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Lakshmi Energy.: Caught in downturn - Views on News from Equitymaster

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Lakshmi Energy.: Caught in downturn
Nov 21, 2011

Lakshmi Energy and Foods Limited has announced its annual results for financial year 2010-2011. The company has reported a 4.4% YoY and 83.7% YoY fall in sales and net profit. Here is our analysis of the results.

Performance summary
  • Consolidated revenues fell by 4.4% YoY during FY11 on lower realizations from agri segment and nil contribution from the energy segment. In 4QFY11, sales were up by 2.6% YoY.
  • Operating (EBITDA) margins contracted by 426 basis points as the company booked loss of Rs 424.4 m on revaluation of the unsold stock of paddy and rice at the end of the year. The margin in 4QFY11 shrunk to a mere 1.8%.
  • A fall in operating income coupled with a steep rise in interest cost led to a steep 83.7% drop in net profit during FY11. The company booked a loss of Rs 275 m in 4QFY11.

Consolidated financial snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Total income 3,978 4,092 2.9% 11,654 11,141 -4.4%
Expenditure 3,398 4,020 18.3% 9,589 9,641 -0.5%
Operating profit (EBDITA) 580 72 -87.5% 2,065 1,500 -27.4%
EBDITA margin (%) 14.6% 1.8%   17.7% 13.5%  
Other income 1 1   11 5 -57.3%
Interest 225 269 19.8% 734 1,058 44.1%
Depreciation 107 96 -10.1% 367 387 5.2%
Profit before tax 249 (292)   975 60 -93.8%
Minority Interest - -   - -  
Tax 14 (17) -224.5% 132 (77) -158.5%
Profit after tax/(loss) 236 (275)   843 137 -83.7%
Net profit margin (%) 5.9% -6.7%   7.2% 1.2%  
No. of shares (m)         63  
Diluted earnings per share (Rs)*         2.2  
Price to earnings ratio (x)*         7.1  
* On a trailing 12-months basis

What has driven performance in FY11?
  • Revenues from agri-based business were up by a modest 2.2% YoY as a large harvest of basmati crop led to price cool down during the year. In addition, the company did not earn income from the energy segment. As a result, the consolidated sales were down by 4.4% YoY. The company was caught in a cyclical downturn just as it shifted its business strategy to wholly concentrate on basmati rice for domestic as well as export markets during the year. Export ban on non-basmati varieties and procurement issues with FCI had necessitated the strategic shift towards basmati rice.

    Cost break-up
    as a % of net sales 4QFY10 4QFY11 Change in basis points FY10 FY11 Change in basis points
    Total Cost of goods 75.4% 82.4% 706.30 74.6% 76.0% 137.05
    Staff Cost 0.5% 0.6% 6.96 0.7% 0.8% 8.60
    Other Expenditure 9.6% 4.9% -470.59 6.9% 5.9% -100.52

  • The company's profitability has been more severely hit due to the changed demand-supply dynamics. Basmati rice normally takes six months to age after which it fetches a higher price thereby requiring rice stocks to be held up for that time. In addition, buoyant demand and higher prices in the global market drove the company to stock up huge quantities of the paddy at the start of FY11. However factors such as bumper harvest and sluggish demand in the European, UK and US markets led to weakening prices during the year. As a result, the company has been stuck with the costly inventory built at the start of the year which has significantly lost its value during the year on account of tapering prices. Consequently, the company booked a loss of Rs 424.4 m on stock revaluation eroding operating profitability by 426 basis points.

  • Apart from stock devaluation pulling down operating income, Lakshmi Energy bore huge carrying costs of maintaining the inventory during the year. Thus the interest charge jumped up by 44% YoY. Despite a tax write-back of Rs 77 m, the company's profits tumbled by 83.7% YoY. The net margin earned during the year was a sliver 1.2% as compared to 7.2% in the previous year.

What to expect?
At a price of Rs 15.45, the stock is trading at 0.7 times our estimated FY13 earnings.

Lakshmi Energy's changed business strategy of shifting focus from non-basmati to basmati rice was caught offguard in the cyclical downturn. This reflects that the company did not weigh all the inherent risks before adopting a more capital-intensive business model. In the absence of any positive trigger in the short term, we would advise investors to remain cautious and not buy anymore into the stock..

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