KRBL Limited (KRBL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Q2 and H1 FY '22 earnings conference call of KRBL Limited. [Operator Instructions] I'll now hand the conference over to Mr. Siddharth Rangnekar from CDR India. Thank you and over to you, sir.

Thank you, Stephen. Welcome to KRBL Limited quarter 2 and H1 FY '22 earnings conference call for analysts and investors. I'm pleased to introduce to you senior members of the management team on today's call. We will have Mr. Anil Kumar Mittal, Chairman and Managing Director; Mr. Anoop Kumar Gupta, Joint Managing Director, Mr. Ayush Gupta, Head, Domestic Division; and Mr. Ashish Jain, Chief Financial Officer joining us. We propose to commence with updates from Mr. Anil Kumar Mittal, Chairman, with views on the industry, business and broad strategy. He would be followed by Mr. Ayush Gupta, who would take us through perspectives on the domestic business. Thereafter, we shall have the financial review presented by Mr. Ashish Jain. After the opening remarks from the management, the forum would be opened for an interactive question-and-answer session. A cautionary note. Certain statements made on today's call could be forward-looking in nature and actual results could vary from these statements. A detailed statement in this regard is available at KRBL's investor presentation, which is available on the company's website. I would now like to invite Mr. Chairman, Anil Mittal, to share his views. Thank you. And over to you, sir.

Good evening to everybody. Let me first give my best wishes to all for this Diwali festival season. May you all be blessed with the bounty of prosperity and happiness in the coming times. Coming to the business, we all know with the efforts of the government by vaccinating more than 100 crore people within the time frame, we have more or less controlled the COVID pandemic to some extent. However, it all depends of how much our people remain disciplined and follow the norms stipulated by the doctors and the government. It is a great relief to note that globally agro commodities have started picking up pacing, leaving few countries like Europe and U.S., however, we had to face some hard times, especially in the logistic front, particularly in shipping. The availability of containers became a challenging chapter, including the escalation of freight rates, which have gone up by 5 times. The container freight rates for USA, which used to be USD 2,000 have shot up to USD 12,000. For Canada, the rates have gone up to USD 14,000 per container. Similarly for Europe, the container freight rates have gone up from USD900 to USD 7,000. And for Middle East, the rates have gone up from USD 600 to USD 700 to USD 2,000 to USD 2,500 per container. Same way freight rates have gone up to every other destination, which has slowed down the demand to some extent. As a result, there is a 15% decline in the second quarter in the export of basmati rice from the country. But that challenge is not just the freight rates, but the availability of containers have become a major obstacle. The containers are not available for many destinations for the last 2 months. We, at KRBL, have to wait for about a month to get container for destinations such as USA, Canada, including Australia and South Africa. Anyhow, I remain thankful to my shipping department, who have been working day and night and have been following up with the shipping companies so that we are able to manage the situation to a great extent. However, the importers are really feeling the heat, because the freight amount for USA is as much as 50% of the cost of the product to the tune of USD 200 billion -- you must have heard that the shipping lines have made astronomical profit to the tune of USD 200 billion this year. But we feel that things will not remain the same and I think that there will be a correction in the freight rates in next 6 months. The turnover of the company increased almost the same as compared to the last quarter and year-over-year basis. But the export sales have come down by 44% over last quarter and 57% over year-over-year basis. During this quarter, we had an incident where there was a breakdown in one of our vessels, which was carrying around 28,000 tonnes of basmati rice worth around INR 140 crores. The cargo reached the destination only by end of October and the payment for the same are being received now. Besides we are unable to locate a new distributor for Saudi Arabia, which used to be our premium market. We are not able to visit Saudi Arabia due to travel restrictions, which I hope would be relaxed by the end of this month or by early December. I'm sure that our fourth quarter will show a remarkable progress as far as Saudi Arabia is concerned. Otherwise, export to other destinations are going fine except Iran. We are quite confident -- we were quite confident when Joe Biden assumed the Presidency of USA that the relation with Iran would improve and there would be relaxation in the U.S. sanctions. Unfortunately, there are no signs of any mutual agreement between two countries. Iran is a market for 1.4 million tonnes of Indian Basmati rice, which has definitely got hit due to U.S. sanctions. However, some quantities are still going to Iran via third countries such as Dubai and Iraq. Pakistan has also become a big competitor though they are also feeling the heat on recovery of money from Iran. Even Pakistan are not able to recover their money from Iran for the last 2, 3 months. They are actually in the big dilemma being a border country. Interactions are going on between India and Iran on a government to government basis for barter deals. If things materialize, there will be a huge export of rice and medicines from India to Iran. Recently, Iran has evoked an embargo of importing rice from India and other countries, which they, every year, imposed during the month of July, August, because their new crop arrival season is from August onward. So day before yesterday only we got this announcement that the importers can import the rice or they can get the licenses. This is the latest news on the Iran. On non-basmati, we are doing extremely fine as far as China is concerned, but we don't entertain much of the non-basmati business, because the profitability is quite low and KRBL do not involve in such businesses where the profit or margins are less than 8% to 10%. China will remain a big importer of 100% broken Indian basmati rice, but there are hardly any chances of exporting large quantities of basmati rice to China. Mostly, basmati rice to China is catered from Hong Kong. But let me add over here that non-Basmati business is increasing from India and there has been 4 to 5 folds as compared to 2, 3 years back, because we are the cheapest today in the world as far as non-basmati is concerned. When we went into the details that how the exporters are concluding such big business, we came to know that the business is concluding on a profit or margin of just 3%. That is why our interest discontinued to enter into non-basmati rice. Now I will like to give you some update on the new crop. I would like to update you on the new crop, which has also shown a lot of variance in pricing and quality of the same. Farmers who are not able to get a lucrative return of their produce last year, and therefore, there was less sowing by 10% as per the Crop Survey this year. Besides, the weather gods were probably unhappy and delayed rains in October have damaged the new crop further. Thus, the crop size as compared to last year has gone down by 25% as against the initial projection of 10%. This has to pulled the basmati paddy prices upwards. Basmati 1121, which was sold at INR 28,000 per metric tonne last year is being sold at INR 36,000 per metric tonne this year. Pusa 1718, which was priced at about INR 24,000 per metric tonne is today -- is at around INR 32,000 per tonne. Similarly, 1509, which was sold at INR 18,000 per tonne last year is now priced at around INR 28,000 to INR 30,000 per tonne. Traditional Basmati has not yet arrived but I believe that the price will open above INR 45,000 per tonne if the prices of the 1121, 1509 remains the same. If they increase, Traditional Basmati will further increase. But Pusa Basmati rice 1401 is costlier by INR 7,000 per tonne as compared to last year. With the current price structure and the freight rates, the working buying pattern are somewhat subdued. The buyers are waiting that trend and may enter the market in the first or second week of December. Last time, we had discussed about the development of new varieties by injecting two genes of bacterial blight and two genes of blast to control the pest diseases and to discontinue the use of pesticide. We have recently visited Pusa Institute and we are amazed to see the trial of the pest-resistant varieties of 1121, 1509 and 1401. The crop was healthy and sound and will get the feed this year for foundation feed and 2023, the commercial production will start for Pusa 1885, Pusa 1882 and Pusa 1886, a substitute of 1121, 1509 and 1401 respectively. We have recommended from the trade rather to change name of the variety, it should be named as pest-resistant 1121, 1509 and 1401. Now, I would like to come on domestic sales. We have achieved a phenomenal growth in domestic sale, achieving a revenue of INR 687 crores compared to INR 386 crores year-over-year and INR 417 crores quarter over quarter, which is around 77% and 65% over comparison -- comparative periods. Further highlights from domestic business by Mr. Ayush Gupta. We are planning to acquire some new businesses in the food category, which will be informed as soon as we sign the agreement. We are in the process also putting up some new plant for processing of regional rices in places such as Kandla, Karnataka, Maharashtra and West Bengal. We have already finalized a land at Kandla and the plant would be ready by next year from where we will handle both export as well as domestic business. This plant will give us a major advantage in export due to logistic structures. We have already recognized a 30-acre land in Karnataka, which would most probably be finalized soon. Besides, our brokers are on a hunt for procuring a land in West Bengal and Maharashtra and this will also be finalized by end of this year. I'm quite sure that with these new plants at Kandla, Karnataka and West Bengal, along with Maharashtra, any finalization of an -- along with the finalization of the acquisition, we will be able to increase our top line as well as bottom line in the years to come. We are a bit late in procuring this land and the project, because of the COVID. Otherwise, these plants would have come by now what was our original plan. On GI, the Supreme Court of India have remanded the case back to Madras High Court to decide on the issue within 3 months out of which 2 months have already past. Since the appeal was of the MP government, our APEDA cannot interfere, hence the initiative has to be taken by MP government. APEDA may intervene after the lapse of 3 months as far as months. As far as EU is concerned, the matter stands as it is. Before concluding, let me add that in any agricultural commodity business, anywhere in the world there could be differences in the revenues from one quarter to another, but we are sure that our yearly revenue picture will remain promising. I would now like to hand over to the moderator...

No, Ayush Gupta.

To Ayush Gupta, sorry, to Ayush Gupta. Over to you, Ayush.

Thank you, sir. I'll be now discussing the domestic division's performance for the quarter two. I'm ecstatic to share that the domestic rice business recorded a strong quarter performance with volumes growing by 105% to 1,52,430 metric tonnes, and revenue growing by 77.9% to INR 687 crores. Branded rice business, which continues to be our main focus in India, grew by 56% in volume terms and 51% in value terms. The balanced increase in volume and value was contributed by an one-off unbranded rice opportunity, which came long ago. The performance of the branded rice business has been all rounded with positive contribution coming from all channels and across product segments. I will be discussing the numbers in 2 broad segments, the consumer segment and the HoReCa segment. KRBL has recorded highest number ever achieved in the quarter 2 of any financial year in the consumer segment. Backed by strong equity of the brand, India Gate, the growth in this segment has been equally contributed by both general trade and modern trade channels. While growth in modern trade and e-commerce has been organically driven, we have, through our teams, put in place a concept of everyday great execution, where we monitor and manage the most critical performance metrics on a daily basis. This not only ensures consistent consumer experience, but also builds stronger trust and confidence among the customers. We believe these small wins every day will compound to give us a substantial competitive advantage in the long term. On the other hand, the growth story in the general trade channel has been far from organic. We have been undergoing systematic transformation. For a category which traditionally has been wholesale-driven, today 30% of our general trade business comes from active retailing. Growth in this channel has been backed by persistent efforts of increasing sales team productivity, running successful retailer loyalty programs, and putting in place a GTM, which is committed, resilient and agile. To summarize, scaling up active retailing, practicing an impactful GTM, and focus on everyday great execution are the strong pillars on which we are driving the consumer segment of the business. Moving on to the HoReCa segment. Majority of the growth in the domestic market in quarter 2 has been contributed by the tremendous volume uplift in the HoReCa segment. While all four zones of India showed high double-digit growth compared to quarter 2 of last year on account of markets opening up after COVID-restrictions, the South zone, the highest contributor to the HoReCa segment, demonstrated close to 100% growth. On a lighter note, all I can say is that South Indians love their biriyani. The performance at this front has been phenomenal, and the HoReCa numbers are a healthy double-digit growth, even when I compare to H1 of pre-COVID levels with the current financial year. While brand equity and quality of product remain the top enablers, which consistently allow us to penetrate this highly cluttered market, I believe undisruptive -- sorry, undisrupted and consistent supply chain has given us an advantage over the vast unbranded fraternity of peers in the market. At KRBL, our outlook for the Basmati category remains progressive. We believe there is immense scope of growth in both the consumer as well as HoReCa segment of the business. We are constantly evaluating and upgrading our retail and distribution capabilities to match that to FMCG best practices. I will now hand it over to Ashish, who will take us through the financial performance.

Thank you, Ayush. I will now take you through the performance from an end-quarter perspective. All figures mentioned by me will refer to the consolidated financials of KRBL limited. Total income for the quarter stood at INR 1,059 crores as against INR 1,136 crores in the same quarter last year, which marked a decline of 6.8%. Overall, revenue performance in the quarter was affected by exports during the quarter. Export rice revenue during the quarter was at INR 283 crores as against INR 669 crores in the same quarter last year, while the rice volume was at 45,896 tonnes as against 95,423 tonnes. The reasons for this performance have already been explained by Mr. Mittal. Moving on to the domestic rice business, as mentioned by Ayush, the domestic rice business recorded a very strong quarter with volumes growing by 105% to 152,430 tonnes, while the revenue grew by almost 78% to INR 687 crores. Arithmetically, you would see that the realization in the domestic business was lower than in the comparable quarter last year. This is the direct impact of lower realization on the unbranded sales, which caused the overall realization to decline, though the realization on the branded business continues to be stable with only a marginal dip over the same period last year. With these comments, I have covered the performance of the rice business of the company. Amongst our other larger products category, the power segment recorded revenue of INR 35 crores against INR 28 crores in the same quarter previous year, thus marking a growth of 20%. Having covered revenue, I will now move to the bottom line performance of the company. Gross profit of the company stood at INR 309 crores as against INR339 crores in the same quarter last year, while the gross margin was at 29.2% as against 29.8%. As you know, rice exports offer a higher realization on a per tonne basis. Owing to lower export in the quarter, overall sales realization per tonne declined causing the cost of materials consumed to increase as a proportion to 70.8% of total income as against 70.2% in the same period last year. This caused the aforementioned movement in gross profit margin. EBITDA margin for the quarter was at 19.2% as against 19.7% in the corresponding quarter last year. PAT for the quarter was at INR 136 crores or 12.9% as against INR 150 crores or 13.2%. I'm happy to share that our net cash flow from operations was at INR974 crores, a growth of almost 30% on a year-on-year basis. This was driven by tighter working capital management during the quarter. As we enter the paddy buying season, our cash position, our access to the working capital and thus our paddy inventoring ability remains strong. Cash and bank balance, including investments, were at INR 915 crores at the end of the quarter as against INR 343 crores in the same quarter last year. Having covered the performance in the quarter, I would now like to touch on some recurring themes raised by investors with a view to provide more color on some of these themes. First is with respect to providing a second click on the 4- to 5-year plan to achieve INR 8,000 crores revenue target managed by management in earlier quarters and the consequent capital allocation. I would like to mention that we are firming up the plan, and we'll be in a position to share more details on this in the next quarter earnings call. As Mr. Mittal mentioned, both organic and inorganic growth will be key to this plan. Second is with respect to the restructuring of the company's energy business. Basis discussion in the Board meeting yesterday, the plan has been suspended. As has been explained in earlier calls, the major challenge in accomplishing any form of restructuring in this business is in dealing with several state electricity boards for amendment of the existing power purchase agreements. Second, the process to transfer the land and immovable property, including certain forest lands and revenue land, et cetera, is very cumbersome and involve considerable costs. Moving ahead, that brings me to the end of my prepared remarks. I will now like to hand over to the moderator for opening the Q&A session. I will just like to mention that as the ED matter has subdued us, we will not be in a position to respond to queries on this matter. So over to the moderator now.

[Operator Instructions] The first question is from the line of Pritesh Chheda from Lucky Investment.

Seasonal greetings, sir. Sir, some color if you could give on the H1, what is the domestic volumes and what is the export volumes that you would have done in H1 and the growth there? Hello?

Can we move ahead to the next question? I'll come back on them right now.

Yes. My second question is, here, since there is a lot of quarterly swing, it would be very nice if you could give us based on the H1 performance, what should be your volume outlook for FY '22? Also this H1 export volume, from your opening commentary, does it mean that it doesn't include any major shipments to Iran and Saudi, if you could clarify that? And my last question is, you mentioned about the new paddy prices in the current harvest. So, I wanted to understand what is the inventory that we are carrying at the end of September in volume terms? And is it fair to assume that a part of this INR 7,000 increase that you are seeing on the new cropping side? A part of that would flow down to your profitability as you start entering the next half or next one year when you use from your old inventory, this INR 7,000 starts flowing to your profitability? These are my questions, sir.

I'll be able to answer you on the exports that in this quarter, there was definitely no exports to Iran.

No, I'm asking for H, I'm asking for half-yearly, that will be very nice if you can give it for half yearly.

Half-yearly numbers, I can't say how much -- half yearly for exports?

Half-yearly volumes for export and half-yearly volumes for domestic.

Okay, okay.

And what is the growth there, yes?

Yes. Yes. You had also put a question to us that was there any exports in H1 to Iran. So that, I was telling you that, in extent, those numbers are not that -- for quarter 1, there was an export to Iran a little bit, that's like 150, I know that. But in quarter 2, there was no export.

And Saudi?

Saudi, there was some export during the first quarter, but second quarter is very weak. Maybe there are exports, but they're very weak.

Okay.

And I've already explained many times in the past that for the last 2 years, it was our most premium market. We used to export about 1 lakh tonnes worth about INR 600 crores to INR 700 crores. Because of the financial debacle with our distributor, we have to now change that distributor. We are not able to achieve those numbers. Those numbers have come down to 20,000 tonnes a year instead of 1 lakh tonnes a year. But we are going -- every day we would -- we want to know when the flights to Saudi will start and when the visas will be given so that we finalize. We are already in discussion with 3, 4 good Saudi distributors.

Okay.

I can now share the volumes for the export -- for the domestic business for the first half of this year. The total volumes sold in the first half of this year in the domestic business was 2,38,300 tonnes. In the export business, it was 1,39,320 tonnes.

What will be the corresponding growth here, both these places? So I think domestic would have grown and export would have declined, right?

Yes, that's right. So the same number for the domestic business in the last year was 137,300 tonnes. And like Ayush mentioned, this marks of almost 100% growth over previous year.

For the export, 139 versus 1...

Yes, I will just tell you that.

[Foreign Language]

So I'll come back on the number for H1.

No problem, sir. So on the other question of this inventory, what is the carrying inventory that we have at the half year and your comment -- yes.

Yes. The total inventory in our books as of September end was INR 2,015 crores.

And in volume terms, sir?

So volume, I will share that number. The total -- in terms of volume, I'll give you the volume of paddy and rice. So we had a total inventory of 62,000 tonnes of paddy and 3,65,000 tonnes of rice.

Okay. So my other question in this was when you're mentioning INR 7,000 increase in prices for paddy this season, is it fair to assume that incrementally when you draw down your inventory through our P&L via sales, a chunk of this inventory, or let's say, higher realization should now start flowing through your profitability?

Yes, so the way we look at it is that I think we -- there is no way that we'll not respond to the higher cost of purchase. But at the same time, given that most of our volumes come from the branded side, I think, to that extent, we have that power to pass on the price and, therefore, protect the margin. Now, in terms of timing, whether that price increase happens in this quarter or a few quarters later, is something that we'll have to work on.

Okay. Okay. And what is your volume outlook for '22 after what you have finished for H1?

So, I think we are looking at -- we are definitely looking at doing better than the last year. However, as Mr. Mittal mentioned, the trend on the export side is evolving. But our current view is that we should do better than what we did last year.

Okay. Just, sir, that export figures of last year volume, if you could get...

Yes, that I'll just come back.

The next question is from the line of Amit Doshi from Care PMS.

Before my question, just wanted to clarify on two comments which were made. So one of the comments mentioned was there was a INR 140 crore of export order, which has been now realized. So is that correct understanding that the current higher debtors, these are approximately INR 150 crores or INR 200 crores higher than our normal debtors is because of that account, and it will be reduced to that extent?

No, no. Actually, we had exported the vessel in the month of September itself. And it was supposed to reach the destination before end of September. But during the voyage, it got accidented and it got -- it got halt and it took it more than 1 month, more than a month to get it repaired and reach the destination, which it has reached just on the fourth week of October and the payments have come.

Now export will come in the third quarter.

The export will come on the third quarter.

Okay. Okay. So higher debtor is irrespective of this order, particular order? Because our debtors are far higher than our average INR 200 crores, INR 250 crores of debtors, so this quarter we have around INR 380 crores of debtors? 140 is included.

Yes, that's correct. So I will just add to what the Chairman said. So this particular sale that Mr. Mittal had mentioned is not a part of debtors. However, you are correct, the debtors are higher. But that's because of a separate transaction, which we'll collect on in the current month.

Okay, fair enough. And one mention was about Iran, the day before yesterday some clarification came. So now we'll be able to export to Iran, correct?

No, no, that is not the thing. Actually, every year, in the month of June, July, Iran puts an embargo to import rice into Iran, because they themselves are Basmati rice growers. And every year to protect the farmers interest up to September and October, they always put the restriction on providing licenses in import of Basmati or any other rices, which has been opened just two days back, and they have asked the importers that they can apply for the license, which is known as [indiscernible], and we will provide you the license to import rice.

Okay.

But that payment problem is still persisting from India, it is difficult because sanctions are there and to send any rice on rupee payment mechanism is not possible. So whatever rice has been exported to Iran, it is exported via Dubai and other destinations.

Okay. Okay. So we still don't see next, say, half year going back to old volumes of our Iran sales that we used to do probably two years back?

No, for the last two months, a very high level delegation discussions are going on between Government of Iran and Government of India. And I am quite hopeful by December or January time constraint could be there, time frame could be there. Otherwise, there is a barter deal, which is going to take place because India is also desperate to import oil from Iran, which is cheaper by 5% to 6% over other countries.

Got it. In the opening remark of Ayush, one-off transaction mentioned that there is one-off transaction of unbranded rice. So, of course, there is a huge jump in the domestic business of almost INR 300 crores year-on-year comparison. So what could be the contribution of this one-off transaction?

INR 140 crores?

100.

INR 100 crores.

Okay. INR 100 crores or so. Okay, which is like a one-off transaction, which is not likely to repeat.

Yes.

Fair enough. And just one point that usually, our margins are higher in the exports compared to our domestic. Now considering that there is a significant jump in the domestic business, despite that, our margins are hardly barging a few basis points down. So what could be the reason for that?

Who told you the domestic margins are less than export. It's the realization in export is more...

Sorry, I meant realization. Sorry, I meant realizations are generally higher in export.

No, no. The question is the realization in domestic is less because the basket, which we sell them is broken rice, low price-rice. But the procurement cost of that price is also low. So you cannot comment that margin is low in domestic. Margin is equally good in domestic as well as exports.

Okay. And sir, you mentioned that non-Basmati rices are a very low margin, and that's something which is not of interest of KRBL. So these new plants, which are being set up in Karnataka, Kandla, West Bengal or Maharashtra and the acquisition that you are planning or probably you are on the way to do some analysis, so what could be in those -- it is towards what kind of segment expansion that we are looking at?

Yes, it's a good question. You are talking this is a regional rice, and it is this very premium quality regional rice. What we are talking, we'll be the paddy, milling it, aging for 1 year, 1.5 years, then selling it in a very, very premium segment, not only in India, even in exports. And premiums are picking up 20% to 30% over to new rice. We are not talking as a commodity. We are talking as a totally branded Basmati -- branded regional special, just like you see Govindbhog. Govindbhog today is sold more than Basmati rice, which is of West Bengal. Kolam rice, which is 1.5 years old already is sold by minimum 25% to 30% higher than to the normal rice. Sona Masoori in South is being sold at 25% higher, if it is aged and a very good quality rice. So we are not trying to hit the 90 million tonne market. We are going in a market, which is around 1 minion tonnes or 2 million tonnes.

Fair enough. And apart from this one-off transaction of this domestic business, the balance part, you believe it's more of a sustainable number, because that's something which is significantly higher? Or do you believe this is just a Q2, there is a bit of a pent-up, et cetera, that is there in these figures?

No, definitely, as I mentioned in my prepared remarks that the numbers that we are doing in consumer segment as well as HoReCa segment are on a positive outlook. The numbers that we have done are sustainable, and we see great amount of opportunities still lying in this market. There are a lot of expansion opportunities. There are still a lot of growth opportunities from a distribution and retailing point of view. So the numbers that we are doing are purely results of our efforts in the general trade and the modern trade channel. And we'll continue to make those, and we see a lot of opportunity still in the Basmati segment.

Okay. And last question about this huge cash that we now have, approximately INR 900 crores plus cash on our hand, what is the plan to use it for these new plants or CapEx or acquisition, et cetera? And what balance portion you plan to distribute it? So I'm just trying to understand the allocation of that cash that we are going to generate and which already have in our books?

In the food industry, the CapEx is not that big a cost. It is generally the raw material. When I say I have to age the rice for 1 year, 1.5 years, so I need thousands of growth for aging those rices. So we have money, but definitely, it will be used in the raw material aging process.

Okay. So most of it is going to be rather than increasing the distribution, we are planning to use that cash, existing cash as well as new cash generation towards this working capital of additional inventory, et cetera. Is that correct?

And we are looking at acquisitions also, so money can money can be spent there also.

Understood. Thank you so much and wish you all the best.

So yes, I think there was a query earlier on the H1 exports. That number is 132,000 tonnes of last year.

[Operator Instructions] The next question is from the line of Rajesh from Moneyore.

Sir, my question is who pays the cost on the container and all, whether we bear or the client bears to understand how the container cost is borne? And second, can there be an average inventory gain of 20% over next 1 year? And third question is, because our domestic business has improved tremendously, going forward, if the export comes back either to Iran or to Saudi, so are we able to meet that demand? What is the capacity utilization basically? Those are the three questions.

All are very important and good questions. First of all, let me clarify that all the freight is borne by the buyer.

Okay.

By the buyer, because we do not have long-term sales. Every 2 months, every 1 month because we are into FMCG products, it is not that like a private label which sell together, 50,000, 40,000 tonnes. Each distributor is sold at 1-month or 2-months consumption basically. So, all whatever other freight is increased, that is to their account. And that is making the hit to the buyer. That is a big hit, and they are really worried if the freight rate goes like this, and if there would be an impact on the pricing also. That's number one. What was the...

Second question on inventory gains on an average, on [ 2,000-odd inventory ], can there be a 20% gain over one year?

That's minimum we are expecting, minimum.

Minimum. Okay. And third question, sir, suppose now domestic demand has gone up. If export comes back in a big way after 6 months when the container price reduces or we are trying to export to Iran, Saudi, Iraq, so we'll be able to meet the demand?

Yes. See, in all our conversations, we have been telling that we have a huge processing and milling unit at Punjab. We are already working that unit on a 60%, 55% to 60% capacity. So we have an addition -- we have a capacity to be utilized 35% to 40%, number one. Number two, that even in processing, if you look at -- we are working today at 80% or 85% utilized capacity. So 15% we have extra over there. Besides, we will be putting another processing plant, because we age the rice for 2 to 3 years, so milling is not that critical for us. For us, it's the rice to be exported and that already we have in stock. So we need more of processing lines, which we already have, and we are going to put another 1 this year also.

But procurement will be easier for us or procurement will be difficult so much volumes if we are going to procure more?

No, no, there is no -- in rice procurement, this is what is our specialty. We have today more than 2.2 million square feet of godowns ready. We have got about 6 million square feet of open flint level for storage of paddy. There is no handling, even if we increase by 200,000 tonnes, it will not be a difficulty for KRBL.

Sir, the last question is like to like, suppose compare Basmati to Basmati in exports and domestic, what is the difference in realization, the cost remaining the same?

No, I couldn't understand your question.

He says if you sell, the realization of Basmati rice, if we look at apple to apple, the realization in the exports and the realization in domestic, what is the difference?

Yes, it's about 5%. It is 5% more in exports.

5% more in exports. Okay.

[Operator Instructions] The next question is from the line of Sarvesh Gupta from Maximal Capital.

Good evening, sir.

Mr. Gupta, if you can speak closer to the handset, please. We are unable to hear you.

Yes. Am I audible now?

Yes, sir, this is better.

Okay. Sir, I have one question on capital allocation. Now you said that most of the cash that we have, and we do have a lot of excess cash now and will be used to finance the inventory. But reality is, sir, your return on net worth is almost like 15%, 20% historically. And I think against that your growth rate is much lower than the return on net worth. So even if you're targeting doubling to INR 8,000-odd crores, even then you're talking about growth rates of 12% or 13% maximum. And since your return on net worth is much higher, you will be able to more or less finance it with your internal accruals, which means that you actually don't need the INR 1,000 crore net cash or what is INR 500 crore to INR 1,000 crore net cash position that you have right now. So what are the concrete plans about that? That is number one. And secondly, I think in the CFO's remarks today, two of the questions related to the investors have been answered. But no decision or no announcement has been done on the buyback front, which also has been a constant question from the investor. So I think on these two, sir, we made more clarity, because we actually feel as an investor that your financing your inventory, which can be financed by 5%, 6% pretax cost of debt with equity, which is much, much expensive way of financing this inventory and which can be financed using the internal accrual from the profits that you will generate from this quarter to the next 5 years?

Yes. Thank you so much for the question. I'd just try to add to the comments that I had made. This is Ashish. I think in the way the things stand right now, your observation is correct. However, as has been mentioned, we are looking at a 2x revenue. Now, for that, like has been mentioned, there will be a couple of levers that we'll pull. One will be on the organic side, which is manufacturing plants being set up. Second, Mr. Mittal has already mentioned that there will be inorganic acquisitions. So the future capital allocation may look a lot different than our current capital needs. And this is why we've asked for time till the next earnings call for us to be able to give you a more second click view on how the capital will be spent or allocated over the next 5 years. Does that answer your question?

Yes. Understood. Second question is on your realizations, I think it was mentioned just now that the realization in domestic is lower by just 5%. But if I remember correctly, if we were to do the math of dividing your export revenues with the export volumes, at least in the previous periods, I think the realization was very significant to the extent of 40% or thereabouts. So more than INR 100 per kilogram in exports versus what we fetch -- what we get in domestic. So can you throw some more light on realizations?

When we talk about the pricing, we talk about the basket of products. In domestic, we have about 7, 8 different SKUs starting from Mogra, Mini Mogra, Dubar, Tibar, and so many other things, wherein in export, only we export the head rice. And let me also add over here that broken rice is not allowed. It is banned under DGFT regulation, 1928/37, where -- back 20 years back, it was not allowed to export any broken rice outside the country. So when we talk of the realization of 57, it includes those SKUs, which are mainly Dubar, Dubar, Tibar, Mogra which cost right from INR 40, INR 45 up to upward trend. Where in exports, we have a better realization, because whatever we export is the head rice. The question was that if we match apple to apple, head rice to head rice, whatever head rice we sell into the domestic market as compared to the head rice exported out of the country, there is a better realization of 5% overall over domestic realizations.

Perfect.

Okay. And for the entire basket, the gross margin of export versus gross margin of domestic, is that the same? Or you were saying that for the same category.

It's basically same, maybe 2%, 3% here or there.

Okay. Thank you. And all the best for the coming quarters.

The next question is from the line of V.P. Rajesh from Banyan Capital.

Most of my questions have been answered. Just wanted to get a sense of potential margin expansion, given what Mittalji said about the exposure to Saudi and Iran potentially coming back in Q4. Where could these margins go up to?

See, it is difficult to comment at this moment because anything being told from me should be 100% correct. But we expect once the Iran and Saudi market starts, you would really have a very good jump because if we look at 5-year back my export, 5-year back alone to Saudi Arabia was around 98,000 to 100,000 tonnes. And Iran, we have been shipping annually about 150,000, 125,000 tonnes. So I'm talking of a missing business of 225,000 tonnes, which cannot be brought back overnight, but slowly, slowly, I hope. It might take a year or 2 years to come back to those numbers. And then we are talking of those 200,000 tonne business coming permanently again back to us, I'm talking of a top line of INR 1,400 crore, INR 1,500 crore a year. And the margins will come. You know KRBL, you have seen for the last my 10-year balance sheet, we don't do any business with lesser margins because we are doing total business in our own brands. We are not doing private labeling.

Right. My second question is that you mentioned there is a high level delegation discussing a barter deal with Iran. So has that been done in the past? Meaning is there a precedence for doing barter deal with Iran?

See, that is indirectly -- see what India played the game, which was played 25, 30 years back with Russia, then we -- you know Russia also came out of sanctions and there were not dollars available, so Indian government driven up a mechanism of rupee payment with Russia. Same happens, the same system we drive with Iran and that rupee payment then you cannot call it exactly barter, but it is a type of barter, because against the import of crude, there was a credit being established with the Central Bank of India. And again, that export was used to be credited and debited to them. So when I talk of barter deal, there is about 2 million tonnes of fertilizer deal is going on, which they are not able to click. Either the mechanism is not helping India and Pakistan to reach any development, but India is very serious, because India requires certain fertilizers and petrochemicals and crude oil, which is much, much cheaper over other countries what we are importing. It will help Indian import budget as well as far as crude is concerned. So India is serious. But openly, they do not talk because of the sanctions.

Understood. My last question is regarding the acquisition, so if you can give a little more color as to what area we are looking at and what is the potential size of the transaction that we may be looking at, that will be helpful just to understand how we are thinking about using this cash?

See, it has been almost now 4, 5 months we have been discussing. It will not be appropriate for me to disclose the price of the acquisition. For five months, day and night, my team is working on this acquisition. But you know there are so many ifs and buts. Till the time it is not signed, if we are working on a deal for 5 months, and there have been hundreds of calls from one end and to another, with the foreigners, with Indians, with third parties to conclude this deal, it is difficult to say, it can be -- our 5 months can be wasted also, or it could be -- I was expecting this deal should have ended up in the month of 15 October only. Now we are reaching 15th of November, it's difficult to comment anything on the deal.

Okay. Maybe you don't want to talk about the size, but maybe just directionally, in which area is it? Is it in the rice business or is it in completely different?

I would like to not disclose too many things, but this is concerning food business.

Okay. Fair enough. Congratulations on hopefully getting this deal, I guess, and all the best.

The next question is from the line of Anuj Sharma from M3 Investments.

Some of my questions have been answered. One was regarding Iran. In the best days, what was the maximum market share we had in Iran historically?

The maximum share of Iran, I feel, was ending 2020, I believe, where we sold about 200,000 tonnes.

Okay. My second question is on the distributor in Arabia, while it will take time as the permits come and you said it will take 1 to 2 years. But he will be distributing on the back of existing setup, right. So why should it take so much time for a new distributor to scale up in a market, wherein your brand is already known? Just some thoughts into this segment.

No, no, you have a valid question. Actually, this distributor was appointed by us in 1988. It has been almost 32, 33 years he has been our distributor. And the relationship you know in 32, 33 years is of a different level. Now, he knows all ins and out of the market. He has been working on a particular product of India Gate. And he has been doing exceptionally excellent results and exceptionally exports to Saudi Arabia. In last 5 to 7 years, I don't know what mistake, they are not coming out with the truth. They made some mistake and did some oil deal or any deal, I do not know where they made a mistake where they lost billions. And that is why financially, they got broken. And for last 2 years or 1.5 years, we are really facing problem. Now we want to change the distributor. Now, changing a distributor, if by mistake, we decide on a wrong distributor, it will be a further disaster for me, if I do not choose the right distributor. So it is most important for us to choose the right distributor. Now for choosing the right distributor, we have already selected 5 or 6, which are big MNC players over there in food items. And we'd require to meet over there and see their operations and their size and decide on the distributor. And that is the reason we want to go and visit, stay there for a week, talk to different people and then decide who will be our net distributor for India Gate, rice.

All right. My last question is in the Middle East, are there any areas or countries beyond Iran and Arabia where you believe you can have a larger market share than what you have now? And which would be those countries?

Yes, there is only one country, which we are still not very aggressive, and we want to really develop business over there. But there, we are facing the problem of profitability. People are working like non-Basmati over there, where a very small margin. So we are looking for our own distribution, and that is Iraq. Iraq is the country that started buying from 150,000 tonne four years back to 600,000 tonnes currently. So that has developed a very huge market. And we are not able to find out that what is the mechanism we should adopt for Iraq, where we could get the good profits and reasonable share of the market.

The next question is from the line of [ Himanshu Upadhyay ], an independent analyst.

I had a question on this last -- am I audible?

Yes, you are audible.

So my question was on this. Last year, we built a large amount of inventory as the prices were very low, okay. And now this year, the prices are 20% to 30% higher, and we'll be selling even volume terms much higher in FY '21 versus FY '20 or even FY '19, okay. So how would our strategy evolve on buying of paddy? And would it be that similar amount we would like to keep of inventory or you would be -- will again like to build a higher inventory because we sold higher in last year or we'll be selling higher in FY '22? So can you throw some light on your strategy and how the mind works when the inventory -- or the prices of paddy increases? Okay. So this was first question.

Yes, you see -- I don't know what will happen after 1 month or 2 months, the market is on. But as the price presently is about 25% to 30% higher, we see our procurement should be 80% to last year. It will be lesser than last year. But next year, our procurement should be 130%. This is the way KRBL operates. If the prices are higher, we do 80%, 85%. If prices are lower, we do about 20% to 30%. That is why today, the stock levels are [ 365,000 ] tonnes of rice.

And what the price what we are getting, it will be double in next year.

And it is natural phenomena in the industry when you get -- when the farmer get a very good price per acre, naturally, he is -- the next year, they're growing -- sowing would be just 50% more than this year.

Okay. And the second question was on the non-Basmati side, okay. When we mill the rice, will get it even broken in half and 1/3, okay, and we sell it in the market, okay. For non-Basmati, is the proportion of broken rice after milling higher or lesser? And do we get similar premium for a non-broken rice in other varieties over broken rice because we are focusing on that segment, so this was the question?

No, there is no premium on non-Basmati broken. Actually, we are looking at rice flour, we are looking at idli rava, we are looking at so many products of non-Basmati broken. We will be value-adding through those SKUs.

Okay. And one last question on the acquisition side. What we see from your balance sheet and try to analyze, the two modes for an agriculture trading form are having a brand, okay, which gets recognized and hence, you get some better realization. And other is your relationship to procure rise and whatever agro commodity, you procure and process it, okay. So what will be the general rationale, let's say, for you to do acquisitions, okay, or thought process, when you will be doing acquisition, not just one, but in future also? And what would be the right approach to look at acquisitions in the future? Yes.

I couldn't understand your question. Could you repeat again?

So I was saying that in agro commodities or companies which deal with agriculture, there are two things, okay, or two modes. One is the brand, okay. We buy companies for a brand. The other is processing and getting the supply chain, okay, the whole supply chain for that agro commodity. So when a company looks at acquisitions, what would be the rationale for acquisitions for us, not like the recent one we are doing, but even in future. So will we want to buy brands or it would be because you want to have a back-end supply chain and storage facility and relationship with these participants in the market.

We are buying the brand for two reasons. One is the brand and to increase our top and bottom lines, because we are sure if the brand comes to us, we will be able to achieve a good top line as well as the bottom line. These are the two reasons of acquiring that company.

The next question is from the line of Abhishek Maheshwari from SkyRidge Wealth Management.

So I wanted to know if you can share the geographical breakup of India revenues, maybe East, West, North, South?

I'm sorry, that information is competitive in nature, we will not be able to share it.

Sure. No problem. And sir, my second question is that last 2, 3 weeks, we've been hearing about food shortages in China. I don't know how far it's true or not, but we have been hearing about it. So do you -- are you hearing something like this in the rice industry or is it just speculation?

I'm just confirming your question, is your question about whether we are seeing any rice shortages in China?

Yes, yes.

No. There is a rice shortage. As far as India is concerned, they are only interested in broken rice, because the demand is quite huge. And Vietnam and Thailand are not able to supply them. Wherever it comes to for buying head rice, they don't want to talk to [Audio Gap]

Hello?

Hello.

Yes, sorry, I couldn't hear you. Could you repeat, I'm sorry?

I think there is a shortage of rice in China. And as far as rice is concerned, when it comes to head rice or superior quality of rice, they don't want to buy from India, and they are buying the total demand either from Thailand or from Vietnam. When India comes, they're only buying broken rice because that is their necessity because so much of broken rice is -- lot of necessity, because they don't have the availability of broken rice from Thailand and Vietnam. They are just -- they don't have alternate of it.

The next question is from the line of Aman Madrecha from Augmenta Research.

Yes, sir, can you just give me a mix of our B2C and B2B, if there's any -- like what proportion of revenue comes from B2B and what proportion comes from B2C?

I'm sorry. Once again, this is competitive in nature. We'll not be able to disclose that.

Okay. And sir, just a basic question, like why are we seeing the inflation, such price rises in the paddy and the rice? Like what are the reasons for this price increase?

See, let me tell you, the rice showing is done in GI area, which are limited to several states. And there is not an expanded, whole India cannot produce Basmati rice. Now Basmati rice, as for other crops, is directly connected to the economics of the farmer income. Now last year, the farmer never got a good price and prices were quite cheap. You will be surprised one of the varieties called 1509 was sold at INR 18,000 to INR 19,000 a tonne, which was 50% in production this year, and the price this year was about INR 30, INR 29, which is not even 20%, which is 33%, 34%. Now, this year because the farmer is going to get handsome prices, and economically, they are very happy on Basmati prices, next year, the production of Basmati is going to increase as Mr. Anoop Gupta told you. So this is directly connected to the economic position and the income of the farmer.

Ladies and gentlemen, we take the last question from the line of [ Chetan Doshi from Tulsi Capital ].

Sir, looking at the balance sheet, if you see that there is changes in inventory of finished goods or work in progress of stock-in trade, now this current quarter, the amount has increased by almost 5x. So last quarter, it was INR 55 crores. This year, you have shown INR 283 crores. Suppose we remove this or this -- whatever is sellable, what impact it will have on the profit before tax, because 6x that amount has increased.

I've not understood your question.

Work in progress or stock-in trade or finished goods or whatever you call it?

What is the question?

Sorry, can you just repeat, I'm not able to say which line item are you talking about?

I'll tell you. See, you have shown that the work in progress or stock-in trade or increase in finished goods, last year, September quarter, it was only INR 55 crores. This year it is INR 283 crores. That has reduced the profit before tax by that much amount.

Sorry, I'm still not able to relate to the figures. Can we just take this offline, if you don't mind?

Yes, sir. See...

Again, I'm also not able to...

[Foreign Language]

English is not the problem, We are not able to understand. Don't worry. We'll let...

Let's take that offline, because I'm not able to relate to the numbers at least in the balance sheet.

Okay, leave it. Now another question is -- hello?

Yes.

You've shown your inventory position at INR 2,016 crores. What is the sellable value of this -- current price, if you see, what will be the sellable value of this INR 2,016 crore.

I think Mr. Gupta had mentioned that if we look at the -- our purchase price as compared to what we are able to sell, there's a clear markup of 20% that we estimate.

Correct.

So, does that answer your question?

So it is INR 2,400 crores.

Yes. But that, so like I had mentioned, our inventory includes, amongst other items, two things. One is paddy and the other is rice. So I think you should look at the 20% number on the rice value.

No, no, even both the value, 20% number, but it will come in next 3, 4 quarters is when the rice will be sold.

Yes. Sir, going by the logic what you just explained to other investors that there is a 30% gain in the current pricing over the last year. Now, if that is true, then the profitability is not showing that much improvement in the quarter, which we ended, that is September. Can we expect that in December quarter the 20% to 30% jump in the current profit level will be shown?

It doesn't mean that I will sell everything in that quarter only, the stock, which I'm carrying 365,000 tonnes will be sold next 5 to 6 quarters.

Sir, let me tell you KRBL is a very efficient company. It is showing an excellent investor presentation. We have no doubt that the performance of company is in good hands. We have no doubt on that.

No, no. So what you are saying, I suppose I reach a turnover of INR 1,200 crores in the third quarter, in INR 1,200 crore, I'll be selling the new crop also, I'll be selling the old crop also. It is not the total stock, which I sold which I'm carry I'll be selling it. Maybe I'm selling 30% of that, 40% of that. 60% I'll be selling the current also, because parboiled doesn't require aging. So the average profit, you can't say the total profit at that will come. Naturally, we are giving an EBITDA of 18%, 19%, 20%. Then third quarter, we expect a better EBITDA, no doubt about it.

Correct, sir. The reason is nobody carries such a big inventory in the rice industry like KRBL. So we are -- what we are concerned is that the profitability of the company also will increase because of the increase in the prices and the realization is improving?

Yes, you're right.

And one last question, sir. We requested you a couple of times regarding issuing some discount opens on the premium Basmati, which we are selling. Like that is not possible, then I would request that you may be having around 40,000 to 50,000 shareholders, why not distribute something free of cost if discount is not possible, because we are carrying INR 900 crores cash, we can very often spend around INR 1 crores or INR 1.5 crores on this.

Yes. Thank you. Thank you for the suggestion. See, as far as pricing for the domestic market is concerned, Ayush runs it. He's sitting right next to me. If he sees value in doing this, he will do it, but the decision is really his. Yes.

I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you to all the participants, and we are quite confident that we are able to answer the question in an appropriate and proper manner and were able to satisfy our investors. And if anything is left over, you are happy to -- do send us a mail to make you satisfied in this regard. Thank you very much for your attendance.

Thank you. Ladies and gentlemen, on behalf of KRBL Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.