yo satish ssarpu

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BASMATI RICE INDUSTRY

Made by:

Satish kumar yadav (62)

Balram singh (57)Rohit raj (49)

TABLE OF CONTENTS


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Sno. Particulars Page

no.

1 Global rice industry 42 International trade of rice 53 Indian rice industry 64 Basmati rice patent 6-75 Basmati rice industry 7-86 How is Basmati rice produced? 8-107 Industry drivers 10-12

8 Supply side of Basmati rice 12-139 Positives for the industry 1310 SWOT analysis 14

11 Pusa 1121 14-1512 New markets 1513 Future outlook of the industry 15-1614 REI Agro 17-19

15 Kohinoor Foods 20-2216 KRBL 23-2417 LT Foods 25-2618 Value chain 27-2819 Analysis 29-3420 Conclusion 35-36

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EXECUTIVE SUMMARY

The following research report relates to the basmati rice industry of

India. India is the second largest producer of rice in the world. But

the contribution of Basmati rice in the overall rice production isvery minute. India and Pakistan are the only two countries that

hold the patent to produce Basmati rice in the world. Basmati rice

is known for its aroma and nutlike flavour. When cooked, it swells

only lengthwise, resulting in long slender grains that are dry,

separate and fluffy.

The production process of Basmati rice is the most critical part

because if the rice gets broken it will not command premium price

in the export market. Therefore, utmost care has to be taken while

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producing it so that the grain is long enough to command premium

price. For this a company needs to have state of the art production

facilities in place. The maturity period also plays a key role

because if the maturity period is long the rice produced will be of a

superior quality.

The demand and supply of Basmati rice is constantly increasing

over the last few years. With the introduction of PUSA 1121 to the

Basmati rice family, favourable demographics of India anddemand for new markets such as China and Mexico it will increase

further in the coming years. On the other hand more realizations

from producing Basmati rice to farmers, increasing awareness and

increase in demand from the foreign countries will result in

increase in the supply as well.

The top four players in the organized market are REI Agro, LT

Foods, KRBL and Kohinoor. REI Agro follows fully integrated

model whereby it does all the operations from procurement of

paddy to ultimately selling it to the final consumer. On the other

hand the rest three players besides producing rice also rely on a bit

of trading. These players concentrate more on branding unlike REI

Agro who is more of a volume player.

Both the models have their pros and cons and its ultimately the

decision of the player to follow whichever model he likes.

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Basmati rice industry is still in a very nascent stage and so a lot of

opportunities exist in the following industry.

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Global Rice industry

Global paddy production over the 2009 season has been lifted by

nearly 10 million tonnes to 678 million tones (454 mn/t on milled

basis), the second highest production on record. World rice

production is expected to increase by 4% to 710 million tons (474

mn/t on milled basis) in 2010 (Source: FAO).

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009

Mn Tonnes

China India Indonesia Bangladesh Vietnam Others

Source: FAO

Global Rice Price

Global rice price have increased at a CAGR of 16% from $173/t in

2001 to $570/t in 2009. The major reasons behind increase in

global rice price during 2007 to 2009 were:

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1. Temporary export bans and restriction implemented by several

major and mid-level rice exporters,

2. Weather related problem in specific growing areas,

3. A sharp decline in the value of dollar in fall 2007 and winter

2008,

4. A shift of fund into commodities from stocks and real estate in

2007 and early 2008 that added to price volatility and may have

temporarily boosted price.

World Rice Price (US$/t)

0

100

200

300

400

500

600

700

2001 2002 2003 2004 2005 2006 2007 2008 2009

(Jan-

July)

Source: IRRI, Note: 5% broken rice price

International Trade of rice

The current forecast for international rice trade in the calendar year

2010, at 31.2 million tonnes, points to a 2.7 percent, or800 000 tonnes, increase from the 2009 estimate and much higher

than forecast last June. The revision reflects larger import

requirements by those countries that faced important crop losses in

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recent months. If confirmed, trade next year would be the second

largest after 2007.

Source: FAO

Much of the expected growth is expected to be driven by larger

imports by Asian countries, which are foreseen to reach

14.8 million tonnes on aggregate, almost 7 percent more than last

year. Part of the increase would stem from increased purchases by

Near East Asian countries, in particular Iraq, Saudi Arabia and the

United Arab Emirates, while rice flows into the Islamic Republic

of Iran may be depressed by large domestic availabilities and a

recent increase in the basmati rice tariff. Among countries in the

Far East, imports by Bangladesh, Nepal and especially thePhilippines are forecast to rise to offset recent losses from natural

disasters.

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Source: FAO

Indian Rice Industry

Rice is one of the most important food crop of India and 2nd of the

world. It feeds more than 50 % of the world population.

Agriculture is the main source of income for families in India.

Farms cover over half the land and almost 1/3rd is used to grow the

two major grains i.e. Rice and Wheat. India is the second leadingproducer of rice in the entire world, preceded only by China.

Current production of Rice in India is 87.5 mn tones. In 2010, the

total area under rice in India was 43mn hectares. Rice Production

has increased at a CAGR of 2.9% from 71mn tones in 2003 to

87.5mn tones in 2010. It is expected to grow at 99mn/t in

2011(Source: USDA). With an ever increasing population, demand

of rice has been increasing in the country. Thereafter, various

efforts such as use of High Yielding Varieties of rice, Hybrid rice,

System of Rice Intensification (SRI) method, responsive to high

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dose of fertilizers coupled with improved package of practices

have been made to increase the production & productivity in the

country through various centrally sponsored schemes

Rice production & yield trend

87.

699.

2

96.

7

93.

4

91.

8

83.

1

88.

5

71.

8

201322142202

2131210319842078

1744

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010

0

500

1000

1500

2000

2500

Rice production ( Mn. Tonnes) Rice yield (Kg/hectare)

Source: CMIE

Basmati Rice

The name Basmati comes from the Hindi language, meaning

'Queen of Fragrance'.

Basmati Rice has been grown in the foothills of the Himalayas for

thousands of years. Its perfume, nutlike flavour and aroma can be

attributed to the fact that the grain is aged to decrease its moisture

content. When cooked, it swells only lengthwise, resulting in long

slender grains that are dry, separate and fluffy. Due to the highamount of starch clinging to the rice grains, Basmati rice should

always be washed before being cooked. Basmati rice is known as

the queen of rice. It is long grained, non glutinous and particularly

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good for formal rice cooking. Basmati Rice is a simple grain yet

throughout history it has been on royal menus of various cultures

as the main dish.

The Basmati Rice Patent

Basmati rice was developed by Indian farmers over hundreds of

years, but in September 1997 a Texas-based company, RiceTec

Inc., won a controversial US patent for a cross-breed with

American long-grain rice. This company was granted a patent to

call the aromatic rice grown outside India `Basmati'. RiceTec was

granted the patent on the basis of aroma, elongation of the grain on

cooking and chalkiness. Many have felt that the patent should not

be granted since basmati is Indian property. India contested the

patent for Basmati rice acquired by Rice Tec Inc, which had beenchallenged by the Agriculture and Processed Food Products Export

Development Authority (APEDA). The US Patent and Trademarks

office accepted the petition and had re-examined its legitimacy.

Contrary to misinformation in some sections of the media, India

did not lose the Basmati Patent Challenge. India has actually won

and not lost the Basmati patent battle. In its original patent on

'Basmati rice lines and grains' - granted by the USPTO on

September 2, 1997 - Rice Tec had made as many as 20 claims.

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Extensive documentation was submitted to establish that the

various Basmati varieties cultivated over the centuries in the

subcontinent contained all the 'novel' grain attributes mentioned in

the patent. As a result of a worldwide citizen campaign against

RiceTec Basmati patents, on Aug 14th 2001 the U.S. Patent and

Trademark Office struck down large sections of the Basmati

patent. In other words, the withdrawal of the grain-specific claims

ensured that Rice Tec would not be able to block the country's

Basmati rice export to US; it could, however, produce 'similar orsuperior grains' outside India.

Basmati rice industry

As mentioned above India and Pakistan are the only producers of

Basmati rice in the world. The total production in the year 2009-10

was around 4 million metric tones (mmt) of which India produced

75% and the rest 25% was produced by Pakistan. Out of the

production of 3 mmt in India, around 1.8 mmt was exported and

1.2 mmt was consumed domestically.

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Source: Company Presentation

Trade in coarse rice is spread in several countries, mainly located

in Asia, with first five importers making 25% of overall rice trade

in 2007. Basmati rice trade is rather concentrated. In 2007, the first

five clients of India had a share of 84.9% and those of Pakistan

68.5% of respective Basmati export (India: 616.7 million USD;

Pakistan: 556 million USD). India mainly exports Basmati to Saudi

Arabia, European Union, Kuwait, UAE and USA, whereas

Pakistan does the same with UAE, Iran, Oman, European Union

and Yemen.

Basmati export (MMTPA)

Particulars 2003 2004 2005 2006 2007 2008 2009

Global Rice

Basmati Rice

Other Varieties

India(75%)

Pakistan(25%)

Mostly ExportsDomestic

(40%)Exports(60%)

Full Grain Broken

Middle East

(75%)

USA/UK

(10%)

ROW

(15%)

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India Quantity 0.71 0.77 1.16 1.17 1.05 1.18 1.56Value(Mn $)

415.80

433.70

628.50

687.30

616.70

1079.10

1958.1

Pakistan Quantity 0.72 0.82 0.81 0.84 0.91 1.27Value(Mn $)

267.7

308.4

439.2

479.6

556.3

1068.9

Source: APEDA (Agricultural & Processed Food Products

Export Development Authority)

Basmati trade is also concentrated by demand side. The first five

importers made 44.5% of overall market in 2007. Main importers

are almost located in Middle East, although European Union is the

third importer.

Market Share in 2007-08 (% of total Export)

6%

10%

16%

46%

13%2%

3%

4%

Saudi Arabia UAE Kuwait United Kindom

Yemen Republic USA Netherland Others

Source: APEDA

How is Basmati Rice produced?

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The first and foremost step for the industry player to produce good

quality Basmati rice is to procure the best quality of paddy from

the mandis. In India there are a total number of 220 mandis, which

are highly diversified. Therefore the procurement skills of the

industry players play a significant role and make a vital difference

among the counterparts. There is a particular process by which

paddy is purchased from the mandis. It consists of the farmers

(sellers) commission agent (Kaccha aratya) and the companys

(buyers) commission agent (Pakka aratya).

The companys agent goes and buys paddy from the farmers

agent. The companys agent needs to possess the required skills to

determine whether the quality of paddy is good or not. If he has a

fair idea of the quality of paddy he will quote his price to the

farmers agent and the trade will take place. To develop good

procurement skills one needs a learning curve which comes

through a lot of experience.

Maturing

The key ingredient to produce full grain Basmati rice is the

maturing period of the rice. To have good quality Basmati rice it

FarmersCommission agent

Kaccha aratya(Farmers agent)

Commission agentPakka aratya

(Companies agent)

TradeTake

place

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Organized &Unorganized

players


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needs to be properly matured. A good maturing period is generally

from 12-14 months. For maturing of the rice proper infrastructure

and maintenance is required throughout the maturing process.

There are a number of risks involved in the maturing process of

Basmati rice.

The biggest challenge of maturing Basmati rice is the money

involved in it. As the companies are operating at very high

inventory days of almost a year the working capital needs of a

company is very high. Therefore a lot of capital is required in

this business.

Besides the challenge of working capital there are a lot of risks

associated with the insects that can hamper Basmati rice when

it is stored in the godowns for about a year. Insects, rodents,

mites and fungi cause considerable damage to stored rice.There are a total of 18 species of insects that infest stored rice

in India. Some of them are lesser grain borer, rice weevil and

rice moth.

To overcome the challenges in maturing Basmati rice one can go

to the intermediaries who keep the rice for a particular period of

time. But it increases the cost of funding for the company. This

will also result in increase in the price of Basmati rice and lower

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margins to the companies as the intermediaries would eat out the

margins of the companies.

Milling

The processing and milling of rice is another important aspect of

producing good quality Basmati rice. The process of milling

involves De-husking and grading which are the most critical

processes.

De-husking

This is one of the most critical processes of Basmati rice

production because it decides the price and the length of the

Basmati rice. The full grain Basmati rice commands the best price

in the export and domestic market which is the ultimate focus of

every company.

Grading

When the paddy is processed we get various sizes of Basmati rice.

Full grain, half grain, three-fourth grain and so on. But the number

of varieties of Basmati rice that we get from the processing

depends on the processing facilities used by the company. If the

company has a good processing facility it will get more varieties of

rice, while if the company has a sub standard processing facility

the quality of rice will also be substandard.

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One can also outsource the milling process but the disadvantage of

it is the handling. But then one does not have any control on the

milling process. Moreover, the person to whom one has outsourced

might not have the facilities which grade rice in a number of

different varieties and this will result in less realization for the

company.

Selling and Distribution

All the processes become irrelevant if the product does not reach

the ultimate consumer. Therefore like every business the

distribution channels play a vital role in this business. Different

companies follow different types of distribution channels to reach

their customers.

REI Agro mainly supplies its products through wholesalers and itsretail arm Six Ten domestically. While on the other hand when we

talk about the export market it supplies its products through its

owned brand and also through the brands of the companies located

in the foreign markets.

On the other hand the other companies such as Kohinoor Ltd.,

KRBL and LT Foods supply their products through the branded

route domestically as well as internationally. Domestically they

supply their products through kirana shops, wholesalers, retail

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chains such as Reliance retail, Big Bazaar etc. These three

companies are more into the branding business as compared to REI

Agro which is more into the private labeling segment.

In this regard Kohinoor Ltd., KRBL and LT Foods have an

advantage that they have an established brand which commands

higher price in the markets as compared to REI Agro. But due to

the higher working capital cost and higher procurement costs, the

margins of these three companies are lower as compared to REIAgro.

Basmati Rice Industry Drivers

Domestic Drivers

India is one of the fastest growing economies of the world. Withthe advantage of the demographics, India is poised to become one

of the developed economies in the next 2 decades.

The following are the reasons which will drive the growth of

Basmati rice industry in India:

Increasing affordability

India is the fifth largest country in purchasing power parity and the

tenth largest in sheer quantum terms. In year 2008-09 Indias per

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capita income was estimated to be more than $653 and is expected

to rise to $2000 by the year 2016-17 (Source CSO). The average

household disposable income would reach Rs 3, 18,869 by the year

2025 at a CAGR of 5.3% resulting in an increased demand for

Basmati. The average Indian is earning higher than ever before.

The estimated cumulative liquid wealth of the Indian affluent class

is poised to grow at 50% over the next three years.

Rising consumerism

India is expected to graduate from the 12th largest in the year 2007

to worlds fifth largest by the year 2025 among consumer markets.

There is a subtle shift occurring in the Indian spending habit.

Expenditure in life style and premium goods, rather than spending

on necessities, is projected to account for 70% of all consumers

spending by the year 2025. (Source Mckinsey report) By 2020,

urban consumers are likely to represent 37% of the population and

still account for 62% of consumption.

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Urban population in India, % of Total

10%

15%

20%

25%

30%

35%

40%

45%

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040

Source: Company presentation

Change in taste & preference

The rise in per capita income has also resulted in increase in the

demand for Basmati rice. This is because more people can now

afford to buy Basmati rice. The domestic consumption of Basmati

rice has increased from 0.35mn/t in 2003 to 0.78mn/t in 2009 at a

CAGR of 14.3%. The expansion of retail stores and hyper marketshas significantly contributed to the increase in the demand for

Basmati rice. The share of branded Basmati rice in total basmati

consumption has seen an exceptional rise. With the increase in the

standard of living, consumers are shifting towards packaged rice

and becoming brand selective. Some brands of Basmati rice which

have become household names are Kohinoor, Daawat, Lal Quila

and Charminar etc. The branded rice category is expected to grow

significantly over the next few years.

Increasing availability

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The production of Basmati rice has more than doubled from

around 1 mn/t in 2003 to 2.3 mn/t in 2009 respectively. This will

continue to grow as the demand from both domestic and

international markets is constantly increasing. Moreover, the

farmers are increasing the production of Basmati rice, because the

production cost of Basmati rice is marginally higher compared to

production cost of non-Basmati rice. But the realization from

Basmati rice is higher compared to non-Basmati rice. Moreover, it

is a premium variety of rice, which generally sells at premiumprices in the domestic as well as international markets. Basmati

rice paddy sells at around Rs 28-32 per kg, while the normal rice

paddy sells at around Rs 10-13 per kg. But there is a huge

difference in the selling price of Basmati rice (average Rs.70-

75/Kg) and normal rice (Average Rs.25-30/Kg), which is forcing

the farmers to increase the production of Basmati rice.

Global market drivers

Basmati rice can only be produced by 2 countries in the world i.e.

India and Pakistan. No other country can produce Basmati rice as

these 2 countries hold the patent to produce Basmati rice. Thefollowing are the reasons which will drive the growth of Basmati

rice industry globally:

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Increasing affordability

The Middle East accounts for 75% of exports of Basmati rice from

India. Due to the better quality of rice, aroma, flavor and taste

there is a huge demand of Basmati rice globally. Theses countries

are developed and cash rich, therefore they are able to pay the

premium for Basmati rice over the non basmati rice. The

realization on exports of Basmati rice is more than the domestic

sales, so it is incentive to export Basmati rice. Moreover India and

Pakistan enjoy a kind of monopoly in this business which furtherhelps them to command a greater price from the global market.

Supply side of Basmati rice

Increasing farmer awareness

Nowadays, with the help of the various social campaigns and

advertisements from the fertilizer and seed companies, farmers are

shifting towards high yielding production methods. Some of the

techniques like High yielding variety (HYV) of seeds, hybrid rice

and various new methods such as system of rice intensification

(SRI) are being used by the farmers to produce high yielding rice.The production cost of Basmati rice is marginally higher compared

to non-Basmati rice. But there is a huge difference in the selling

price (average Rs.70-75/Kg) of Basmati rice and normal rice

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(Average Rs.25-30/Kg), which is forcing the farmers to increase

the production of Basmati rice. Due to the awareness of the various

production techniques farmers will make more profits by

producing it. So a farmer is shifting his focus from the production

of non-Basmati rice to the production of Basmati rice.

Assured off take of Basmati rice

The demand for Basmati rice is constantly increasing in both

domestic as well as international markets. On YoY basis the

exports of Basmati rice have increased tremendously. It is evident

from the fact that in the last 10 years the exports of Basmati rice

have never reduced. The export market of Basmati rice has

increased tremendously over the last few years. Similarly the

domestic consumption is also increasing because more and morepeople are shifting towards Basmati rice due to its quality, aroma,

flavor and taste. Players in both organized and unorganized market

are increasing the procurement of Basmati rice, as the demand in

both domestic and international markets is increasing. Indian

basmati rice will shortly enter the kitchens in China and Mexico.

At present, basmati is exported to over 130 countries, and thegovernment hopes to tap the huge markets of China and Mexico in

a couple of years. Therefore the farmers are assured that whatever

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they will produce will be consumed either domestically or

internationally.

Positives for the Basmati industry

The major paddy growing states of Punjab, Haryana and Uttar

Pradesh, are likely to see 20-25 percent decline in non-basmati

rice production this kharif season on account of decrease in the

crop sowing area due to low rain and shift towards basmati

rice, an Assocham survey said.

In 2008-09 - Basmati Rice Production 35 lacs Tons and In 2009 -

There was 50 percent increase in the basmati rice area in Punjab

and Haryana, the study said. Moreover, it was observed that a

large proportion of cultivation area has been shifted from non-

basmati rice sowing to basmati rice sowing (PUSA 1121 varietyof basmati rice) in Punjab and Haryana.

It is the inclusion of the PUSA 1121 variety in basmati rice

category which gives better returns as it yields about Rs 65,000

per acre against Rs 30,000-35,000 per acre that one garners from

the non-basmati varieties.

A tremendous demand for basmati rice in the international

markets has seen the country's basmati rice exports increased

from about USD 470 million in 2000-2001 to about USD 1900

million during 2008-09.

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Owing to the government of India's decision to reduce the

minimum export price (MEP) of basmati rice, the country's

basmati rice exports are expected to surge by a whooping 33%

during the season starting October. India's Food and Agriculture

Minister Sharad Pawar had announced lowering of MEP of

basmati to $ 900 PMT from the level of $ 1,100 PMT.

In the new season starting October, almost half of the 2.5 million

tonnes labeled basmati leaving India will reach Iran. When 50%

of your eggs are in one basket, you tend to watch it rathercarefully. That is what Indian industry is doing.

Iran also pays top-notch prices for Indias Pusa Rice 1121. Who

ever imagined that the variety Pusa 1121, fetching around $200/t.

Saudi Arabia still buys up to 750,000 tonnes basmati from India, it is a tou

bargainer.

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http://www.articlesbase.com/business-opportunities-articles/a-market-study-of-indian-basmati-rice-import-and-opportunities-1233358.htmlhttp://www.articlesbase.com/business-opportunities-articles/a-market-study-of-indian-basmati-rice-import-and-opportunities-1233358.html


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SWOT analysis of Indian Basmati Rice industry

PUSA 1121 New addition to the Basmati rice family

Pusa 1121 is an evolved variety ofPusa Basmatirice developed by

Indian scientists. This variety of rice is known for its extra ordinary

length and after cooking elongation. It has a milder aroma, but

scores equally, if not more, on other basmati traits. Having yield of

13.7 quintals per acre, it possesses extra long slender grains with

good cooking quality and it has longest cooked rice length among

Weaknesses

Lower net marginsdue to littledifferentiation

High workingcapital requirement,reducing return oncapital

High dependenceon monsoons

High dependenceon Middle East

Opportunities

Consumers

Ability andwillingness to payfor better qualityproducts

Increaseddomesticconsumptionto drivedue to favourabledemographics

Greater access toglobal markets

Threats

Emergence oflow cost substitutes byPakistan exporters

Improvedperformance byPakistan exports

Significant changein govt. policies could

disrupt the business

Strengths

Our global dist.

network consists ofboth exclusive andnon exclusivedistributors

Our portfolioconsists of all kindsof Basmati rice

Advanced surveytechnologies help us

in optimizing ourprocurement process

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28/73

all the aromatic rice varieties. The length ofgrain of Pusa 1121

rice can be as long as 9.5mm. The area under cultivation of Pusa

1121 is the maximum in the states of Punjab and Haryana. In the

year 2009, an estimated one million hectares was sown under

Pusa-1121 in Punjab and Haryana alone more than twice the area

in 2008. During 2009-10, the country exported around 2.6 mt of

basmati rice, of which 1.3 mt is believed to have been constituted

by Pusa-1121. The export realizations averaged $1,100 a tonne for

parboiled and $ 1,400 for white rice, translating into revenues ofover $ 1.5 billion from a single variety. Besides the 1.3 mt exports,

roughly 0.15 of Pusa-1121 was also consumed within the country.

But that was still insufficient in relation to the sheer size of the

produce.

Most of the people related to the industry are talking about the ill

effects on traditional basmati rice due to higher production of Pusa

1121. Even the farmers are switching towards Pusa 1121 because

of its higher yields and lower cost. Industry is also expecting the

production of Pusa 1121 to be roughly around 1.6 mt by the year

FY11. As Pusa 1121 had been accorded Basmati status by thecentre and state government last year, the overall basmati

production (including Pusa) will increase in future. Currently the

average selling price of traditional basmati rice is around Rs 70-75

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http://en.wikipedia.org/wiki/Grainhttp://en.wikipedia.org/wiki/Grain


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per kg which is higher compared to average selling price of Pusa

which is around Rs 45-50 per kg. Due to higher production and

supply in the market at a reasonable price domestic consumption of

Pusa will increase in the future from current level of 0.15 mt. So

going ahead we might see a pricing pressure in the branded

segment which will affect the overall profitability of the players

like REI Agro, Kohinoor, KRBL and LT Foods. But we believe it

will benefit the industry in the long term.

New markets

State run Agricultural and Processed Food Products Export

Development Authority (APFPEDA) said that Mexico has

contracted for the basmati rice and China is expected to open a

market for premium rice soon. Existing buyers are aiming to raise

their purchases. The South Asian nation is also aiming to push

sales in relatively new markets such as Japan and Australia.

Currently, the United Arab Emirates, Saudi Arabia, Iran and the

U.K. are the top four buyers of the premium rice from India.

New markets

China Mexico

Japan Australia

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Future outlook of the industry

Exports of Basmati rice from India is likely to rise this year with

production slated to increase by at least 10 lakh tonne.

According to industry estimates, export of Basmati rice this fiscal

is likely to touch 20 lakh tonne against 16-17 lakh tonne last fiscal.

Export of Basmati rice from India has been growing at a rate of 50-

60%, according to estimates.

Production of Basmati rice in the country is likely to go up to 50

lakh tonne this year from 40 lakh tonne last year, pulling downprocurement price of the crop.

Faced with competition from the Super variety of rice from

Pakistan, Indian Basmati prices in the international market have

also come down. The prices of Pusa 1121 this year is between

$1,100 and $1,300 per tonne. Super variety of Basmati, which

tastes similar to Pusa (a lower variety) from India, has a price of

$1000 per tonne.

Last year, India exported 8 lakh tonne of Basmati rice to the

country after which Iran suddenly put restrictions on Indian

exports on alleged presence of heavy metals in the Indian crop.

Earlier, Iran used to buy rice from Thailand and Pakistan beforeshifting to the Indian crop a few years ago after 1121 was

introduced in the country.

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Moreover India will get the advantage of its demographic changes.

Presently the Basmati rice consumption domestically is very low

because of the premium prices. But with the addition of the low

price Pusa 1121 variety to the Basmati rice family the consumption

of Basmati rice will increase in the domestic market. As shown in

the graph below the maximum growth of population will take place

in the age group of 15-64 i.e. the working class. As the working

population of the country will grow, changes are bound to occur in

the standard of living and taste and preferences of the people.Therefore, the demand for Basmati rice is poised to increase in the

next few years.

Population in millons

0

200

400

600

800

1000

1200

1400

1600

2000 2005 2010 2015 2020 2025

Age 0-14 Age 15-64 Age 65+ All ages

Source: Indian Demographics Scenario, 2025

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Source: NCAER

REI Agro

Company background

REI Agro was established in the year 1994 by Mr. Sundip

Jhunjhunwala. The company was formed with a vision to

consolidate the fragmented basmati rice industry. In a short span of

time it has risen to the position of an undisputed leadership in the

industry. A unique business model, out of the box approach of the

management, and the goodwill of the customers have enabled the

company to consolidate on its leadership position. In the beginning

the company focused more on processing rice rather than the saleof branded basmati rice. But as the company has comfortably

established itself in the industry it has started sale of branded

basmati rice as well. Lately the company has entered in wind

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power generation as well with a total generation capacity of 46MW

wind farms, located in Rajasthan, Maharashtra, Tamil Nadu and

Gujarat.

The company processes rice with the state of the art rice

processing unit supplied by the world leaders in food processing

equipments. Today the company caters to the domestic and

international markets through its branded and indirect sales.

Brands

REI Agro offers a wide range of brands in Basamati rice. It offers

various brands under 3 heads namely Premium, Midrange and

Economy.

6Ten Retail

REI Agro launched 6Ten chain of retail outlets in the last quarter

of the fiscal of 2006-07. Currently 6Ten is operating 344 stores in

the NCR, Chandigarh, Mohali, Panchkula, Jalandhar, Ambala etc.

Brands

Premium

Kasauti

Mid-range

Mr. Miller, Hungama

Economy

Hansraj, Raindrop

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Some part of domestic sales of Basmati rice is done by 6Ten

though it is a separate company from REI Agro.

Production and capacity utilization trend

REI has increased its processing capacity on YoY basis over the

last few years with the total processing capacity of 902280mn/t p.a.

The capacity utilization of the company has increased from 62.5 %

in the year 2003 to 75 % in 2009. The production has also

increased from 194000mn/t to 430000mn/t in the same period.There was a fall in the capacity utilization in the year 2007 due to

substantial capacity ramp up during the year but after that it has

only increased and touched new highs.

Production and Capacity utilization trend

429.

9

397.

9

288

265.

6

230.

7

207

194

7574.5

59.8

77.674.366.8

62.5

0

50

100

150

200

250

300

350

400

450

500

2003 2004 2005 2006 2007 2008 2009

0

10

20

30

40

50

60

70

80

90

Production (in 000 MT) Capacity utilization in %

Source: Company financial statements

Production of Basmati rice at REI

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REI Agro processes Basmati rice to make it excel for the quality

conscious market. The production of Basmati rice goes through a

series of processes:

Procurement of Paddy

The first and foremost step in producing good quality Basmati rice

is the procurement of the best quality of paddy. The quality of

paddy will ultimately determine the premium it will command.

REIs huge presence in 170 mandis out of 220 mandis in NorthernIndia gives the company first mover advantage and allows it to

procure the best quality of paddy for the production of Basmati

rice. Due to the huge presence REI procures around 17% of the

total basmati rice paddy produced in India.

Processing and maturing

Theres a common saying for Wine that the older it is, the better it

is and therefore it commands a premium price over the other

wines. The same holds for Basmati rice as well. At REI before

starting with the processing of Rice, paddy is kept for around 18

months which is the longest ageing period of any company in theindustry. The matured paddy is then processed with the help of the

state of the art facilities at the company. Utmost care is taken by

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the experts who make sure that each grain of rice produced

conforms to strict corporate policy.

Distribution and consumption

REI Agro has a huge network of distribution with around 500

distributors across the country. The company also supplies to its

subsidiary company Six Ten which is an alternative vehicle to

access the domestic customers. The sorting of rice is done at 6

different points which gives the company an advantage to offerBasmati rice at various price-points with various varieties. This

helps in increasing the revenues for the company.

Maturity period

0

2

4

6

8

10

12

14

16

18

20

2003 2004 2005 2006 2007 2008 2009 2010e

Ageing(mont


On YoY basis the company has increased its maturing period of

the basmati rice by holding more inventory than the previous

period. This has helped the company in getting a higher yield of

the full grain rice from paddy. Due to the higher yield of the full

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grain rice the margin and head rice yield of the company has

substantially increased over the last 5 years.The following is being

represented by the EBITDA margins of the company which have

increased from 8% to 18% over the last 5 years. But higher

maturing period also increased the companys financial leverage

ratio.

Head Rice yield

As the company has increased its maturing period of rice to around

18 months it has enabled to produce more of full grain rice, which

will definitely command a premium over other rice. Over the last

7-8 years the companys yield of head rice has increased from 30%

to around 54%. The other players in the industry are still operating

at 40% head rice which gives an enormous advantage to the

company.

Head Rice yield

30 3639 43

47 49 4954

37 3128 24

20 18 1813

33 33 33 33 33 33 33 33

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 E

Head rice % Broken rice % Others %

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Kohinoor Foods

Company background

Kohinoor Foods Ltd. embarked upon its journey in 1989. Since

then it has been treating every milestone achieved as a stepping

stone to go past another one. Today, in India and in over 60

countries, consumer's lives have been touched by not only some of

the finest basmati rice brands, but also a wide assortment of food

products that includes Basmati Rice, Ready to Eat products, Cook-

in Sauces and Cooking Pastes to Spices, Seasonings and Frozen

Food. Its a feat that Kohinoor Foods Ltd. pulled off by spreading

the authentic India flavour abroad.

To be a globally competitive organization, Kohinoor Foods Ltd.

has strategic bases in US, UK and the Middle East. The company

has two 100% fully owned subsidiaries SOL Inc., operating

from New Jersey, USA that looks after the North American and

Canadian markets, and Indo European Food Limited, in the UK

with headquarters in London, that looks after the Europeanmarkets. The joint-venture company Rich Rice Raisers Factory

LLCoperating from Dubai, UAE takes care of the markets in the

Middle East.

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Even in India, Kohinoor Foods Ltd. has a wide-spread presence

that boasts of an extensive and unmatched distribution network

with more than 200 thousand retail outlets, 100 super distributors

and 600 stockists.

Brands

Kohinoor Foods Ltd. is more into the branded segment so it offers

a wide range of brands in Basmati rice. Some of the leading brands

are as follows:

Production capacity

The rice factory at Murthal, Haryana is one of the largest in the

country with an unbelievable milling capacity 50 metric tonnes

365

Charminar

KohinoorSilver

KohinoorGold

KohinoorPlatinum

KohinoorSuper

Brands

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per hour. Not only that, the plant is ISO 9001:2000, HACCP and

BRC certified along with being EUFSA and USFDA compliant.

Fully automated through the entire chain of processing and final

packaging, the factory uses the worlds best technologies and

equipment for churning out rice grains that can only be described

as impeccable.

Also, the manufacturing facility has a strong scientific

procurement system. The company has contract farming to ensure

consistency of agri produce and control on the entire value chain of

basmati. In addition to that, an able, technical team of procurement

personnel takes care of what is sourced for produce. The entire

chain is documented to the minutest detail ensuring 100%

traceability as per international norms.

Facts about the Rice Factory:

Area of about 36 acres with a production capacity of 1000 metric

ton per day.

One of the largest storage capacities 20,000 metric ton of rice;

50,000 metric ton of paddy

5 milling lines with milling capacity of 6 metric ton per hour

Mechanical Dryers with paddy drying capacity of 1000 metric

ton per day

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Silos attached with dryers for safe storage of paddy (8 silos with

300 metric ton capacity and 3 silos with 500 metric ton capacity)

Parboiling capacity of 500 metric ton per day

Semi-automated packing plant with imported metal detectors and

check weigher systems

Most versatile packaging offered, ranging from Jute & Cotton

Bags to Laminate Pouches, Pet Jars, Paper & Tyvek Bags to

Non-Woven Fabric Bags

Paddy Procurement

Kohinoor Foods Limited does the procurement of paddy in a very

scientific way, with a lot of research work behind it. The company

gives the farmers all the help they need in bringing up their crop

with good vigor and health. R&D teams regularly visit the farms

and advise the farmers with the status of their crop and remedies of

diseases, if any. This is done right from sowing to transplanting

and harvesting of the crop.

Before the harvesting happens, Kohinoor Foods Limited draws

samples from different zones and tests them in the laboratory.

They are tested under various parameters of the company. Thezones that conform to the quality standard norms of the company

are selected for the procurement of the paddy. The paddy is

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received and stored in controlled atmosphere with tight pest

control measures.

Source: Company, FQ Research

Organic Basmati rice

Looking at the stressful life and heightened awareness of health

among the consumers, Kohinoor Foods Limited conducts contract

farming for growing Organic Basmati Rice. This is done in

Dehradun, India one of the places where Basmati Rice

originated. The company procures Organic Basmati Rice by

coming in direct contact with the farmers, helping them in

production and by using the required technology. The companys

Organic Basmati Program is in collaboration with Uttarrakhand

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Government of India under their Organic Basmati Export

Program.

Kohinoor Foods Limited has contracts with 8 big groups of

farmers comprising a total of 1128 farmers. What started with a

small area of about 110 hectare in 2005 is today extended to

around 750 hectare. The total area of farming Organic Basmati

Rice is intended to cross a target of 1200 hectares soon.

KRBL

Company Background

India's first integrated rice company, they are also the world's

largest Basmati rice exporters and leaders in innovation across thevalue chain, from seed development and multiplication (QSDIP

program) to contact farming and marketing. KRBL is the largest

exporter of Basmati rice in India (Basmati sales account for 85%

of KRBL's total revenues) & its packaged Basmati products have

gained a brand image of their own. Today, the Company holds 11

% market share of the total Basmati exports from the country and

has strong presence internationally in markets like Saudi Arabia,

Kuwait, US & Middle East, which account for 80-85% of KRBL's

total export revenues.

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Energy Division

The Company has three power plants as shown above. In 2008-09,

the Company's energy division constituted 0.56% of the total

revenues. The total divisional sales accounted for Rs. 740 lacs.

Manufacturing Capacity

KRBL acquired an integrated rice processing plant at Dhuri (in the

state of Punjab) in FY06 at a cost of Rs. 1,580 lacs. With this

acquisition, KRBL became the largest rice miller in the world witha total capacity of 195 MT/hr, including 150 MT/hr capacities at

Dhuri & existing 45 MT/hr capacities at Ghaziabad. The plant also

has rice bran oil capacity of 42 MT/day. The Dhuri facility is

expected to be a major catalyst for future growth of KRBL. The

facility also enjoys mandi tax exemption (4% tax exemption upto

August 2015) that could enable it to market its produce at a more

competitive price. Also, most of the paddy requirement for this

plant would be met by procuring it from Punjab, thus leading to

savings in the logistics cost.

Energy Division

10.5 MW power plant inPunjab

3.5 MW plant inGhaziabad

12.5 MW plant inMaharashtra

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The Ghaziabad plant is currently working on 90% capacity

utilization. The Company is in the process of commissioning a

state-of-the-art packaging plant, with hands-free, imported

machines, at an investment of Rs. 1,500 lacs. Focusing on

extensive health and hygiene, the high-end packaging plant caters

to the needs of modern retail in US, Europe. Both the Ghaziabad

and Dhuri units have world-class milling facilities that enable the

Company to produce quality rice and better head rice quantity. The

Delhi-based Grading plant separates milled rice (mixture ofdifferent sizes: whole grain, head rice and broken rice).

Expansion plans

Going ahead, the Company plans to earmark investments to the

tune of more than Rs. 7,500 lacs in capital assets during fiscal2009-10, mainly in storage, packaging and finishing of rice for

exports.

Revenue Model

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Source: Company, FQ Research

Value added products make a difference

KRBL has achieved significant success in deriving and marketing

of by- products from the milling of rice. KRBL is has also set up a

husk fire power plant. The company will use husk to generate

power at very low cost. Approximately 50 % power will be usedfor internal consumption thus reducing the power cost

substantially. The balance will be sold. Ash from the process will

be converted into amorphous silica used in cosmetics & cement

industry. All these activities will help the company to improve on

its bottom line.

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Source: FQ Research

LT Foods

Company background

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In 1965, Bhikiwind, in a little village in Amritsar (Punjab, India);

Shri Raghunath Arora started a small trading company which grew

from being a commissioning agent to a partnership firm by 1977,

as Lalchand Tirathram Rice Mills. In 1978 Mr. V.K.Arora joined

the family business with his father, with a clear vision of taking his

company to a global level. In 1980, the company started exporting

Premium Rice.

Simultaneously, the company decided to face the challenges in

domestic markets by setting up a modern, state-of-the-art ricefactory in Sonepat, Haryana in 1984. Unorganized players with

inconsistent quality products were crowding the market. In this

scenario, Mr. V K Arora felt the need to promote branded and

packaged products. In line with this vision, the company started the

business of milling, processing and marketing of branded basmati

rice and manufacturing of rice food products in the domestic and

overseas market.

About the Company

The milling capacity of the capacity as on July, 2008 was 50million tonne per hour. The company exports Basmati rice to

almost 40 countries worldwide. The exports contributed around

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48% to the total revenues of Rs. 695 crores in FY 2007-08. Exports

are growing at a CAGR of 15% over the last 4 years.

LT Foods is ranked among the top 10 food processing companies

in Northern India. It is ranked among the top 50 companies by

Dun and Bradstreet 8th Edition of Indias Top 500 companies

2007. Daawat is registered as one of the premium and top

basmati rice brands in the country.

It bought US based $20-million Kusha Inc. in Dec 2007, post

which Daawat groups share in the US retail market increasedfrom 7% to about 51%, making it the largest basmati rice retailer

in the country. First time in the Industry, an Indian rice player

had acquired a US Company.

In the last two years Countrys top line has grown by 20% while

net profit has gone up by 2.5 times

In 2007, LT Foods set up State-of-the-art plant set up in the

Mandideep, Bhopal (MP) for Parboiled Rice, which has huge

demand in export markets.

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Profit after Tax, INR Crores

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009

Source: Company PresentationIndian Subsidiaries:-

Dawaat Foods (P) Limited

The wholly owned subsidiary of LT Foods Ltd. (formerly known

as LT Overseas Ltd.) was set up with state of the art technology,

milling unit in Mandideep, Bhopal, for production of parboiled

rice. Rice processed here caters to the institutions and requirements

of Middle East markets as well. The company has made aninvestment of 23.5 crores in this subsidiary.

Nature Bio Foods Limited

The company recognized that organic food is the future of the

world and in the same direction, company initiated steps few years

back. For the same, the wholly owned subsidiary of the companywas incorporated to cater the need of organic market which is

approximately a market of 22 billion dollar world wide and

growing with the peace of 10%.

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Staple Distribution Company Ltd.

Looking at the potential and boom in retail business, Staple

Distribution Company, a wholly owned subsidiary of the company

has been incorporated to play and establish itself as a backend

player for Modern retail.

LT International Limited

LT International Ltd., a subsidiary of the company is engaged intrading of varied merchandise.

Overseas subsidiaries

Kusha Inc.

Kusha Inc. is the largest distribution company in U.S. with the

brand name Royal and the said company have been acquired in

December 2007 by LTO North America Inc. - a wholly owned

subsidiary of LT Foods Limited. This acquisition has increased our

market share from 7% to 52% appx in U.S. market.

LT Foods North America Inc.

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LT Foods North America Inc., a wholly owned subsidiary has been

formed in California, to capture market share as well as to

strengthen our presence in U.S.

Sona Global Limited & Nice International FZE

Middle East market has a potential and to capture market share and

strengthen our presence Sona Global Limited Dubai and its

subsidiary Nice International FZE, Dubai were formed and these

are engaged in trading of rice and rice products in the Middle East.

Value chain

The value chain of the Basmati rice industry is being summarized

in the following diagram. The Pucca Artiyas or the agents of the

companies purchase raw paddy from the farmers and keep it withthemselves for 2 months. The stockists or the company if incase

the company is fully integrated like REI Agro keeps the paddy for

4 months before the raw paddy is properly milled and graded. The

milled rice is again kept by stockists for 4 months before it is

disbursed to the distributors. Before distributing to the wholesalers

and exporters the distributor matures the rice for 2 more months.

Finally fully matured rice reaches the retailers who sell it to the

ultimate consumers.

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Source: REI Presentation

Since it is a very long value chain a player can enter and exit at any

point. But the entry or the exit of a player is very important as it

will determine the margin and the working capital requirements for

that particular player. A company like REI Agro who is a fully

integrated player from purchase of raw paddy to finally selling it to

the ultimate consumer will have a higher margin. It will also have

the highest working capital requirement in the industry as it will

perform each and every function from procuring of raw material to

finally selling the finished product. As we can infer from the

diagram the money will be blocked for around 18 months, so the

fully integrated player will have the maximum requirement ofworking capital.

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EBITDA margins

0%

5%

10%

15%

20%

LT Foods KRBL Kohinoor REI Agro

2007 2008 2009


As against this if a player wants to enter at a later stage he will

have less requirement for working capital. His margins would also

shrink as the intermediaries would eat out the margins for

providing the relevant services of storage or maturing on behalf of

him. That is why players like LT Foods, KRBL and Kohinoor

Foods who are more into the branding segment have fewer margins

as compared to REI Agro which is evident from the graph given

above. They focus more on brand building and rely on trading as

well because they are not fully integrated as REI Agro. This also

means that the pressure of working capital requirements is less on

these companies.

Ultimately its the decision of the player to enter or exit at anytime

as the value chain is very long in case of this industry. But pros

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and cons are also associated with the timing of the entry or exit by

the company.

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ANALYSIS

Paddy purchase

REI Agro has an advantage over the others when it comes toprocurement of paddy from the mandis. It purchases paddy from

170 mandis out of 220 mandis of India which gives him a first

mover advantage. It buys almost 17% of the Basmati paddy

produced in India. Bulk purchase of paddy and prompt payment to

the farmers agent by REI also allows him to get a discount of 6-

10% as compared to other players of the industry. Because of the

huge participation in the market i.e.17%, REI agro sets the price of

paddy which others follow.

Being a fully integrated player, REI Agro purchases the paddy

directly from the mandis through its agents and performs all thefunctions from milling to distribution on its own. On the other

hand the other players do not have the required skills, facilities,

working capital and infrastructure to produce all of the Basmati

rice on their own so they also rely a bit on trading of Basmati rice.

These players purchase paddy in small quantities and sometimes

they purchase from REI Agro or other agents as well which drags

down their margin because of the higher cost of procurement.

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Processing facility

REI Agro has an advantage as it has the best processing facility in

the industry which has a good grading process that enables it to get

6 varieties of rice, when compared to its counterparts who get only

2-3 varieties of rice. Moreover the company also has the Ultra-

violet machine which removes the rice, which consists of the black

spots and other damages. This enables it to get greater realization

as compared to other players. The details of the Gross Block of the

top players are given below which shows the amount spent bycompanies on their processing facilities and other infrastructure.

The following chart clearly depicts that REI Agro has spent the

maximum amount on building its infrastructure and other facilities

to get the better product with good quality, which gives them the

best realization and margin in the industry.

Gross Block (in million Rs)

0

1000

2000

3000

4000

5000

2005 2006 2007 2008 2009



Maturity period

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Inventory days

0

50

100

150

200

250

300

350

400

2005 2006 2007 2008 2009

LT Food KRBL kohinoor REI agro

Source: Company financial statementsAmong the industry players, REI Agro has the longest inventory

days of 344 days compared to industry average of around 266

days. Due to its backward integration of the business from

procurement to selling the product, company has all the facilities

and capacity, which requires the higher no. of days for maturingprocess. Other players are not fully integrated, they either purchase

paddy from the farmers & matured it till 240-260 days or they

outsource some of the paddy from the REI agro. Lesser no. of

maturing days affects the quality, size and realization of the

basmati rice, which ultimately reflects in the profitability and

margin of the company. Hence, higher maturing days gives REI an

edge over the others in terms of quality, quantity, size and

realization, which resulting in better margin compare to industry

players.

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Financials

Working capital to balance sheet ratio

65%

70%

75%

80%

85%

90%

2005 2006 2007 2008 2009


Source: Company financial statementsBecause of the higher inventory days, the requirement of working

capital is huge in this industry. REI Argos working capital to

balance sheet ratio is 87% in 2009 which is highest as compared to

its peers which are averaging at around 79%. As the company is

fully integrated from procurement to selling, the working capital

need for the company is the maximum in the industry. On the otherhand, other players of the industry outsource some of their work to

the intermediaries which reduces the working capital requirement

for them.

Similarly the debt-equity ratio of REI is 4.9 in the year 2009 as

compared to other players such as KRBL, Kohinoor and LT Foods

which are at 1.43, 3.48 and 4.1 respectively.

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Although the working capital to Balance sheet and debt equity

ratio is very high of REI Agro the margin of the company is also

the highest in the industry. This is because it has a very long

maturity period with the help of which it produces the best quality

rice in the industry. Therefore, the price of rice produced by it

commands premium over the rice of others which ultimately helps

in increasing the margin of the company.

R e tu r n o n e

- 1 0 %

- 5 %

0 %

5 %

1 0 %

1 5 %

2 0 %

2 5 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

LT Fo odsKR BL K oh inoo rREI A g r

R e t u r n o n c a p i ta l e m

0 %

2 %

4 %

6 %

8 %

1 0 %

1 2 %

1 4 %

1 6 %

1 8 %

2 0 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

LT FoodsKRBL Koh inoo rRE I A g r


The inventory days of the companies in the industry are very high

due to which they require huge working capital to run the business.

As mentioned above, not all the players are fully integrated as REI

Agro, which has all the facilities from procurement to selling in

place. The company has the highest processing and maturing

capacity compared to its peers which requires huge capital. Due to

higher working capital debt and huge capex, interest and

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depreciation costs of REI Agro drags down the overall profitability

of the Business. While other players do not have all the facilities in

place so they outsource some of their work to the intermediaries

which requires lesser working capital and capex. Therefore, the

other players have an edge over REI Agro which has better return

ratios which follows outsourcing business model.

Similarly when we talk about the advertising expenses of variouscompanies REI Agro is far behind its peers. It is not even visible if

we look at the chart below. KRBL and Kohinoor Foods are the

ones that incur maximum expenditure on advertising and

promotion. This shows how REI Agro is different in terms of its

business model when compared to its peers. REI Agro is more into

the volume and private labeling business while the rest of the

players are into the branded and packaging business. The brands of

the companies such as LT Foods, Kohinoor and KRBL have

become household names. Examples: Charminar, Daawat and

India gate etc. The advertising expenses incurred by the companies

show that exactly. While REI Argos brands such as Real Magicand Kasauti are never heard by a common man.

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Advertising expenses, INR million

0

50

100

150

200

250

2005 2006 2007 2008 2009



The business of Basmati rice is such that a lot of debt is involved

as a lot of capital gets blocked in the maturity period of rice.

Therefore, the Debt equity ratio of all the players is relatively high.

KRBL has the lowest Debt equity ratio among all the players

because the company is more into branding business. On the other

hand in 2009 the ratio was highest for REI Agro because it is more

into the volume business in which everything from production to

distribution is done by the company itself.

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Debt equity ratio

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2005 2006 2007 2008 2009



Financials of all the companies in the organized market

KRBL 2005 2006 2007 2008 2009

EBITDA 8.1% 11.4% 12.5% 14.4% 14.9%EBIT 6.6% 9.8% 10.6% 12.0% 13.1%PBT 5.1% 6.7% 6.3% 6.6% 7.0%

APAT 3.2% 4.4% 5.4% 5.5% 5.0%RoE 10.0% 13.3% 15.9% 15.2% 15.6%Debt-

Equityratio 1.8 1.9 1.6 2.1 1.4RoCE(EBIT onTCE) 7.1% 10.8% 12.8% 10.9% 17.2%Days Inventory 220.4 190.1 232.4 305.8 219.2

Debtors 64.0 71.7 36.1 66.2 19.7Creditors 31.1 14.4 72.1 69.5 40.3

L T 200 2006 2007 2008 2009

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Food 5

EBITDA 6.4% 7.8% 9.5% 11.6% 14.8%EBIT 4.4% 5.7% 7.8% 9.5% 12.9%PBT 1.8% 3.0% 4.3% 4.8% 3.4%

APAT 1.4% 2.8% 3.8% 4.2% 2.8%RoE 9.8% 18.6% 17.5% 22.0% 17.0%Debt-Equityratio 3.93 3.67 2.43 3.87 4.09RoCE(EBIT onTCE) 6.3% 8.4% 10.8% 10.4% 15.4%

DaysInventory 175.9 166.2 169.5 242.4 217.7Debtors 63.0 40.7 52.1 53.5 48.3Creditors 199.0 178.7 189.2 226.2 214.2

Kohinoor Food 2005 2006 2007 2008 2009

EBITDA 7.4% 8.1% 9.9% 10.6% 13.3%EBIT 6.1% 6.4% 7.9% 8.6% 11.6%PBT 4.1% 4.4% 4.8% 0.7%

APAT 3.0% 3.1% 3.4% 0.7% 6.0%RoE 15.8% 15.3% 15.7% 3.4%Debt-

Equityratio 3.0 3.6 3.8 4.1 3.4RoCE(EBIT onTCE) 8.0% 7.3% 7.7% 8.1% 9.5%

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Days Inventory 205.3 219.8 247.3 259.5 284Debtors 34.3 37.7 52.4 61.7 57Creditors 33.2 32.2 42.1 34.7 34

REIAgro

200

5

200

6

200

7

200

8

200

9

EBITDA 10% 16% 18% 18% 18%EBIT 10% 15% 17% 16% 17%PBT 6% 11% 10% 7% 4%

APAT 4% 7% 8% 6% 2%RoE 20% 20% 20% 19% 10%Debt-Equityratio 2.70 2.31 2.79 4.02 4.94RoCE(EBIT onTCE) 12% 12% 10% 11% 12%

Days Inventory 222 227 312 331 344Debtors 63 91 153 79 88Creditors 86 22 23 33 45

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Conclusion

Basically there are 2 types of models which are followed by the

companies in this industry. One is the fully integrated which is

followed by REI Agro in which each and every thing from

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procurement to selling is done by REI itself. This model is more of

a volume driven which is followed by REI Agro. The other model

is followed by rest of the 3 companies whereby these companies

produce less and also rely a bit on trading. Moreover these

companies focus mainly on brand building and selling.

The benefits to REI Agro are as follows:

Being a fully integrated player REI Agro has the best processing

facility and therefore it commands better margins because it doesnot have to pay anything to the intermediaries unlike its peers.

It also gets discount on purchase of paddy as it makes bulk

purchases as compared to other 3 players.

Being the largest producer of Basmati rice it also has the

advantage of economies of scale.

It also has its own retail chain in the form of 6TEN through

which it sells its products directly to the customers and thereby

eliminating the costs incurred on the intermediaries.

It has the longest maturing period among the industry with the

help of which it makes good quality rice which commands

premium over its competitors. The company can also benefit in case of an economic downturn

as it is a volume player and not a branded segment player.

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The ill effects of the following Business model are as follows:

Being a volume player the company cannot command a premium

price unlike a branded segment player who can easily command

premium from its customers.

The requirement of debt and working capital is immense as a lot

of money gets blocked during the maturity period.

A company needs a very strong balance sheet to follow this kind

of model.

The company cannot establish rapport with its customers as it isnot following the branded segment model.

The other business model is followed by 3 companies namely

KRBL, Kohinoor and LT Foods. The players in this model focus

more on brand building and selling. The benefits of this model are

as follows:

The players following this model are into the branded segment

and can therefore command premium price from the customers.

The retail industry is all set to grow at a rate of 9% every year

which will ultimately benefit these players. A customer when buys a brand and is satisfied makes repeat

purchases. This leads to brand loyalty which ultimately benefits

the company.

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These companies are also known by the customers as these

companies repeatedly advertise themselves which leads to brand

recognition by the customers.

The ill effects of the following Business model are as follows:

The following companies do not have their own distribution

network and have to rely on suppliers and distributors and

thereby reducing the margins. As these companies also rely on a bit of trading as the production

is less, the margins are further reduced due to the intermediaries

present in the value chain.

These companies are more likely to lose out incase of economic

downturn as they will have to reduce premium prices charged

through their respective brands.

Therefore both the business models have their pros and cons and it

is ultimately the decision of the player to follow whichever

business model he likes.

Particulars REI

Agro

LT

Food

Kohinoor KRBL

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s

Fully integrated

Premium price

Branding/Advertisement low high high high

Working capitalrequirements

high low low low

EBITDA margins high low low low

Financial cost high low low low

Maturity period high low low lowVarieties of Rice

produced5-6 2-3 2-3 2-3

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Bibliography

http://www.articlesbase.com/business-opportunities-articles/a-

market-study-of-indian-basmati-rice-import-and-opportunities-

1233358.html

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set-to-enter-china-mexico_10066425.html

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2350250400.htm

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spx

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http://business.rediff.com/report/2009/may/12/rice-production-

seen-at-record-99-point-37-mt-in-08-09.htm

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