LAKSHMI ENERGY AND FOODS -- contra buy

LAKSHMI ENERGY AND FOODS  cmp 95, fv Rs 2, market cap around 600 crores.

The company is the biggest processor of non-basmati rice in India and has a lot of value addition during the processing. It generates biomass power from husk of rice.

WHAT HAS GONE WRONG THIS QUARTER

During the third quarter ended June 2010 (year ending September 2010) the company reported excellent sales figures amounting to 338 crores compared to 178 crores for June 09.  This showed a growth of 90% y-o-y and 40% q-o-q. 

PUSA Basmati contributed 70% to net sales with robust sales in domestic as well as export markets.

The margins took a strong beating in this quarter because the company decided to reprocess unsold finshed goods inventory and sell it. This inventory was at a higher price due to higher rice prices which subsequently fell from around 62 per kg to 48 per kg. This lead to higher raw material cost. Going forward, company is likely to procure raw material at lower prices and sell it at normal margins.

Energy division showed sales of 27 crores which was up around 70% q-on -q because of higher realisation of 6.38 per unit of electricity. For 9M ended June 2010, the avg realisation was around Rs 5.64 per unit.  Going forward, realisation of power division is likely to stabilise at higher levels witnessed in June qtr.

For nine months ended June 2010, company posted sales of 782 crores compared to 505 crores for 9M ended June 2009.  Net profits were at 64.7 cr as compared to around 62 crores for 9M ended june09.  EPS for 9M ended June 10 was around 10 per share.

WHAT CAN IMPROVE

1.       Company plans to launch rice in retail segment under its brand Lakshmi Foods, beginning with Delhi and ultimately covering metros and a total of 7-8 cities by end of FY 10.

2.       There could be margin improvement in last quarter (which is usually the best quarter every year) due to lower raw material prices and stable power realisations.

3.       Launch of retail brand could reduce dependence on FCI offtake of its products and hence reduce volatility in its earnings.

4.       Conservative estimates would lead to eps of around 15-16 per share with possibility of upside surprises, unless something goes wrong drastically. Sales for fy 10 ended Sep are projected as 1100-1150 crores and net profits in range of 90-100 crores. (source: reports of edelweiss and crisil)

INVESTMENT ARGUMENT:

Looking at the above projections,  here there is a company available with a very good business model, passing through a rough patch and still delivering a PAT of around 90 crores minimum with a market cap of 600 crores.  And there seem to be better times to come with its retail launch of products set to take place sooner or later.

RISKS:

Delay in retail launch could derail the calculations to some extent

Raw material prices theoretically could play spoilsport.

disc: I have a position in the stock.

PS   I had posted the synopsis on TED in June 09 when the price was around 75-80. The company had a good few quarters after this and the stock reached a high of around 175 and has subsequently fallen to the current levels of around 90-100, where it seems to be consolidating.

TECHNICAL VIEW:

The stock has seen a strong run up from around 63 where it formed a bottom to around 175 and has subsequently fallen to around 95 levels currently. It seems to be consolidating in the 90-100 range currently.  If things fall into place fundamentally, we may be looking at wave 3 up in the medium term which is usually quick in terms of value and time. (I am no expert in elliot wave analysis but this is how the picture looks to an optimistic amateur analyst)

link:  http://www.theequitydesk.com/forum/forum_posts.asp?TID=2206