REI Agro Ltd is Best play on the rising demand for Basmati rice says Religare

REI Agro Ltd
Best play on the rising demand for Basmati rice
We met the management of REI Agro, one of India’s largest Basmati rice
producers with a total capacity of 920,000 tonnes. Of this, its owned capacity
stands at 534,000 tonnes, which it plans to scale up to 1.5mn tonnes (mt) by
FY13; this move would enable the company to gradually phase out its leased
capacities (40% of total capacity). Further, REI Agro would see a sharp
reduction in interest costs as proceeds from a recent rights issue have mainly
been used to repay debt (D/E ratio at 1.1x now from 4.5x in FY10). In addition,
the company, like other producers of Basmati rice in India, stands to benefit
from the flood-damaged Basmati crop in Pakistan, the only other nation that
produces this variant of rice. REI Agro has guided to a 30% revenue CAGR over
FY10-FY13. The stock is trading at 5.1x its FY10 earnings (pre equity dilution on
account of rights issue). We do not have a rating on the stock.
Owned capacity to triple by FY13: Currently, REI Agro has a capacity of 920,000
tonnes, of which 534,000 tonnes is owned and the balance is leased. The
company plans to increase its owned capacity to 858,000 tonnes by this fiscalend,
to 1.2mt by FY12 and to 1.5mt by FY13. This measured expansion will
enable REI Agro to gradually phase out its leased capacities.
Increase in head rice yield to boost profitability: Currently, the operating
efficiency of REI Agro’s leased capacity is lower than that of its owned capacity
(46% vs. 52%). However, with incremental capacities coming on stream, it
expects operating efficiency levels (or head rice yield) to improve to at least 52%.
Sharp reduction in leverage post rights issue: REI Agro has primarily used the
proceeds (Rs 12.45bn) from its recent 2:1 rights issue to repay debt. This has
brought down its D/E ratio from 4.5x in FY10 to ~1.1x currently.
Working capital to stabilize: The working capital days are likely to stabilize as
maturing period for Paddy is unlikely to increase from current 14 months
(increased from 3 months 4-5 years back), and slowing topline growth compared
to the historic 50% CAGR. REI Agro expects to clock a sales/PAT CAGR of
30%/75% over the next 3 years. During Q2FY11, the company saw a 13% drop
in revenues to Rs 8bn on account of production shutdown at one of its plants.
However, even as volumes dipped ~25% YoY, realisations improved 16% YoY.
On the profitability front too, it saw a 47% increase in PAT to Rs 725mn, led
primarily by a 36% decline in interest costs.
Trading at 5x FY10 earnings (pre rights issue): REI Agro is trading at 5.1x its
FY10 earnings (pre rights issue). We do not have a rating on the stock.