Updated: Jun 9, 2022
Company Name – L T Foods Limited (LT Foods)
Current Share Price – INR 74 (March 23, 2022)
Market Cap – INR 2,352 cr
Rice is one of the most significant consumer foods since it provides a staple meal for half of the world's population. In 2020-21, an individual person is predicted to have consumed roughly 549 kg of rice, a slight increase from the previous year. Between 2021-26, the worldwide rice market is forecast to increase at a CAGR of 1.2%, however the Indian rice market is likely to grow at a faster pace of 2.7%.
1. What is interesting about the stock?
LT Foods, previously known as LT Overseas, is an Indian firm established in the 1980s. It is a worldwide consumer food firm specializing in Basmati and other specialty rice, organic food and ingredients, and health and convenience foods. It has customers in more than 60 countries and a worldwide supply chain with more than 900+ distribution partners. In India, it retails through ~1.37 lakh locations.
The Company’s flagship brands are Daawat and Royal. It also retails other brands such as 817 Elephant, Gold Seal Indus Valley, Heritage, Devaaya and Rozana. Basmati & other specialty rice segment accounts for 83% of total revenue, and has grown at an annual rate of 8% over the last three years. This segment in the Company's portfolio appeals to a growing customer base at all price ranges. In addition, the Company's International business, which accounts for over 70% of revenues, is fueled by the substantial brand equity of the Royal and Daawat brands.
Nature Bio Foods Limited (NBF), LT Foods' organic business, founded in 1999, has built a strong reputation for delivering authentic organic ingredients to consumers in the United States and Europe. It sells organic Asian goods such as rice, pulses, beans, and ancient grains. Organic soya meal, a healthy protein supplement derived from farms in India and African nations such as Togo and Uganda, is also exported by the Company. The segment's sales increased by 51% in FY21, and it now accounts for 12% of the Company's total revenue. In addition, to fulfill rising customer demand for chemical-free and environmentally friendly food items, the Company launched the organic brand "Eco Life" on e-commerce platforms. The Eco Life brand expanded by 26% in India last year.
In order to save time and effort, ready-to-eat or semi-prepared convenience meals are gaining traction. In response to these consumer trends, LT Foods launched Daawat Sehat, a fortified rice on the health platform, as well as Royal Ready to Heat, Daawat Cuppa Rice, Daawat Sauté Sauces, and Kari Kari on the convenience platform, all of which contributed 2% (INR 69 crores) to the overall revenue for FY21.
Through its subsidiary LT Foods Americas Inc. (LTFA), the Company announced the acquisition of 51% ownership in Golden Star Trading Inc. and its trademark Golden Star. With this purchase, LTFA will be able to use its robust distribution network across channels to grow its share of the specialty rice market in North America.
LT Foods’ performance is predicated on its ability to maintain a broad portfolio, both in terms of area and category and its ability to expand in response to changing consumer trends. As a result, the Company has grown over 12% in overall sales year-on-year
The Company intends to utilize its earnings to fund future expansion, decrease debt, and pay dividend to shareholders. The Company has gradually lowered its total debt by INR 205 crore to INR 1,253 crore, majority of which is Working Capital debt. As a result, the Debt-to-Equity ratio decreased from 0.91x to 0.66x, while the debt-to-EBITDA ratio decreased from 2.9x to 2.1x
To expand its consumer base, the Company is investing in omni-channel Go-to-Market (GTM) strategies and expanding its distribution network across all channels – general trade, modern trade, and e-commerce
Increased rivalry in the market and competitive pricing by opponents may produce market disruption
Basmati accounts for most of the Company's revenue, and therefore the Company is still regarded as a commodity player
The Company's success is predicated on its capacity to respond to changing consumer preferences by launching new products regularly, and success in such new launches is a challenge
The Company's business performance might be jeopardized by frequent changes in food regulations across the countries to which it exports
As exports form a large chunk of business, the results are affected by currency fluctuations
Chaman Lal Setia Exports - is a company that mills and processes raw and parboiled Basmati rice
KRBL - is a rice miller and exporter of Basmati rice
GRM Overseas - is a company that processes and sells almond kernels, rice, cloves, pista, rice, and wheat
Vijay Kumar Arora is the Chairman & Managing Director of LT Foods. He started working for the Company after completing his graduation in 1978. Ashwani Kumar Arora, the Managing Director of LT Foods Limited, has been the Chief Executive Officer and Chief Financial Officer of the company since April 1, 2012, and May 27, 2016, respectively.
2. Key Historical Financials
LT Foods’ Q3FY22 results were strong; the Company's revenue increased 21% to INR 1,368 crore in Q3FY22, compared to INR 1,128 crore in the same quarter in the previous fiscal year. In addition, the firm recorded an 8% rise in total net profit to INR 71 crore for the quarter.
During the last three fiscal years (FY19-FY21), revenue from operations expanded at a CAGR of 9%, backed by significant expansion across regions. The Company's sales increased by 12% in FY21, thanks to 9% growth in the Basmati and Specialty Rice section, 51% growth in the Organic division, and 45% growth in the Health and Convenience area.
The Company's net profits increased by 49% to INR 274 crore in FY21, up from INR 184 crore the previous year. Furthermore, due to a shift in product mix and lower input costs, net profit margins grew to 6%, while EBITDA increased by 18% to INR 552 crore in FY21.
3. What is my view on company valuation?
The Company has shown improved financial ratios and has been rewarded in the stock market as well. The Return on Capital Employed (ROCE) improved by 2% to 15% in 2021, while the Company’s Return on Equity (ROE) increased by 4% to 17%.
With a share price of INR 74 and a market capitalization of INR 2,352 crores, LT Foods P/E Ratio (TTM) is ~8x vs. the Indian Food industry P/E (TTM) ~40x.
The Company has had a remarkable profit gain of 31% CAGR during the last five years. However, the firm has had a relatively disappointing revenue growth rate of 9% over the same period.
Still, LT Foods has seen a considerable re-rating in its valuation due to an increased share of the branded business (resulting in steady margins), global expansion, and product innovation (organic foods, value-added items).
Investors should evaluate investing in the Company for a long term. However, the business remains a commodity play with high working capital requirement which will cap the valuation ratios and long term growth prospects.
4. What are the risks to the investment analysis?
If GDP growth slows, consumer demand may shift from branded to unbranded and premium to value range items
Any change in rainfall patterns can have a detrimental impact on crop health, which can impact crop quality, prices and therefore, profit margins.
About the Author
I write about the stock market, cryptocurrency, blockchain. I have Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.