REI Agro - A Staple Diet

Rei Agro - Eyes $30m Saudi Deal

Rei Agro, India's largest exporter of basmati rice, is in advanced talks to buy rice distribution firms in its main export market, Saudi Arabia, and could spend up to $30 million on deals in the next few months. Basmati, which in Hindi means 'the queen of fragrance', is among the most expensive rice in the world. The premium, long-grain rice is only grown on the Indian sub-continent. 'We are in advanced negotiations with some distribution companies in Saudi Arabia for buying stakes,' Rei Agro's vice-chairman and managing director Sundip Jhunjhunwaala said on the sidelines of a conference.

The Jhunjhunwaala family owns 45 per cent of Rei Agro, while foreign investors including US bank Goldman Sachs and Deutsche Asset Management own about 25 per cent. Jhunjhunwaala said distribution margins in Saudi Arabia, India's biggest export market for basmati rice, are high because of entry barriers. Rei Agro is not looking at other acquisitions. He said net profit would double to about 650 million rupees ($14.7 million) in the year ending March 2006, compared with 320 million rupees last year. He also forecast rising profits and sales for next year thanks to a new production plant that will help boost exports. 'For March 2007, we should have at least a 20 to 30 per cent jump from here on the top line.' He expects sales to reach 9 billion to 10 billion rupees in the year ending March 2006, up from 8.5 billion rupees last year.

The company produces 375,000 tonnes of rice a year, 100,000 tonnes of which it exports mainly to Saudi Arabia. Its exports are expected to double to 200,000 tonnes next year. Jhunjhunwaala said a new production facility for higher-value parboiled rice, which will be completed in April, would help the company capture strong demand for basmati rice.'Next year, about 30 percent of our revenue will come from parboiled rice. That gives me 10 per cent extra margin.'

Rei Agro plans to diversify its portfolio away from rice and is planning to boost its power generation business. Jhunjhunwaala said he expects to produce 100 megawatts by September 2006. It already produces 30 megawatts of wind power and plans to produce a total of 500 megawatts with a mix of wind and hydro power by March 2008.

The rice business is changing fundamentally from being a trading business to an industry where technology and branding is bringing in a major change. REI Agro with its attractive promotional offers and tie-ups with emerging big discount stores like Big Bazaar is on its path towards attaining leadership position in the sector.

REI Agro Limited (RAL), set up 11 years ago in Haryana, is a 600-crore basmati rice processing and marketing company. It is an integrated player and undertakes right from contract farming to procuring paddy to drying, de-husking, milling and polishing, colour sorting, grading, inspection, packing, branding, distribution and retailing. RAL has two processing units in North India, with an aggregate capacity of 302400 tonnes per annum. In addition it also operates a 7.5 MW windmill farm at Jaisalmar in Rajasthan. The company sells Basmati rice, in bulk, in the domestic wholesale market and also sells whole-grained Basmati rice under its brands, major being ‘Mr. Miller’ and ‘Al-Tahaan’, through a wide network of semi-wholesalers and distributors spread across the country. The company has witnessed a steady topline growth of 43% CAGR over the last three years and its profit margins are better than the industry's.

India being the largest producer and exporter of basmati rice commands a premium over its traditional rivals in terms of price and quality. The total rice market in the country is estimated to be worth around Rs 1, 00,000 crore of which only 10 per cent of the rice is branded. The branded rice sales have taken off in recent years and have been growing at around 15 per cent in the domestic market compared to 5 per cent for unbranded rice. The branded rice sales growth is an impressive 25 per cent in the international market as compared to stagnant sales of unbranded rice. Added to this, of the Rs 3500 crore worth of basmati rice produced, only around Rs500 crore worth is sold in branded form. On the pricing front, Basmati rice prices are expected to increase by Rs 7-8 per kg due to steady export demand supported by lower crop. REI Agro is among the select few companies that have pan-India presence and are likely to reap the benefits of growing penetration of branded rice including basmati. The rice business in the country is altering fundamentally from being a trading business to an industry where technology and branding is bringing in a major change. The setting of fully integrated rice mills by RAL allows it to utilize the bran for rice bran oil and de-oiled cake. The husk finds usages in captive energy generation and manufacture of other value added products. The expansion of capacities and improving efficiencies is expected to have a beneficial impact on the profit margins of the company and would also beef up the bottomline.

Unlike its competitors who are positioning their brands like Kohinoor, Lal Qila, Dawaat, and Doon in the premium sector, RAL is focussing more in the lower and middle sector. The company has products for the entire price points of the market and had recently launched one-for-one free offer for its Mr. Miller brand, at price which is almost half the industry's rate. The company was able to generate good brand awareness for the same across various regions by ensuring product availability at major bargain stores and food exhibitions. In addition, the distribution cost was cut to the bare minimum by adopting a three-tiered distribution system ­company, distributor, and retailer. RAL further rolled out the basmati rice in tiny sachets 'magic pack' for Rs 5 to reach out to the masses, the response to which was overwhelming. The company would soon be launching the 'magic pack' to other cities soon with an eye on expanding markets horizontally.

RAL's profit margins are better than the industry's even after its buy-one-get-one-free offer. The emphasis on branding has enabled RAL to increase its share of branded products from 16% in 2002-03 to 27% in 2003-04, resulting in higher realization across the value chain. The company has adopted a two-pronged strategy, viz. moving up the value chain & emphasis on cost reduction. The company has appointed 15 specialized procurement managers at each mandis (markets) through which it not only gains direct access to price-sensitive information, but also gets help in cutting down intermediation costs. In addition, it has improved its performance owing to the doubling of production under contract farming on crop sharing basis and lower interest charges. The company’s net profit margins are set to improve to 6.50% in FY06E led by higher exports after the commissioning of new facility in January 2005 and jump in share of branded products.