The stock price of LT Foods Limited reached an all-time-high (ATH) of Rs 109 per share on 08Jan2018 before losing 82 per cent of its value by Christmas 2019 to plunge to Rs 20.
This is not the first time that the stock suffered such a heavy loss in stock market. During the Global Financial Crisis (GFC), the stock lost 75 per cent of its value between January 2008 and March 2009.
However, the same stock has given a phenomenal return of nearly 550 per cent between the COVID-19 low of March 2020 and now--moving from Rs 15 to Rs 97 during the past two years or so.
So, what is the story here? Such explosive moves in the stock price tell you something about the nature of the company's business and the company itself.
What is LT Foods?
LT Foods has been traditionally a Basmati rice exporter under its well-known brand 'Daawat.' It has got a wide distribution network and operates through modern trade and e-commerce also. Its broad portfolio includes, brown rice, organic food and convenience foods.
It has a subsidiary in the US owing 'Royal' brand Basmati rice, which is a leading brand in the US. LT Foods' other brands include, Devaaya, Rozana, Ecolife, Heritage and Chef's Secretz.
More than four-fifths of its revenue comes from Basmati rice. The nature of the business is such the company has to maintain high inventories, by buying rice from more than 100,000 farmers mainly in Punjab and Haryana; and stocking it--entailing the company to have higher working capital needs.
The company is susceptible to changes in rice / paddy prices. A large part of its sales revenue emanates from exports and any adverse movements in dollar-rupee exchange rate may impact the company substantially.
It could be vulnerable to truant Indian monsoons. Higher commodity prices are likely to impact businesses of food companies adversely due to demand contraction by consumers in times of high prices.
It's depending on ready-to-eat (RTE) and ready-to-heat (RTH) foods to grow its business. The Middle East is a big market for LT Foods in Basmati rice.
The company is also present in HoReCa segment, supplying its products to hotels, restaurants and caterers.
Basmati rice industry is highly competitive. LT Foods' main competitors are KRBL Ltd, GRM Overseas Ltd and Chamanlal Setia Exports Ltd--all the three are listed on Indian stock exchanges.
It has reduced its debt in the past three years. Its long term credit is A/positive (pronounced singe A positive), according to CRISIL Ratings Ltd's report of 16Mar2022. The rating reflects improvement in its credit profile and profitability in the past three years.
It has got various overseas subsidiaries.
Why is the company paying very low dividends?
The dividend payout ratio has been an average of five per cent in the past five years, which is low. The company justifies the low dividends with the following: 1) using the profits as capital expenditure for growing its businesses, brand values and supply chains and 2) for debt reduction.
How are the sales and profit growing?
A substantial part of LT Foods' sales growth in the past two years has come from subsidiaries it acquired recently (one could check the difference between company's Standalone and Consolidated results to see the growth of overseas subsidiaries).
Who owns the company?
About 57 per cent of the equity share are owned by Ashok Kumar Arora, Vijay Kumar Arora and other family members. No shares of promoters have been pledged.
Institutional ownership is meagre at 4.8 per cent of the total shareholding (11 per cent of the free float). Retail investors own 89 per cent of the free float.
How are the valuations ratios?
Its price-earnings ratio is 11.2, price-to-book-value is 1.6 and price-to-sales is 0.6.
How are the company's debt metrics?
Its debt-equity ratio is 0.60. Even though it's slightly higher, this appears to be okay given the growth path and profitability prospects of the company. Based on the current available information, one could say the company's ability to service its debt is comfortable.
The Story
To come back to my original question, what is the story here?
COVID-19 Pandemic changed the outlook on food companies in India. Basmati rice industry got re-rated after March 2020. Earlier, such companies used to command a price-earnings ratio of less than five or six. Now, investors are willing to give P/E ratios north of 10 for them.
Specific to LT Foods, value migration seems to have benefited the company. Its acquisition of 'Royal' Basmati rice brand in the US has helped the company in pushing up its sales and profit margins. 'Royal' brand has more than 35 per cent market share in the US.
Operating profit margins for Basmati rice exporters have been traditionally in lower range.
LT Foods has forayed into other food businesses, diversifying into wheat flour, convenience foods and others. Last year, it picked up 30-per-cent stake in a Dutch food company, named Leev, which specialises in organic food.
It has lately acquired 51-per-cent stake in Golden Star Trading Inc.
This value migration has changed the complexion, in the minds of investors, from a mere trading company to a consumer food company. Hence, the stock price has moved spectacularly from Rs 15 to Rs 97 now (its current market cap is Rs 3,100 crore).
So What of the Future?
This is the trickiest part. If the value migration continues and the company continues to focus its energies on brand building and diversifying into other related businesses, the company is likely to show good growth in sales and profits--giving decent rewards to shareholders going forward.
It's trying to transition from a rice exporter to a consumer food company--claiming to move to a farm-to-fork model.
Eternal vigilance is the name of the game in stock markets. If LT Foods is able to grow in future without over-stretching its balance sheet (that is, using internal resources wisely and not depending too much on raising new equity or debt), investors may be able to reap rewards.
Investors should watch how the company will move from a commodity play to a brand play.
LT Foods could command price multiples closer to the marquee food companies in India only if it will be able to focus on the future path of the value migration chain.
Finally
An African cheetah's technique is extraordinary speed in hunting its prey in the savanna--but it has little endurance. Speed is the name of game for cheetahs. In contrast, a pack of wolves needs fortitude to hunt its prey, like, wild buffaloes in America. The pack tracks the prey for extraordinary lengths--relying on endurance--ultimately wearing down the prey.
In stock investing, investors with endurance have an edge over lightning-speed cheetahs.
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Note: market prices mentioned above are adjusted for corporate actions, like, stock split and bonus if any.
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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