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Basmati brilliance on a global scale!

LT Foods (LTFOODS) is a leading Indian basmati and specialty rice producer with over 70 years of experience in offering a diverse range of rice products under brands, Daawat and Royal. The company operates on a farm-to-fork model, ensuring comprehensive control over the value chain. With a significant presence in over 80 countries, LTFOODS achieved a 15% revenue CAGR over FY19-24. It focuses on expanding margins while maintaining a strong market share globally.

* According to industry reports, Basmati rice accounts for ~4% of the global rice market (USD376.5b in CY24). Basmati sales are likely to experience a 9% CAGR over FY24-32, led by rising immigration, increasing disposable incomes (a shift toward basmati), a shift to packaged products, and heightened health awareness. India is a leading global producer of basmati rice, accounting for ~75% share. Basmati rice, while comprising only 4% of India's domestic consumption, drives significant export revenue (INR483.9b in FY24). LTFOODS, being the key Indian player, stands to gain with increasing penetration of basmati rice globally.

* LTFOODS has transformed Indian rice from a loose commodity to a branded product with notable brands like Daawat and Royal. With a market share of ~30% in India and ~50% in the US, the company has diversified into organic foods (9% of revenue) and aims for double-digit growth. LTFOODS is also expanding its convenience and health (C&H) segment, targeting a revenue share increase from 3% to 10% over five years, with strong growth projected in its ready-to-heat (RTH) products in the US.

* LTFOODS has achieved an impressive 17% CAGR in international revenue over FY19-24 (69% revenue share in FY24). Its strategic expansion in the US and Europe drives growth, while the Middle East has rebounded with a remarkable 26% surge in FY24. The company's international growth is driven by geographic expansion, innovative product launches, and acquisitions, benefiting from higher price realizations abroad.

* Over the last five years, LTFOODS rerated from ~8x P/E (average of the last five years; one-year forward) to ~21x (in FY25), fueled by strong cash flow generation (cumulative FCF of INR17.7b), consistent performance (36% PAT CAGR) due to product and geographical diversification, and improved RoE/RoCE (of 19%/16% in FY24). Transitioning from a commodity to an FMCG model, these factors position LTFOODS nearer to its FMCG peer valuation. We estimate LTFOODS will record a revenue/EBITDA/adj. PAT CAGR of 14%/15%/19% over FY24-27.

* LTFOODS is currently trading at ~21x/16x/13x FY25E/FY26E/FY27E EPS with an FY27E RoE/RoCE of ~20% each. We initiate coverage on the stock with a BUY rating and a TP of INR520, based on 18x FY27E P/E.

* Key downside risks: a) climate risk for rice production and volatility in rice prices; b) competitive business environment; and c) geopolitical and foreign currency risks.

India dominating the global basmati rice market

* The global rice market, valued at USD376.5b in CY24, is projected to clock 3% CAGR during FY24-FY29, according to industry reports. While basmati rice, representing only ~4% of this market, is expected to grow at a faster rate (9% CAGR) over CY24-32, led by rapidly rising popularity with increasing immigration of basmati-consuming population to low basmati-consuming regions, increasing disposable incomes, a shift toward packaged products, and growing awareness of health benefits.

* India dominates global rice exports, with its market share surging to 46% in 2023 from 35% in 2021. India is the largest basmati rice producer. It accounts for ~75% of the world's basmati rice production. India generated ~INR483.9b revenue from basmati exports in FY24 (up 26% YoY).

* Around 70% of India's basmati rice exports in FY24 went to the Middle East, with Saudi Arabia now the top destination at 21.4% share, while Iran's share dropped to 11.6%. Despite this, LTFOODS earns only 5.6% of its revenue from the region but aims to boost this through a recent partnership with Saudi Agricultural and Investment Co. (SALIC), which has acquired a 9.22% stake in LTFOODS.

* The Indian rice market includes basmati, non-basmati, packaged, and unpackaged categories, with basmati driving significant export revenue despite accounting for only ~4% of domestic consumption. The market has seen a 7-8% CAGR over the last decade, driven by rising disposable income, shift toward packaged products, and increasing fast-food culture.

* Packaged basmati rice is projected to clock an 11% CAGR, driven by consumer interest in health-oriented products like brown, organic, and black rice.

* The organized sector features key players such as LTFOODS, KRBL and Kohinoor Foods, alongside emerging private labels from major e-commerce platforms.

* Growing consumption of basmati rice both in the domestic and global markets augurs well for branded players such as LTFOODS, which have a strong global presence.

Diversifying its commodity risk

* Indian rice market has transformed from a loose commodity to a branded and packaged product market, largely due to extensive branding efforts by organized players such as LTFOODS, which have established popular brands (like Daawat, Devaaya, Royal, et al.).

*  LTFOODS has achieved a strong market share across regions through branding activities and distribution expansion (over 1,400 global distributors). The Daawat brand commands ~30% market share in India (up from 20% in FY19). Royal and Golden Star (recently acquired) are the leading brands in the US market (Royal has over 50% market share), while 817 Elephant is the no. 2 brand in Canada. LTFOODS’ brands have 30% market share in Northern Europe and ~12-13% in the far-east region (leader in 11 out of 16 countries in this region).

* LTFOODS has come a long way from being just a rice company to a FMCG company having built a diverse portfolio to meet needs for all meal occasions. For this, the company has forayed into new segments such as organic foods & ingredients, and C&H segments.

* LTFOODS is a pioneer in the organic food sector (over two decades of presence), accounting for 9% of total revenue, with plans to achieve double-digit growth. The company primarily functions as a B2B supplier, partnering with over 64,000 farmers across 94,000 hectares of certified organic farmland to provide diverse products. Additionally, LTFOODS is establishing a manufacturing facility in Uganda to export soymeal to the US (to circumvent anti-dumping duty) and focus on high-demand crops. The global organic food market is projected to report a 15.9% CAGR over CY22-27, as per industry reports. LTFOODS aims to capitalize on this opportunity by expanding its branded organic offerings, particularly with its 'Daawat Ecolife' brand.

* LTFOODS expanded into the C&H segment in FY20, introducing products like Daawat Quick Brown Rice and RTH meals. The segment currently makes up 3% of total revenue, which the company aims to increase to 10% in five years. Its US RTH products, under the Royal brand, are strong growth drivers, contributing 65-70% of the C&H segment. With plans to double its US capacity, LTFOODS projects a 33-35% CAGR for C&H over five years, driven by global trends in convenience food consumption.

From local to global; growing its global reach

* LTFOODS has a strong international presence in over 80 countries (69% revenue share in FY24), achieving a 17% CAGR in international revenue during FY19-24. Its global business features leading brands like Daawat, Royal, Indus Valley, Devaaya, Daawat Rozana, 817 Elephant and the recent addition of Golden Star, with a focus on North America, Europe, and the Middle East.

* The company's international growth is fueled by new geography expansion, innovative product launches, and brand acquisitions. LTFOODS benefits from higher price realizations abroad, contributing to stronger margins. With the global demand for premium, health-conscious foods and growing retail reach, the company sees significant growth potential in both domestic and international markets.

* LTFOODS continues to dominate the US market (39% revenue share in FY24), leveraging its flagship Royal brand, which commands over 50% market share in packaged basmati rice. With an impressive 17% CAGR in US revenue during FY19-24, the company thrives on growing demand for premium, organic, and specialty rice varieties. Its RTH segment also saw robust 15% YoY growth. Expanding into adjacent categories, LTFOODS acquired a 51% stake in Golden Star, the largest Jasmine rice brand (non-basmati rice) in the US, boosting its market presence. The company is poised for further growth, driven by rising demand and an expanding product portfolio.

* LTFOODS has solidified its European presence, contributing 20% of its total business, with a 29% CAGR over FY19-24. With dedicated operations in the Netherlands and the UK, it captured 22% of the basmati rice market in Europe. Strategic expansions, including new processing facilities (60,000mt) in the UK and product launches, are expected to further boost revenues to EUR100m within five years.

* The Middle East, accounting for 75% of India's basmati rice exports, offers significant growth potential with rising demand in key markets like Saudi Arabia, UAE, and Iraq. Despite declining sales over FY19-23, LTFOODS achieved 26% YoY growth in FY24, driven by brand-building, targeted marketing, and strategic partnerships, notably with SALIC in Saudi Arabia. The region’s revenue mix is expected to recover within the next 4-5 years.

Leading brands backed by healthy financials

* LTFOODS has been a consistent performer with a revenue CAGR of 12%/15% over the last ten/five years.

* LTFOODS achieved broad-based growth across segments, with basmati rice and organic foods growing at 15% CAGR each and the C&H segment expanding 4.2x over FY19-24. All the geographies witnessed healthy growth, except the Middle East, which also rebounded in FY24.

* Future growth is expected across segments due to changing consumer preferences, geographic expansion, and product innovation. We estimate a 14% CAGR in total revenue during FY24-27, supported by new product launches, penetration into existing and new geographies, and strategic partnerships.

* LTFOODS has maintained stable margins of 10-12% over the last five years despite challenges like rising freight costs and fluctuating paddy prices. To counter these pressures, the company has focused on improving its product mix and expanding into higher-margin geographies. With stabilizing freight costs, operational efficiencies, and the ramp-up of new segments like Jasmine rice and C&H, we estimate margin to improve to ~13% by FY27 from ~12% in FY24.

* LTFOODS has significantly reduced its working capital days from 261 in FY19 to 189 in FY24, mainly due to extending payable days facilitated by supplier agreements for off-season procurement with extended credit terms. Inventory days remained stable at around 245 due to rice ageing requirements, with an average ageing period of eight months. The company expects working capital days to stabilize at the FY24 level through enhanced inventory management.

*  Improving margins and stable working capital translate into healthy cash flow. The company has generated cumulative FCF of INR17.6b over the last five years, with an average CFO-to-EBITDA ratio of ~81%. We estimate the company will maintain a healthy ratio going forward.

Valuation and View

* LTFOODS has been a prominent player in the Indian basmati rice market for decades, with brands like Daawat, Devaaya, and Rozana. Daawat's market share in India has risen to 30%, while the Royal brand leads the US market with over 50% share.

*  The company has achieved a robust CAGR of 15% in revenue and 19% in EBITDA during FY19 to FY24, bolstered by innovative products and a focus on organic offerings. With a presence in key consuming regions, LTFOODS aims to enhance its market share through strategic marketing and distribution, particularly in the Middle East.

* Over the last five years, LTFOODS rerated from ~8x P/E (average of the last five years; one-year forward) to ~21x (in FY25), fueled by strong cash flow generation (cumulative FCF of INR17.7b), consistent performance (36% PAT CAGR) due to product and geographical diversification, and improved RoE/RoCE (of 19%/16% in FY24). Transitioning from a commodity to an FMCG model, these factors position LTFOODS nearer to its FMCG peer valuation. We estimate LTFOODS will record a revenue/EBITDA/adj. PAT CAGR of 14%/15%/19% over FY24-27.

* LTFOODS is currently trading at ~21x/16x/13x FY25E/FY26E/FY27E EPS with an FY27E RoE/RoCE of ~20% each. We initiate coverage on the stock with a BUY rating and a TP of INR520, based on 18x FY27E P/E.

* Key downside risks: a) climate risk for rice production and volatility in rice prices; b) competitive business environment; and c) geopolitical and foreign currency risks.

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