Saturday, 17 May 2014

Equity Study: Rei Agro

About the company (via Reuters)

REI Agro Ltd was established in the year 1994, and is listed in the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), the London Stock Exchange and the Singapore Stock Exchange.

The company has 22% share of the World’s Basmati Rice Market.

The Company is also engaged in the generation of power through its wind mill and operating retail chains in India.

Markets its Basmati rice under Raindrops ELG, Raindrops Gold Supreme, Raindrops Gold Royal, Raindrops Gold Super, Raindrops Supreme, Raindrops Royal, Raindrops Select, Raindrops Super, Raindrops Popular, Raindrops Daily, and Raindrops Rozana.

Operates in India, the United Arab Emirates and Mauritius. It exports basmati rice mainly to Saudi Arabia, the United Arab Emirates, Europe, the United States, and Africa.

Subsidiaries include Ammalay International PTE Ltd., Ammalay Commoditiess JLT, Auckland Holdings Lt Holy Stars Ltd and Orient Agro (M) Ltd.

Is it all downhill from now on?

State-run United Bank of India has filed a winding-up petition against REI Agro Ltd for non-payments of Rs 224 crore outstanding.

Via Reuters:

© Reuters 2014
Market-Leading Position, Lower Price Volatility: REI's 'B+' rating is supported by its market-leadership and integrated business model in India's basmati rice industry. This in turn, is supported by REI's well-known brand and strong distribution network within India. The company is also expanding in key export markets in the Middle East and has established a distribution network via its subsidiaries to support its branded rice sales.

Branded basmati rice has historically exhibited lower price volatility compared with most other agricultural commodities. This is due to the limited supply of basmati rice, the lengthy time needed for processing and maturing, as well as strong demand stemming from a niche segment of rice consumers.

Working Capital-Intensive Operations: REI's 'B+' rating also reflects its working capital-intensive operations, which result in negative free cash flow and high funds flow from operations (FFO) net leverage (FYE13: 3.7x). The company's working capital intensity is driven by its need to hold processed basmati rice in inventory for 18-24 months as part of the maturing process. Fitch expects REI's free cash flow generation to turn positive from FY15 because capex is likely to decline following a peak in FY12 and FY13.

Moderate Liquidity: Over INR 10.6bn of REI's scheduled maturities fall due in FY15. Over half of this consists of foreign-currency bonds issued in FY10, which have an option for bondholders to convert their notes to common equity. However these bonds are currently deep out-of-the-money and are unlikely to be converted to equity by November 2014, which leads to refinancing risks for the company. As a result, REI's average borrowing costs will increase, with the rise likely to be exacerbated by rising domestic interest rates. However the company's highly liquid inventory provides creditors with a solid buffer in a stressed scenario.

Ok, so they are expecting some money in FY15 that will ease their problems.

But stock prices are more about public perception which is based on information as well as misinformation. Interpretation as well as misinterpretation. Judgement as well as misjudgement.

If we look at the Technicals of this stock, a bottom does not seem to be forming. It's at 2.96 at the time of writing, F.V. (face value) is 1.

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