LAKSHMI ENERGY AND FOODS- Steady quarter: Edelweiss

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􀂄 Revenue above estimate; PAT in line
Lakshmi Energy and Foods (LEAF) reported strong revenue growth of 106% Y-o-Y
(13.6% Q-o-Q) in Q4FY10, on account of robust sales of Pusa rice in the domestic
market and higher offtake from Food Corporation of India (FCI), coupled with
improved rice realisation. As expected, EBITDA margin improved Q-o-Q to 15.2%,
an 80bps improvement over Q3FY10. However, it was lower than our expectation
due to higher operating expenses and lower margin in the power segment. PAT
came in line at INR 240 mn. Y-o-Y, it dipped 25.1%, primarily due to substantial
dip in operating margins in rice as well as power segments due to lower
realizations.


Operating margin is expected to improve over next two quarters on account of:
• Rice realisations have improved over the past few months.
• Exhausting of the high cost inventory.
• Expectation of higher realization for power.
• Retail sale of Pusa rice.

􀂄 Retail operations likely to boost FY11 revenue
LEAF is in the process of launching its retail operations in the packaged rice category
under the Lakshmi Foods brand. The company has already launched an advertising
campaign for the same. The launch is expected to provide for strong offtake in Pusa
volumes and boost FY11 revenues. Moreover, by venturing into retail sale of rice,
LEAF aims to diversify its revenue stream and reduce exposure to volatility in FCI
offtake. In addition, higher realizations in retail operations are expected to improve
the company’s margins. It is planning to launch its rice in 7-8 cities by CY10 end.

􀂄 Strong outlook on rice exports
With respect to Pusa exports, the outlook is strong for LEAF in FY11, on account of
strong price realisation globally supported by supply side concerns owing to floods in
Pakistan and Thailand (India’s major competitors in the global premium rice export
market). Moreover, the government is expected to abolish the two-year ban on
non-basmati exports, which will benefit the company.

􀂄 Outlook and valuations: Attractive; maintain ‘BUY’
The outlook is positive for LEAF on account of launch of retail operations and
improved outlook in the export market. At CMP of INR 88, the stock is trading at P/E
of 5.1x FY11E and 4.3x FY12E. Based on DCF, we arrive at a fair value of INR 130,
and maintain ‘BUY’ recommendation on the stock.