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BASMATI RICE INDUSTRY
Made by:
Satish kumar yadav (62)
Balram singh (57)Rohit raj (49)
TABLE OF CONTENTS
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Sno. Particulars Page
no.
1 Global rice industry 42 International trade of rice 53 Indian rice industry 64 Basmati rice patent 6-75 Basmati rice industry 7-86 How is Basmati rice produced? 8-107 Industry drivers 10-12
8 Supply side of Basmati rice 12-139 Positives for the industry 1310 SWOT analysis 14
11 Pusa 1121 14-1512 New markets 1513 Future outlook of the industry 15-1614 REI Agro 17-19
15 Kohinoor Foods 20-2216 KRBL 23-2417 LT Foods 25-2618 Value chain 27-2819 Analysis 29-3420 Conclusion 35-36
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EXECUTIVE SUMMARY
The following research report relates to the basmati rice industry of
India. India is the second largest producer of rice in the world. But
the contribution of Basmati rice in the overall rice production isvery minute. India and Pakistan are the only two countries that
hold the patent to produce Basmati rice in the world. Basmati rice
is known for its aroma and nutlike flavour. When cooked, it swells
only lengthwise, resulting in long slender grains that are dry,
separate and fluffy.
The production process of Basmati rice is the most critical part
because if the rice gets broken it will not command premium price
in the export market. Therefore, utmost care has to be taken while
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producing it so that the grain is long enough to command premium
price. For this a company needs to have state of the art production
facilities in place. The maturity period also plays a key role
because if the maturity period is long the rice produced will be of a
superior quality.
The demand and supply of Basmati rice is constantly increasing
over the last few years. With the introduction of PUSA 1121 to the
Basmati rice family, favourable demographics of India anddemand for new markets such as China and Mexico it will increase
further in the coming years. On the other hand more realizations
from producing Basmati rice to farmers, increasing awareness and
increase in demand from the foreign countries will result in
increase in the supply as well.
The top four players in the organized market are REI Agro, LT
Foods, KRBL and Kohinoor. REI Agro follows fully integrated
model whereby it does all the operations from procurement of
paddy to ultimately selling it to the final consumer. On the other
hand the rest three players besides producing rice also rely on a bit
of trading. These players concentrate more on branding unlike REI
Agro who is more of a volume player.
Both the models have their pros and cons and its ultimately the
decision of the player to follow whichever model he likes.
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Basmati rice industry is still in a very nascent stage and so a lot of
opportunities exist in the following industry.
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Global Rice industry
Global paddy production over the 2009 season has been lifted by
nearly 10 million tonnes to 678 million tones (454 mn/t on milled
basis), the second highest production on record. World rice
production is expected to increase by 4% to 710 million tons (474
mn/t on milled basis) in 2010 (Source: FAO).
0
100
200
300
400
500
600
700
2005 2006 2007 2008 2009
Mn Tonnes
China India Indonesia Bangladesh Vietnam Others
Source: FAO
Global Rice Price
Global rice price have increased at a CAGR of 16% from $173/t in
2001 to $570/t in 2009. The major reasons behind increase in
global rice price during 2007 to 2009 were:
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1. Temporary export bans and restriction implemented by several
major and mid-level rice exporters,
2. Weather related problem in specific growing areas,
3. A sharp decline in the value of dollar in fall 2007 and winter
2008,
4. A shift of fund into commodities from stocks and real estate in
2007 and early 2008 that added to price volatility and may have
temporarily boosted price.
World Rice Price (US$/t)
0
100
200
300
400
500
600
700
2001 2002 2003 2004 2005 2006 2007 2008 2009
(Jan-
July)
Source: IRRI, Note: 5% broken rice price
International Trade of rice
The current forecast for international rice trade in the calendar year
2010, at 31.2 million tonnes, points to a 2.7 percent, or800 000 tonnes, increase from the 2009 estimate and much higher
than forecast last June. The revision reflects larger import
requirements by those countries that faced important crop losses in
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recent months. If confirmed, trade next year would be the second
largest after 2007.
Source: FAO
Much of the expected growth is expected to be driven by larger
imports by Asian countries, which are foreseen to reach
14.8 million tonnes on aggregate, almost 7 percent more than last
year. Part of the increase would stem from increased purchases by
Near East Asian countries, in particular Iraq, Saudi Arabia and the
United Arab Emirates, while rice flows into the Islamic Republic
of Iran may be depressed by large domestic availabilities and a
recent increase in the basmati rice tariff. Among countries in the
Far East, imports by Bangladesh, Nepal and especially thePhilippines are forecast to rise to offset recent losses from natural
disasters.
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Source: FAO
Indian Rice Industry
Rice is one of the most important food crop of India and 2nd of the
world. It feeds more than 50 % of the world population.
Agriculture is the main source of income for families in India.
Farms cover over half the land and almost 1/3rd is used to grow the
two major grains i.e. Rice and Wheat. India is the second leadingproducer of rice in the entire world, preceded only by China.
Current production of Rice in India is 87.5 mn tones. In 2010, the
total area under rice in India was 43mn hectares. Rice Production
has increased at a CAGR of 2.9% from 71mn tones in 2003 to
87.5mn tones in 2010. It is expected to grow at 99mn/t in
2011(Source: USDA). With an ever increasing population, demand
of rice has been increasing in the country. Thereafter, various
efforts such as use of High Yielding Varieties of rice, Hybrid rice,
System of Rice Intensification (SRI) method, responsive to high
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dose of fertilizers coupled with improved package of practices
have been made to increase the production & productivity in the
country through various centrally sponsored schemes
Rice production & yield trend
87.
699.
2
96.
7
93.
4
91.
8
83.
1
88.
5
71.
8
201322142202
2131210319842078
1744
0
20
40
60
80
100
120
2003 2004 2005 2006 2007 2008 2009 2010
0
500
1000
1500
2000
2500
Rice production ( Mn. Tonnes) Rice yield (Kg/hectare)
Source: CMIE
Basmati Rice
The name Basmati comes from the Hindi language, meaning
'Queen of Fragrance'.
Basmati Rice has been grown in the foothills of the Himalayas for
thousands of years. Its perfume, nutlike flavour and aroma can be
attributed to the fact that the grain is aged to decrease its moisture
content. When cooked, it swells only lengthwise, resulting in long
slender grains that are dry, separate and fluffy. Due to the highamount of starch clinging to the rice grains, Basmati rice should
always be washed before being cooked. Basmati rice is known as
the queen of rice. It is long grained, non glutinous and particularly
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good for formal rice cooking. Basmati Rice is a simple grain yet
throughout history it has been on royal menus of various cultures
as the main dish.
The Basmati Rice Patent
Basmati rice was developed by Indian farmers over hundreds of
years, but in September 1997 a Texas-based company, RiceTec
Inc., won a controversial US patent for a cross-breed with
American long-grain rice. This company was granted a patent to
call the aromatic rice grown outside India `Basmati'. RiceTec was
granted the patent on the basis of aroma, elongation of the grain on
cooking and chalkiness. Many have felt that the patent should not
be granted since basmati is Indian property. India contested the
patent for Basmati rice acquired by Rice Tec Inc, which had beenchallenged by the Agriculture and Processed Food Products Export
Development Authority (APEDA). The US Patent and Trademarks
office accepted the petition and had re-examined its legitimacy.
Contrary to misinformation in some sections of the media, India
did not lose the Basmati Patent Challenge. India has actually won
and not lost the Basmati patent battle. In its original patent on
'Basmati rice lines and grains' - granted by the USPTO on
September 2, 1997 - Rice Tec had made as many as 20 claims.
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Extensive documentation was submitted to establish that the
various Basmati varieties cultivated over the centuries in the
subcontinent contained all the 'novel' grain attributes mentioned in
the patent. As a result of a worldwide citizen campaign against
RiceTec Basmati patents, on Aug 14th 2001 the U.S. Patent and
Trademark Office struck down large sections of the Basmati
patent. In other words, the withdrawal of the grain-specific claims
ensured that Rice Tec would not be able to block the country's
Basmati rice export to US; it could, however, produce 'similar orsuperior grains' outside India.
Basmati rice industry
As mentioned above India and Pakistan are the only producers of
Basmati rice in the world. The total production in the year 2009-10
was around 4 million metric tones (mmt) of which India produced
75% and the rest 25% was produced by Pakistan. Out of the
production of 3 mmt in India, around 1.8 mmt was exported and
1.2 mmt was consumed domestically.
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Source: Company Presentation
Trade in coarse rice is spread in several countries, mainly located
in Asia, with first five importers making 25% of overall rice trade
in 2007. Basmati rice trade is rather concentrated. In 2007, the first
five clients of India had a share of 84.9% and those of Pakistan
68.5% of respective Basmati export (India: 616.7 million USD;
Pakistan: 556 million USD). India mainly exports Basmati to Saudi
Arabia, European Union, Kuwait, UAE and USA, whereas
Pakistan does the same with UAE, Iran, Oman, European Union
and Yemen.
Basmati export (MMTPA)
Particulars 2003 2004 2005 2006 2007 2008 2009
Global Rice
Basmati Rice
Other Varieties
India(75%)
Pakistan(25%)
Mostly ExportsDomestic
(40%)Exports(60%)
Full Grain Broken
Middle East
(75%)
USA/UK
(10%)
ROW
(15%)
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India Quantity 0.71 0.77 1.16 1.17 1.05 1.18 1.56Value(Mn $)
415.80
433.70
628.50
687.30
616.70
1079.10
1958.1
Pakistan Quantity 0.72 0.82 0.81 0.84 0.91 1.27Value(Mn $)
267.7
308.4
439.2
479.6
556.3
1068.9
Source: APEDA (Agricultural & Processed Food Products
Export Development Authority)
Basmati trade is also concentrated by demand side. The first five
importers made 44.5% of overall market in 2007. Main importers
are almost located in Middle East, although European Union is the
third importer.
Market Share in 2007-08 (% of total Export)
6%
10%
16%
46%
13%2%
3%
4%
Saudi Arabia UAE Kuwait United Kindom
Yemen Republic USA Netherland Others
Source: APEDA
How is Basmati Rice produced?
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The first and foremost step for the industry player to produce good
quality Basmati rice is to procure the best quality of paddy from
the mandis. In India there are a total number of 220 mandis, which
are highly diversified. Therefore the procurement skills of the
industry players play a significant role and make a vital difference
among the counterparts. There is a particular process by which
paddy is purchased from the mandis. It consists of the farmers
(sellers) commission agent (Kaccha aratya) and the companys
(buyers) commission agent (Pakka aratya).
The companys agent goes and buys paddy from the farmers
agent. The companys agent needs to possess the required skills to
determine whether the quality of paddy is good or not. If he has a
fair idea of the quality of paddy he will quote his price to the
farmers agent and the trade will take place. To develop good
procurement skills one needs a learning curve which comes
through a lot of experience.
Maturing
The key ingredient to produce full grain Basmati rice is the
maturing period of the rice. To have good quality Basmati rice it
FarmersCommission agent
Kaccha aratya(Farmers agent)
Commission agentPakka aratya
(Companies agent)
TradeTake
place
15
Organized &Unorganized
players
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needs to be properly matured. A good maturing period is generally
from 12-14 months. For maturing of the rice proper infrastructure
and maintenance is required throughout the maturing process.
There are a number of risks involved in the maturing process of
Basmati rice.
The biggest challenge of maturing Basmati rice is the money
involved in it. As the companies are operating at very high
inventory days of almost a year the working capital needs of a
company is very high. Therefore a lot of capital is required in
this business.
Besides the challenge of working capital there are a lot of risks
associated with the insects that can hamper Basmati rice when
it is stored in the godowns for about a year. Insects, rodents,
mites and fungi cause considerable damage to stored rice.There are a total of 18 species of insects that infest stored rice
in India. Some of them are lesser grain borer, rice weevil and
rice moth.
To overcome the challenges in maturing Basmati rice one can go
to the intermediaries who keep the rice for a particular period of
time. But it increases the cost of funding for the company. This
will also result in increase in the price of Basmati rice and lower
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margins to the companies as the intermediaries would eat out the
margins of the companies.
Milling
The processing and milling of rice is another important aspect of
producing good quality Basmati rice. The process of milling
involves De-husking and grading which are the most critical
processes.
De-husking
This is one of the most critical processes of Basmati rice
production because it decides the price and the length of the
Basmati rice. The full grain Basmati rice commands the best price
in the export and domestic market which is the ultimate focus of
every company.
Grading
When the paddy is processed we get various sizes of Basmati rice.
Full grain, half grain, three-fourth grain and so on. But the number
of varieties of Basmati rice that we get from the processing
depends on the processing facilities used by the company. If the
company has a good processing facility it will get more varieties of
rice, while if the company has a sub standard processing facility
the quality of rice will also be substandard.
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One can also outsource the milling process but the disadvantage of
it is the handling. But then one does not have any control on the
milling process. Moreover, the person to whom one has outsourced
might not have the facilities which grade rice in a number of
different varieties and this will result in less realization for the
company.
Selling and Distribution
All the processes become irrelevant if the product does not reach
the ultimate consumer. Therefore like every business the
distribution channels play a vital role in this business. Different
companies follow different types of distribution channels to reach
their customers.
REI Agro mainly supplies its products through wholesalers and itsretail arm Six Ten domestically. While on the other hand when we
talk about the export market it supplies its products through its
owned brand and also through the brands of the companies located
in the foreign markets.
On the other hand the other companies such as Kohinoor Ltd.,
KRBL and LT Foods supply their products through the branded
route domestically as well as internationally. Domestically they
supply their products through kirana shops, wholesalers, retail
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chains such as Reliance retail, Big Bazaar etc. These three
companies are more into the branding business as compared to REI
Agro which is more into the private labeling segment.
In this regard Kohinoor Ltd., KRBL and LT Foods have an
advantage that they have an established brand which commands
higher price in the markets as compared to REI Agro. But due to
the higher working capital cost and higher procurement costs, the
margins of these three companies are lower as compared to REIAgro.
Basmati Rice Industry Drivers
Domestic Drivers
India is one of the fastest growing economies of the world. Withthe advantage of the demographics, India is poised to become one
of the developed economies in the next 2 decades.
The following are the reasons which will drive the growth of
Basmati rice industry in India:
Increasing affordability
India is the fifth largest country in purchasing power parity and the
tenth largest in sheer quantum terms. In year 2008-09 Indias per
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capita income was estimated to be more than $653 and is expected
to rise to $2000 by the year 2016-17 (Source CSO). The average
household disposable income would reach Rs 3, 18,869 by the year
2025 at a CAGR of 5.3% resulting in an increased demand for
Basmati. The average Indian is earning higher than ever before.
The estimated cumulative liquid wealth of the Indian affluent class
is poised to grow at 50% over the next three years.
Rising consumerism
India is expected to graduate from the 12th largest in the year 2007
to worlds fifth largest by the year 2025 among consumer markets.
There is a subtle shift occurring in the Indian spending habit.
Expenditure in life style and premium goods, rather than spending
on necessities, is projected to account for 70% of all consumers
spending by the year 2025. (Source Mckinsey report) By 2020,
urban consumers are likely to represent 37% of the population and
still account for 62% of consumption.
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Urban population in India, % of Total
10%
15%
20%
25%
30%
35%
40%
45%
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040
Source: Company presentation
Change in taste & preference
The rise in per capita income has also resulted in increase in the
demand for Basmati rice. This is because more people can now
afford to buy Basmati rice. The domestic consumption of Basmati
rice has increased from 0.35mn/t in 2003 to 0.78mn/t in 2009 at a
CAGR of 14.3%. The expansion of retail stores and hyper marketshas significantly contributed to the increase in the demand for
Basmati rice. The share of branded Basmati rice in total basmati
consumption has seen an exceptional rise. With the increase in the
standard of living, consumers are shifting towards packaged rice
and becoming brand selective. Some brands of Basmati rice which
have become household names are Kohinoor, Daawat, Lal Quila
and Charminar etc. The branded rice category is expected to grow
significantly over the next few years.
Increasing availability
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The production of Basmati rice has more than doubled from
around 1 mn/t in 2003 to 2.3 mn/t in 2009 respectively. This will
continue to grow as the demand from both domestic and
international markets is constantly increasing. Moreover, the
farmers are increasing the production of Basmati rice, because the
production cost of Basmati rice is marginally higher compared to
production cost of non-Basmati rice. But the realization from
Basmati rice is higher compared to non-Basmati rice. Moreover, it
is a premium variety of rice, which generally sells at premiumprices in the domestic as well as international markets. Basmati
rice paddy sells at around Rs 28-32 per kg, while the normal rice
paddy sells at around Rs 10-13 per kg. But there is a huge
difference in the selling price of Basmati rice (average Rs.70-
75/Kg) and normal rice (Average Rs.25-30/Kg), which is forcing
the farmers to increase the production of Basmati rice.
Global market drivers
Basmati rice can only be produced by 2 countries in the world i.e.
India and Pakistan. No other country can produce Basmati rice as
these 2 countries hold the patent to produce Basmati rice. Thefollowing are the reasons which will drive the growth of Basmati
rice industry globally:
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Increasing affordability
The Middle East accounts for 75% of exports of Basmati rice from
India. Due to the better quality of rice, aroma, flavor and taste
there is a huge demand of Basmati rice globally. Theses countries
are developed and cash rich, therefore they are able to pay the
premium for Basmati rice over the non basmati rice. The
realization on exports of Basmati rice is more than the domestic
sales, so it is incentive to export Basmati rice. Moreover India and
Pakistan enjoy a kind of monopoly in this business which furtherhelps them to command a greater price from the global market.
Supply side of Basmati rice
Increasing farmer awareness
Nowadays, with the help of the various social campaigns and
advertisements from the fertilizer and seed companies, farmers are
shifting towards high yielding production methods. Some of the
techniques like High yielding variety (HYV) of seeds, hybrid rice
and various new methods such as system of rice intensification
(SRI) are being used by the farmers to produce high yielding rice.The production cost of Basmati rice is marginally higher compared
to non-Basmati rice. But there is a huge difference in the selling
price (average Rs.70-75/Kg) of Basmati rice and normal rice
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(Average Rs.25-30/Kg), which is forcing the farmers to increase
the production of Basmati rice. Due to the awareness of the various
production techniques farmers will make more profits by
producing it. So a farmer is shifting his focus from the production
of non-Basmati rice to the production of Basmati rice.
Assured off take of Basmati rice
The demand for Basmati rice is constantly increasing in both
domestic as well as international markets. On YoY basis the
exports of Basmati rice have increased tremendously. It is evident
from the fact that in the last 10 years the exports of Basmati rice
have never reduced. The export market of Basmati rice has
increased tremendously over the last few years. Similarly the
domestic consumption is also increasing because more and morepeople are shifting towards Basmati rice due to its quality, aroma,
flavor and taste. Players in both organized and unorganized market
are increasing the procurement of Basmati rice, as the demand in
both domestic and international markets is increasing. Indian
basmati rice will shortly enter the kitchens in China and Mexico.
At present, basmati is exported to over 130 countries, and thegovernment hopes to tap the huge markets of China and Mexico in
a couple of years. Therefore the farmers are assured that whatever
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they will produce will be consumed either domestically or
internationally.
Positives for the Basmati industry
The major paddy growing states of Punjab, Haryana and Uttar
Pradesh, are likely to see 20-25 percent decline in non-basmati
rice production this kharif season on account of decrease in the
crop sowing area due to low rain and shift towards basmati
rice, an Assocham survey said.
In 2008-09 - Basmati Rice Production 35 lacs Tons and In 2009 -
There was 50 percent increase in the basmati rice area in Punjab
and Haryana, the study said. Moreover, it was observed that a
large proportion of cultivation area has been shifted from non-
basmati rice sowing to basmati rice sowing (PUSA 1121 varietyof basmati rice) in Punjab and Haryana.
It is the inclusion of the PUSA 1121 variety in basmati rice
category which gives better returns as it yields about Rs 65,000
per acre against Rs 30,000-35,000 per acre that one garners from
the non-basmati varieties.
A tremendous demand for basmati rice in the international
markets has seen the country's basmati rice exports increased
from about USD 470 million in 2000-2001 to about USD 1900
million during 2008-09.
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Owing to the government of India's decision to reduce the
minimum export price (MEP) of basmati rice, the country's
basmati rice exports are expected to surge by a whooping 33%
during the season starting October. India's Food and Agriculture
Minister Sharad Pawar had announced lowering of MEP of
basmati to $ 900 PMT from the level of $ 1,100 PMT.
In the new season starting October, almost half of the 2.5 million
tonnes labeled basmati leaving India will reach Iran. When 50%
of your eggs are in one basket, you tend to watch it rathercarefully. That is what Indian industry is doing.
Iran also pays top-notch prices for Indias Pusa Rice 1121. Who
ever imagined that the variety Pusa 1121, fetching around $200/t.
Saudi Arabia still buys up to 750,000 tonnes basmati from India, it is a tou
bargainer.
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SWOT analysis of Indian Basmati Rice industry
PUSA 1121 New addition to the Basmati rice family
Pusa 1121 is an evolved variety ofPusa Basmatirice developed by
Indian scientists. This variety of rice is known for its extra ordinary
length and after cooking elongation. It has a milder aroma, but
scores equally, if not more, on other basmati traits. Having yield of
13.7 quintals per acre, it possesses extra long slender grains with
good cooking quality and it has longest cooked rice length among
Weaknesses
Lower net marginsdue to littledifferentiation
High workingcapital requirement,reducing return oncapital
High dependenceon monsoons
High dependenceon Middle East
Opportunities
Consumers
Ability andwillingness to payfor better qualityproducts
Increaseddomesticconsumptionto drivedue to favourabledemographics
Greater access toglobal markets
Threats
Emergence oflow cost substitutes byPakistan exporters
Improvedperformance byPakistan exports
Significant changein govt. policies could
disrupt the business
Strengths
Our global dist.
network consists ofboth exclusive andnon exclusivedistributors
Our portfolioconsists of all kindsof Basmati rice
Advanced surveytechnologies help us
in optimizing ourprocurement process
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all the aromatic rice varieties. The length ofgrain of Pusa 1121
rice can be as long as 9.5mm. The area under cultivation of Pusa
1121 is the maximum in the states of Punjab and Haryana. In the
year 2009, an estimated one million hectares was sown under
Pusa-1121 in Punjab and Haryana alone more than twice the area
in 2008. During 2009-10, the country exported around 2.6 mt of
basmati rice, of which 1.3 mt is believed to have been constituted
by Pusa-1121. The export realizations averaged $1,100 a tonne for
parboiled and $ 1,400 for white rice, translating into revenues ofover $ 1.5 billion from a single variety. Besides the 1.3 mt exports,
roughly 0.15 of Pusa-1121 was also consumed within the country.
But that was still insufficient in relation to the sheer size of the
produce.
Most of the people related to the industry are talking about the ill
effects on traditional basmati rice due to higher production of Pusa
1121. Even the farmers are switching towards Pusa 1121 because
of its higher yields and lower cost. Industry is also expecting the
production of Pusa 1121 to be roughly around 1.6 mt by the year
FY11. As Pusa 1121 had been accorded Basmati status by thecentre and state government last year, the overall basmati
production (including Pusa) will increase in future. Currently the
average selling price of traditional basmati rice is around Rs 70-75
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per kg which is higher compared to average selling price of Pusa
which is around Rs 45-50 per kg. Due to higher production and
supply in the market at a reasonable price domestic consumption of
Pusa will increase in the future from current level of 0.15 mt. So
going ahead we might see a pricing pressure in the branded
segment which will affect the overall profitability of the players
like REI Agro, Kohinoor, KRBL and LT Foods. But we believe it
will benefit the industry in the long term.
New markets
State run Agricultural and Processed Food Products Export
Development Authority (APFPEDA) said that Mexico has
contracted for the basmati rice and China is expected to open a
market for premium rice soon. Existing buyers are aiming to raise
their purchases. The South Asian nation is also aiming to push
sales in relatively new markets such as Japan and Australia.
Currently, the United Arab Emirates, Saudi Arabia, Iran and the
U.K. are the top four buyers of the premium rice from India.
New markets
China Mexico
Japan Australia
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Future outlook of the industry
Exports of Basmati rice from India is likely to rise this year with
production slated to increase by at least 10 lakh tonne.
According to industry estimates, export of Basmati rice this fiscal
is likely to touch 20 lakh tonne against 16-17 lakh tonne last fiscal.
Export of Basmati rice from India has been growing at a rate of 50-
60%, according to estimates.
Production of Basmati rice in the country is likely to go up to 50
lakh tonne this year from 40 lakh tonne last year, pulling downprocurement price of the crop.
Faced with competition from the Super variety of rice from
Pakistan, Indian Basmati prices in the international market have
also come down. The prices of Pusa 1121 this year is between
$1,100 and $1,300 per tonne. Super variety of Basmati, which
tastes similar to Pusa (a lower variety) from India, has a price of
$1000 per tonne.
Last year, India exported 8 lakh tonne of Basmati rice to the
country after which Iran suddenly put restrictions on Indian
exports on alleged presence of heavy metals in the Indian crop.
Earlier, Iran used to buy rice from Thailand and Pakistan beforeshifting to the Indian crop a few years ago after 1121 was
introduced in the country.
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Moreover India will get the advantage of its demographic changes.
Presently the Basmati rice consumption domestically is very low
because of the premium prices. But with the addition of the low
price Pusa 1121 variety to the Basmati rice family the consumption
of Basmati rice will increase in the domestic market. As shown in
the graph below the maximum growth of population will take place
in the age group of 15-64 i.e. the working class. As the working
population of the country will grow, changes are bound to occur in
the standard of living and taste and preferences of the people.Therefore, the demand for Basmati rice is poised to increase in the
next few years.
Population in millons
0
200
400
600
800
1000
1200
1400
1600
2000 2005 2010 2015 2020 2025
Age 0-14 Age 15-64 Age 65+ All ages
Source: Indian Demographics Scenario, 2025
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Source: NCAER
REI Agro
Company background
REI Agro was established in the year 1994 by Mr. Sundip
Jhunjhunwala. The company was formed with a vision to
consolidate the fragmented basmati rice industry. In a short span of
time it has risen to the position of an undisputed leadership in the
industry. A unique business model, out of the box approach of the
management, and the goodwill of the customers have enabled the
company to consolidate on its leadership position. In the beginning
the company focused more on processing rice rather than the saleof branded basmati rice. But as the company has comfortably
established itself in the industry it has started sale of branded
basmati rice as well. Lately the company has entered in wind
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power generation as well with a total generation capacity of 46MW
wind farms, located in Rajasthan, Maharashtra, Tamil Nadu and
Gujarat.
The company processes rice with the state of the art rice
processing unit supplied by the world leaders in food processing
equipments. Today the company caters to the domestic and
international markets through its branded and indirect sales.
Brands
REI Agro offers a wide range of brands in Basamati rice. It offers
various brands under 3 heads namely Premium, Midrange and
Economy.
6Ten Retail
REI Agro launched 6Ten chain of retail outlets in the last quarter
of the fiscal of 2006-07. Currently 6Ten is operating 344 stores in
the NCR, Chandigarh, Mohali, Panchkula, Jalandhar, Ambala etc.
Brands
Premium
Kasauti
Mid-range
Mr. Miller, Hungama
Economy
Hansraj, Raindrop
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Some part of domestic sales of Basmati rice is done by 6Ten
though it is a separate company from REI Agro.
Production and capacity utilization trend
REI has increased its processing capacity on YoY basis over the
last few years with the total processing capacity of 902280mn/t p.a.
The capacity utilization of the company has increased from 62.5 %
in the year 2003 to 75 % in 2009. The production has also
increased from 194000mn/t to 430000mn/t in the same period.There was a fall in the capacity utilization in the year 2007 due to
substantial capacity ramp up during the year but after that it has
only increased and touched new highs.
Production and Capacity utilization trend
429.
9
397.
9
288
265.
6
230.
7
207
194
7574.5
59.8
77.674.366.8
62.5
0
50
100
150
200
250
300
350
400
450
500
2003 2004 2005 2006 2007 2008 2009
0
10
20
30
40
50
60
70
80
90
Production (in 000 MT) Capacity utilization in %
Source: Company financial statements
Production of Basmati rice at REI
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REI Agro processes Basmati rice to make it excel for the quality
conscious market. The production of Basmati rice goes through a
series of processes:
Procurement of Paddy
The first and foremost step in producing good quality Basmati rice
is the procurement of the best quality of paddy. The quality of
paddy will ultimately determine the premium it will command.
REIs huge presence in 170 mandis out of 220 mandis in NorthernIndia gives the company first mover advantage and allows it to
procure the best quality of paddy for the production of Basmati
rice. Due to the huge presence REI procures around 17% of the
total basmati rice paddy produced in India.
Processing and maturing
Theres a common saying for Wine that the older it is, the better it
is and therefore it commands a premium price over the other
wines. The same holds for Basmati rice as well. At REI before
starting with the processing of Rice, paddy is kept for around 18
months which is the longest ageing period of any company in theindustry. The matured paddy is then processed with the help of the
state of the art facilities at the company. Utmost care is taken by
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the experts who make sure that each grain of rice produced
conforms to strict corporate policy.
Distribution and consumption
REI Agro has a huge network of distribution with around 500
distributors across the country. The company also supplies to its
subsidiary company Six Ten which is an alternative vehicle to
access the domestic customers. The sorting of rice is done at 6
different points which gives the company an advantage to offerBasmati rice at various price-points with various varieties. This
helps in increasing the revenues for the company.
Maturity period
0
2
4
6
8
10
12
14
16
18
20
2003 2004 2005 2006 2007 2008 2009 2010e
Ageing(mont
Source: Company Presentation
On YoY basis the company has increased its maturing period of
the basmati rice by holding more inventory than the previous
period. This has helped the company in getting a higher yield of
the full grain rice from paddy. Due to the higher yield of the full
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grain rice the margin and head rice yield of the company has
substantially increased over the last 5 years.The following is being
represented by the EBITDA margins of the company which have
increased from 8% to 18% over the last 5 years. But higher
maturing period also increased the companys financial leverage
ratio.
Head Rice yield
As the company has increased its maturing period of rice to around
18 months it has enabled to produce more of full grain rice, which
will definitely command a premium over other rice. Over the last
7-8 years the companys yield of head rice has increased from 30%
to around 54%. The other players in the industry are still operating
at 40% head rice which gives an enormous advantage to the
company.
Head Rice yield
30 3639 43
47 49 4954
37 3128 24
20 18 1813
33 33 33 33 33 33 33 33
0
20
40
60
80
100
120
2003 2004 2005 2006 2007 2008 2009 2010 E
Head rice % Broken rice % Others %
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Source: Company Presentation
Kohinoor Foods
Company background
Kohinoor Foods Ltd. embarked upon its journey in 1989. Since
then it has been treating every milestone achieved as a stepping
stone to go past another one. Today, in India and in over 60
countries, consumer's lives have been touched by not only some of
the finest basmati rice brands, but also a wide assortment of food
products that includes Basmati Rice, Ready to Eat products, Cook-
in Sauces and Cooking Pastes to Spices, Seasonings and Frozen
Food. Its a feat that Kohinoor Foods Ltd. pulled off by spreading
the authentic India flavour abroad.
To be a globally competitive organization, Kohinoor Foods Ltd.
has strategic bases in US, UK and the Middle East. The company
has two 100% fully owned subsidiaries SOL Inc., operating
from New Jersey, USA that looks after the North American and
Canadian markets, and Indo European Food Limited, in the UK
with headquarters in London, that looks after the Europeanmarkets. The joint-venture company Rich Rice Raisers Factory
LLCoperating from Dubai, UAE takes care of the markets in the
Middle East.
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Even in India, Kohinoor Foods Ltd. has a wide-spread presence
that boasts of an extensive and unmatched distribution network
with more than 200 thousand retail outlets, 100 super distributors
and 600 stockists.
Brands
Kohinoor Foods Ltd. is more into the branded segment so it offers
a wide range of brands in Basmati rice. Some of the leading brands
are as follows:
Production capacity
The rice factory at Murthal, Haryana is one of the largest in the
country with an unbelievable milling capacity 50 metric tonnes
365
Charminar
KohinoorSilver
KohinoorGold
KohinoorPlatinum
KohinoorSuper
Brands
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per hour. Not only that, the plant is ISO 9001:2000, HACCP and
BRC certified along with being EUFSA and USFDA compliant.
Fully automated through the entire chain of processing and final
packaging, the factory uses the worlds best technologies and
equipment for churning out rice grains that can only be described
as impeccable.
Also, the manufacturing facility has a strong scientific
procurement system. The company has contract farming to ensure
consistency of agri produce and control on the entire value chain of
basmati. In addition to that, an able, technical team of procurement
personnel takes care of what is sourced for produce. The entire
chain is documented to the minutest detail ensuring 100%
traceability as per international norms.
Facts about the Rice Factory:
Area of about 36 acres with a production capacity of 1000 metric
ton per day.
One of the largest storage capacities 20,000 metric ton of rice;
50,000 metric ton of paddy
5 milling lines with milling capacity of 6 metric ton per hour
Mechanical Dryers with paddy drying capacity of 1000 metric
ton per day
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Silos attached with dryers for safe storage of paddy (8 silos with
300 metric ton capacity and 3 silos with 500 metric ton capacity)
Parboiling capacity of 500 metric ton per day
Semi-automated packing plant with imported metal detectors and
check weigher systems
Most versatile packaging offered, ranging from Jute & Cotton
Bags to Laminate Pouches, Pet Jars, Paper & Tyvek Bags to
Non-Woven Fabric Bags
Paddy Procurement
Kohinoor Foods Limited does the procurement of paddy in a very
scientific way, with a lot of research work behind it. The company
gives the farmers all the help they need in bringing up their crop
with good vigor and health. R&D teams regularly visit the farms
and advise the farmers with the status of their crop and remedies of
diseases, if any. This is done right from sowing to transplanting
and harvesting of the crop.
Before the harvesting happens, Kohinoor Foods Limited draws
samples from different zones and tests them in the laboratory.
They are tested under various parameters of the company. Thezones that conform to the quality standard norms of the company
are selected for the procurement of the paddy. The paddy is
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received and stored in controlled atmosphere with tight pest
control measures.
Source: Company, FQ Research
Organic Basmati rice
Looking at the stressful life and heightened awareness of health
among the consumers, Kohinoor Foods Limited conducts contract
farming for growing Organic Basmati Rice. This is done in
Dehradun, India one of the places where Basmati Rice
originated. The company procures Organic Basmati Rice by
coming in direct contact with the farmers, helping them in
production and by using the required technology. The companys
Organic Basmati Program is in collaboration with Uttarrakhand
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Government of India under their Organic Basmati Export
Program.
Kohinoor Foods Limited has contracts with 8 big groups of
farmers comprising a total of 1128 farmers. What started with a
small area of about 110 hectare in 2005 is today extended to
around 750 hectare. The total area of farming Organic Basmati
Rice is intended to cross a target of 1200 hectares soon.
KRBL
Company Background
India's first integrated rice company, they are also the world's
largest Basmati rice exporters and leaders in innovation across thevalue chain, from seed development and multiplication (QSDIP
program) to contact farming and marketing. KRBL is the largest
exporter of Basmati rice in India (Basmati sales account for 85%
of KRBL's total revenues) & its packaged Basmati products have
gained a brand image of their own. Today, the Company holds 11
% market share of the total Basmati exports from the country and
has strong presence internationally in markets like Saudi Arabia,
Kuwait, US & Middle East, which account for 80-85% of KRBL's
total export revenues.
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Energy Division
The Company has three power plants as shown above. In 2008-09,
the Company's energy division constituted 0.56% of the total
revenues. The total divisional sales accounted for Rs. 740 lacs.
Manufacturing Capacity
KRBL acquired an integrated rice processing plant at Dhuri (in the
state of Punjab) in FY06 at a cost of Rs. 1,580 lacs. With this
acquisition, KRBL became the largest rice miller in the world witha total capacity of 195 MT/hr, including 150 MT/hr capacities at
Dhuri & existing 45 MT/hr capacities at Ghaziabad. The plant also
has rice bran oil capacity of 42 MT/day. The Dhuri facility is
expected to be a major catalyst for future growth of KRBL. The
facility also enjoys mandi tax exemption (4% tax exemption upto
August 2015) that could enable it to market its produce at a more
competitive price. Also, most of the paddy requirement for this
plant would be met by procuring it from Punjab, thus leading to
savings in the logistics cost.
Energy Division
10.5 MW power plant inPunjab
3.5 MW plant inGhaziabad
12.5 MW plant inMaharashtra
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The Ghaziabad plant is currently working on 90% capacity
utilization. The Company is in the process of commissioning a
state-of-the-art packaging plant, with hands-free, imported
machines, at an investment of Rs. 1,500 lacs. Focusing on
extensive health and hygiene, the high-end packaging plant caters
to the needs of modern retail in US, Europe. Both the Ghaziabad
and Dhuri units have world-class milling facilities that enable the
Company to produce quality rice and better head rice quantity. The
Delhi-based Grading plant separates milled rice (mixture ofdifferent sizes: whole grain, head rice and broken rice).
Expansion plans
Going ahead, the Company plans to earmark investments to the
tune of more than Rs. 7,500 lacs in capital assets during fiscal2009-10, mainly in storage, packaging and finishing of rice for
exports.
Revenue Model
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Source: Company, FQ Research
Value added products make a difference
KRBL has achieved significant success in deriving and marketing
of by- products from the milling of rice. KRBL is has also set up a
husk fire power plant. The company will use husk to generate
power at very low cost. Approximately 50 % power will be usedfor internal consumption thus reducing the power cost
substantially. The balance will be sold. Ash from the process will
be converted into amorphous silica used in cosmetics & cement
industry. All these activities will help the company to improve on
its bottom line.
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Source: FQ Research
LT Foods
Company background
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In 1965, Bhikiwind, in a little village in Amritsar (Punjab, India);
Shri Raghunath Arora started a small trading company which grew
from being a commissioning agent to a partnership firm by 1977,
as Lalchand Tirathram Rice Mills. In 1978 Mr. V.K.Arora joined
the family business with his father, with a clear vision of taking his
company to a global level. In 1980, the company started exporting
Premium Rice.
Simultaneously, the company decided to face the challenges in
domestic markets by setting up a modern, state-of-the-art ricefactory in Sonepat, Haryana in 1984. Unorganized players with
inconsistent quality products were crowding the market. In this
scenario, Mr. V K Arora felt the need to promote branded and
packaged products. In line with this vision, the company started the
business of milling, processing and marketing of branded basmati
rice and manufacturing of rice food products in the domestic and
overseas market.
About the Company
The milling capacity of the capacity as on July, 2008 was 50million tonne per hour. The company exports Basmati rice to
almost 40 countries worldwide. The exports contributed around
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48% to the total revenues of Rs. 695 crores in FY 2007-08. Exports
are growing at a CAGR of 15% over the last 4 years.
LT Foods is ranked among the top 10 food processing companies
in Northern India. It is ranked among the top 50 companies by
Dun and Bradstreet 8th Edition of Indias Top 500 companies
2007. Daawat is registered as one of the premium and top
basmati rice brands in the country.
It bought US based $20-million Kusha Inc. in Dec 2007, post
which Daawat groups share in the US retail market increasedfrom 7% to about 51%, making it the largest basmati rice retailer
in the country. First time in the Industry, an Indian rice player
had acquired a US Company.
In the last two years Countrys top line has grown by 20% while
net profit has gone up by 2.5 times
In 2007, LT Foods set up State-of-the-art plant set up in the
Mandideep, Bhopal (MP) for Parboiled Rice, which has huge
demand in export markets.
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Profit after Tax, INR Crores
0
5
10
15
20
25
30
35
2005 2006 2007 2008 2009
Source: Company PresentationIndian Subsidiaries:-
Dawaat Foods (P) Limited
The wholly owned subsidiary of LT Foods Ltd. (formerly known
as LT Overseas Ltd.) was set up with state of the art technology,
milling unit in Mandideep, Bhopal, for production of parboiled
rice. Rice processed here caters to the institutions and requirements
of Middle East markets as well. The company has made aninvestment of 23.5 crores in this subsidiary.
Nature Bio Foods Limited
The company recognized that organic food is the future of the
world and in the same direction, company initiated steps few years
back. For the same, the wholly owned subsidiary of the companywas incorporated to cater the need of organic market which is
approximately a market of 22 billion dollar world wide and
growing with the peace of 10%.
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Staple Distribution Company Ltd.
Looking at the potential and boom in retail business, Staple
Distribution Company, a wholly owned subsidiary of the company
has been incorporated to play and establish itself as a backend
player for Modern retail.
LT International Limited
LT International Ltd., a subsidiary of the company is engaged intrading of varied merchandise.
Overseas subsidiaries
Kusha Inc.
Kusha Inc. is the largest distribution company in U.S. with the
brand name Royal and the said company have been acquired in
December 2007 by LTO North America Inc. - a wholly owned
subsidiary of LT Foods Limited. This acquisition has increased our
market share from 7% to 52% appx in U.S. market.
LT Foods North America Inc.
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LT Foods North America Inc., a wholly owned subsidiary has been
formed in California, to capture market share as well as to
strengthen our presence in U.S.
Sona Global Limited & Nice International FZE
Middle East market has a potential and to capture market share and
strengthen our presence Sona Global Limited Dubai and its
subsidiary Nice International FZE, Dubai were formed and these
are engaged in trading of rice and rice products in the Middle East.
Value chain
The value chain of the Basmati rice industry is being summarized
in the following diagram. The Pucca Artiyas or the agents of the
companies purchase raw paddy from the farmers and keep it withthemselves for 2 months. The stockists or the company if incase
the company is fully integrated like REI Agro keeps the paddy for
4 months before the raw paddy is properly milled and graded. The
milled rice is again kept by stockists for 4 months before it is
disbursed to the distributors. Before distributing to the wholesalers
and exporters the distributor matures the rice for 2 more months.
Finally fully matured rice reaches the retailers who sell it to the
ultimate consumers.
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Source: REI Presentation
Since it is a very long value chain a player can enter and exit at any
point. But the entry or the exit of a player is very important as it
will determine the margin and the working capital requirements for
that particular player. A company like REI Agro who is a fully
integrated player from purchase of raw paddy to finally selling it to
the ultimate consumer will have a higher margin. It will also have
the highest working capital requirement in the industry as it will
perform each and every function from procuring of raw material to
finally selling the finished product. As we can infer from the
diagram the money will be blocked for around 18 months, so the
fully integrated player will have the maximum requirement ofworking capital.
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EBITDA margins
0%
5%
10%
15%
20%
LT Foods KRBL Kohinoor REI Agro
2007 2008 2009
Source: Company financial statements
As against this if a player wants to enter at a later stage he will
have less requirement for working capital. His margins would also
shrink as the intermediaries would eat out the margins for
providing the relevant services of storage or maturing on behalf of
him. That is why players like LT Foods, KRBL and Kohinoor
Foods who are more into the branding segment have fewer margins
as compared to REI Agro which is evident from the graph given
above. They focus more on brand building and rely on trading as
well because they are not fully integrated as REI Agro. This also
means that the pressure of working capital requirements is less on
these companies.
Ultimately its the decision of the player to enter or exit at anytime
as the value chain is very long in case of this industry. But pros
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and cons are also associated with the timing of the entry or exit by
the company.
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ANALYSIS
Paddy purchase
REI Agro has an advantage over the others when it comes toprocurement of paddy from the mandis. It purchases paddy from
170 mandis out of 220 mandis of India which gives him a first
mover advantage. It buys almost 17% of the Basmati paddy
produced in India. Bulk purchase of paddy and prompt payment to
the farmers agent by REI also allows him to get a discount of 6-
10% as compared to other players of the industry. Because of the
huge participation in the market i.e.17%, REI agro sets the price of
paddy which others follow.
Being a fully integrated player, REI Agro purchases the paddy
directly from the mandis through its agents and performs all thefunctions from milling to distribution on its own. On the other
hand the other players do not have the required skills, facilities,
working capital and infrastructure to produce all of the Basmati
rice on their own so they also rely a bit on trading of Basmati rice.
These players purchase paddy in small quantities and sometimes
they purchase from REI Agro or other agents as well which drags
down their margin because of the higher cost of procurement.
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Processing facility
REI Agro has an advantage as it has the best processing facility in
the industry which has a good grading process that enables it to get
6 varieties of rice, when compared to its counterparts who get only
2-3 varieties of rice. Moreover the company also has the Ultra-
violet machine which removes the rice, which consists of the black
spots and other damages. This enables it to get greater realization
as compared to other players. The details of the Gross Block of the
top players are given below which shows the amount spent bycompanies on their processing facilities and other infrastructure.
The following chart clearly depicts that REI Agro has spent the
maximum amount on building its infrastructure and other facilities
to get the better product with good quality, which gives them the
best realization and margin in the industry.
Gross Block (in million Rs)
0
1000
2000
3000
4000
5000
2005 2006 2007 2008 2009
LT Foods KRBL Kohinoor REI Agro
Source: Company financial statements
Maturity period
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Inventory days
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008 2009
LT Food KRBL kohinoor REI agro
Source: Company financial statementsAmong the industry players, REI Agro has the longest inventory
days of 344 days compared to industry average of around 266
days. Due to its backward integration of the business from
procurement to selling the product, company has all the facilities
and capacity, which requires the higher no. of days for maturingprocess. Other players are not fully integrated, they either purchase
paddy from the farmers & matured it till 240-260 days or they
outsource some of the paddy from the REI agro. Lesser no. of
maturing days affects the quality, size and realization of the
basmati rice, which ultimately reflects in the profitability and
margin of the company. Hence, higher maturing days gives REI an
edge over the others in terms of quality, quantity, size and
realization, which resulting in better margin compare to industry
players.
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Financials
Working capital to balance sheet ratio
65%
70%
75%
80%
85%
90%
2005 2006 2007 2008 2009
LT Foods KRBL Kohinoor REI Agro
Source: Company financial statementsBecause of the higher inventory days, the requirement of working
capital is huge in this industry. REI Argos working capital to
balance sheet ratio is 87% in 2009 which is highest as compared to
its peers which are averaging at around 79%. As the company is
fully integrated from procurement to selling, the working capital
need for the company is the maximum in the industry. On the otherhand, other players of the industry outsource some of their work to
the intermediaries which reduces the working capital requirement
for them.
Similarly the debt-equity ratio of REI is 4.9 in the year 2009 as
compared to other players such as KRBL, Kohinoor and LT Foods
which are at 1.43, 3.48 and 4.1 respectively.
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Although the working capital to Balance sheet and debt equity
ratio is very high of REI Agro the margin of the company is also
the highest in the industry. This is because it has a very long
maturity period with the help of which it produces the best quality
rice in the industry. Therefore, the price of rice produced by it
commands premium over the rice of others which ultimately helps
in increasing the margin of the company.
R e tu r n o n e
- 1 0 %
- 5 %
0 %
5 %
1 0 %
1 5 %
2 0 %
2 5 %
2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9
LT Fo odsKR BL K oh inoo rREI A g r
R e t u r n o n c a p i ta l e m
0 %
2 %
4 %
6 %
8 %
1 0 %
1 2 %
1 4 %
1 6 %
1 8 %
2 0 %
2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9
LT FoodsKRBL Koh inoo rRE I A g r
Source: Company financial statements
The inventory days of the companies in the industry are very high
due to which they require huge working capital to run the business.
As mentioned above, not all the players are fully integrated as REI
Agro, which has all the facilities from procurement to selling in
place. The company has the highest processing and maturing
capacity compared to its peers which requires huge capital. Due to
higher working capital debt and huge capex, interest and
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depreciation costs of REI Agro drags down the overall profitability
of the Business. While other players do not have all the facilities in
place so they outsource some of their work to the intermediaries
which requires lesser working capital and capex. Therefore, the
other players have an edge over REI Agro which has better return
ratios which follows outsourcing business model.
Similarly when we talk about the advertising expenses of variouscompanies REI Agro is far behind its peers. It is not even visible if
we look at the chart below. KRBL and Kohinoor Foods are the
ones that incur maximum expenditure on advertising and
promotion. This shows how REI Agro is different in terms of its
business model when compared to its peers. REI Agro is more into
the volume and private labeling business while the rest of the
players are into the branded and packaging business. The brands of
the companies such as LT Foods, Kohinoor and KRBL have
become household names. Examples: Charminar, Daawat and
India gate etc. The advertising expenses incurred by the companies
show that exactly. While REI Argos brands such as Real Magicand Kasauti are never heard by a common man.
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Advertising expenses, INR million
0
50
100
150
200
250
2005 2006 2007 2008 2009
LT Foods KRBL Kohinoor REI Agro
Source: Company financial statements
The business of Basmati rice is such that a lot of debt is involved
as a lot of capital gets blocked in the maturity period of rice.
Therefore, the Debt equity ratio of all the players is relatively high.
KRBL has the lowest Debt equity ratio among all the players
because the company is more into branding business. On the other
hand in 2009 the ratio was highest for REI Agro because it is more
into the volume business in which everything from production to
distribution is done by the company itself.
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Debt equity ratio
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2005 2006 2007 2008 2009
LT Foods KRBL Kohinoor REI Agro
Source: Company financial statements
Financials of all the companies in the organized market
KRBL 2005 2006 2007 2008 2009
EBITDA 8.1% 11.4% 12.5% 14.4% 14.9%EBIT 6.6% 9.8% 10.6% 12.0% 13.1%PBT 5.1% 6.7% 6.3% 6.6% 7.0%
APAT 3.2% 4.4% 5.4% 5.5% 5.0%RoE 10.0% 13.3% 15.9% 15.2% 15.6%Debt-
Equityratio 1.8 1.9 1.6 2.1 1.4RoCE(EBIT onTCE) 7.1% 10.8% 12.8% 10.9% 17.2%Days Inventory 220.4 190.1 232.4 305.8 219.2
Debtors 64.0 71.7 36.1 66.2 19.7Creditors 31.1 14.4 72.1 69.5 40.3
L T 200 2006 2007 2008 2009
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Food 5
EBITDA 6.4% 7.8% 9.5% 11.6% 14.8%EBIT 4.4% 5.7% 7.8% 9.5% 12.9%PBT 1.8% 3.0% 4.3% 4.8% 3.4%
APAT 1.4% 2.8% 3.8% 4.2% 2.8%RoE 9.8% 18.6% 17.5% 22.0% 17.0%Debt-Equityratio 3.93 3.67 2.43 3.87 4.09RoCE(EBIT onTCE) 6.3% 8.4% 10.8% 10.4% 15.4%
DaysInventory 175.9 166.2 169.5 242.4 217.7Debtors 63.0 40.7 52.1 53.5 48.3Creditors 199.0 178.7 189.2 226.2 214.2
Kohinoor Food 2005 2006 2007 2008 2009
EBITDA 7.4% 8.1% 9.9% 10.6% 13.3%EBIT 6.1% 6.4% 7.9% 8.6% 11.6%PBT 4.1% 4.4% 4.8% 0.7%
APAT 3.0% 3.1% 3.4% 0.7% 6.0%RoE 15.8% 15.3% 15.7% 3.4%Debt-
Equityratio 3.0 3.6 3.8 4.1 3.4RoCE(EBIT onTCE) 8.0% 7.3% 7.7% 8.1% 9.5%
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Days Inventory 205.3 219.8 247.3 259.5 284Debtors 34.3 37.7 52.4 61.7 57Creditors 33.2 32.2 42.1 34.7 34
REIAgro
200
5
200
6
200
7
200
8
200
9
EBITDA 10% 16% 18% 18% 18%EBIT 10% 15% 17% 16% 17%PBT 6% 11% 10% 7% 4%
APAT 4% 7% 8% 6% 2%RoE 20% 20% 20% 19% 10%Debt-Equityratio 2.70 2.31 2.79 4.02 4.94RoCE(EBIT onTCE) 12% 12% 10% 11% 12%
Days Inventory 222 227 312 331 344Debtors 63 91 153 79 88Creditors 86 22 23 33 45
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Conclusion
Basically there are 2 types of models which are followed by the
companies in this industry. One is the fully integrated which is
followed by REI Agro in which each and every thing from
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procurement to selling is done by REI itself. This model is more of
a volume driven which is followed by REI Agro. The other model
is followed by rest of the 3 companies whereby these companies
produce less and also rely a bit on trading. Moreover these
companies focus mainly on brand building and selling.
The benefits to REI Agro are as follows:
Being a fully integrated player REI Agro has the best processing
facility and therefore it commands better margins because it doesnot have to pay anything to the intermediaries unlike its peers.
It also gets discount on purchase of paddy as it makes bulk
purchases as compared to other 3 players.
Being the largest producer of Basmati rice it also has the
advantage of economies of scale.
It also has its own retail chain in the form of 6TEN through
which it sells its products directly to the customers and thereby
eliminating the costs incurred on the intermediaries.
It has the longest maturing period among the industry with the
help of which it makes good quality rice which commands
premium over its competitors. The company can also benefit in case of an economic downturn
as it is a volume player and not a branded segment player.
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The ill effects of the following Business model are as follows:
Being a volume player the company cannot command a premium
price unlike a branded segment player who can easily command
premium from its customers.
The requirement of debt and working capital is immense as a lot
of money gets blocked during the maturity period.
A company needs a very strong balance sheet to follow this kind
of model.
The company cannot establish rapport with its customers as it isnot following the branded segment model.
The other business model is followed by 3 companies namely
KRBL, Kohinoor and LT Foods. The players in this model focus
more on brand building and selling. The benefits of this model are
as follows:
The players following this model are into the branded segment
and can therefore command premium price from the customers.
The retail industry is all set to grow at a rate of 9% every year
which will ultimately benefit these players. A customer when buys a brand and is satisfied makes repeat
purchases. This leads to brand loyalty which ultimately benefits
the company.
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These companies are also known by the customers as these
companies repeatedly advertise themselves which leads to brand
recognition by the customers.
The ill effects of the following Business model are as follows:
The following companies do not have their own distribution
network and have to rely on suppliers and distributors and
thereby reducing the margins. As these companies also rely on a bit of trading as the production
is less, the margins are further reduced due to the intermediaries
present in the value chain.
These companies are more likely to lose out incase of economic
downturn as they will have to reduce premium prices charged
through their respective brands.
Therefore both the business models have their pros and cons and it
is ultimately the decision of the player to follow whichever
business model he likes.
Particulars REI
Agro
LT
Food
Kohinoor KRBL
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s
Fully integrated
Premium price
Branding/Advertisement low high high high
Working capitalrequirements
high low low low
EBITDA margins high low low low
Financial cost high low low low
Maturity period high low low lowVarieties of Rice
produced5-6 2-3 2-3 2-3
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