LT Foods

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Key Highlights of LT Foods

• Daawat has introduced regional rice, Daawat Cuppa Rice, Biryani kits, and Daawat Sauté Sauces to its product portfolio
• The company expanded to new geographies such as Mauritius, Denmark, and Slovenia
• The Board declared an interim dividend of ₹1 in FY22
• The Company acquired a majority stake in Golden Star Trading Inc to strengthen its share in the Jasmine rice segment
• The Company operates in three segments, basmati and other specialty rice (79%), organic food and ingredients (13%), and convenience and health (6%)

Indian Rice Industry

• The Global rice market size amounted to INR 3 lakh crore in FY22 and is forecasted to grow at a rate of 2.2%. India is the largest exporter and second-largest producer of rice, next to China, with about 122 million metric tons in FY21
• India is the largest basmati rice exporter to the global market, with its basmati rice exports amounting to INR 26,416.49 crore out of total rice export of INR 72,100 crore India in FY22
• KRBL is the leading basmati rice player with a 35% market share, followed by LT Foods, which enjoys a 25% share
• The key growth driver of the industry is the expansion of the middle-class, rise in disposable income, and a significant increase in capital investment by the Indian government to ease supply-chain bottlenecks

Daawat – The Royal Rice

LT Foods (NSE: DAAWAT) is a 72-year-old consumer food business leading in basmati and specialty rice and other rice-based products. The Company is a key player in branded “Basmati rice” around the globe, with its flagship brand Daawat enjoying a 25% market share in India and Royal having a 49% market share in North America in FY22. The Company offers a portfolio of products – basmati rice, regional rice, organic products, and other rice-based health and convenience products in more than 60 countries. It has an entrenched processing and distribution network with more than 1,300 distributors and 9 plants worldwide. Moreover, the Company is expanding into new geographies- Mauritius and Denmark. It has also added new products in the convenience and health segments.

Journey

In 1950, Shri Raghunath Arora started his business with a vision to provide quality rice to his village. In 1978, Mr. Vijay Kumar Arora (son of Shri Raghunath Arora) joined the firm and helped set up the first rice mill and launch the brand ‘Daawat’ in the same year. The Company was incorporated in 1990 under the name LT Overseas Pvt. Ltd. In 1995, it was converted into a public company. During this period, the Company operated on a processing facility leased by Lal Chand Tirath Ram Rice Mills (LCTRRM). In 1995, it set up its first milling capacity of 4 Metric Tonnes per Hour (MTPH) at Sonepat. The Company was enlisted on NSE and BSE in 2006. In 2007, the Company acquired the ROYAL^® brand basmati rice in the US. Moreover, in 2008, the Company was renamed LT Foods Ltd due to diversity in its business and increasing domestic business. LT Foods is a leading player in rice and other specialty foods today.

Industry

The Company operates in three segments:

• Basmati and Specialty Rice
• Convenience and Health
• Organic Food

Rice is a staple food for 50% of the world’s population, making it one of the most important consumer foods.

According to IBEF, India accounts for nearly 70% of the world’s total basmati rice production. Rice is cultivated in 500+ districts, with West Bengal, Punjab, Uttar Pradesh, and Andhra Pradesh being India’s primary rice-producing states. India shipped 21 million tonnes of rice in FY22, of which non-basmati rice accounted for more than 17 million tonnes, the remaining being aromatic, long-grain basmati rice. Iran and Saudi Arabia have been the largest importers of rice from India. The basmati rice business is dominated by organized players like Khushi Ram and Behari Lal (KRBL), LT Foods, Adani Wilmar-Kohinoor foods, Amir Chand Jagdish Kumar (Export) Ltd, Sarveshwar Foods, and Amira Pure Foods Limited.

India is the largest rice exporter, with export revenues of ~USD 9.6 billion. In FY22, the Indian rice industry exported to 150+ nations and has witnessed an increase in the past several years. India has leveraged its focus on improving port facilities and developing a value chain incorporating essential stakeholders. Moreover, the overall rice exports for the country increased by ~46% in 2021 compared to the previous year resulting from higher imports by Bangladesh, China, and Vietnam.

Paddy is the primary input, and its procurement is an essential part in the production process for companies operating in the rice industry. Thus, monsoon plays a crucial role in determining the quality and availability of raw materials. Stocks of rice are forecasted to decline, and paddy prices are expected to rise due to a below-average monsoon in four key producing states.

The organic food business is experiencing growth due to rising health concerns and increased health consciousness among consumers. North America, followed by Europe, is leading the global organic food industry. The organic food business is a niche sector in India worth INR 2,200 crore in FY21; it is expected to grow at a compounded growth rate of around 20.5% during the forecast period between FY21 and FY26, driven by rising awareness about organic food and changing demographics.

The Convenience Food segment in India amounted to INR 4.69 lakh crore and is expected to grow at a CAGR of 12.8% between FY22 and FY27. The convenience food market has increased demand for ready-to-eat snacks, expanding the working population, increasing women’s participation in the workforce, and a sedentary lifestyle. Ready-to-eat food is emerging as a significant market due to user-friendly apps, tech-enabled driver networks, and shifting consumer preferences. The pandemic and lockdowns significantly boosted this category, and it is anticipated to grow due to the shift in consumer habits.

Business Model

Rice and Specialty Rice Segment

Basmati and Other Specialty Rice is the primary segment of LT Foods, contributing ~79% of the business’s revenue. This segment operates in Branded B2C business catering to consumers and households and in the Strategic private label segment, which caters to large institutions like Hotels, Restaurants, and Cafes (HORECA). It consists of the flagship brands Daawat, Royal, Rozana, and Devaaya. This segment witnessed a 9% YoY growth, which stemmed from a 15% rise in the small-pack consumer business and 58% in the large-pack HORECA business.

Organic Food Segment

Organic segment is operated through a wholly-owned subsidiary, Nature Bio Foods Limited (NBFL), which is the leading player in India’s organic food industry. NBFL is a pioneer in Indian organic foods and is well-recognized worldwide, deriving its success from its all-organic operations, remarkable performances, and quality products. 90% of revenue from this segment comes from exports. LT Foods caters to the rising demand for organic food and ingredients by offering a diverse range of products – organic rice, cereal grains, soya-based meals, oil and oilseeds, nuts, spices, herbs, and millets. The organic segment contributes 13% to the total revenue and has witnessed a 19% YoY growth.

Convenience and Health Segment

This value-added segment caters to consumers who wish to indulge in healthy convenience-based cooking and don’t want to put extra effort into eating healthy. This segment contributes 2% of the overall revenue, with a growth rate of 62% on a YoY basis. The Company has launched various new products into this segment as it plans on building the segment to be worth 10% of its overall business.

LTFL has an integrated ‘Farm to Fork’ model, collaborating with farmers, commission agents, and other stakeholders for an effective procurement network and marking its presence across all aspects of the value chain. The Company has a network of 260+ procurement agents across 234+ government-approved mandis and has arrangements with 90,000+ farmers. The Company encouraged and trained 75,000+ farmer families to practice sustainable farming and organic cultivation for its organic segment. The Company has a well-defined distribution network to ensure efficient inventory management and quality control. The Company also has 1,52,000+ domestic retail points, 1,200+ distributors in India, and 100+ distributors in international markets. The Company is focused on automating processes and reducing reliance on manual labor to improve its supply chain. The Company has added Mauritius, Denmark, and Slovenia market space during the year. LTFL has developed an extensive distribution network to expand its reach globally by exporting the products to key markets like Europe, North America, East Asia, and the Middle East. It has also established local subsidiaries in Europe and the US to cater better to its organic food segment.

Subsidiaries

The Company has 14 subsidiaries, 6 foreign and 8 domestic, to carry out its operations in different geographies and business verticals. Daawat Foods Limited (20%) and LT Overseas North America, Inc (36%) are the major contributors to the Company’s overall income. The Company has established local subsidiaries in the US and Europe to boost its export revenue further.

SWOT Analysis

Strengths

Global Presence and Strong Brand Portfolio

The LT group is a global player with an established market presence across 60+ countries around the globe, with the majority of its business from India, North America, Europe, and the Middle East. The Company has a strong brand image with its flagship brands, Daawat and Royal, enjoying a commanding market share of 25% in India and ~50% in the US.

Established Market Position

The promoters’ experience and the Company’s market position as one of the leading players in the domestic and international basmati rice industry led it to a consolidated turnover of INR 5,451 crore in FY22 from INR 4,773 crore in FY21. The Company has a 25% market share in India, ~50% in North America, 20% in Europe, and the Middle East. Also, it is the market leader on the e-commerce platform Amazon.

Manufacturing Facilities and Strong Distribution Network

LTFL has ‘state-of-the-art’ manufacturing facilities and an integrated business model. The Company has a strong, integrated distribution network with more than 1,52,000+ domestic retail stores and 1,300+ distribution partners. The strong distribution and procurement networks and longstanding relationships with key importers and customers continue to support the business.

Product Mix Enabling Better Financial Profile

It has enhanced its product mix by adding products that have a low cash conversion cycle. This has enabled the company to generate significant free cash flows and significantly lower working capital requirements. The working capital cycle has declined from 235 days to 207 days. The Company intends to enhance its product portfolio further by foraying deeper into these products.

Weaknesses

Huge Working Capital Requirements

The basmati rice business is a working capital-intensive business. The working capital requirement remains stretched commensurate with the size and scale of the business. The Company has to maintain facilities for the aging of rice to provide quality for later consumption.

Dependence on Weather

The business is based primarily on rice which hugely depends on weather conditions. Weather conditions impact the supply and price of paddy, hence exposing the Company to steep fluctuations in paddy prices.

Susceptibility to Changes in Trade Policies of Countries

The Company is exposed to trade policy changes in India and in key importing countries. The impact was seen in declining revenue growth in Middle Eastern countries due to the loss of the Iranian market because of the US sanctions. The ban on the export of broken rice by the Indian government also contributed to the slowdown of revenue growth. This, however, is not a significant concern for the Company as only 2-3% of its business comes from broken rice.

Opportunities

Preference for Indian Basmati

There has been a shift in the international market towards Indian food, particularly basmati rice dishes; various ethnicities have started consuming basmati. There is a significant expansion opportunity for the basmati rice category across geographies apart from India as the household demand for specialty rice is increasing.

Changes in Consumer Preferences

The rising consumer awareness has led to a demand for organic products and healthy meals. This awareness has presented considerable growth potential for the organic and health segment. The Company’s organic food vertical is expected to grow further because of limited competition in this segment.

Lifestyle and Demographics Shift

With the growth of the working population, women’s participation in the workforce, rising disposable income, sedentary lifestyles, and changing consumption patterns, the demand for ready-to-eat snacks and the convenience food retail business have expanded.

Threats

Competition from Unorganized Players

Rice is a staple food and is widely consumed worldwide; this invites competition by unorganized players who pose a threat to the organized players who provide higher quality branded products. The unorganized sector engages in price-based competition, which hurts the margin and market share of the company in rural areas.

Adani-Wilmar & Kohinoor Merger

Adani Wilmar has acquired Kohinoor, Charminar, and Trophy, which are positioned in premium, affordable, and HORECA segments, respectively. These acquisitions have created significant competition for the Company on all fronts and could significantly impact the company’s revenue and distribution.

Differentiating Strategies

Globally Diversified Portfolio

LT Foods has a well-diversified global presence in more than 60+ countries. The Company has expanded its global presence by adding new countries to its market areas. Also, it has seen an increasing market share in the countries it operates. Along with the existing brands like Rozana, Devaaya, and Elephant 817 coupled with new acquisitions like Golden Star and a strong brand of Jasmine rice in the US, the Company has placed itself in good stead and has improved its global footprint.

Sustainable Rice Production

LT Foods is a founder of India’s UN-backed Sustainable Rice Production (SRP) program. The program helps in achieving economic growth while maintaining ecological health. The Company took the initiative to train and expose farmers to different aspects of SRP. Under its SRP program, the Company works with farmers to grow sustainable and residue-free basmati rice. The program helps farmers in increasing their profitability by increasing paddy yield and reduction in costs while following sustainable practices.

Enhancing Brand Equity

Today’s consumers are very conscious of what they consume, so it is essential to be transparent about the production process. Seeing the changes in consumer tastes and preferences, the Company has evolved its brand communication. LT Foods is among the few industry players worldwide that inspect 100% of its raw materials before processing. The Company launched a ‘Banega toh Farq Dikhega’ campaign to showcase its efforts to choose the best products for its consumers. The campaign helped the Company differentiate itself from its competitors in key markets and helped enhance its brand recall.

Michael Porter 5 Forces Analysis

Barriers to Entry:

There are low barriers to entry as the rice industry is extensive and fragmented, with a huge market space. This invites unorganized players into the affordable segment of the business, primarily the company’s domestic business. However, in the international sector, the leading players with well-established sales and distribution channels across the country and worldwide make it a little difficult for unorganized players. Furthermore, there is a substantial working capital requirement as the paddy procurement, storage, and rice aging process is time and cash-consuming. At the same time, due to basmati being produced in selected geographies across the world, there is little competition from non-Indian players.

Bargaining Power of Suppliers:

The bargaining power of suppliers is moderate to high. The rice industry highly depends on the quantity and quality of paddy, which depends on the weather conditions. Farm yields can impact the availability and quality of produce, giving farmers the power to raise their prices. The Company utilizes its network of farmers and commission agents brokers dispersed in 230+ government-approved mandis and collaborates with farmers to ensure quality and cost-effective procurement.

Bargaining Power of Buyers:

Consumers enjoy high bargaining power. Due to the fragmented market and presence of unorganized players, the demand is elastic, which was further aggravated by COVID-19. However, in the convenience and health segment, the Company has some power to pass on its rising input costs to the consumers.

Rivalry Among Competitors:

The rivalry among competitors is low to moderate. The changing consumer awareness and preferences have led the Company to introduce innovative products to increase its market share; this has stemmed primarily from the convenience and organic segments of the business. The rivalry in branded rice segment is based more on product innovation. However, there is price-based competition in the unorganized sector due to fragmented markets.

Threat of Substitutes:

Due to the presence of both organized and unorganized players, and a broad and fragmented market, the threat of substitutes is high. However, the Company has tried to differentiate itself with new innovative products and its brand image.

Branding & Other Initiatives

• The Company officiated a special day for Biryani lovers by designating July 3rd, 2022, as the World’s First Biryani Day. It raised an international campaign to raise awareness for the day and invited all Biryani enthusiasts to celebrate the day with their family and friends. The Company celebrated the day with 1,500+ underprivileged children in Haryana and Madhya Pradesh.
• The Company launched a campaign, ‘Banega toh Farq Dikhega,’ during the year to bring to light the efforts taken in handpicking the best products for its consumers.

• The Company launched several TV campaigns targeting specific ethnicities and geographies. The Company launched 10 major campaigns for particular occasions – Diwali, Eid, and Onam. The campaigns were focused on driving brand visibility along with cultural awareness.

Financial Analysis

1.    Strong Topline Growth

The Gross Revenue for the Company rose by INR 678 crore, a YoY growth of 14%. The HORECA business saw a 58% growth due to the revival of the hospitality industry. Furthermore, the Company has been explicitly targeting to gain market share by capitalizing on the shift in consumer preferences towards organic and convenience products. There has been a YoY growth of 62% in the convenience segment of the Company, although it is still a small and evolving vertical. The Organic food and ingredient segment grew 19% YoY, while the Basmati rice segment, which is a more mature part of the business, grew 9% YoY.

2.    Improving Working Capital Efficiency

The Company has seen a decrease in its working capital requirements due to an efficient production system for new products. This has reduced the working capital days of the company. The fall in working capital requirements was also due to lower inventory by the company. An improvement in the working capital efficiency reflects well on the Company as the majority of its debt is used for working capital requirements. This has resulted in a fall in the cash conversion cycle to 207 days, down from 228 days in FY22.

3.    Reduction in Debt Levels

The Company generated significant free cash flows amounting to INR 373 crore, which was used to reduce overall debt from INR 1,289 crore to INR 1,061 crore. This improved the debt-equity ratio to 0.53 from 0.73. The Company has improved its interest coverage ratio from 5.6 to 7.2 times. However, the CEO said they are not keen on further debt reduction and would instead use the fund for productive purposes.

4.    Freight Prices Reduce Margins

The EBITDA has increased by 4%, rising from INR 598 Crore to INR 620 Crore. The PAT for the Company was INR 309 crore in FY22, up from INR 289 crore in FY21. However, the EBITDA margin for the Company has gone down from 12.4% to 11.2%. This fall in margin has stemmed from the rising freight costs. This is reflected in the normalized EBITDA margin on account of freight costs, which has increased to 14.1% from 11.8%. The Company faced a 1.8% rise in freight costs due to rising fuel costs, shortage of containers, and disruptions in International supply chains. Furthermore, lower paddy production in the key producing states has also contributed to a rise in input costs.

5.    Return On Equity

The ROE for LT Foods was 14.4% in FY22, down from 15.3% last fiscal year. However, it is higher than the ROE of its peer KRBL, which was 11.8%, as against 16.4% in the previous year. The fall in ROE has been a result of rising freight costs and weather-pushed paddy prices. The freight costs, which have increased due to global scenarios, are expected to cool off as geopolitical tensions reduce.

Environmental, Social & Governance

Environmental

Water Conservation

The Company follows a water conservation project and has saved 113 billion liters over the past three years through its land laser leveling program. The project covers 12 villages, 12 stop dams, and 4 ponds. As a result of this project, the Company has a rainwater harvesting and zero water discharge facility at all its factories.

Sustainable Farming

The Company is a founder of the SRP program and has 47,000 acres of land under its land leveling and AWD program, along with 1.4 lakh acres of certified organic farming. The Company trained 13,000+ farmers in the past three years on sustainable farming practices. This initiative led to a rise in yield and profitability of farmers and a reduction in fertilizers and pesticides cost.

Social

LT Foods strives for the betterment and growth of its stakeholders and is proactive in addressing consumer issues. The Company focuses on ensuring safety and sustainability in all its processes and has had zero fatalities at the workplace. It invested INR 4 crore in CSR activities, which went into the infrastructural development of 10 villages and 19 schools and setting up sanitary pad units.

Governance

In compliance with SEBI Listing Obligations and Disclosure Requirement (LODR) Regulations, the Company’s Board consists of 7 directors from diverse backgrounds, of which 4 (more than 50%) are non-executive independent directors and 2 women Independent Directors. The Board is diverse in terms of qualifications; while the executive directors are related, there is no inter-relationship among the non-executive board members. The Board constituted a Risk Management Committee under SEBI(LODR) regulations. The Board declared an interim dividend of INR1 in FY22.

Mr. Rajesh Kumar Srivastava resigned, due to personal reasons, from the Nominee Directorship of the Company with effect from April 2021. Mr. Suparas Bhandari and Mr. Gokul Patnaik resigned from the Directorship of the Company in July 2021 due to pre-occupation and personal reasons, respectively.

Risk Analysis

The rice industry is susceptible to weather conditions and trade policies of importing nations. The Company follows a comprehensive risk assessment and minimization process to hedge itself from such factors.

1.    Volatility In Raw Material Prices

As LT Foods’ primary input, rice depends on weather conditions, the availability and costs of raw materials are susceptible to unfavorable weather conditions or supply dynamics. This may create a scarcity of raw materials and negatively impact margins. The Company has an integrated procurement process and maintains sufficient stock to shield itself from such adversaries.

2.    Foreign Currency Risk

The Company operates in 60+ countries, and 68% of its revenue comes from outside India, so any currency fluctuations might adversely impact the Company’s finances and revenues. The Company has a regulated hedging program to reduce any possible risk from currency fluctuation.

3.    Operational Risk

The Company is exposed to risks from an increase in the use of pesticides above the Minimum Residue Level, which is frequently changed. Any political instability in the country or that of the importing nations might impact supply or revenues, as was seen during the Farm Bill protest or US sanctions on Iran.

COVID-19 Impact

The pandemic did not have much impact on the consumer segment of the business and had positively impacted the convenience and organic part of the business. The HORECA business was affected during the pandemic due to lockdowns in several parts of the world. Moreover, retail sales growth in the Middle East was subdued due to the piling of inventories during the COVID and geopolitical tensions. However, the lockdowns and travel restrictions boosted the convenience and health segment of the Company.

End Note

The rice business is never going out of fashion, but competition from the organized and unorganized players may impact the market share and margins of LT Foods. The ban on non-basmati rice exports could be an advantage for the Company as experts believe basmati rice will likely face a greater demand due to the ban. However, the Company has seen slow growth in the Middle East compared to its peers, despite the Middle East being the largest consumer of basmati rice. The convenience and health segment is projected to bring larger revenue and profit to the Company due to consumer lifestyles and preferences changes. The pandemic was a further boost to this segment. Do you think the Company will continue to grow or was it a temporary growth amid favorable conditions?

Stock Price History For 5 Years

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