Almondz Research

Indian Equities

Satnam Overseas Ltd. Buy

Rice above all !!! CMP Rs97
Initiating Coverage Target Rs142

Market Data Investment Rationale

BSE Code 512559 • A leader in basmati rice segment with strong global presence.
Bloomberg STO@IN

Market Cap (Rsbn) 1.9 • Company could leverage its umbrella brand ‘Kohinoor’ (basmati
Company P/E (x) 7.7*
rice) to foray into new high margin products.
52 Week H/L (Rs) 131 / 73
• Satnam Overseas Limited (SOL) is undergoing an image shift
Face Value (Rs) 10 from being a ‘commodity player’ to an ‘integrated food
Sensex 8650 company’.
S&P Nifty 2604
• SOL has strong marketing tie-ups globally and has also emerged
*Based on FY06E as a preferred supplier to global retail majors.
Share Holding (September 2005)
• Increased thrust on branding and introduction of high margin
products to improve the overall margins.
Shareholders % Holding

Promoters 44.1

Mutual Funds & FIs 0.7

Financials and Valuation
FIIs & Foreign Banks 16.7 SOL is currently trading at 7.7x FY06E and 5.8x FY07E earnings. Based
Indian Public 24.2 on the overall growth in its core branded basmati rice segment and value
addition from ready to eat (RTE) segment, we expect SOL to get re-rated
Others 14.3
as a FMCG player rather than a commodity player. We initiate our
coverage with ‘BUY’ rating and 12 month target price of Rs142.
Stock Performance INR Mn
Particulars FY04 FY05 FY06E FY07E
Satnam vis-a-vis Sense x
9000 14 0
Net Sales 5,417.9 5,263.5 6,312.9 7,761.7
8 50 0 13 0 Growth (%) (2.8) 19.9 22.9
8000 12 0
750 0 110 Operating Profit 343.6 391.2 520.2 699.7
70 0 0 10 0
Growth (%) 13.9 33.0 34.5
6 50 0 90
6000 80 Net Profit 117.9 157.3 245.9 328.9
550 0 70
Nov- 04 J a n-05 Ma r- 05 Ma y- 05 J ul-05 S e p- 05
Growth (%) 33.5 56.3 33.8
S e ns e x S a tna m Equity 196.0 196.0 196.0 196.0
EPS (Rs) 6.0 8.0 12.5 16.8
OPM (%) 6.3 7.4 8.2 9.0
Analyst: Vijay Narayanan GPM (%) 5.3 6.3 7.1 7.2
vijay.narayan@almondz.com NPM (%) 2.2 3.0 3.9 4.2
℡ 91-22-55526613
PER (x) 16.1 12.1 7.7 5.8
P/BV (x) 2.1 1.9 1.5 1.2
Associate: Rahul Singhvi
rahul.singhvi@almondz.com E-Estimates
℡ 91-22-55526608

November 17, 2005

Almondz Capital Markets Pvt Ltd. (Almondz) and its associates does and seeks to do business with companies covered in its research reports. As
a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. The investor should
consider this report as only a single factor in making their investment decision.
Food Processing
Global basmati rice player
Associated with global retail
chains
Well established distribution
network
Diversifying revenue stream
Satnam Overseas Limited
Company background
Satnam Overseas Limited (SOL) has come a long way from being a rice
miller with a single factory in Punjab in 1976 to a fully integrated food
processing company. SOL has successfully established its flagship brand
‘Kohinoor’ in the basmati segment and is further leveraging it for launching
newer products like ready to eat and frozen/chilled foods.
The company has global infrastructure with subsidiaries in US and UK, a
rice polishing mill in UK and a joint venture with 25% stake in a company
based in UAE (Rich Rice Raisers factory). It supplies to 57 countries
worldwide through 45 international distributors and has relationships with
leading global retail chains such as Tesco in U.K., Mustafa market in
Singapore, Coles & Woolworth in Australia, Tiger Brands International in
South Africa, Takashimaya in Japan and other retailers in US and Middle
East markets. It is also preferred by Malaysian Airlines.
SOL’s infrastructure includes a state of art manufacturing plant with fully
automated facilities for 40 tonnes per hour for basmati rice and 50,000
pouches per day for packaged food. It has two rice milling facilities in
India at Amritsar in Punjab and Murthal in Haryana, one rice polishing mill
at Felixstowe in UK and a ready to eat (RTE) processing facility at
Bahalgarh in Haryana.
The company has a well-established distribution network with 130 domestic
distributors, 475 stockists and it supplies to 215,000 retail outlets in India
and to 25,000 retail outlets in other countries.
Having established its leadership in its core area of basmati rice, the
company is making a foray to emerge as a leading foods company with a
basket of products for homes across the globe. The company seeks to
achieve this by introducing premium value added food products both for
domestic and overseas markets through its ‘Kohinoor’ brand, which is
exported to 15 countries and leverage its global distribution network. It will
focus in the international market instead of domestic market for its ready to
eat segment, where the margins are lower and competition is fierce.
Market share of branded basmati rice
18%
38%
19%
10% 15%
Satnam Overseas Ltd (Kohinoor/T rophy) L.T . Overseas (Dawat)
K.R.B.L. (India Gate/Doon) Amar Singh Chawal wala (Lal Quila)
Others
Source: Almondz Research, Industry data
2
Food Processing
Grown in India and Pakistan
Premium long grain rice
India- largest producer and
exporter of basmati rice in the
world
Middle-East – major market for
Indian basmati rice
Satnam Overseas Limited
Industry background
Basmati rice
Basmati (derived from the Hindi word for fragrance) is the customary name
for certain varieties of rice with unique properties that are grown
exclusively in specific areas of the Indo Gangetic plains of Northern India
and Pakistan.
Basmati rice is grown exclusively in the Northern part of Western Punjab
(on both sides of the Indo-Pakistan border), Haryana and Western Uttar
Pradesh. Haryana accounts for around 50% of the area under basmati rice in
India, followed by Uttar Pradesh with 25% and Punjab with 18%.
Basmati is premium long grain rice. Its high value stems from its
characteristic aroma in both the raw and cooked state and the grain is of
distinctive shape, which on cooking elongates to almost double its length
whilst its width remains the same. In addition to having unique eating
qualities, Basmati rice is reported to be a good source of slow releasing
carbohydrates (i.e. it has a low glycaemic index compared with other rice).
India is the largest producer and exporter of basmati rice in the world. The
annual production in the country hovers at around 1-1.5mn tonnes per
annum, of which around 2/3rd is exported. The remaining is consumed,
within the country. India’s basmati rice export is poised to breach the 1mn
tonnes per annum mark for the first time during 2004-05. The basmati
export till January 2005 touched nearly 0.8mn tonnes per annum.
(Source: Almondz Research, Industry Data)
While the average selling price in domestic market for broken basmati rice
is Rs 15-20 per kg and for full grain rice it is Rs 40-45 per kg, the average
selling price in the international markets is Rs 25-30 per kg.
Major markets
Middle-East remains the major market for Indian basmati rice with Saudi
Arabia accounting for the major chunk of basmati imports from India.
Pakistan is the sole competitor for India in the international market for
basmati rice. Middle East account for approx. 65% of exports of basmati
rice from India, UK and USA account for approx 20% and balance 15% to
the rest of the world.
During 1998-99, 1999-2000 and 2000-01, total quantities of basmati rice
exports from India were 6.0 lakh tonnes per annum, 6.4 lakh tonnes per
annum and 8.5 lakh tonnes per annum, in which the percentage share of
Asia was 85.7%, 82.1% and 73.4% respectively. The percentage share of
Asia has decreased for basmati rice, during 1998-99, 1999-2000 and 2000-
01 but the export to Europe has increased consistently from 11.4% in 1998-
99 to 14.4% in 1999-2000 and 20.5% during 2000-01 respectively.
The export to North America has also increased in the same order from
1.4% during 1998-99 to 5.3% during 2000-01. However, export to other
countries remains constant with slight fluctuation from year to year.
3
Food Processing

Ready to eat food

Consumer lifestyle drive sales of convenience packaged food. Consumer

trends towards home meal replacement continue to play an important role in
RTE food - Home meal increasing demand. Change in social and demographic trends, added with
replacement products that respond to the consumer search for convenience and higher
quality contribute to value growth of packaged food.

Trends toward increased pressures on time and longer workdays (including

commuting time), busy lifestyles and increase in the number of dual income
RTE –eating on the go households have led to a rise in “on-the-go” eating. These factors are key
elements that underpin steady growth in sales of ready to eat packaged food.
While dinners are a large part of the trend, it is not just entrees (main dish of
meal) that drive retail sales growth, but all ready to eat (RTE) food
products, including snacks, confectionery, baked goods and meal
replacement products will continue to meet the demand for portability and
“eating-on-the-go”.

With more and more women entering the work force, the ready-to-eat meals
Changing lifestyle demands market has been showing strong growth in India. Now players in industry
growth of RTE food are trying to spur further growth in urban India by dropping prices of some
of these products.

Ready-to-Eat packs are fully cooked and posses long shelf life, which
ranges up to 3 years (and beyond) without refrigeration depending on
storage temperatures. Some items are available which are also known as
RTE food – Easy food heat and eat. The food is normal, not freeze dried, and each item is cooked
and sealed in an individual high strength pouch. Once the food is
cooked/half cooked and packaged, it never sees the light of day. Full meal
RTE typically includes a main entree, a side dish, a dessert, crackers and
spread, beverage base, a spoon, and an accessory packet. All the contents
are packaged inside an outer bag making them compact and easy to pack.

Most popular RTE food is made
from basmati rice
With over 13mn persons spread all over the world and Asian Americans
now numbering over 10mn are a huge potential market for the RTE foods
out of India. This creates a scope for the producers to come out with a long
range of dishes including the usual meals. India had been at the forefront for
variety of dishes both in domestic and global market. Today the ready-to-
eat products produced from India are: Pulao & Biryani (mostly on basmati
rice), Dal, Channa, Rajma, Spicy Vegetable Curry, Mushroom, Paneer,
Chicken, Sweets and many more South Indian dishes.

EU, USA and Arab countries
remain major buyers
RTE products exported from India are mostly consumed in UK, Europe,
USA and Arab countries. With the advanced food preservation technology,
the chances of preserving food for longer time are increasing day by day.
Still the stuff inside the ready-to-eat packs remains nutritious and hygienic
for a certain period only. So it is highly essential to enhance the quality to
compete in the global market.

RTE food market yet to mature
Though the demand for RTE products is increasing in the global market, the
supply is still not sufficient. Exports as well as the domestic market offer a
vast scope for the Indian producers to excel in this sector. The success of
RTE products is dominated by the fact that the market is decades away from
maturity and therefore can look forward to continued strong growth over a
long period of time.

Satnam Overseas Limited 4

Food Processing
RTE food yet to gain popularity
in NRIs
Higher margins in branded sales
Rising income levels to boost
basmati rice sale & RTE food
Reach to improve due to growing
organized retail industry
Diversified product portfolio
Diversified customer base
Orders worth Rs720mn
Satnam Overseas Limited
The market can only grow as these products gain acceptability in the NRI
communities, with a significant push coming from the steady expansion of
the domestic market. Currently, the size of the domestic market is estimated
at Rs500mn and is expected to grow to Rs2bn by 2006.
Key strengths
Enhanced focus on branded business
The company is eyeing to stay in two businesses: branded basmati sales and
branded ready to eat food segment. The company is moving up the value
chain by moving from unbranded to branded products. Moreover the foray
in frozen and chilled products will further boost the profitability. The RTE
and frozen foods segment will evolve as the high growth-high margin
segment for SOL in the years to come. At present, the branded sales account
for only 35-40% of revenues, this is expected to grow to 70% over the next
two years.
Changing Indian Scenario
India’s per capita consumption has seen improvement over the years. Rising
incomes will fuel the consumption expenditure. The average urban
household incomes have grown by approximately 5% annually over the last
decade. With rise in per capita income, more number of people would
upgrade their consumption pattern to basmati rice from non basmati rice.
Organized retail
The organized retail is wooing the Indian consumers. Retailing is at the
cusp of a big secular expansion wave in India, where growth rates are
expected to be exponential. The future appears promising for the Indian
retail sector with organized retail looking to increase its share from the
current 2%.
Product extension
The company has been continuously expanding its product portfolio from 9
variants in FY04 to more than 100 variants in FY05. The company is
venturing into frozen and chilled food, where it perceives to have greater
potential for growth. The frozen food market is four times the size of the
ambient food market. We believe, the ready to eat food segment is set for an
explosive growth with favourable demographics and changing consumer
attitudes.
Well planned expansion with diversified client base
Driven by the success in the branded basmati market the company has
forayed into ready to eat chilled and frozen market. The company has
experience and strong distribution network, which it would use to gain
presence in the market. It has a diversified client base with no customer
contributing more than 5% of the turnover.
Recent order for supply of 26,000 tonnes basmati rice
Company has received orders of 26,000 tonnes for supply of basmati rice.
The export orders constitute 16,000 tonnes mainly from Kuwait and Saudi
Arabia and 10,000 tonnes from domestic market mainly from the state of
Maharashtra and Gujarat.
5
Food Processing

FCCB issue
The company has borrowed US$20mn (Rs878mn) in August 2005, through
issue of foreign currency convertible bonds carrying 1% rate with maturity
period of 5 years (September 2010). The proceeds of the issue would
Low cost borrowing mainly be utilized by the company in expanding its production and
distribution network of basmati rice and ready to eat (RTE) in domestic and
overseas market; mainly targets to strengthening its brand in UK, US and
Middle East. The company would trim down its interest costs by repaying
its costly long term secured loans to an extent of Rs50mn.

Ansoff’s matrix

Opportunities for growth(Ansoff's Matrix)

Current Product New Product

Branded Basmati (Domestic+Exports) Cooking Paste (Domestic+Exports)

Current Market RTE food products (Domestic+Exports) Cooking Sauces (Domestic+Exports)

Market leader in the branded rice market Diversifying the product segment

Branded Basmati (Domestic+Exports) Cooking Paste (Domestic+Exports)

New Market RTE food products (Domestic+Exports) Cooking Sauces (Domestic+Exports)

Widening it supply network globally Focusing to enter the chiiled & frozen food market

Source: Almondz Research

BCG matrix

Current standing of a Company

20%

18% Question Mark

16% Food Products
Stars - Branded Rice
14%

Market Growth Rate 12%

10%

8%

6%

4% Cash Cow Dogs

2%

0%

10x 1x 0.1x

Relative Market Share

Source: Almondz Research

As per the Boston Consultancy Group model, we put Satnam Overseas

Limited in the categories of the Stars and Question mark for the branded
rice and the food products respectively. As far as the food products are
concerned, the company does not have much market share. So the position
for this segment of the company is not easy to decide at current level.
Accordingly food products have been allotted question mark position.

Satnam Overseas Limited 6

Food Processing

Porter’s model

Potential Entrants

Supplier power Industry rivalry Buyer power

Substitutes

Source: Almondz Research

Industry Rivalry
RTE food
Company faces tough competition from unorganized players in domestic
markets and imports from global players like McCain Foods Ltd.
Branded rice
Company faces moderate competition from unorganized players in
domestic market.

Supplier Power
RTE food
Minimal bargaining power of supplier due to its own production
Branded rice
Major portion of the raw material is bought through contract farming of
basmati paddy therefore minimal supplier's power exists

Buyer Power
RTE food
Higher bargaining power of buyer due to existence of close substitutes and
fierce competition from peers
Branded rice
Higher bargaining power of buyer due to rivalry from peers

Potential Entrants
RTE food
High threat of potential entrants due to low capital requirements, untapped
market potential and attractive margins in the segment.
Branded rice
High threat of potential entrants due to existence of large number of players
in unbranded basmati rice.

Substitutes
RTE food
Significant threat from other food products like instant noodles
Branded rice
No major substitutes available

Satnam Overseas Limited 7

Food Processing

Company standing

Criteria/Scale(5H-1L) 5 4 3 2 1

Technology/Innovation

Brand/Social Image

Distribution Strength

State of Competition

Barrier for Entry/Exit

Source: Almondz Research

Technology and Innovation

The company has state of art automated manufacturing facility which are
US-FDA, EU-FSA and HACCP compliant. These facilities are also Kosher,
BRC (British Retailers Consortium) and ISO 9001:2000 certified. We rate
the company on a scale of 4 out of 5.

Brand/Social Image
The company has a flagship brand “Kohinoor” with great brand recall. We
rate the company 5 for its brand.

Distribution Strength
The company has a strong distribution network with a total of 174
distributors worldwide with 475 stockist and 240000 retailers. The company
has own distribution network in 46 countries. We rate the company 5 for its
strong distribution network.

Competition
The company faces moderate competition in the branded basmati market
whereas in ready to eat food market it faces high competition from domestic
as well as international players. We rate the company 3 due to relatively
moderate competition.

Entry/Exit barrier
The entry/exit barrier for the company is moderate. We rate the company 3
on a scale of 5.

Satnam Overseas Limited 8

Food Processing

Quarterly performance review

Particulars Q2FY06 Q1FY06 % chg Q2FY05 % chg

Net Sales 885.5 1,054.2 (16.0) 844.0 4.9
Expenditure 765.6 955.5 (19.9) 762.1 0.5
EBIDTA 119.9 98.7 21.5 81.9 46.4
Depreciation 15.0 15.0 - 12.5 20.0
Gross Profit 104.9 83.7 25.3 69.4 51.2
Interest Cost 34.8 24.9 39.7 15.4 126.0
Other Income 6.9 0.8 762.5 1.8 283.3
PBT 77.0 59.6 29.2 55.8 38.0
Tax 15.0 10.0 50.0 3.5 328.6
Net Profit 62.0 49.6 25.0 52.3 18.5
Equity Capital 196.0 196.0 196.0
EPS (Rs) 3.2 2.5 2.7
OPM (%) 13.5 9.4 9.7
GPM (%) 11.8 7.9 8.2
NPM (%) 7.0 4.7 6.2

Satnam Overseas Limited 9

Food Processing

Financials

Profit & Loss Account INR Mn

Particulars FY04 FY05 FY06E FY07E

Net sales & Income from operations 5,417.9 5,263.5 6,312.9 7,761.7
Cost of sales 5,074.3 4,872.3 5,792.7 7,062.0
Operating profit 343.6 391.2 520.2 699.7
Depreciation 54.8 60.5 74.9 138.7
Gross profit 288.8 330.7 445.3 561.0
Interest & Financial charges 147.2 126.6 124.9 128.6
Other income 20.9 13.4 15.5 16.9
PBT 162.5 217.5 335.9 449.3
Provision for tax 44.6 60.2 90.0 120.4
Net Profit 117.9 157.3 245.9 328.9

Share Data (Rs)

EPS 6.0 8.0 12.5 16.8
CEPS 8.8 11.1 16.4 23.9
Dividend per share 1.5 2.0 - -
Book value per share 47.0 50.8 63.4 80.1
No of shares (Mn) 19.6 19.6 19.6 19.6

Valuation Ratios
Market price (Rs) 97.0 97.0 97.0 97.0
P/E (x) 16.1 12.1 7.7 5.8
Price/CEPS (x) 11.0 8.7 5.9 4.1
Price/Book value (x) 2.1 1.9 1.5 1.2
Mcap/Sales (x) 0.4 0.4 0.3 0.2
EV/Sales (x) 0.8 0.9 0.9 0.7
EV/EBIDTA (x) 12.2 12.5 10.5 8.0

Key Ratios and Statistics

Growth in (%)
Net Income (2.9) 20.0 23.0
Operating Profit 13.9 33.0 34.5
Gross Profit 14.5 34.7 26.0
PBT 33.9 54.4 33.8
Net Profit 33.5 56.3 33.8
EPS 33.5 56.3 33.8

Other Ratios (%)

Operating margin (EBIDTA) 6.3 7.4 8.2 9.0
Net profit margin 2.2 3.0 3.9 4.2
RoCE (%) 3.6 3.9 4.8 6.0
RoNW (%) 12.8 15.8 19.8 20.9
Interest cover (times) 2.3 3.1 4.2 5.4

E-Estimates

Satnam Overseas Limited 10

Food Processing

Balance Sheet INR Mn

Particulars FY04 FY05 FY06E FY07E

Equity capital 196.0 196.0 196.0 196.0
Profit and Loss/General reserves 723.1 800.1 1,046.0 1,374.9
Exchange rate fluctuation reserve 2.0 (0.5) - -
Net worth 921.1 995.6 1,242.0 1,570.9
Secured loans 2,320.1 2,811.4 2,771.4 2,771.4
Unsecured loans 48.1 222.7 1,100.7 1,100.7
Total debt 2,368.2 3,034.1 3,872.1 3,872.1
Deferred tax liabilities 31.0 36.7 57.4 76.7
Total liabilities 3,320.3 4,066.4 5,171.5 5,519.7

Assets
Gross block 676.8 1,022.9 1,352.9 1,522.9
Accumulated depreciation 294.9 343.9 418.8 557.5
Net fixed assets 381.9 679.0 934.1 965.4
Capital WIP 38.2 69.4 86.8 108.4
Investments - 2.6 2.6 2.6
Current assets 3,104.2 3,751.9 4,639.9 4966.8
Cash & Bank 67.3 53.4 322.3 187.8
Accounts receivable 372.5 493.4 484.3 552.9
Inventory 2,328.2 2,954.6 3,547.9 3,892.8
Loans & advances 336.2 250.5 285.4 333.3
Current Liabilities 241.6 478.2 571.6 603.2
Accounts payable 35.8 133.2 190.8 231.1
Other Liabilities 75.2 147.8 193.3 212.1
Provisions 130.6 197.2 187.5 160.0
Net current assets 2,862.6 3,273.7 4,068.3 4,363.6
Miscellaneous expenses 37.6 41.7 79.7 79.7
Capital employed 3,320.3 4,066.4 5,171.5 5,519.7

Ratios
Current ratio (x) 12.8 7.8 8.1 8.2
Average collection period (Days) 25.1 34.2 28.0 26.0
Inventory turnover (Days) 167.5 221.3 223.6 201.2
Average payment period (Days) 3.1 12.3 14.8 14.6
Debt-Equity ratio (x) 2.6 3.0 3.1 2.5

E-Estimates

Satnam Overseas Limited 11

Food Processing

The ratings are based on the absolute upside of our target price from the current price.

Ratings Upside
Buy > 20 %
Hold 0% - 20%
Sell <0%

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This Document has been prepared by Almondz Capital Markets Pvt Ltd (Almondz). The information, analysis and estimates contained
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Satnam Overseas Limited 12