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Chaman Lal Setia Exports Ltd (Chaman Lal) manufactures basmati rice. We
assign Chaman Lal a fundamental grade of ‘2/5’, indicating that its
fundamentals are ‘moderate’ relative to other listed securities in India. The
grade reflects the company’s small-scale operations and lack of aggression in
business expansion.
Management lacked aggression in the past
Despite manufacturing basmati rice for more than 25 years, Chaman Lal has
not capitalised on the growth potentials due to less focus on expanding its
business. This has resulted in muted volume growth during the past five years,
while the overall industry export volumes have grown at a CAGR of 14.7%.
Also, the company’s 14 tph (tonnes per hour) production capacity is one of the
lowest amongst organised players.
Measured moves for future growth
With the entry of second generation promoters, Chaman Lal has renewed its
focus on expanding the business. The company has ventured into new
geographies like Australia, New Zealand and Singapore. It is also planning to
increase marketing spend for its brand ‘Maharani’ to increase retail presence.
However, the management is taking measured steps, whereby volumes will
pick up slowly and steadily.
Diabetic rice may be a game changer
Chaman Lal’s strong R&D has developed rice with low Glimex Index suitable
for diabetics. The company is currently marketing the rice in export markets
and has entered into an agreement with Marico to supply diabetic rice which
will be marketed as ‘Safola Arise’. Chaman Lal plans to market the rice locally
under its brand ‘Maharani’ in 2HCY12. With the larger populace becoming
highly health conscious, diabetic rice holds huge potential and can be a game
changer for the company.
Revenues to grow at two-year CAGR of 5%, EPS to be Rs 12.9 in FY12
CRISIL Equities expects the company’s revenue to grow at a CAGR of 5% to Rs
2 bn during FY10 to FY12, supported by increased volumes. PAT is expected to
increase at a CAGR of 3.3% to Rs 74.3 mn over FY10 to FY12. EPS is expected
to be Rs 9.5 in FY11 and Rs 12.9 in FY12.
Valuations: Current market price has upside
We have used the P/E multiple approach to value Chaman Lal and arrived at a
fair value of Rs 39 per share. We have assigned a P/E multiple of 3x to the
company as its lack of focus on volume growth can impact profits adversely,
should basmati prices fall. We initiate coverage with a valuation grade of
‘4/5’, indicating that the market price has ‘upside’ from the current levels.
GRADING RATIONALE
Basmati rice industry: poised for strong growth
India’s basmati rice industry is poised for strong growth following an increase in
demand for basmati rice both locally and internationally. India’s basmati rice
exports have increased at a CAGR of 24% between FY07 and FY10 supported by
strong demand from countries such as Saudi Arabia, Kuwait, Iran and the UK.
The industry has greatly benefitted from global acceptance and increase in
demand for the new hybrid basmati varieties such as Pusa – 1121.
The basmati rice industry is attractive, primarily because:
• Premium pricing: Basmati rice is premium long-grain rice with a fine
texture and is one of the most expensive varieties of generally available rice
in the world.
• Lower regulations: Due to its premium nature, basmati rice is not subject
to strict regulations as in normal rice, which is the common man’s food.
• Strong growth in exports: International demand for Indian basmati rice
has grown at a CAGR of 12% since FY00, while the market size has grown
at a 20% CAGR from Rs 17 bn to Rs 109 bn between FY00 to FY10. With
volumes rising at a 24% CAGR since FY07 and pricing at 26%, the industry
CAGR is pegged at 57%. We expect the long-term average of 12% volume
growth to continue over the next three-five years.
• Lifestyle changes: With the increasing Indian middle-class population,
mall culture and growth in hotels and restaurants, domestic demand for
basmati is on the rise.
• Increasing land under cultivation for basmati: The area under
cultivation in Punjab, Haryana, Uttar Pradesh and Uttarakhand, the basmati
belt of India, has increased in FY10 as basmati rice (in particular, the Pusa
1121 variety) requires lesser water for cultivation and is more lucrative for
the farmers vis-à-vis normal rice.
Chaman Lal – a contained, small player
Chaman Lal started milling of rice in 1974 and ventured into exports in 1982.
Despite manufacturing basmati rice for more than 25 years, the company has
remained a relatively small player in this industry. With a manufacturing
capacity of 14 tph, Chaman Lal ranks low compared with other players in the
basmati rice industry.
However, notwithstanding its small size, the company is well known for
producing quality basmati rice. It has also developed a niche for itself by
developing innovative products such as rice for diabetics and pesticide-free
basmati rice
Revenues primarily driven by higher realisations
Historically, Chaman Lal has had low focus on expanding its business operations.
Its sales volumes remained range bound between FY06 and FY10, while the
export volumes have grown at a CAGR of 14.7% during the same period.
Revenues increased primarily on account of improving industry-wide
realisations.
R&D focus, product innovation can be game changer
Developer of rice for diabetics: Chaman Lal is increasingly focusing on R&D
to develop new processes which will further improve the quality of rice. The
company has developed rice with low Glimex Index (GI), which is suitable for
diabetic people who avoid the normal rice. The diabetic rice has been certified by
Indian and international agencies and is already being exported to the UK,
Singapore, USA and UAE. While the company developed the rice, it was not able
to patent it, as it released a working paper on diabetic rice before applying for
patent. As per the management, nobody else has the know-how of processing
basmati rice with lower GI at present.
Launch in domestic market may provide good upside: The company
already sells the low-GI rice in export markets under the Maharani brand. In
domestic markets, it is has entered into an agreement with Marico to be an
exclusive supplier of low-GI basmatic rice. Marico is expected to market the rice
under the brand ‘Saffola Arise’. ChamanaLal expects to launch the diabetic rice
in domestic market under the Maharani brand during 2HCY12. With the change
in focus of people on maintaining a healthy lifestyle the diabetic rice holds huge
market potential and can be a game changer for the Company.
Focus on international markets and branding
Chaman Lal markets its basmati rice under its flagship brand – ‘Maharani’ - both
locally and internationally largely through wholesalers. It is not present in the
organised retail market. Domestic sales (~36% of total sales), though branded,
are mostly conducted on a B2B (business to business) basis, where the retailer
buys in large quantities and sells to customers in a small quantity. Hence, the
end customer is not aware of the brands. In the export market, the company
mainly sells through private labels.
Taking the right steps for future growth: With the entry of second
generation promoters, Chaman Lal has renewed its focus on expanding
business. Over the past two years, the company has ventured into new
geographies such as New Zealand, Australia and Singapore. The management
expects volume growth to increase as presence in the newer geograhies gets
established. Also, the company is planning to expand its production capacity to
20 tph in FY12 from 14 tph.
New branding strategy: Going forward, Chaman Lal intends to focus on the
promotion of its flagship brand ‘Maharani’ as a premium brand. The company
has already introduced attractive packaging for 'Maharani' rice and is in the
process of launching a print and electronic media campaign to promote the
brand. Establishment of a strong brand could help Chaman Lal improve sales
volume, command higher realisations and improve profitability.
Chaman Lal’s operations not fully integrated
Due to lack of backward and forward integration, Chaman Lal has relatively
lower profitability compared with other large players such as KRBL and REI Agro.
a) Backward integration: Chaman Lal does not have an integrated
power plant unlike its large competitors.
b) Forward integration: After de-husking the paddy, the company sells
the by-products, bran and husk, in the open market. However, larger
players process the by-product and sell value-added products like bran
oil, de-oiled cakes, furfural and also use the product for power
generation.
Key Risks
Domestic and international regulatory challenges
Basmati rice exports are often hindered by regulatory policies implemented by
the Indian government as well from those countries where the rice is being
exported.
a) Domestic regulations: The Indian basmati rice industry is not highly
regulated. However, the government partially controls it through the
minimum export price (MEP), and may intervene by raising or reducing
MEP. In the past one year, the MEP has seen many fluctuations. In August
2009, MEP was reduced from US$1,100 to US$800 per tonne. Currently the
MEP is at $900. Any major increase in MEP by the government may have an
adverse impact on Chaman Lal’s volumes.
Although historically, India has not witnessed a ban on basmati rice exports,
any policy change in this regard could have a significant impact on the
volumes and revenues of the company.
b) Regulations in export countries
Saudi Arabia: CSE exports rice to the Saudi Arabian market. In order to
reduce inflation, the Consumer Affairs Department in Saudi Arabia withdrew
the import subsidy of $267 per tonne, as a result of which, realisations for
exporters are likely to fall. Any similar events in the importing countries
can have a significant impact on volumes and revenues of the company.
Basmati cultivation dependent on rainfall
While basmati requires less water for cultivation compared to normal rice, it is
still prone to the vagaries of nature. In the event of scanty or no rainfall, the rice
crop including basmati could witness a significant drop in crop cultivation
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and business
prospects, and financial performance.
Experienced management with domain expertise
Chaman Lal is headed by an experienced management who brings along more
than 25 years of experience in the rice production and processing industry. It is
led by Mr Chaman Lal Setia (chairman and managing director) who looks after
the overall management of the company. Mr Vijay Setia (executive director)
looks after procurement, processing and production of rice, while Mr Rajeev
Setia (executive director) looks after marketing and finance activities.
Strong R&D, but patents applied in promoter’s name
Mr Vijay Setia leads the company’s R&D activities and has developed several
processes and technologies which are currently in the implementation stage and
could result in cost savings. The R&D focus has also been vindicated by the
development of new varieties of basmati rice such as rice for diabetics and
pesticide-free rice which has, in turn, improved realisations. Mr Vijay Setia has
also applied for patents in his individual capacity for certain process
improvements done at the plant to reduce the water and power utilisation.
Lack of aggression restricted growth in the past
Chaman Lal’s management has lacked the necessary aggression to expand
business operations. The company continues to operate as a small player with a
production capacity of 14 tph, and its volumes have been range bound over the
past five years despite strong growth reported by the basmati industry.
Second line of management
Chaman Lal’s day-to-day activities are handled by the promoters and it doesn’t
require a strong second line of management. The second generation promoters
have also joined the operations and are actively involved in the business
activities. Mr Vijay Setia’s son Ankit Setia is a qualified food technologist and
supports the company in R&D activities. Mr Sukarn Setia is driving the
company’s marketing intiative and is looking after strengthening Chaman Lal’s
position in the domestic as well export market. As per our interaction with the
management, the company is expected to remain a family-run business.
Corporate Governance
CRISIL’s fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors
such as industry and business prospects, and financial performance. In this
context, CRISIL Equities analyses the shareholding structure, board composition,
typical board processes, disclosure standards and related-party transactions.
Any qualifications by regulators or auditors also serve as useful inputs while
assessing a company’s corporate governance.
Overall, corporate governance at Chaman Lal presents good practices supported
by a strong and fairly independent board, good and relevant experience and
board processes and structures broadly conforming to minimum standards.
Board composition
Chaman Lal’s board consists of well-qualified directors with experience in various
fields. Based on our discussions and the company’s disclosure levels, we are of
the opinion that the board’s structure, processes and disclosure conform to the
required standards.
The board consists of 10 members, six of whom are non-executive directors. Of
the six, five are independent directors. This is well above the minimum
stipulated standard set in the SEBI listing guidelines. The balance sheet
disclosures are sufficient to gauge the involvement of board members in the
meetings. Chaman Lal has various committees in place to support corporate
governance practices. The audit committee is chaired by an independent
director, Mr Inder Dev Kukkar; it has two other independent directors on board
and it meets at timely and regular intervals.
Weak disclosure levels
Chaman Lal has not implemented a proper management information system
which limits its ability to maintain proper business data. The company’s quality
of disclosure is poor, judged by the level of information and details furnished in
annual reports, website and other publicly available data.
Valuation Grade: 4/5
We have used the P/E multiple approach to value Chaman Lal. We have
assigned a forward P/E multiple of 3x to Chaman Lal’s FY12 EPS of Rs 12.9 and
arrived at the fair value of Rs 39 per share. Lack of focus on volume growth can
impact profits adversely should basmati prices fall. Due to this overhang, we
prefer to use a low muliple of 3x, a 50% discount to the multiple assigned for
KRBL, the best basmati play, as per CRISIL Equities. Accordingly, we initiate
coverage on Chaman Lal with a valuation grade of ‘4/5’, indicating that the
current market price of Rs 31 (as on March 03, 2011) has upside.
Company Overview
Incorporated in 1974, Chaman Lal mills, processes and markets basmati rice. It
started exporting basmati rice in 1982. It markets its products in the Middle
East, the UK, the US and Iran. It markets its products under its flagship brand
“Maharani” and also under private labels. Chaman Lal’s rice processing facilities,
located in Amritsar in Punjab and Karnal in Haryana, have a total production
capacity of 14 tph. Over the years, the company has gained strong experience in
the processing of basmati rice and has developed several in-house technologies
that produce quality rice with uniform colour. Chaman Lal has developed an
indigenous technique of clarifying waste parboiling water and adoption of cleaner
fuels and combustion techniques which are under patent application.
Milestones
1974 Chaman Lal Setia established as a partnership firm
1982 Started basmati rice export
1995 Listed on the Bombay Stock Exchange
2007 Started production of basmati rice for diabetics
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Chaman Lal Setia Exports Ltd (Chaman Lal) manufactures basmati rice. We
assign Chaman Lal a fundamental grade of ‘2/5’, indicating that its
fundamentals are ‘moderate’ relative to other listed securities in India. The
grade reflects the company’s small-scale operations and lack of aggression in
business expansion.
Management lacked aggression in the past
Despite manufacturing basmati rice for more than 25 years, Chaman Lal has
not capitalised on the growth potentials due to less focus on expanding its
business. This has resulted in muted volume growth during the past five years,
while the overall industry export volumes have grown at a CAGR of 14.7%.
Also, the company’s 14 tph (tonnes per hour) production capacity is one of the
lowest amongst organised players.
Measured moves for future growth
With the entry of second generation promoters, Chaman Lal has renewed its
focus on expanding the business. The company has ventured into new
geographies like Australia, New Zealand and Singapore. It is also planning to
increase marketing spend for its brand ‘Maharani’ to increase retail presence.
However, the management is taking measured steps, whereby volumes will
pick up slowly and steadily.
Diabetic rice may be a game changer
Chaman Lal’s strong R&D has developed rice with low Glimex Index suitable
for diabetics. The company is currently marketing the rice in export markets
and has entered into an agreement with Marico to supply diabetic rice which
will be marketed as ‘Safola Arise’. Chaman Lal plans to market the rice locally
under its brand ‘Maharani’ in 2HCY12. With the larger populace becoming
highly health conscious, diabetic rice holds huge potential and can be a game
changer for the company.
Revenues to grow at two-year CAGR of 5%, EPS to be Rs 12.9 in FY12
CRISIL Equities expects the company’s revenue to grow at a CAGR of 5% to Rs
2 bn during FY10 to FY12, supported by increased volumes. PAT is expected to
increase at a CAGR of 3.3% to Rs 74.3 mn over FY10 to FY12. EPS is expected
to be Rs 9.5 in FY11 and Rs 12.9 in FY12.
Valuations: Current market price has upside
We have used the P/E multiple approach to value Chaman Lal and arrived at a
fair value of Rs 39 per share. We have assigned a P/E multiple of 3x to the
company as its lack of focus on volume growth can impact profits adversely,
should basmati prices fall. We initiate coverage with a valuation grade of
‘4/5’, indicating that the market price has ‘upside’ from the current levels.
GRADING RATIONALE
Basmati rice industry: poised for strong growth
India’s basmati rice industry is poised for strong growth following an increase in
demand for basmati rice both locally and internationally. India’s basmati rice
exports have increased at a CAGR of 24% between FY07 and FY10 supported by
strong demand from countries such as Saudi Arabia, Kuwait, Iran and the UK.
The industry has greatly benefitted from global acceptance and increase in
demand for the new hybrid basmati varieties such as Pusa – 1121.
The basmati rice industry is attractive, primarily because:
• Premium pricing: Basmati rice is premium long-grain rice with a fine
texture and is one of the most expensive varieties of generally available rice
in the world.
• Lower regulations: Due to its premium nature, basmati rice is not subject
to strict regulations as in normal rice, which is the common man’s food.
• Strong growth in exports: International demand for Indian basmati rice
has grown at a CAGR of 12% since FY00, while the market size has grown
at a 20% CAGR from Rs 17 bn to Rs 109 bn between FY00 to FY10. With
volumes rising at a 24% CAGR since FY07 and pricing at 26%, the industry
CAGR is pegged at 57%. We expect the long-term average of 12% volume
growth to continue over the next three-five years.
• Lifestyle changes: With the increasing Indian middle-class population,
mall culture and growth in hotels and restaurants, domestic demand for
basmati is on the rise.
• Increasing land under cultivation for basmati: The area under
cultivation in Punjab, Haryana, Uttar Pradesh and Uttarakhand, the basmati
belt of India, has increased in FY10 as basmati rice (in particular, the Pusa
1121 variety) requires lesser water for cultivation and is more lucrative for
the farmers vis-à-vis normal rice.
Chaman Lal – a contained, small player
Chaman Lal started milling of rice in 1974 and ventured into exports in 1982.
Despite manufacturing basmati rice for more than 25 years, the company has
remained a relatively small player in this industry. With a manufacturing
capacity of 14 tph, Chaman Lal ranks low compared with other players in the
basmati rice industry.
However, notwithstanding its small size, the company is well known for
producing quality basmati rice. It has also developed a niche for itself by
developing innovative products such as rice for diabetics and pesticide-free
basmati rice
Revenues primarily driven by higher realisations
Historically, Chaman Lal has had low focus on expanding its business operations.
Its sales volumes remained range bound between FY06 and FY10, while the
export volumes have grown at a CAGR of 14.7% during the same period.
Revenues increased primarily on account of improving industry-wide
realisations.
R&D focus, product innovation can be game changer
Developer of rice for diabetics: Chaman Lal is increasingly focusing on R&D
to develop new processes which will further improve the quality of rice. The
company has developed rice with low Glimex Index (GI), which is suitable for
diabetic people who avoid the normal rice. The diabetic rice has been certified by
Indian and international agencies and is already being exported to the UK,
Singapore, USA and UAE. While the company developed the rice, it was not able
to patent it, as it released a working paper on diabetic rice before applying for
patent. As per the management, nobody else has the know-how of processing
basmati rice with lower GI at present.
Launch in domestic market may provide good upside: The company
already sells the low-GI rice in export markets under the Maharani brand. In
domestic markets, it is has entered into an agreement with Marico to be an
exclusive supplier of low-GI basmatic rice. Marico is expected to market the rice
under the brand ‘Saffola Arise’. ChamanaLal expects to launch the diabetic rice
in domestic market under the Maharani brand during 2HCY12. With the change
in focus of people on maintaining a healthy lifestyle the diabetic rice holds huge
market potential and can be a game changer for the Company.
Focus on international markets and branding
Chaman Lal markets its basmati rice under its flagship brand – ‘Maharani’ - both
locally and internationally largely through wholesalers. It is not present in the
organised retail market. Domestic sales (~36% of total sales), though branded,
are mostly conducted on a B2B (business to business) basis, where the retailer
buys in large quantities and sells to customers in a small quantity. Hence, the
end customer is not aware of the brands. In the export market, the company
mainly sells through private labels.
Taking the right steps for future growth: With the entry of second
generation promoters, Chaman Lal has renewed its focus on expanding
business. Over the past two years, the company has ventured into new
geographies such as New Zealand, Australia and Singapore. The management
expects volume growth to increase as presence in the newer geograhies gets
established. Also, the company is planning to expand its production capacity to
20 tph in FY12 from 14 tph.
New branding strategy: Going forward, Chaman Lal intends to focus on the
promotion of its flagship brand ‘Maharani’ as a premium brand. The company
has already introduced attractive packaging for 'Maharani' rice and is in the
process of launching a print and electronic media campaign to promote the
brand. Establishment of a strong brand could help Chaman Lal improve sales
volume, command higher realisations and improve profitability.
Chaman Lal’s operations not fully integrated
Due to lack of backward and forward integration, Chaman Lal has relatively
lower profitability compared with other large players such as KRBL and REI Agro.
a) Backward integration: Chaman Lal does not have an integrated
power plant unlike its large competitors.
b) Forward integration: After de-husking the paddy, the company sells
the by-products, bran and husk, in the open market. However, larger
players process the by-product and sell value-added products like bran
oil, de-oiled cakes, furfural and also use the product for power
generation.
Key Risks
Domestic and international regulatory challenges
Basmati rice exports are often hindered by regulatory policies implemented by
the Indian government as well from those countries where the rice is being
exported.
a) Domestic regulations: The Indian basmati rice industry is not highly
regulated. However, the government partially controls it through the
minimum export price (MEP), and may intervene by raising or reducing
MEP. In the past one year, the MEP has seen many fluctuations. In August
2009, MEP was reduced from US$1,100 to US$800 per tonne. Currently the
MEP is at $900. Any major increase in MEP by the government may have an
adverse impact on Chaman Lal’s volumes.
Although historically, India has not witnessed a ban on basmati rice exports,
any policy change in this regard could have a significant impact on the
volumes and revenues of the company.
b) Regulations in export countries
Saudi Arabia: CSE exports rice to the Saudi Arabian market. In order to
reduce inflation, the Consumer Affairs Department in Saudi Arabia withdrew
the import subsidy of $267 per tonne, as a result of which, realisations for
exporters are likely to fall. Any similar events in the importing countries
can have a significant impact on volumes and revenues of the company.
Basmati cultivation dependent on rainfall
While basmati requires less water for cultivation compared to normal rice, it is
still prone to the vagaries of nature. In the event of scanty or no rainfall, the rice
crop including basmati could witness a significant drop in crop cultivation
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of
management quality, apart from other key factors such as industry and business
prospects, and financial performance.
Experienced management with domain expertise
Chaman Lal is headed by an experienced management who brings along more
than 25 years of experience in the rice production and processing industry. It is
led by Mr Chaman Lal Setia (chairman and managing director) who looks after
the overall management of the company. Mr Vijay Setia (executive director)
looks after procurement, processing and production of rice, while Mr Rajeev
Setia (executive director) looks after marketing and finance activities.
Strong R&D, but patents applied in promoter’s name
Mr Vijay Setia leads the company’s R&D activities and has developed several
processes and technologies which are currently in the implementation stage and
could result in cost savings. The R&D focus has also been vindicated by the
development of new varieties of basmati rice such as rice for diabetics and
pesticide-free rice which has, in turn, improved realisations. Mr Vijay Setia has
also applied for patents in his individual capacity for certain process
improvements done at the plant to reduce the water and power utilisation.
Lack of aggression restricted growth in the past
Chaman Lal’s management has lacked the necessary aggression to expand
business operations. The company continues to operate as a small player with a
production capacity of 14 tph, and its volumes have been range bound over the
past five years despite strong growth reported by the basmati industry.
Second line of management
Chaman Lal’s day-to-day activities are handled by the promoters and it doesn’t
require a strong second line of management. The second generation promoters
have also joined the operations and are actively involved in the business
activities. Mr Vijay Setia’s son Ankit Setia is a qualified food technologist and
supports the company in R&D activities. Mr Sukarn Setia is driving the
company’s marketing intiative and is looking after strengthening Chaman Lal’s
position in the domestic as well export market. As per our interaction with the
management, the company is expected to remain a family-run business.
Corporate Governance
CRISIL’s fundamental grading methodology includes a broad assessment of
corporate governance and management quality, apart from other key factors
such as industry and business prospects, and financial performance. In this
context, CRISIL Equities analyses the shareholding structure, board composition,
typical board processes, disclosure standards and related-party transactions.
Any qualifications by regulators or auditors also serve as useful inputs while
assessing a company’s corporate governance.
Overall, corporate governance at Chaman Lal presents good practices supported
by a strong and fairly independent board, good and relevant experience and
board processes and structures broadly conforming to minimum standards.
Board composition
Chaman Lal’s board consists of well-qualified directors with experience in various
fields. Based on our discussions and the company’s disclosure levels, we are of
the opinion that the board’s structure, processes and disclosure conform to the
required standards.
The board consists of 10 members, six of whom are non-executive directors. Of
the six, five are independent directors. This is well above the minimum
stipulated standard set in the SEBI listing guidelines. The balance sheet
disclosures are sufficient to gauge the involvement of board members in the
meetings. Chaman Lal has various committees in place to support corporate
governance practices. The audit committee is chaired by an independent
director, Mr Inder Dev Kukkar; it has two other independent directors on board
and it meets at timely and regular intervals.
Weak disclosure levels
Chaman Lal has not implemented a proper management information system
which limits its ability to maintain proper business data. The company’s quality
of disclosure is poor, judged by the level of information and details furnished in
annual reports, website and other publicly available data.
Valuation Grade: 4/5
We have used the P/E multiple approach to value Chaman Lal. We have
assigned a forward P/E multiple of 3x to Chaman Lal’s FY12 EPS of Rs 12.9 and
arrived at the fair value of Rs 39 per share. Lack of focus on volume growth can
impact profits adversely should basmati prices fall. Due to this overhang, we
prefer to use a low muliple of 3x, a 50% discount to the multiple assigned for
KRBL, the best basmati play, as per CRISIL Equities. Accordingly, we initiate
coverage on Chaman Lal with a valuation grade of ‘4/5’, indicating that the
current market price of Rs 31 (as on March 03, 2011) has upside.
Company Overview
Incorporated in 1974, Chaman Lal mills, processes and markets basmati rice. It
started exporting basmati rice in 1982. It markets its products in the Middle
East, the UK, the US and Iran. It markets its products under its flagship brand
“Maharani” and also under private labels. Chaman Lal’s rice processing facilities,
located in Amritsar in Punjab and Karnal in Haryana, have a total production
capacity of 14 tph. Over the years, the company has gained strong experience in
the processing of basmati rice and has developed several in-house technologies
that produce quality rice with uniform colour. Chaman Lal has developed an
indigenous technique of clarifying waste parboiling water and adoption of cleaner
fuels and combustion techniques which are under patent application.
Milestones
1974 Chaman Lal Setia established as a partnership firm
1982 Started basmati rice export
1995 Listed on the Bombay Stock Exchange
2007 Started production of basmati rice for diabetics
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