Powerfulpicks call update: My call on Lakshmi Energy and Foods (enter at 99.5 or below for a 1 year target of 135) did not go well. However, it is a good company, which has seen much higher prices in recent past and I would recommend you to hold and average in small quantities.
On Sep 13, IDFC Small And Mid Cap Equity SME Fund bought 10,00,000 shares of Lakshmi Energy and Foods at Rs 93.80 on the BSE. They would not have purchased, if there was no prospect of a bounce back to 100+ levels.
The script corrected to around 76-77 because of fears from the effects on flood. Do not forget though that crops have been destroyed at only a few places and the company also sells wheat and does not depend on paddy alone. We had a good and full monsoon and the threat of further floods have subsided at present.
Some facts to note before you decide to write off this stock:
a. Basic business model: Simple and robust - From 100 kg paddy they get 67 kg rice,2 kg nakku (broken rice),9kg rice bran and 20 kg husk. Out of rice bran they make de-oiled cake used as cattle-feed and rice bran oil (which is consumed in north India.). From nakku, they make starch. From husk they make biomass power. There is talk of making bricks from ash generated while making power. LEAF buys paddy from the farmers, process it as above and then sell the rice to the government at MSP (minimum support price) and earn their profits.
b. LEAF has plans to enter the branded basmati segment very shortly. This will boost margins.
c. CRISIL and EDELWEISS have indicated the `fair value` of this stock to be about Rs. 136. So it is highly under-valued at present. CRISIL gave a 5/5 valuation rating, citing 46% CAGR for next 2 years.
d. Balbir Singh Uppal & family rated 284th India's Super Rich, 2010 worth Rs. 351.32 Crore in March 2010.
e. LEAF produces Basmati rice, long grain rice, cattle feed, refined oils, whole wheat atta and power.
f. LEAF is a leading non-basmati rice player, with the largest paddy processing capacity in India and has a lot of value addition during the processing. It generates biomass power from husk of rice. Company's 30MW power plant is doing well and contributes around 35-40% of the profit after tax for the company.
g. Q1 FY11 PROBLEMS: During the Q3FY10 quarter (year ending September 2010), the company reported excellent sales figures amounting to 338 crores compared to 178 crores for June 09. This showed a growth of 90% y-o-y and 40% q-o-q. PUSA Basmati contributed 70% to net sales with robust sales in domestic as well as export markets. But the margins took a strong beating in this quarter because the company decided to reprocess unsold finished goods inventory and sell it. This inventory was at a higher price due to higher rice prices which subsequently fell from around 62 per kg to 48 per kg. This lead to higher raw material cost. So this was a one-time affair and going forward, company is likely to procure raw material at lower prices and sell it at normal margins.
h. Energy division showed sales of 27 crores which was up by 70% q-o-q due to higher realization of 6.38 per unit of electricity. For 9M ended June 2010, avg. realization was around Rs 5.64 per unit. Going forward, realization of power division is likely to stabilize at higher levels witnessed in June qtr. At present they generate 30 MW power from the biomass power plant and since it is clean energy they have agreement with Punjab electricity board to sell power at 7.8 Rs per unit; the company is also eligible for carbon credits but the amount should not be very significant.
i. For nine months ended June 2010, company posted sales of 782 crores compared to 505 crores for 9M ended June 2009. Net profits were at 64.7 crores as compared to around 62 crores for 9M ended June09. EPS for 9M ended June 10 was around 10 per share.
j. Company plans to launch rice in retail segment under its brand Lakshmi Foods, beginning with Delhi and ultimately covering metros and a total of 7-8 cities by end of FY 10. And there could be margin improvement in last quarter (which is usually the best quarter every year) due to lower raw material prices and stable power realizations.
k. The company has been trying hard to reduce its dependence on FCI (govt: Food Corporation of India), its largest customer because it has recently been affected by FCI's lowering the amount of procurement from the company. The launch of the retail brand could reduce dependence on FCI off-take of its products and hence reduce volatility in its earnings.
l. Conservative estimates for EPS is Rs 15 and Sales projected at Rs 1100 crores, net profit projection is Rs 90 crores. I think the company will be close to achieving the estimate.
m. There is a ban on exports of non basmati rice imposed by govt which is likely to be lifted soon.
n. During next two years company proposes to raise power capacity to 105 MW. Capacity expansions for rice milling are on and due to be completed by 2010.
TECHNICAL OUTLOOK: The stock had reached a high of around Rs 170-175 in December 2009 and thereafter has corrected to around Rs 76. It has a very strong support at Rs 69, which I do not think will be broken. In fact, fresh buys in small quantities, can be made around 70-72. For those who hold, can start averaging. The downside and bad news has already been built into the script. It should bounce back to at least 90, after some consolidation.
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