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Sunday, Sep 04, 2005

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Satnam Overseas: Buy

Aarati Krishnan

Mr Gurnam Arora, Director, Satnam Overseas.

INVESTORS can consider accumulating the Satnam Overseas stock at the current price level of Rs110, as it offers scope for sizeable appreciation over a one-to-two-year period. The company can deliver strong earnings growth, as the export prospects for basmati rice to West Asia and the European Union grow considerably. A change in the company's product mix in favour of branded exports and a growing presence in the ready-to-eat foods segment may also lead to higher profit margins. The stock trades at a price-earnings multiple of 11 times its trailing 12-month earnings.

Satnam Overseas is a large exporter of basmati rice from India, with a presence in markets such as Saudi Arabia, the UK and the US. Its Kohinoor brand is sold in 57 countries through two wholly-owned subsidiaries in the US and the UK and a network of 45 distributors.

The premium Kohinoor brand has a 35 per cent share of the domestic market, and is flanked by regional brands such as Trophy and Shehanshah. In 2004, the company made a successful foray into ready-to-eat foods, rolling out a range of curries and curry-and-rice combinations under the Kohinoor banner.

Presiding over a rich harvest in the exports market for rice and eyeing the domestic market with the Kohinoor brand.

The company's sales and profits have shown a steady ascent over the past five years. Revenues have grown at an annual rate of 11 per cent, while earnings sustained a 20 per cent climb to 2004-05. Export prospects for basmati rice are bright, with the volume offtake from Saudi Arabia sustaining an annual growth upwards of 40 per cent over the past couple of years. Aromatic rice from India has found an expanding market in that country as consumers switch from American to Indian varieties. Export prices for basmati rice have remained largely stable over the past year.

The new strategic initiatives taken by Satnam over the past two years have the potential to expand the company's profit margins and boost sales volumes. In the export business, the company has been focusing on enhancing branded rice exports. While earlier, a large proportion of the basmati exports was targeted at the private label business of the leading retailers in the US and the UK, now the bulk of exports is done under the company's own brand name. This is likely to fetch better margins.

Second, in August, Satnam commissioned a new rice milling facility in the UK to process un-milled basmati rice exported from India for sale in England and the Continent. Apart from helping the brand expand its geographic presence in Europe, this initiative is also expected to result in better realisations for the company, as un-milled rice attracts lower import duty.

While the rice export business offers prospects for healthy volume growth, Satnam's presence in the ready-to-cook foods segment has the potential to improve significantly its margin profile if the company manages to grow in the face of competition. Satnam Overseas is targeting the domestic and the export markets for the Kohinoor range of ready-to-eat foods. Breaking into the export market may be relatively easy, given the company's established distribution network and relationships with major retail chains.

The domestic business will face competition from the likes of ITC, which has been promoting its Aashirwad range. But potential for growth exists given the size of the opportunity and the nascent character of the market.

In the two years since its launch, the Kohinoor range of ready-to-eat foods appears to have notched up high growth rates, albeit on a small base. The business now makes a small contribution to sales, at about Rs 9 crore a year.

The pace of the company's financial performance has been robust in the past two years. Satnam Overseas registered an 18 per cent growth in net profit for 2004-05, which accelerated to 51 per cent in the first quarter of 2005-06. Strong volumes drove the latter in the export business and higher branded exports.

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