Lakshmi Energy and Foods

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1 Initiating Coverage April 15, 28 Key Take Away Recommended Price Rs 2 Target Price Rs 297 Expected Upside 48% Market Data Nifty Code LAKSHMIEFL Sensex 15,87.6 Nifty 4, week range (Rs) 38/15 Market Cap (Rs crore) 12 Shareholding Pattern (%) As on Dec 27 Promoters 42.1 MFs, FIs & Banks 2.2 FIIs 37.5 Other Bodies corporate 11.1 Public and others 7.1 Price Performance (%) 3M 6M 12M Price (Rs) Absolute Rel to Nifty Comparative Price Movement Lakshmi Energy Foods Nifty (RHS) Mar-7 Apr-7 May-7 Jun-7 Jul-7 Aug-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Nisha Harchekar Analyst - FMCG, Pharma & Entertainment Theme Lakshmi Energy and Foods, the leading manufacturer of long grain nonbasmati white rice and related by-products like rice bran oil, de-oiled cake, and cattle feed has been reporting consistent financial performance. On the back of robust industry scenario, capacity expansion and increased revenues from its ancillary activities, we expect the net sales to grow at a CAGR of 39% over FY7- FY1. Operating profits is expected to register a CAGR of 54% driven by increased realizations from rice, revenues from power generation gaining steam and PAT is expected to grow with a CAGR of 58% over the same period. At the CMP of Rs 2, the stock quotes at PE of 7.2x and 5.3x its FY9E and FY1E earnings of Rs 27.7 and 38. Our fair price based on DCF valuation is Rs 297. At our target price, the stock will be valued at 6.2x EV/EBIDTA and 1.7x P/E on the basis of FY9E earnings. Our target price provides an upside of 48%. We recommend BUY. Volume-led growth: Though its by-products business is gaining momentum, the company would continue to derive major portion of the revenues from the rice processing business. Bulk of the sale is to FCI at the MSP determined by the Government and as such it is insulated from the fluctuation in the prices of the final product. Thus, the key to improve the bottom line of the company is to improve the volumes, which the company is very well aware of. The company is in the process of expanding its rice processing capacity from 1.35 mtpa to 3 mtpa by FY1. Margins to get a booster from value-added products: In addition to its core business, the company is involved in various downstream activities like power, de oiled cake and rice bran oil. These by-products are instrumental in further enhancing the margins and the bottom line of the company. Operating margins have expanded from 9% in FY5 to 16.8% in FY7 and are expected to be 21.5% in FY8 and over 23% in FY9. Such kind of margins is the best in the industry with the peers having operating margins in the range of 1-15%. Diversification in power generation: The Company recently commissioned the first biomass power plant in North India to use rice husk as fuel at a cost of Rs 15 crores. Current plant capacity is 3 MW is divided in two lines of 15 MW each. The capacity is expected to increase to 15 MW in the next 3 years. Only 15% of the power generated will be for captive use, the rest will be sold to the state. The management expects the plant to improve LEAF s bottom line by 25% after completion. Significant expansion plans: The paddy processing capacity is currently 1.35 mtpa, which will be expanded to 2 mtpa by FY9, and 3 mtpa by FY1. With the increase in the paddy processing capacity, the company also plans to build corresponding capacities for various downstream projects and by-products. The Company had budgeted a capex of Rs 3 crores for FY8, which will be funded equally from internal accrual and bank loan. The company has planned a capex of Rs 2 crores per year for the next four years. Key Financials Lakshmi Energy and Foods Year to March (Rs crore) FY7 FY8E FY9E FY1E Sales Growth (%) EBITDA Growth (%) PAT Growth (%) Equity Capital (FV-Rs 2) EPS (Rs) PE (x) Market cap/sales EV/EBITDA RoCE RoE research@way2wealth.com website:

2 Company Background Largest manufacturer of non-basmati rice in India Lakshmi Energy and Foods (LEAF), earlier known as Lakshmi Overseas was incorporated in 1981 by Mr. Balbir Singh Uppal with an initial capacity of 5 tons/hour. Currently it is amongst the largest manufacturer of non-basmati rice in India with capacity of 225 tons/hour. The company has transformed itself from a rice miller to a fully integrated processing company with its various by-products such as refined edible oil, de-oiled cake and cattle feed. The plants are strategically located in the paddy-growing region of Punjab, which has the best soil and water quality in India. It is located 1 km away from the Food Corporation of India warehouse. Inherent advantage in manufacturing non-basmati rice A non-basmati rice player LEAF is mainly into manufacturing of non-basmati rice. Against popular belief basmati rice has lower margins despite being a premium product. The following table shows that LEAF is present is the right segment of non-basmati rice which is more of a volume play rather than a play on realization. Basmati Low Volume, High Price Fewer by- products, no downstream Advantages of focussing on non basmati Rice High packaging, marketing and selling cost Consumed by less than 2% of the worldwide population Price volatility Source: Company Punjab Greenfield Resources Non Basmati High Volume, Low price Downstream products Sustained demand from Govt agencies, commodity traders and retail customers Consumed by majority of the population Steady prices LEAF has a wholly owned subsidiary, Punjab Greenfield Resources which undertakes export of a part of its produce and import of farm implements/fertilizers, pesticides, harvest and marketing of farm produce, as well as packaged food products. LEAF distributes the food grains in the wholesale markets under the brand name Lakshmi Foods. The cattle feed is sold in the market under the brand name Heera Moti and markets its vegetable oil under the Gold Crown brand. The Group exports its products to Middle East, Europe, the United States, Canada, Africa, Nigeria, South Africa, Russia and Asian Countries. Integrated business model 98% of all byproducts are converted into value added products LEAF has diversified into various downstream activities and by-products, which will add significant value to the company in the coming years. It uses husk (a by-product) to generate power from bio waste. 98% of all by-products are converted into value added products with wastage of only 2%. Thus, the company enjoys higher margins than its peers in the basmati rice segment. By-products processed into value-added products - Rice bran is used in the manufacture of oil and De-Oiled Cake (DOC) - Rice bran oil is refined and sold as edible oil - DOC is converted to cattle feed - Husk, which is sold presently as a by-product, will be the primary source of fuel for power generation beginning December 27 Page 2 of 2

3 Process Flow chart Rice forms 86% of revenues while byproduct forms the balance Source: Company Revenue breakup 9mFY8 Rice Bran Oil 5% Others 6% Broken Rice 1% De oiled cakes 2% Rice 86% Page 3 of 3

4 Investment Rationale Volume-led growth Around 75% of sales volume is to FCI The company derives 86% of its revenues from rice processing, though its by-products business is gaining momentum, it would continue to derive major portion of the revenue from the rice processing business. The company is insulated from fluctuation in the prices of the final product as around 75% of sales volume is to FCI at a price determined by the Government (minimum support price). The MSP of paddy and rice is in up trend as can be seen from the chart below. Thus, the key to improve the bottom line of the company is to improve the volumes, which the company is very well aware of. LEAF is continuously expanding the paddy processing capacity. The capacity is currently 1.35 million tones p.a, which is expected to grow to 2 million tones by March 29 and 3 million by The capacity utilization currently is 7%. The company expects to procure 1 million tones of paddy this year and 1.3 million tones in 29. MSP is on the uptrend with Rs per 1 kgs Trend in MSP of Paddy and Rice Paddy price Rice price Margins to get a booster from value-added products Margins are higher than peers due to additional revenue from by-product In addition to its core business, the company is involved in various downstream activities like power, de oiled cake and rice bran oil. These by-products are instrumental in further enhancing the margins and the bottom line of the company. Operating margins have expanded from 9% in FY5 to 16.8% in FY7 and are expected to be 21.5% in FY8 and over 23% in FY9. Such kind of margins is the best in the industry with the peers having operating margins in the range of 1-15%. Rs crores FY4 FY5 FY6 FY7 9mFY8 Net sales Operating margins (%) PAT * * Deferred tax liability to come up in Q4FY8 Packaged rice contributes 1% to the revenues Rice bran oil and de-oiled cake- Rice bran obtained during the milling of rice is a good source of oil. The present capacity of rice-bran oil is 3 tones per day; it plans to increase production to 6 MT/day. The company plans to sell rice-bran oil in packaged form FY9. Rice Bran oil is currently sold at Rs 47,/MT in crude form currently which is expected to rise to Rs 55,/MT by 29. Similarly, de-oiled cake, another by-product is used as cattle feed. Branded Foods- Packaged rice under the brand name Lakshmi Foods currently contributes 1% to the revenues. With the advent of modern retail formats and changing customer preference toward packed food, the management expects it to contribute around 25% in FY9 and close to 5% in FY1. Branded rice commands a premium is Rs 2-5/kg as compared to rice sold in loose form. The company has plans to launch wheat flour and rice bran oil to its branded foods category soon. Page 4 of 4

5 Power generation business to improve bottom line by 25% capex estimated to be Rs 2 crores per year for the next four years Diversification in power generation The Company recently commissioned the first biomass power plant in North India to use rice husk as fuel at a cost of Rs 15 crores. Current plant capacity is 3 MW is divided in two lines of 15 MW each. The capacity is expected to increase to 15 MW in the next 3 years. Only 15% of the power generated will be for captive use, the rest will be sold to the Punjab State Electricity Board. The power will be generated at a cost of Rs 1.9 per unit and will be sold at Rs 3.59 per unit. The plant is expected to add substantially to the company s profitability. The management expects the plant to improve LEAF s bottom line by 25% after completion. The plant is expected to commence from April 28. Shriram EPC currently manages the plant. The company also become eligible for carbon credit and encash the benefits for a period of 1 years. Significant expansion plans The paddy processing capacity is currently 1.35 mtpa after the commissioning of three new units of 4 tones/hour. The company plans to scrap few oil lines plants and to add another 165-tonnes/hour capacity at the existing location. This will take the total capacity to 2 mtpa by FY9. The company will further expand the capacity to 3 mtpa by FY1. With the increase in the paddy processing capacity, the company also plans to build corresponding capacities for various downstream projects and byproducts. It presently has 3-tonnes/day solvent extraction plant, which will be doubled to 6 tones/day by FY9. It has already set up a new 1-tonnes/day wheat flourmill, which is expected to be 3 tones/day in FY9E. The company currently has biomass power capacity of 3 MW. This is likely to expand to 6 MW by FY11 and 15MW by FY12 as more husk become available post the expansion of paddy processing capacity (1 mn ton of paddy processing will result in 2,, tons of husk which can generate 3 MW power plant). TPA FY7 FY8E FY9E FY1E FY11E Paddy 9,72, 13,5, 2,, 3,, 3,, Solvent extraction 6, 9, 1,8, 1,8, 2,4, Refinery 9, 9, 9, 12, 18, Wheat flour 3, 9, 9, 9, Cattle Feed 24, 24, 24, 6, 6, Power Generation (MW) Source: Company, W2W Research The Company had budgeted a capex of Rs 3 crores for FY8. Out of which, it has spent Rs 5 crores on subsidiary, Rs 1 crores on power plant and Rs 15 crores on expansion and modernisation of plant. The capex is funded equally from internal accrual and bank loan. The company has planned a capex of Rs 2 crores per year for the next four years. The company has ruled out any equity dilution to fund the expansion. Exemption of market fee to directly add to the bottom line As an incentive for the biomass power plant, the Punjab Government has exempted the company from payment of 4% market fees until 217 on purchase of non-fci grade paddy. This would help the company in procuring paddy at lower cost, which will add to the bottom line growth. Concerns The company has chalked out huge expansion plans. Timely execution remains a key risk for the company. Due to the commodity nature of the industry, any reversal in the commodity cycle of rice could affect the future profitability of the company. The company has a poor dividend policy; at 4.7%, the dividend payout ratio is low. The company slashed the dividend rate from 4% during 26 and 3% during 25 to 25% in 27. This was inspite of a 43% increase in PAT in FY7. Page 5 of 5

6 Financial Analysis Excellent financial performance LEAF has been reporting consistent financial performance while topline has registered 45.7% CAGR during FY4-7, EBITDA and PAT have grown at 166% and 88% during the same period. The operating margins are quite high as compared to the peers as the company effectively utilizes all its by-products for sale. The margins are in steady uptrend from 13.3% in FY6 to 16.8% in FY7. The return ratios, ROCE and ROW are also quite healthy at 29.5% and 35% respectively. Backed by aggressive expansion plans and increasing contribution of value adds in the total revenue, the financial picture for next 3-4 years seems to be very optimistic. For FY7- FY11, we expect net sales to grow at a CAGR of 39%, EBITDA and PAT are expected to chalk an average growth of 54% and 58% respectively during the same period. (%) Net sales EBITDA PAT CAGR (FY7-FY1) Rs crores Net sales FY3 FY4 FY5 FY6 FY7 Rs crores PAT FY3 FY4 FY5 FY6 FY7 Rs crores EBITDA FY3 FY4 FY5 FY6 FY7 EBITDA margins % % Return ratios FY3 FY4 FY5 FY6 FY7 ROCE RONW Rapid volume growth Sales Quantity (MT) Rice 17, ,2 42,45 5,755 Rice Bran Oil 1,42 2,127 1,884 7,416 Rice Bran De-oiled Cake 5,633 25,888 47,486 32,159 Cattle Feed 1,63 1,725 4,626 2,88 Husk-Paddy 8,494 29,797 21,965 5,917 Nakku 1, ,484 6,53 Increase in realizations Average realization (Rs/ton) Rice 12,661 1,28 11,956 12,141 Rice Bran Oil 35,273 31,124 27,6 35,452 Rice Bran De-oiled Cake 2,876 1,653 3,327 3,47 Cattle Feed 4,11 4,291 4,237 4,933 Husk-Paddy ,6 Nakku 318 4,828 5,73 7,213 Page 6 of 6

7 Valuation We expect the net sales to grow at a CAGR of 39% to Rs 1,859 crores over FY7-FY1 on the back of capacity expansion and increased revenues from its ancillary activities. Operating profits is expected to register a CAGR of 54% to Rs 424 crores over the same period driven by increased realizations from rice, revenues from power generation gaining steam. The PAT is expected to grow with a CAGR of 58% to Rs 239 crores in FY1E. At the CMP of Rs 2, the stock quotes at PE of 7.2x and 5.3x its FY9E and FY1E earnings of Rs 27.7 and 38. Free Cash Flow Year Net Sales Operating expenses Operating profits (EBIT) Cash taxes NOPLAT Depreciation Gross cash flow Less capital expenditures Less working capital investments Free cash flow DCF Valuation per share Total FCFF Continuing Value Value of operations 239. Plus: value of non operating assets 58.7 Value of firm Less: market value of obligations Shareholder value Shareholder value per share Cost of equity 15% Post Tax cost of debt 7% Debt/Equity ratio.84 WACC 11% Peer Comparison Most of the listed rice companies are basmati based and LEAF business model is paddy based. So, peer comparision in strict sense is not feasible. Recommendation Our fair price based on DCF valuation is Rs 297. At our target price, the stock will be valued at 6.2x EV/EBIDTA and 1.7x P/E on the basis of FY9E earnings. Our target price provides an upside of 48%. We recommend BUY. Page 7 of 7

8 W2W Ratings Quantitative models of valuation are firmly established as well as practiced as taught in B- schools. However as we all know there are severe limitations in conventional quantitative models. DCF captures time value of money and is as good as its assumptions. Wish a price for scrip and behold! DCF will give you the desired estimation. P/E does not capture quality of earnings and rate of growth objectively. What is baffling is that P/E is more like one size fits all strategy and therefore in the market P/E range is remarkably high from 5 to 5. Even after discounting growth there is a huge variation in P/E within a sector. Amongst peers P/E vary as though underlying scrips are as different as oranges and apples. This provide enough evidence that major qualitative factors, like management quality, strength of business model and investor perception, any inherent strength etc, which writes the market movements gets largely ignored in historic valuation techniques. We pondered over intensely and wondered if we can evolve a research process encompassing qualitative as well as quantitative factors such that there is more transparency in valuation. Whilst subjective element cannot be avoided it is possible to assign weightage such that there is objectivity in assessment. The subjective element is viewed more as an art of evaluation married with the science of methodology providing 36 o perspective of the targeted script. We hereby introduce this methodology for evaluating Lakshmi Energy & Foods. W2W Ratings weightage (%) Scorecard Management quality/promoter background Business Model Soft factors (corporate governance, certification/awards, corporate social responsibility, employee benefits etc) Macro Factors 1 7 Competitive Advantage Industry Attractiveness Event Risk Product - Markets position 1 6 Brands/ Market Share Technology/Capacity Distribution Reach Exports Quality of earnings 2 18 Sales Growth Margin Growth PBT Growth EPS Growth Financial Health 2 15 Balance Sheet Strength Liquidity/Resources ROCE ROE Investor Perception 5 3 P/E Relative to Sensex P/E Relative to Sector GDR Vs Local Stock liquidity FII fancy Future Prospects 5 4 W2W Cut Off Criteria TOTAL 1 75 Action 1 >8% Strong Buy % Buy % Hold 4 <49% Reduce W2W Recommendation: BUY * Disclaimer: The above analysis is highly subjective in nature, as the analyst has used his/her judgment in exercising ratings. Readers and users are cautioned to verify the information before using it for any personal or business purpose Page 8 of 8

9 Financial Statements INCOME STATEMENT FY6 FY7 FY8E FY9E FY1E Revenues Total Expenditure Operating Profit Dep. & Amortizations EBIT Interest EBT Other Income PBT Tax PAT Revenue Growth % Op. Profit Growth % PAT Growth % BALANCE SHEET FY6 FY7 FY8E FY9E FY1E Equity Share Capital Reserves & Surplus Networth Total debt Deferred tax liability Capital Employed Gross Fixed Assets Net Fixed Assets CWIP Investments Current Assets Current Liabilities Net Current Assets Total Assets CASH FLOW FY6 FY7 FY8E FY9E FY1E Operating cash earnings Depreciation Interest Change in WC Tax paid CFO Net Capex Net Borrowings FCFE RATIOS FY6 FY7 FY8E FY9E FY1E Gearing (%) Current Ratio Inventory turnover Debtors (sale days) Asset Turnover RONW(%) ROCE(%) OPM (%) NPM(%) VALUATION PARAMETERS (fully diluted for all yrs) FY6 FY7 FY8E FY9E FY1E EPS (Rs) P/E Ratio Book Value P/BV CEPS (Rs) Dividend % DPS Dividend Yield DuPont Analysis FY7 FY8 FY9 FY1 Profit margin (PAT/Sales) 8.7% 11.7% 13.% 12.9% Total Asset turnover (Sales/TA) Equity multiplier (TA/TE) RoE 25.2% 27.7% 28.8% 28.5% Page 9 of 9

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