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Expect margin pressure in the near-term…

LT Foods Ltd. (LTF) is a global consumer specialty company with an explicit focus on basmati rice, organic foods and ready to eat/ready to cook (RTE/RTC) products. LTF is having a presence in more than 80 countries with significant regional exposure in the US, Europe, Middle East etc.

* We revise our target price to Rs. 230 considering the healthy performance in the quarter, but downgrade to SELL rating due to expected pressure on margins in the near-term.

* Revenue grew by 14%YoY in Q4FY24 aided by 15%/27%/55% YoY respectively for Basmati rice segment (87% mix)/organic segment (10% mix)/ RTE/RTC segment (3% mix).

* EBITDA margin improved by 100bps YoY to 11.8% in Q4FY24, mainly aided by lower freight costs, efficiencies at manufacturing level and benefit of scale. However, the disruption in the Red Sea will impact freight costs in the coming quarters.

* LTF has strong focus on distribution and has 1.4 lakh outlets now (86.9k in FY23). Market share in India has risen to 30.1 vs 29.8 in Q1FY24.

* The recently acquired ‘Golden Star’ has increased the market share to 15% (from ~10%) and has grown by 31% YoY in FY24.

* Expect earnings to grow at a 13% CAGR over FY24E-26E. LTF currently trades at 1Yr Fwd P/E of 12x, we value at 13x FY25E EPS.

Healthy topline growth aided by export volumes.

Q4FY24 consolidated revenue grew by 14%YoY, basmati rice segment (contributes ~87% of total revenue) grew by 15%YoY while, organic foods segment (~10% of total revenue) grew by 27%YoY. RTE/RTC segment (3% of total revenue) rose by 55% YoY. FY24 consolidated revenue grew by ~13% YoY. The company is optimistic about maintaining double digit volume growth for Basmati international market. LTF has 1.4 lakh outlets (86.9k in FY23). Market share in India has risen to 30% vs. 29.8% in Q1FY24 while maintaining ~50%+ market share in the US. RTE/RTC business has grown 6x since FY20 and is expected to grow at a CAGR of 33-35% while the organic segment growth is recovering which was lost due to anti-dumping duties on soya. The company is doubling the capacity of RTE/RTC in America. We expect a consolidated revenue CAGR of ~9% over FY24E-FY26E.

Higher freight cost and pressure on realisation to impact margins

EBITDA margin improved by 100bps YoY to 11.8% in Q4FY24, mainly aided by lower freight costs, efficiencies at manufacturing level and benefit of scale. The company is investing significantly in digital capabilities (45-50cr in FY25). This along with the likely surge in freight costs due to Red sea disruption and pressure on realisation will impact margins in the short run. However, LTF has a strong focus on value added portfolio and cost efficiency measures which will improve margins in the long term. The RTE/RTC business which is currently contributing ~3% of revenue (Rs. 200 cr) is expected to break even at a revenue of Rs. 370cr by FY26-27E considering current growth rate of more than 30%. The company expects consolidated EBITDA margin of ~14%-14.5% in the next 5 years. LTF has got a favorable court order for Rs.161.2cr related to insurance claim, along with interest @ 6% p.a for which the LTF has already provided for Rs. 134.1cr. An appeal has been filed by the insurance company in the High Court.

Valuation & Outlook:

LTF has a strong focus on strengthening brands, distribution, and region & product diversification for growth. We expect earnings to grow at a CAGR of 13% over FY24E26E. LTF currently trades at 12x 1Yr Fwd P/E. We value LTF at 13x FY25E EPS and arrive at a target price of Rs. 230, and downgrade to SELL rating due to expected pressure on margins in the near-term.

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