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Lakshmi Energy: Research meet extracts
Dec 1, 2010

We recently had a conference call with the management of Lakshmi Energy and Foods Limited (LEFL). The company's top line for FY10 grew by 73% YoY. However, the operating profit fell by 6% as a result of high cost of raw material. Cost of raw material increased by 123% YoY to stand at 76% of sales. As a result of fall in operating income, net profit was also affected, falling by 3.5% YoY. The main points of the conference calls are given hereunder:

Business with FCI: Historically, LEFL's core business has been of selling rice to the Food Corporation of India (FCI). However, in the recent years, this business has been under pressure. This is because of lower purchasing by the FCI as a result of high levels of rice stocks already present at their godowns.

Exports: The government of India has banned the export of common grain rice. As of now, only basmati rice is allowed to be exported. While the company has been exporting some basmati rice over the last 2 years, this year the company plans to increase this quantity by 150% YoY. LEFL plans to do this by entering new geographies.

Domestic and retail business: For FY11, LEFL is targeting at selling 80,000 tonnes of rice in the domestic market. This rice will be a combination of broken rice and branded basmati. The company plans to target retail chains and kirana stores for this business.

Power business: The company has not been operating its power business as a result of low rates for merchant power ruling in the market. Going forward, the company plans to sign up long term contracts with State Electricity Boards to sell power at fixed rates. The company would also at some point like to explore selling its power business.

Working Capital: The working capital requirement of LEFL is expected to increase going forward. This is due to the expected increase in debtor days as retail chains are expected to demand credit from LEFL. Also, the company plans to mature basmati before selling it in the market. This will result in the pile up of inventory.

What we expect?
At a price of Rs 77, the company is trading at 3.5 times our estimated FY13 earnings. Besides low power rates, we believe that the power business of the company is suffering due to insufficient husk (raw material for power generation) being generated by the company from its rice processing. This means that the company is forced to buy husk from the open market, driving up the cost of power generated. The reason why LEFL is unable to scale up its production is because the FCI is not buying rice due to its go downs already filled with grains. Furthermore, in the open market there is an oversupply of rice. As a result of this, the company is not able to enjoy economies of scale. Going forward, the quantity being supplied to FCI is expected to stabilise at current levels. We also believe that given the competition in the domestic market and the small market for basmati rice due to its high price, the company has set aggressive targets for itself. As the company seeks to enter new geographies it will face more competition. This also leads us to believe that LEFL has set aggressive targets for exports as well.

We have assumed that as the basmati business becomes larger, the company will borrow more and more money for its working capital requirements. We are also sceptical regarding the operating margins indicated by the company. This is because comparable companies like KRBL and Kohinoor foods had operating margins of 12.7% and 10.5% respectively in FY10 whereas LEFL is targeting operating margins of 25%. Considering all the above points and after plugging in relevant numbers into our models, we believe that the price of LEFL's stock should not be more than Rs 200 on an FY13 basis. This is a growth of 37% on an annualised basis. Thus, while the stock does look attractive despite our conservative projections, we believe that the risk is on the higher side on account of the change in business model that is underway at the company. There could be greater surprises in store than what we have been accustomed to.

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