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Wednesday, April 18, 2012

REI Agro: World Leader in Basmati

As Amitabh Bachchan said in one of his old blockbuster, three key elements for survival for a human being are Roti, Kapda and Makan (Food, Clothing and Shelter). REI Agro, the company we are looking at today, is India’s biggest Basmati rice processing and marketing firm, and is the biggest company in the whole world in this humble space.

In the past one year, many such market gems took a harsh beating in the market. REI Agro from their 52 week highs of Rs 30 per share is currently languishing at Rs 12.9 with a 52 week low of Rs 9.61. Considering this firm has seen a high of Rs 90 in past few years, this is trading at pretty much lower band of its price range of past several years. Let’s look under the hood and see if there is any value for us to pick and analyze. Lets scram the data:

Revenues for past 5 years show that REI Agro has grown from Rs 1085 Crores topline per year in 2007 to Rs 3723 Crores in 2011. If you look at past one quarter revenues, it has clocked Rs 1002 crores in Dec, 11 alone, which is a runrate of over Rs 4000 crores on a annualized basis. So REI has been growing aggressively from a top-line perspective and has grown 4X times in past 5 years. Profits have grown from Rs 91 Crores in 2007 to Rs 282 crores in 2011. Clearly this is a moderate margin business, where harvesting paddy, processing and marketing is providing only about 7-8% margin for players in this segment.

Looking at Cash statement, it provides a decent comfort level as company is holding about Rs 352 crores as Cash and equivalent at end of year 2011. Reserves and surplus have grown on a YoY basis from Rs 247 crores in 2007 to Rs 2225 crores in 2011. Company is carrying high amount of debt, which is probably because rice processing is a high working capital intensive business. The business requires upto 14 months of inventory of Basmati paddy, which requires significant tied up investments in working capital.

The P/E ratio reflects all of the above situation, and firm is trading at a very modest P/E ratio of 3.99. Promoters own about 47.7% of the firm and general public owns only about 2.7% of the firm. 

Typical cases where public ownership is so less, are cases of quick capital gains in case company makes a strong turnaround or sharp growth in profit. In any case, firm is trading at reasonable market cap of Rs 1200 crores, and for a world leader in their business segment, the firm is a good case of multiplying your investments in years to come.

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