2.5 times
In 2007, LT Foods set up State-of-the-art plant set up in the Mandideep, Bhopal (MP) for Parboiled Rice, which has huge demand in export markets. Profit after Tax, INR Crores 35 30 25 20 15 10 5 Source: Company Presentation
Indian Subsidiaries:-
Dawaat Foods (P) Limited
The wholly owned subsidiary of LT Foods Ltd. (formerly known as LT Overseas Ltd.) was set up with state of the art technology, milling unit in Mandideep, Bhopal, for 33
production of parboiled rice. Rice processed here caters to the institutions and requirements of Middle East markets as well. The company has made an investment of 23.5 crores in this subsidiary. Nature Bio Foods Limited
The company recognized that organic food is the future of the world and in the same direction, company initiated steps few years back. For the same, the wholly owned subsidiary of the company was incorporated to cater the need of organic market which is approximately a market of 22 billion dollar world wide and growing with the peace of 10%. Staple Distribution Company Ltd.
Looking at the potential and boom in retail business, Staple Distribution Company, a wholly owned subsidiary of the company has been incorporated to play and establish itself as a backend player for Modern retail. LT International Limited
LT International Ltd., a subsidiary of the company is engaged in trading of varied merchandise. Overseas subsidiaries
Kusha Inc.
Kusha Inc. is the largest distribution company in U.S. with the brand name “Royal” and the said company have been acquired in December 2007 by LTO North America Inc. - a wholly owned subsidiary of LT Foods Limited. This acquisition has increased our market share from 7% to 52% appx in U.S. market. LT Foods North America Inc.
LT Foods North America Inc., a wholly owned subsidiary has been formed in California, to capture market share as well as to strengthen our presence in U.S.
34
Sona Global Limited & Nice International FZE
Middle East market has a potential and to capture market share and strengthen our presence Sona Global Limited Dubai and its subsidiary Nice International FZE, Dubai were formed and these are engaged in trading of rice and rice products in the Middle East. Value chain
The value chain of the Basmati rice industry is being summarized in the following diagram. The Pucca Artiyas or the agents of the companies purchase raw paddy from the farmers and keep it with themselves for 2 months. The stockists or the company if incase the company is fully integrated like REI Agro keeps the paddy for 4 months before the raw paddy is properly milled and graded. The milled rice is again kept by stockists for 4 months before it is disbursed to the distributors. Before distributing to the wholesalers and exporters the distributor matures the rice for 2 more months. Finally fully matured rice reaches the retailers who sell it to the ultimate consumers.
Source: REI Presentation
Since it is a very long value chain a player can enter and exit at any point. But the entry or the exit of a player is very important as it will determine the margin and the working capital requirements for that particular player. A company like REI Agro who is a fully integrated player from purchase of raw paddy to finally selling it to the ultimate 35
consumer will have a higher margin. It will also have the highest working capital requirement in the industry as it will perform each and every function from procuring of raw material to finally selling the finished product. As we can infer from the diagram the money will be blocked for around 18 months, so the fully integrated player will have the maximum requirement of working capital.
EBITDA margins 20% 15% 10% 5% 0% Source: Company financial statements
As against this if a player wants to enter at a2007 later stage have less requirement for 2008he will 2009 working capital. His margins would also shrink as the intermediaries would eat out the margins for providing the relevant services of storage or maturing on behalf of him. That is why players like LT Foods, KRBL and Kohinoor Foods who are more into the branding segment have fewer margins as compared to REI Agro which is evident from the graph given above. They focus more on brand building and rely on trading as well because they are not fully integrated as REI Agro. This also means that the pressure of working capital requirements is less on these companies. Ultimately it’s the decision of the player to enter or exit at anytime as the value chain is very long in case of this industry. But pros and cons are also associated with the timing of the entry or exit by the company.
36
ANALYSIS Paddy purchase
REI Agro has an advantage over the others when it comes to procurement of paddy from the mandis. It purchases paddy from 170 mandis out of 220 mandis of India which gives him a first mover advantage. It buys almost 17% of the Basmati paddy produced in India. Bulk purchase of paddy and prompt payment to the farmer’s agent by REI also allows him to get a discount of 6-10% as compared to other players of the industry. Because of the huge participation in the market i.e.17%, REI agro sets the price of paddy which others follow. Being a fully integrated player, REI Agro purchases the paddy directly from the mandis through its agents and performs all the functions from milling to distribution on its own. On the other hand the other players do not have the required skills, facilities, working capital and infrastructure to produce all of the Basmati rice on their own so they also rely a bit on trading of Basmati rice. These players purchase paddy in small quantities and sometimes they purchase from REI Agro or other agents as well which drags down their margin because of the higher cost of procurement.
Processing facility
REI Agro has an advantage as it has the best processing facility in the industry which has a good grading process that enables it to get 6 varieties of rice, when compared to its counterparts who get only 2-3 varieties of rice. Moreover the company also has the Ultraviolet machine which removes the rice, which consists of the black spots and other damages. This enables it to get greater realization as compared to other players. The details of the Gross Block of the top players are given below which shows the amount spent by companies on their processing facilities and other infrastructure. The following chart clearly depicts that REI Agro has spent the maximum amount on building its infrastructure and other facilities to get the better product with good quality, which gives them the best realization and margin in the industry.
37
Gross Block (in million Rs) 5000 4000 3000 2000 1000 0 Source: Company financial statements
Maturity period LT Foods
KRBL
Kohinoor
REI Agro
Inventory days 400 350 300 250 200 150 100 50 Source: Company financial statements
Among the industry players, REI Agro has the longest inventory days of 344 days KRBL kohinoor integration REI agro of the compared to industry average of around LT 266Food days. Due to its backward
business from procurement to selling the product, company has all the facilities and capacity, which requires the higher no. of days for maturing process. Other players are not fully integrated, they either purchase paddy from the farmers & matured it till 240260 days or they outsource some of the paddy from the REI agro. Lesser no. of maturing days affects the quality, size and realization of the basmati rice, which ultimately reflects in the profitability and margin of the company. Hence, higher maturing days gives REI an
38
edge over the others in terms of quality, quantity, size and realization, which resulting in better margin compare to industry players. Financials
Working capital to balance sheet ratio 90% 85% 80% 75% 70% 65% Source: Company financial statements
Because of the higher inventory days, the requirement of working capital is huge in this LTcapital Foods to balance KRBLsheet ratio Kohinoor REI Agro industry. REI Argo’s working is 87% in 2009 which is
highest as compared to its peers which are averaging at around 79%. As the company is fully integrated from procurement to selling, the working capital need for the company is the maximum in the industry. On the other hand, other players of the industry outsource some of their work to the intermediaries which reduces the working capital requirement for them. Similarly the debt-equity ratio of REI is 4.9 in the year 2009 as compared to other players such as KRBL, Kohinoor and LT Foods which are at 1.43, 3.48 and 4.1 respectively. Although the working capital to Balance sheet and debt equity ratio is very high of REI Agro the margin of the company is also the highest in the industry. This is because it has a very long maturity period with the help of which it produces the best quality rice in the industry. Therefore, the price of rice produced by it commands premium over the rice of others which ultimately helps in increasing the margin of the company.
39
R e t u rn o n e
R e tu r n o n c a p i ta l e m
25%
20% 18%
20%
16% 14%
15%
12% 10% 8%
10% 5%
6% 4%
0% 2005
2006
2007
2008
2%
Source: Company financial statements
The inventory days of the companies in the industry are very high due to which they T F o o d s Kcapital R B L K oto h inrun o o rthe R EI business. A gro L T not F o oall d s Kthe R B players L K o h in o o r R EI A g r o require hugeL working As mentioned above,
are fully integrated as REI Agro, which has all the facilities from procurement to selling in place. The company has the highest processing and maturing capacity compared to its peers which requires huge capital. Due to higher working capital debt and huge capex, interest and depreciation costs of REI Agro drags down the overall profitability of the Business. While other players do not have all the facilities in place so they outsource some of their work to the intermediaries which requires lesser working capital and capex. Therefore, the other players have an edge over REI Agro which has better return ratios which follows outsourcing business model.
Similarly when we talk about the advertising expenses of various companies REI Agro is far behind its peers. It is not even visible if we look at the chart below. KRBL and Kohinoor Foods are the ones that incur maximum expenditure on advertising and promotion. This shows how REI Agro is different in terms of its business model when compared to its peers. REI Agro is more into the volume and private labeling business while the rest of the players are into the branded and packaging business. The brands of the companies such as LT Foods, Kohinoor and KRBL have become household names. Examples: Charminar, Daawat and India gate etc. The advertising expenses incurred by 40
the companies show that exactly. While REI Argo’s brands such as Real Magic and Kasauti are never heard by a common man.
Advertising expenses, INR million 250 200 150 100 50 0 Source: Company financial statements
LT Foods The business of Basmati rice is such that a lotKRBL of debtKohinoor is involvedREI as aAgro lot of capital gets
blocked in the maturity period of rice. Therefore, the Debt equity ratio of all the players is relatively high. KRBL has the lowest Debt equity ratio among all the players because the company is more into branding business. On the other hand in 2009 the ratio was highest for REI Agro because it is more into the volume business in which everything from production to distribution is done by the company itself. Debt equity ratio 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Source: Company financial statements
Financials of all the companies in the organized market LT Foods
KRBL
Kohinoor
REI Agro
41
KRBL
EBITDA EBIT PBT APAT RoE Debt- Equity ratio RoCE (EBIT on TCE)
2005
2006
2007
2008
2009
8.1% 6.6% 5.1% 3.2%
11.4% 9.8% 6.7% 4.4%
12.5% 10.6% 6.3% 5.4%
14.4% 12.0% 6.6% 5.5%
14.9% 13.1% 7.0% 5.0%
10.0%
13.3%
15.9%
15.2%
15.6%
1.8
1.9
1.6
2.1
1.4
7.1%
10.8%
12.8%
10.9%
17.2%
220.4 64.0 31.1
190.1 71.7 14.4
232.4 36.1 72.1
305.8 66.2 69.5
219.2 19.7 40.3
Days
Inventory Debtors Creditors
L T Food
EBITDA EBIT PBT APAT RoE Debt- Equity ratio RoCE (EBIT on TCE)
2005
2006
2007
2008
2009
6.4% 4.4% 1.8% 1.4% 9.8%
7.8% 5.7% 3.0% 2.8% 18.6%
9.5% 7.8% 4.3% 3.8% 17.5%
11.6% 9.5% 4.8% 4.2% 22.0%
14.8% 12.9% 3.4% 2.8% 17.0%
3.93
3.67
2.43
3.87
4.09
6.3%
8.4%
10.8%
10.4%
15.4%
175.9 63.0 199.0
166.2 40.7 178.7
169.5 52.1 189.2
242.4 53.5 226.2
217.7 48.3 214.2
Days
Inventory Debtors Creditors
Kohinoor Food
EBITDA EBIT PBT APAT RoE Debt- Equity ratio RoCE (EBIT on TCE)
2005
2006
2007
2008
2009
7.4% 6.1% 4.1% 3.0% 15.8%
8.1% 6.4% 4.4% 3.1% 15.3%
9.9% 7.9% 4.8% 3.4% 15.7%
10.6% 8.6% 0.7% 0.7% 3.4%
13.3% 11.6%
3.0
3.6
3.8
4.1
3.4
8.0%
7.3%
7.7%
8.1%
9.5%
205.3 34.3 33.2
219.8 37.7 32.2
247.3 52.4 42.1
259.5 61.7 34.7
284 57 34
6.0%
Days
Inventory Debtors Creditors
REI Agro
EBITDA
2005
10%
2006
16%
2007
18%
2008
18%
2009
18%
42
EBIT PBT APAT RoE
10% 6% 4% 20%
15% 11% 7% 20%
17% 10% 8% 20%
16% 7% 6% 19%
17% 4% 2% 10%
Debt- Equity ratio RoCE (EBIT on TCE)
2.70
2.31
2.79
4.02
4.94
12%
12%
10%
11%
12%
222 63 86
227 91 22
312 153 23
331 79 33
344 88 45
Days
Inventory Debtors Creditors
43
Conclusion
Basically there are 2 types of models which are followed by the companies in this industry. One is the fully integrated which is followed by REI Agro in which each and every thing from procurement to selling is done by REI itself. This model is more of a volume driven which is followed by REI Agro. The other model is followed by rest of the 3 companies whereby these companies produce less and also rely a bit on trading. Moreover these companies focus mainly on brand building and selling. The benefits to REI Agro are as follows: •
Being a fully integrated player REI Agro has the best processing facility and therefore it commands better margins because it does not have to pay anything to the intermediaries unlike its peers.
•
It also gets discount on purchase of paddy as it makes bulk purchases as compared to other 3 players.
•
Being the largest producer of Basmati rice it also has the advantage of economies of scale.
•
It also has its own retail chain in the form of 6TEN through which it sells its products directly to the customers and thereby eliminating the costs incurred on the intermediaries.
•
It has the longest maturing period among the industry with the help of which it makes good quality rice which commands premium over its competitors.
•
The company can also benefit in case of an economic downturn as it is a volume player and not a branded segment player.
The ill effects of the following Business model are as follows: •
Being a volume player the company cannot command a premium price unlike a branded segment player who can easily command premium from its customers.
•
The requirement of debt and working capital is immense as a lot of money gets blocked during the maturity period.
•
A company needs a very strong balance sheet to follow this kind of model. 44
•
The company cannot establish rapport with its customers as it is not following the branded segment model.
The other business model is followed by 3 companies namely KRBL, Kohinoor and LT Foods. The players in this model focus more on brand building and selling. The benefits of this model are as follows: •
The players following this model are into the branded segment and can therefore command premium price from the customers.
•
The retail industry is all set to grow at a rate of 9% every year which will ultimately benefit these players.
•
A customer when buys a brand and is satisfied makes repeat purchases. This leads to brand loyalty which ultimately benefits the company.
•
These companies are also known by the customers as these companies repeatedly advertise themselves which leads to brand recognition by the customers.
The ill effects of the following Business model are as follows: •
The following companies do not have their own distribution network and have to rely on suppliers and distributors and thereby reducing the margins.
•
As these companies also rely on a bit of trading as the production is less, the margins are further reduced due to the intermediaries present in the value chain.
•
These companies are more likely to lose out incase of economic downturn as they will have to reduce premium prices charged through their respective brands.
Therefore both the business models have their pros and cons and it is ultimately the decision of the player to follow whichever business model he likes.
45
Particulars
REI Agro
LT Foods
Kohinoor
KRBL
Fully integrated
√
×
×
×
Premium price
×
√
√
√
Branding/Advertisement
low
high
high
high
Working capital requirements EBITDA margins
high
low
low
low
high
low
low
low
Financial cost
high
low
low
low
Maturity period
high
low
low
low
Varieties of Rice produced
5-6
2-3
2-3
2-3
46
Bibliography
http://www.articlesbase.com/business-opportunities-articles/a-market-study-of-indian basmati-rice-import-and-opportunities-1233358.html
http://www.thaindian.com/newsportal/business/indian-basmati-set-to-enter-chinamexico_10066425.html
http://www.thehindubusinessline.com/2009/03/23/stories/2009032350250400.htm
http://www.thehindu.com/2009/01/03/stories/2009010351690300.htm
http://www.ltoverseas.com/InvestorRelations/analyst_coverage.aspx
http://www.ltoverseas.com/InvestorRelations/analyst_coverage.aspx
http://www.eurosa.in/index.php?option=com_content&task=view&id=77&Itemid=107
http://business.rediff.com/report/2009/may/12/rice-production-seen-at-record-99-point37-mt-in-08-09.htm
http://www.no-patents-on-seeds.org/index.php? option=com_content&task=view&id=74&Itemid=42
http://www.thehindubusinessline.com/2007/12/28/stories/2007122850980700.htm
http://www.environmentportal.in/node/249077
www.moneycontrol.com/company-facts/ltfoods/history/LTF
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