Rice Fuels 132% Rally in Indian Mills Tapping New-Age Consumers

December 1, 2015 06:24 AM

For Mumbai homemaker Sonali Ray, buying basmati rice until a year ago was a leap of faith. It often meant a silent prayer for grain free of weevils and stones as she watched her old grocer scoop up the produce from open burlap sacks onto his ancient scales.

Not anymore. These days she walks into a swanky supermarket in the same neighborhood and picks up a neat, branded 5-kilogram (11 pounds) pack. And, she doesn’t mind paying 20 percent more. “I am assured of the quality and I know what I am paying for even if it’s a bit expensive,” says Ray, 36. “Adulteration is a big issue.”

The changing profile of consumers like Ray in India is fueling a stock rally in local producers of branded rice as rising incomes and the shift to modern convenience stores from grimy mom-and-pop shops stoke demand. Rice being a staple for a majority of the 1.2 billion Indians, Rabobank estimates sales of the packaged grain is growing 15 percent annually and will jump 81 percent to about 2.9 million metric tons worth $3.5 billion by 2017.

“Branded rice is turning into gold for the industry with its growing consumer acceptability,” said Shiva Mudgil, an analyst with the Mumbai unit of Rabobank International. “The premium will help the companies boost revenue growth and profitability.”

Shares of KRBL Ltd., the seller of India Gate basmati rice and the nation’s biggest in the segment, have surged 132 percent this year to 242.55 rupees after tripling in 2014, while those of LT Foods Ltd., which sells the Daawat brand, have jumped 166 percent, poised for a fourth straight year of gains. Kohinoor Foods Ltd. surged as much as 10.5 percent to 57.90 rupees, extending gains this year to 33 percent.

Sales of branded packs account for only 2 percent of the total in India, which is the world’s largest consumer and producer of rice after China. As consumption rises, even the old mom-and-pop stores are starting to stock the popular, packed brands, widening the reach, said Saravana Gughan, an executive vice president for India at Dutch processed food maker Samhoud Food BV.

“The more packets consumers see on the shelves, the more they tend to buy,” said Gughan, who earlier was an executive with Reliance Retail Ltd. and the local unit of McDonald’s Corp.

Plunging Prices

Domestic consumption in India is also rising after prices plunged from their 2013 record after Iran slashed imports. Rates for some basmati rice varieties in India have tumbled 56 percent to about $700 a ton from as high as $1,600 a ton in 2013, according to Anil Kumar Mittal, chairman of KRBL, who has been trading the commodity for three decades at the family-owned company founded in 1889.

Though the dip in exports and prices caused growth in KRBL’s group sales to decline to 8.6 percent in the 12 months through March 2015, from 40 percent the previous year, the food processor has managed to maintain its EBITDA margins at about 15 percent, according to data compiled by Bloomberg.

“Any revenue loss due to lower prices is likely to be compensated by an increase in volumes,” said V.V.L.N. Sastry, chief executive officer at Mumbai-based Firstcall India Equity Advisors Pvt. “Since, the industry has a positive outlook, the rice companies are going to attract investors in a big way.”

The potential for growth has already driven overseas investors to pick up minority stakes in some of these companies.

Abu Dhabi-based Al Dahra International Investment LLC has picked up 20 percent of Kohinoor Foods while the International Finance Corp., the private equity arm of the World Bank, invested in Amritsar, Punjab-based Dunar Foods Ltd. Rabobank International’s private equity fund has bought a stake in LT Foods.

Roller Coaster

India is the world’s largest exporter of basmati rice and ships about half of its output to countries including Iran, Saudi Arabia, United Arab Emirates and Iraq. In the non-basmati trade India competes with Thailand and Vietnam for exports to countries including Bangladesh, Senegal, South Africa and Liberia.

Overseas sales totaled 11.4 million tons in the year through March, according to the All India Rice Exporters Association. India’s exports accounted for 25 percent of the global rice trade in 2014 and helped the country earn $4.8 billion, a fifth of its total food and agriculture shipments, according to Rabobank.

Shipments out of India may drop to between 5 million tons to 6 million tons in the next five years from more than 10 million tons in recently, according to estimates by Rabobank.

KRBL is seeking to increase sales volume locally to counter the drop in prices and exports by taking its produce to small towns and rural areas, Mittal said.

“It’s like a roller-coaster ride,” he said in an interview. “We are trying to increase our share and going to new destinations. When sales increase, the cost of expenses comes down and that will reflect in our EBITDA.”

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