REI Agro: Rei Agro may soon see a turnaround

Co’s Rs 1,245-Cr Rights Issue Will Lower Debt, Additional Capacity To Boost Efficiency

THE shares of India’s biggest basmati rice player REI Agro have heavily underperformed the market in the past one year, falling 26%, while the BSE Sensex gained 21%.
With its Rs 1,245-crore rights issue, it is expected to lower its debt burden and improve efficiencies with additional capacities. This can boost its profitability and mark a key turnaround in the performance of its shares.
The company ended FY10 with a debt burden, which was 4.45 times its equity and interest cost, which was more than twice its reported net profit. The debt-equity ratio is likely to fall to 1.5, post the rights issue while the saving on interest cost could be around Rs 85 crore annually.
At the same time, the company is planning to increase its rice-processing capacity by 60% in the coming months to replace the leased capacity it currently uses. This is expected to bring in additional gains in the form of improved operational efficiency.
Rei Agro reported a strong 51% growth in net sales to Rs 3,693.2 crore for the year ended March 2010, while the net profit jumped 158% to Rs 157.2 crore. The company has had an exciting growth record with a compounded annualised sales growth of 37.7% in the past 10 years, while its profits rose 46.1%.
However, the nature of the basmati rice industry meant that the high-speed growth needed a morethan-proportionate rise in inventories. The inventory of basmati paddy increased annually at 55% as the company expanded its maturing period to 14 months from four months earlier, which necessitated huge investments in inventory.
As a result, the company’s cashflows from operating activities remained negative continuously in the past 10 years, requiring continuous debt financing. Since the company is not going to increase the maturing period any further, the growth in inventories is likely to fall drastically.
The company which markets its product under the Real Magic, Hungama and Kasauti in India brands, had earlier also entered the retailing business. Subsequently in 2008, the retail venture was demerged in a separate company named REI Six Ten Retail (RSTRL) that has 310 outlets mainly in northern and western India. REI Agro holds nearly 24.4% stake in this company, which had posted a net profit of Rs 26.4 crore in FY 10 and has a market capitalisation of around Rs 780 crore.
The company’s growth so far has highly been dependent on outside funds, which didn’t find favour with the general investors and resulted in continuous underperformance. However, the scene may change if the company manages to improve its earnings and cashflows along with its balance sheet. Despite its overall underperformance, the scrip is commanding a premium over its peers.
Based on the earnings for the past 12 months, the scrip currently trades at a price-to-earnings multiple (P/E) of 17.5 against a P/E between 4 and 5 for competitors such as KRBL and Kohinoor Foods.