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Value Migration leading to Margin Expansion

LT Foods (LTF) is one of the leading specialty rice producers in India with more than seven decades of operations. The company has a wide range of rice portfolio suitable to every cuisine and ethnicity. LTF forayed into organic food and ingredient business in the year 1999 through its subsidiary Nature Bio-Foods Ltd. Recently, LTF also forayed into value added business of health and convenience products with the launch of rice based snack Kari Kari, Quick Brown rice, Cuppa rice and sauté sauces. LTF has major brands in: Rice business - Daawat, Devaaya, Royal, Indus Valley, 817 Elephant, Chef’s Secret, Heritage and Rozana; Organic Business – Daawat and EcoLife; New Product Business – Kari Kari, Daawat and Royal. LTF has exports in more than 60 countries with presence in major geographies like North America, Middle East, Europe and Africa among others. The company generates around 85% of its revenues from the core rice business followed by 9% from the organic business. The new product business is still at the nascent stage, while the company targets this business to contribute between12-15% in next few years. For the last 10 years, LTF has been consistently growing its revenues at a CAGR of c.15%. LTF has streamlined its operations to reduce its exposure to price risk and geographic risk through diversification and better hedging activities. We expect the company to continue the momentum going forward with key focus on margin expansion and return on capital. We Initiate Coverage on LT Foods with a target price of ₹186.

Moving up the Value Chain towards a branded foods company

Traditionally, Rice is a commodity business dominated by regional unorganized players. However, over the years players like LTF and KRBL have transformed this business into a consumer company by establishing renowned brands like Daawat and India Gate respectively. LTF has focused on building a leading national brand in the basmati rice segment through various branding and advertising activities. The company is also diversifying into value added business such as organic foods and health & convenience products

Forward Integration as a consumer play to drive re-rating

LTF is diversifying away from its traditional rice business to more value added business of organic food & ingredients and health & convenience products. Both the business command higher margins than the rice business and has a huge market opportunity size. Recent consumer trend indicates increase in focus towards healthy and organic foods along with ready to eat products owing to time poverty. With the launch of products in the health & convenience business such as Ready to heat rice under the Royal brand, Daawat Quick Brown rice, Daawat Sehat, Kari Kari snacks and range of sauté sauces, LTF has tapped a larger audience. All the products have performed extremely well in the initial launch stage and the company is in process to scale up the operations. In the organic business as well, the company has launched various agro based products under the brand-EcoLife which is well accepted in the market.

Expanding Global Footprints

LTF has a well-diversified geographic presence with exports in more than 60 countries. The company has established its presence in major economies such as North America (37%), Europe (9%), and Middle East (14%) among others. LTF has set up a ready-to-heat plant in Houston, USA and a manufacturing facility in Rotterdam, Netherlands. The Europe business has now turned around and is growing its revenues with positive EBIDTA margins. The US business is growing at a good rate with higher realization across product categories.

Investment Rationale

Moving up the Value Chain towards a branded foods company Rice business is viewed as a commodity business where the share of unorganized players is significant. However, over the years LTF has transformed its business into a FMCG business by building reputed brands like ‘Daawat’, ‘Devaaya’, ‘Royal’, ‘Indus Valley’, ‘817 Elephant’ and ‘ Rozana’.

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