Buy REI Agro; target of Rs 31.4: MLR Securities

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Buy REI Agro; target of Rs 31.4: MLR Securities

MLR Securities is bullish on REI Agro and has recommended buy rating on the stock with a target of Rs 31.4 in its November 26, 2010 research report.

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MLR Securities is bullish on REI Agro and has recommended buy rating on the stock with a target of Rs 31.4 in its November 26, 2010 research report.

"REI Agro was established in the year 1994. The company is a leading player in the Basmati Rice Industry. REIAL operates two manufacturing units, both located in the state of Haryana, it has also acquired manufacturing units on a lease basis. It has set up wind mills at Rajasthan, Maharashtra and Tamil Nadu that have an installed capacity of 35.9 MW."

"The premium for Basmati Rice over Normal Rice has increased from 3.5x in 2007-08 to 4.3x in 2010. As per a WTO ruling only a certain type of rice grown in few specified regions of India & Pakistan can be referred to as "Basmati". The production of Basmati Rice has increased at a CAGR of 26% during last three years. REI is the one of the largest purchasers of Basmati paddy in India. As the company owned capacities increases, leased capacities will be phased out which will improve the Head Rice Yield. Broken Rice was sold at 75% discount to head Rice in 2003, the company spotted this out and reduced the discount to 55% through branding of Broken rice."

"The company is currently trading at 7.7 x FY11e Adj EPS of INR 3.0 and 4.5 x FY12e Adj EPS of INR 5.2. The equity dilution will reduce the RoE in FY11e to 11.9% from 17.4% in FY10 but it is likely to improve to 17.2% by FY12e as the cash will be deployed to increase the company owned capacity and the Head Rice Yield will also improve. The longer term CAPEX plan, Basmati Rice demand growth, normalization of Debt Equity ratio post rights issue and reasonable valuations makes the stock an attractive BUY at current levels. We believe that the stock can trade at 6 x FY12e Adj EPS of 5.2 and target price for the stock is INR 31 which suggests an upside of 35% from current levels," says MLR Securities research report.

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To read the full report click on the attachment