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Strong revenue growth, margin pressure continues

LT Foods (LTF) is a global consumer specialty company with focus on Basmati rice, Organic Foods and Rice based Convenience Products. LTF is having presents across 60+ countries with strong footprint in US, Europe and the Middle EAST.

* We downgrade to Accumulate rating with a Target of Rs. 82 factoring current pressure on margins.

* Q4FY22 revenue grew by 33%YoY. For FY22, revenue growth was at 16% YoY. Basmati & specialty rice segment grew by 9%, Organic foods by 19%, Health & Convenience segment by ~62% on YoY basis.

* Gross margins improved by 110bpsYoY to 33.0% due to improved product mix and higher realisation, while EBITDA margin declined by 40bps YoY to 10.0% due to higher freight cost and ad spends.

* LTF has recently acquired 51% stake in Golden Star Trading Inc. to strengthen market share in US Jasmine rice segment and the brand has ~10% share in US market.

* We expect earnings to grow at 24% CAGR over FY22-24E. LTF currently trades at 7x 1Yr Fwd PE. We value at 6x FY24E EPS (3Yr Avg=6x).

Strong topline growth aided by growth across segments.

Q4FY22 consolidated revenue grew by 33%YoY (+12%QoQ) and FY22 revenue growth was 16% YoY aided by growth across segments. Basmati & Other specialty rice segment grew by 9%, Organic Foods segment by 19% and Health & Convenience segments by ~62% on YoY basis. Accelerated brand investments along with reopening of HoReCa (Hotel, Restaurants and Catering) is aiding topline growth. The company has recently acquired 51% stake in Golden Star Trading Inc. to strengthen market share in US Jasmine rice segment (the brand has ~10% share in US market). LTF targets 5Yr revenue CAGR of 10-12% supported by continuous focus on expanding product portfolio and strengthening distribution network. We expect revenue CAGR of ~11% over FY21-FY24E.

EBITDA margin declines due to higher freight costs

Gross margin improved by 110bps YoY to 33.0% aided by improvement in product mix and higher realisation. However, EBITDA margin declined by 40bps YoY to 10.0% (10.9% QoQ) due to higher freight cost and additional investments in brands. LTF has strong focus on value added portfolio which will support margin improvement in the long-term. Health & Convenience product segment which include ready-to-eat products currently contributes ~2% in FY22 improved from 1.1%/1.5% in FY20/FY21. The company targets ~150bps expansion in EBITDA margin through improvement in product mix, operational efficiency, and scale. The green energy initiatives by the company will provide production efficiency. We expect EBITDA margin to moderate in FY22E due to higher costs and gradually improve thereafter.

Valuation & Outlook:

LTF’s consistent efforts on strengthening the brands, widening distribution network, along with region & product diversification through organic & inorganic routes has been the strategy for growth. The recent acquisition in Jasmine rice segment will strengthen market share. The re-opening of HoReCa channels is also aiding growth while LTF’s strong focus on value-added products will improve margins. LTF currently trades at 7x 1Yr Fwd P/E. We value at 6x FY24E (3Yr avg=6x) with a Target of Rs. 82, downgrade to Accumulate rating factoring the current margin pressure.

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