Rice companies have fared relatively well in the recent past. Chamanlal Setia too is one such company that has done great in the last few quarters. However, there is a distinct possibility that the future might be brighter than the past. This blog will aim to delve deeper into the business and its thesis. So, lets begin!
Industry overview
Chamanlal Setia deals with Basmati rice and hence we will focus on that industry.
As of CY24, The global rice market is valued at USD376.5b and is projected to clock 3%
CAGR during FY24-FY29. Basmati rice represents only ~4% of this market but is expected to grow at a faster rate at 9% CAGR over CY24-32, due to increasing popularity, increasing immigration of basmati-consuming population to low basmati-consuming regions, increasing disposable incomes, a shift toward packaged products, and growing awareness
of health benefits.
India dominates global rice exports, with its market share surging to 46% in 2023 from 35% in 2021. India is the largest basmati rice producer. It accounts for
~75% of the world's basmati rice production. India also generated ~INR483.9b revenue from basmati exports in FY24 (up 26% YoY). Around 70% of India's basmati rice exports in FY24 went to the Middle East, with Saudi Arabia now the top destination at 21.4% share, while Iran's share dropped to 11.6%.
The Indian rice market includes basmati, non-basmati, packaged, and
unpackaged categories, with basmati driving significant export revenue despite
accounting for only ~4% of domestic consumption. The market has seen a 7-8%
CAGR over the last decade
Private labels are on the rise and are expected to grow at a CAGR of 11%
The question arises, Why are we the undisputed leaders in Basmati rice though?
Climate conditions and the GI tag
Basmati rice grows in the foothills of the Himalayas, in regions where the climate, soil, and water create perfect growing conditions. This is not something that can be easily copied elsewhere. The country also has strong agricultural roots and hence expertise in rice farming is backed by generations of farmers who know how to care for the crop from planting to harvest. The exporters too maintain strict standards which help India maintain its superiority.
A big milestone for the industry was getting the Geographical Indication (GI) tag for basmati rice which was inacted in 1999 by India and 2002 by Pakistan. This tag works like a badge of authenticity. It means that only rice grown in specific regions of India can be called “basmati.” Without the GI tag, anyone could use the name and sell lower-quality rice under the same label, confusing customers and harming farmers who grow the real thing. The GI tag protects both buyers and producers, ensuring that when people buy basmati, they get the genuine product that made the name famous. With this, Indian players have an edge and hence can command a premium.
How is rice made?
Basmati rice is mainly grown during the monsoon season( kharif season: June to September). Farmers plant high-quality seeds, often starting them in nurseries before moving them to the main fields. The fields are kept moist, thanks to the seasonal rains. Farmers manage weeds, pests, and nutrients to help the plants grow strong and healthy.
When the grains mature and turn a golden color, it’s time to harvest. After harvest, the rice is dried, and machines remove the husk and bran layers during milling. This turns paddy (unmilled rice) into the polished or white grains most people recognize. The rice is then sorted, graded, and packaged, ready to be sold in markets at home and around the world. Basmati rice gets an enhanced flavour and Aroma when aged and hence many companies age their Basmati rice for months before selling.
Company overview
Chamanlal Setia exports limited was established in 1983 as a partnership firm by Setia family, post which it got listed on BSE in 1994-95. Currently, the business mainly engages in private labeling and exporting them but is also the owner of a few brands such as Maharani. The business mainly derives its revenue from exporting of contracted labeling.
Basically, the business procures Paddy from small farmers and process it in their facilities. Post that, the rice is taken to the pacaking facility where it is packaged under the contracted private label. Finally, the packaged rice is then exported to 90+ countries.
The company derives most of its revenue from exports. In Q2FY25, 82% of the revenue was from exports.
Currently, the business from their private labels( Maharani, Mithas and Begum) is only 10%, but the management aims to scale it to a significantly higher figure with 30% in the coming future.
There are multiple things that caught my eye and which I found very impressive, lets cover these things under Strengths and Thesis.
Strengths and Thesis
Impressive business practices: Multiple things make this business very strong, which are necessary to maintain profitability in a commodity industry like rice. Firstly, the business prevents inventory loss (to some extent) by opting not to sell aged rice and instead selling it directly. That way, they do not hold much inventory, which keeps them susceptible to wild price fluctuations. Secondly, they maintain a good rapport with the people from whom they procure paddy. The business instantly sells the rice to them in cash, which is why they get a discount. Thirdly, the company is highly risk averse with their customers. They are diversified into 90 countries and prefer to take smaller orders over larger ones to maintain margins and risk profile. They do not export much to Iran due to geopolitical risks even though it's a big market.
Cash rich and return ratios: The business maintains excellent cash levels. They prefer buying the paddy in cash rather than in than debt. However, they do take debt and wind it down in two quarters. There is a big trigger in this. High cash levels ensure that debt remains low and the EBITDA flows down to PAT.
Most importantly, the company can start distributing dividends and make buybacks. IN the first quarter, The company announced a buyback worth 60 crores and is planning to increase dividends by 10-15% every year. This allows the opportunity for great rerating. An extraordinary thing that I noticed was that the company has maintained ROCE above 18% with the last two years being above 20%. These strategies ensure that such return ratios are maintained.
Growth triggers: The company sets up three packaging plants for 1.5-2 crores each. The company already owns the lands and hence such a low price. Each unit can do 150 crores max per quarter, but the management has guided 70-80 crores to be safer. Hence, these units can incrementally bring in 200-250 crores of revenue per quarter. The first unit will start contributing to the revenue from Q4FY25.
Personal brand: The company is aiming to increase its share in the domestic market via its personal brands. The company is guiding for aggresive growth here so that th share of domestic increases from 10% to 30%. There are multiple advantages to this. First, the company generates higher margins and second that it increases the optionality of rerating.
Low base margins: Price variations in rice forced the company to sell at lower margins. It historically gets 10-15% EBITDA margins and it currently has been in the lower end of it. With the expensive inventory churned, we can expect better margins in the future for FY26 for all rice brands. An important thing to note is that low paddy prices aren't passed on and hence, that leads to abnormal margin expansion.
Anti thesis
Geopolitical risks: Countries like Israel are regular customers of the coompany. Even though the company is quite sure of Israeli companies payment terms and that they are going to be regular, we should not discount geopolitical risks in general. The problem for a diversified company like Chamanlal Setia exports is quite low but the uncertainties are too many and hence we must be wary of it
Freight costs: The company witnessed a sharp rise in freights where the prices went up by 10x. This too played a role in their margin depressions. This can also prevent more orders as it gets expensive but it can also cause problems for the company's profitability and hence, freight costs are a key variable to monitor going forward.
Rice price volatility: Last year, there was quite a lot of volatility where the rice prices came down by 15-20rupees per kg which caused the company to sell the product at low prices. However, they have been buying low cost paddy heavily and hence FY26 can be great. To conclude, the volatility might favour us in the near term but it something to be wary of in the future.
Technicals
The stock broke the resistance at 270 and witnessed a sharp surge in prices and volumes. The stock is currently consolidating near its ATH and seems to be holding well. The high volumes suggest genuine buying and not speculative surges. Overall, the structure appears to be quite bullish.
Valuations
With the capacity expansion , we can expect 20-25% growth in the top line and the margin expansion can bump up the number to 30-40% of growth (maybe). With this+ multiple triggers for rerating such as dividends and personal brand, I believe the company is placed a decent valuation and can be considered a bit undervalued. However, that is upto you to decide.
Well, that is the end of the blog and I hope it was worth a good read. Thank you!
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