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Strong revenue growth, margin to recover...

LT Foods (LTF) is a global consumer specialty company with an explicit focus on Basmati rice, Organic Foods and Rice based Convenience Products. LTF is having a presence in more than 60 countries with significant regional exposure in the US, Europe, and the Middle East.

• We revise our target price to Rs.120 (from Rs.132), considering the current margin pressure, but upgrade to Buy rating due to strong revenue growth and the recent correction in stock price.

• LTF’s revenue growth was robust at 30%YoY in Q3FY23, aided by price and volume growth. The main segment, basmati & specialty rice (82% of total revenue), grew by 29%YoY.

• Gross margin declined by 190bpsYoY to 31.3% (37.3%QoQ) due to higher input costs while a reduction in freight cost limited EBITDA margin contraction by 160bps YoY to 9.3% (10.0% QoQ).

• Higher input costs will impact margins in the short-term. However, input costs are expected to soften given growth in paddy acreage and rupee depreciation and reduction in freight rates support margins.

• Backed by strong focus on distribution & branding, LTF’s India market share has improved to 29.4% (28.5% QoQ), and retail outlets have increased to 1.78 lakhs (1.76L QoQ) which will support future growth.

• We expect earnings to grow at a 18% CAGR over FY22-25E. We value LTF at 8x FY25E EPS (5Yr Avg=8x).

Strong topline growth aided by volume and price growth

Q3FY23 consolidated revenue grew by 30%YoY (+31%YoY in 9MFY23), aided by growth in basmati rice segment (+29%YoY, contributes ~82% of total revenue), supported by both volume and price growth. Organic foods segment (~11% of total revenue) grew by 36%YoY and Convenience & Health segment (~2.5% of total revenue) grew by 25% YoY. LTF 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 a 5Yr revenue CAGR of 10-12% aided by continuous focus on expanding its product portfolio, making investments in branding and strengthening its distribution network. LTF’s market share has improved to 29.4% (28.5% QoQ) and retail outlets have increased to 1.79 lakhs (1.76 lakhs QoQ), which will strongly support future growth. We expect the higher realisation to soften in FY24 with the anticipated increase in supply (growth in paddy acreage) unless any negative impact on production due to adverse weather conditions and expect a revenue CAGR of ~11% over FY22-FY25E.

Ease in freight costs will support EBITDA margin

Gross margin declined by 190bps YoY to 31.3%, due to higher input costs while EBITDA margin contracted only by 160bps YoY to 9.3% (10.0% QoQ), aided by reduction in freight costs. The input prices are expected to soften in FY24, given growth in paddy acreage unless any adverse weather condition leading to production shortage. LTF has strong focus on value added portfolio to improve margin in the longterm. The Health & Convenience product segment currently contributes ~2.5% of total sales (2% in FY22). LTF targets ~150bps expansion in EBITDA margin through improvements in product mix, operational efficiency, and scale.

Valuation & Outlook:

LTF’s consistent efforts on strengthening the brands, widening distribution, and region & product diversification through organic & inorganic routes have been the strategy for growth. The margin is gradually recovering due to reduction in costs and higher volumes. We value LTF at 8x FY25E (5Yr avg=8x) and arrived at a target of Rs. 120, (earlier Rs.132) upgrade to BUY rating due to recent correction in stock price.

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