Mr. Sandip Jhunjhunwala, Vice Chairman and Managing Director, REI Agro Ltd.

Replying to Jasmine Kohli of IIFL, Mr. Sandip Jhunjhunwala says, "We are in the process of expanding capacity at Bawal. Also look forward to increase capacity further to about 15,24,240 MTPA by FY13".

July 07, 2010 11:04 IST | India Infoline News Service

Mr. Sandip Jhunjhunwala, Vice Chairman and Managing Director, REI Agro Ltd.,is the younger brother of Chairman, Mr. Sanjay Jhunjhunwala and has been associated with the Company since its inception. He is primarily responsible for setting up state-of-the-art processing equipment for the company. Under his leadership, REI Agro is continuously expanding and upgrading its processing facilities. Mr. Sandip Jhunjhunwala is instrumental in developing and monitoring the implementation of the company's business plans and strategy. He oversees the overall operational activities and reviews the progress with the senior members of the management team. He ensures that the company moves in line with the overall objectives and mission as set out in the business plans. He has successfully implemented standard operating procedures at REI Agro.

REI Agro Ltd. is one of India’s leading food companies and the world’s largest processor of Basmati Rice. The company is an integrated player and commands presence across the value chain – from farm to market shelves. The company operates state-of-the-art rice processing units supplied by world leaders in food processing equipment. The company markets reputed brands like ‘Kasauri’, ‘Real Magic’, ‘Mehrab’, ‘Mr. Miller’, ‘Hungama’, ‘Hansraj’ and ‘Nausheen’ and commands presence at various price points – from the non-premium to premium. Strict adherence to the international standards as well as world-class quality initiatives has built up a strong brand image of the company in the international markets.

Replying to Jasmine Kohli of IIFL, Mr. Sandip Jhunjhunwala says, "We are in the process of expanding capacity at Bawal. Also look forward to increase capacity further to about 15,24,240 MTPA by FY13".

Brief us about your business model?
The company is one of the few basmati processing companies having an ‘integrated business model, thereby achieving operating margin of 18% - 19%, which is almost double the industry standards.

The company is present across the basmati rice value chain - from the procurement of paddy from farmers to maturing to processing and marketing of basmati rice. The company has managed to expand its market share consistently over the years, thereby consolidating the industry in an organic manner.

The basmati rice industry remains fragmented, thereby presenting an immense opportunity for the company. The entire chain - right from procurement to maturing, processing and distribution - includes multiple intermediaries. This leads to inefficiencies.

Taking advantage of the situation, the company started consolidation by increasing its seasonal purchase of basmati paddy from the mandis on the one hand and by extending the maturing of basmati on the other hand.

REI Agro is the largest buyer of basmati paddy in the country and one of the few companies that pays upfront to farmers. The company enjoys a preferred buyer status among the farmers which enables it to procure large quantity of quality paddy at comparatively lower cost. The consolidation of the maturing process provides REI with more efficient maturing by reducing intermediaries. The company has set up a strong paddy management team to ensure that proper care is taken of the paddy.

REI has also set up one of the largest processing facilities built by world leaders in food processing technologies. As a result, the company has been able to improve its operational efficiencies by increasing the yield of whole grain (Full) basmati rice. It is pertinent to add that the entire success of a basmati rice processor is dependent on the head rice realization achieved. REI has emerged as a clear leader in this regard.

Also, India is the largest producer of Basmati rice in the world. It produces around three millions tonnes of Basmati Rice per annum which is about 75% of the estimated four millions tonnes of globe production.

Most of the Indian Basmati rice is exported. It is estimated that India exports about 75% of the production which goes mainly to Saudi Arabia and other Gulf regions.

The demand has been strong as consumers in the Middle East, Europe and America developed a taste for the variety. Indian consumers have also become more affluent and have moved to Basmati rice.

Gulf region remains the major market for the Indian Basmati rice. Within the Gulf region, UAE and Saudi Arabia account for the major chunk of Basmati imports from India.

The Government of India does not regulate the basmati rice market and we are happy about the same.

What are the entry barriers for this sector?
There are no legal entry barriers for this sector. However, basmati rice is a premium product with a distinct nutty fragrance and a grain that elongates 2-3 times when cooked. Basmati forms less than 2% of India’s rice production. Half of the market is presently in the unorganized sector. The basmati rice business is a grass root level business and requires strong farmer relations. It requires considerable time and effort to build relations with farmers and enjoy their trust.

The basmati rice business requires very specific skills. REI Agro has invested heavily over the years in developing these skills. We have over 180 buyers who have been specifically trained in the procurement of basmati rice. Much like wine and tea tasters, all our purchasers are trained at identifying basmati paddy. Besides there purchasers are also trained to make an estimate of the head rice yield expected from the paddy procured. Since the basmati rice industry is relatively small any new entrant will have do develop all these skills which act as an effective entry barriers.

Briefly walk us through your various segments?
REI Agro is a focused basmati rice processing company which is the main segment with over 99% of revenues. However, the company also operates 46.1 MW of wind farms located in the states of Rajasthan, Maharashtra, Tamil Nadu and Gujarat. The company has signed long term Power Purchase Agreements for sale of power with local state owned electricity distribution companies. The segment accounts with less that 1% of revenues.

We are an integrated processor of basmati rice with about 20% market share in the Indian basmati rice segment. The company operates two processing plants in Bawal (Haryana) and leased units in Amritsar with cumulative installed capacity of 103 TPH. All the units are located in the heart of basmati producing belt. REI Agro’s successful business strategies have resulted in increasing basmati rice production and revenues.

With growing demand of conventional energy the company has also diversified into the business of wind energy generation by setting up wind farms in Maharashtra, Rajasthan, Tamil Nadu and Gujarat with the total installed capacity of 46.1 MW. The company’s investments in wind farms have resulted in deferment of taxes for the company.

Tell us about the growth rate, turnover and margins?
The company’s net sales for the year ended March 2010 increased by 50.85% to Rs 3693.23 crores as against Rs 2448.23 crores for the previous fiscal year. Improvement in the revenues is attributed to the increased and wider marketing presence during FY10. Net profit of the company has increased by 158% to Rs157.17 crores in FY10 from Rs60.93 crores in FY09.

The PAT margin increased by 177 bps to 4.26%, reflecting strong growth in the wake of better economies of scale and improved production efficiencies, despite higher paddy prices. On equity of Rs31.93 crores, the company’s EPS amounted to Rs5.02.

Net sales for the quarter ended March 2010 (on consolidated basis) increased by 42.25% to Rs. 1214.4 crores as against Rs. 853.7 crores for the corresponding period last year. Net profit rose to Rs 32.4 crores as against Rs 13 crores. On equity of Rs 31.93 crores, EPS for the quarter amounted to Re 0.99.

To cater to the increased demand for Basmati rice during 2010, the company added 24 TPH capacity on lease basis. The company is now expanding capacity with a target to increase its owned capacity from existing 61 tons per hectares (TPH) to 98 TPH in 2011 at a planned cost of over Rs300 crores.

Who are the main buyers of your rice?
The company exports its products to all the major buyers of basmati rice in the Gulf region. Namely Saleh A Babaker Sons Co, Al-Muhaidib Food Co, Al – Naki International trading Co, KRBL DMCC, Miad General Trading Co. and Yosufi General Trading Co.

In the domestic market, the company sells its products though a chain of 490 distributors spread across the country. According to our estimates, the company covers about 100,000 retailers across the country.

How is the consumer acceptance of basmati rice?
Basmati rice is the most expensive rice in the world, commanding a premium of over 100% over any other variety of rice. We believe that there is a huge latent demand for basmati rice which is primarily restricted by supply. We produce about 4mn metric ton (mt) of basmati rice.

Basmati supply has increased at a CAGR of about 12% in the last 10 years or so. It has grown at a CAGR of about 17% over the last five years and 26% over the last three years. In spite of the rapid increase in production on account of increasing preference of farmers for basmati rice the entire incremental produce was lapped up by the Gulf. This has still left unsatisfied latent demand in other parts of the world.

The supply of Basmati is limited as it can be grown only in the four states of Haryana, Punjab, Western Uttar Pradesh and Uttarakhand. Also, Basmati rice can be grown only once in a year.

It is also interesting to note that though production has doubled over the last three years prices have also remained strong and have almost doubled during the same period. The demand for Basmati rice has been largely dependent on the supply and has shown inelasticity to prices.

Brief us about your brand portfolio?
The company has launched brands in all segments. For the Premium category we have Kasauti and Real Magic; for the popular category we have Hungama, Rain Drop and Icon; for the mass category we have Hansraj and Masti; and for the export category we have Nausheen, Mehrab and Al Tahhan.

We have a growing brand presence at all price points. However, in the future we could look at more brands to capture more shelf space. Presently, branded basmati rice accounts for about a third of the company’s sales.

Any new brands on the anvil?
We have recently launched two brands in the export markets viz. ‘Nausheen’ and ‘Mehrab’. The two brands have been accepted in the Gulf. In the previous year about 12% of our export revenues have been in our own brands. We plan to promote these brands in the Gulf and expect to increase the share of these brands in the export market over the next few years.

What is your marketing strategy?
Basmati rice reaches consumers through distribution networks that comprise multiple middlemen, including the street corner retailer and the large departmental stores that also sell them under their own brand name.

REI Agro has expanded its basmati rice business in two ways; we have widened our pan-India presence across 490 dealers and 100,000 retail outlets on the one hand and an extended presence in the global market countries on the other.

REI Agro’s matured premium quality rice is either exported or sold either through the chain of ‘6Ten’ retail stores or through the chain of distributors, wholesalers and retailers. The company has a very wide network of semi wholesalers and distributors for its products.

The semi matured basmati rice is sold unbranded and is classified as institutional sales. This is sold either to one of the re-exporters or to stockists and distributors. Once the rice is matured enough to be consumed, the stockists and wholesalers sell some quantities to exporters and re packers who brand the rice.

Over the years, REI Agro has been able to increase the volumes of matured rice and therefore we have seen a manifold rise in the percentage of branded and unbranded rice. The company has relied on the distributor push based on the supply of consistent quality basmati rice.

In recent years, REI Agro has been able to further strengthen its brands by reaching out to the customer through the ‘6Ten’ outlets. The company is focusing on increasing its presence and visibility in the market through various product and brand promotion activities. The company also hopes to increase its brand presence through ‘6Ten’ retail outlets. The response of the customers to ‘6Ten’ stores and REI Basmati Rice has been very encouraging.

How are you placed in the retail space?
REI Agro sells its branded products through the retail chain christened as ‘6Ten’. REI Six Ten Retail Ltd. operates 310 stores in NCR, Chandigarh, Mohali, Panchkula, Jaipur, Mumbai, Ahmedabad, Baroda, West Bengal and Nagpur.

Since its inception the company has emerged as one of the leading retailer of grocery, especially in northern and western India.

REI Six Ten Retail Ltd. is probably the only retail company in India with Zero Debt.

Besides ‘6Ten’, REI Agro has the strongest presence in the Kirana stores spread across the country. Our products reach out to about 100,000 retail outlets throughout the country.

Brief us about the price scenario?
Basmati rice is not a commodity. The most remarkable thing about Basmati rice pricing is that its price is not volatile. The supply is stable and growing. There is a large dormant demand that goes unfulfilled simply because enough Basmati rice is not produced. Basmati rice production has increased year to year.

Unlike any other agricultural product there has never been a drop in supply of Basmati rice due to crop failure etc. The incremental production has been lapped up by countries in the Gulf region, making Basmati rice a supply driven market. The key reason for such stable production growth is because Basmati rice is a very stable crop. It requires less water for cultivation and is grown in the most fertile and irrigated portion of the country.

Since about 60% of the Basmati rice industry is still fragmented, prices are decided on a cost plus pricing model. Hence typically Basmati rice price is fixed at the cost of paddy procured plus all other costs and multiple intermediary margins. Since our cost of procurement cost of maturing and the cost of processing is the lowest in the industry we are quite comfortable in this regard.

Brief us about your capex plans? How do you plan to raise the funds?
REI Agro is also in the process of expanding its capacity at Bawal. After this expansion, the owned capacity of the company is estimated to increase from 534,360 MTPA to 858,480 MTPA.

We are looking to increase out capacity further to about 15,24,240 MTPA by FY13.

We have already raised US$5mn as FCCB issue towards funding of the proposed expansion.

Who are your main competitors? What edge do you have against them?
The Indian Basmati rice industry remains fragmented; about 60% of the market is controlled by small family run businesses. We face competition from the small players. However, there are a few larger players in the industry like KRBL and Kohinoor Foods.

REI Agro is probably one of the few focused basmati rice companies in the world. We capture the largest portion of the value chain. As a result not only has the company registered much faster growth, we have also recorded the highest margins in the industry.

How do you procure your raw material?
All procurement of Basmati paddy has to be made through auctions rate only during the harvesting season. At REI Agro, we prefer to make maximum purchases during the season in the mandis.

We cover over 180 mandis spread across the basmati rice producing areas in Haryana, Punjab, Uttarakhand and Western Uttar Pradesh. This is by far the maximum geographical reach for any company in the basmati rice industry.

We leverage on our strengths for the procurement of quality paddy at a cheaper price by making upfront payment to farmers. REI Agro is one of the very few companies that make upfront payment to farmers. This provides us the "preferred buyer status" in the mandis and all farmers want to associate with REI Agro. It helps us bring more competitiveness in terms of pricing and ensures purchases of large quantities of quality paddy.

What is the revenue contribution from exports?
The revenue contribution from exports amounted to Rs564.80 crores, which is 18% of the total sales of the company. We expect this to increase to about 50% of sales over the next three years.

How does monsoon impact your business?
Unlike other rice crops, Basmati rice does not require large quantities of water. In fact Basmati rice requires only sprinkling water and not standing water. Basmati rice does not depend on monsoon. Over the last 15 years we have seen that Basmati Paddy production is pretty constant and in fact increasing year to year, as farmers are getting equipped with proper irrigation facilities. The production of Basmati rice has not dropped even once in the last several years.

The lack of dependence on monsoon continued in FY10. The monsoon was not good last year which resulted in a drop in non-Basmati rice production by almost 15%. Yet the production of Basmati rice increased by 30% last year.

Basmati is cultivated in the foothills of Himalayas, the northern part of Western Punjab (on both sides of the Indo-Pakistan border), Haryana, Western Uttar Pradesh, and Uttarakhand. Haryana accounts for around 50% of the area under basmati rice, followed by Uttar Pradesh at 25% and Punjab at 18%. The soil and climate of this region is responsible for Basmati rice’s unique taste and texture.

Inflation has been soaring. How has it impacted your business?
Basmati rice is a premium product and is not affected by inflation. As mentioned above, the demand for Basmati rice has been inelastic to prices. Though prices have almost doubled in the previous three years demand has remained strong thereby leaving an unsatisfied demand.

However, REI Agro has always believed in enhancing the consumer’s price-value and volumes will grow. The result is that we consistently supply quality products at the right price. Our presence in mandis has helped us procure paddy cheap. The result is that even as inflation has shot up, our customers are happy with our stable and attractive pricing. This has translated into strengthening of volumes.

What is your message to the shareholders?
We believe that we have now developed a robust, sustainable and scalable business model. REI Agro expects to continue its growth in the future. We are looking to increase our owned capacity by almost three times in the next three years. We expect to benefit from the increase in our operating efficiency and due to the operating leverage.

We are also looking to raise capital through an attractively priced rights issue. The proceeds of the rights issue will be used primarily for incremental working capital requirements and for repayment of debt.

This will reduce our interest cost which is the second biggest cost head after the cost of raw material. In fact, in FY09, the interest cost was about 13% of our sales. We have been able to reduce this to about 9% of our sales in FY10 due to repayment of debt on account of our US$37.5mn QIP and softening of interest rates.

The result is that we have been able to increase our profits from Rs600mn in FY09 to Rs1.57bn in FY10. We expect the percentage of interest cost to revenue to reduce further post our rights issue. Hence, we are very optimistic about the future prospects of the company.

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