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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to the KRBL Limited Q3 FY '19 Earnings Conference Call hosted by Ambit Capital. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Amandeep Singh from Ambit Capital. Thank you, and over to you, sir.
Thank you, Denise. Good afternoon, ladies and gentlemen. On behalf of Ambit Capital, we welcome you all to the Q3 FY '19 Earnings Call of KRBL Limited. We have with us Mr. Anil Kumar Mittal, Chairman and Managing Director; Mr. Anoop Kumar Gupta; Joint Managing Director; and Mr. Rakesh Mehrotra, Chief Financial Officer of the company. Now I hand over the call to Mr. Rakesh for opening comments, post which, we can set the floor open for questions and answers. Thank you, and over to you, sir.
Good afternoon. It's my pleasure to welcome all stakeholders to a discussion on Q3 and 9 months FY '19 performance of KRBL Limited. A detailed investor presentation is available on the stock exchange and on our website for your easy reference.Let me begin with the quarter 3 of FY '19. The revenue from operations increased by 19.5% year-on-year to INR 936 crores. The demand for basmati rice remains strong in India. Overall company has achieved 7% year-on-year volume growth on back of a strong focus on branding, customer engagement and distribution network strengthened. The company has spent around 2% of sales on ad and promotional expenses during the quarter. Realization per metric tonne was up by 14% year-on-year. This is strong increase and the realization per metric tonne was result of multiple factors, such as superior product mix comprising of high-end brands, rise in U.S. dollar rate and increase in prices in the export market. EBITDA stood at INR 209 crores, a 13% year-over-year increase. EBITDA margins declined marginally to 22.3%, down 130 basis points due to rise in cost of materials. The profit before tax was INR 165 crores, slightly lower than same period last year. And then costs rose on account of several regions, including higher average working capital loan utilization, notional loss on ForEx fluctuation on foreign currency short-term loan and marginal increase in the rate of interest as compared to same period last year.Profit after tax stood at INR 108 crores, a decline of 13% as compared to same period last year. The lower PAT is mainly on account of ForEx fluctuation loss of INR 17 crores shown in the interest cost vis-à-vis M2M gain of INR 13 crores in the same period last year. Thus, having total impact of INR 30 crores and onetime power income of INR 12 crores in the previous year, which is not there in the current year.The effective tax rate has increased for the company as it is not investing in any wind public solar power plants for the last 2 years.Moving to 9-month period of FY '19 performance. Revenue from operations grew by 23.3% year-on-year to INR 2,924 crores. EBITDA stood at INR 633 crores, up 4% year-on-year. EBITDA margins stood at 21.6%, a decline of 400 basis points, which can be attributed to bulk tender sales having lesser margin as compared to other export sales. However, we would like to highlight that during the current 9-month period of FY '19, company has achieved the highest ever revenue, EBITDA, PBT and PAT in value terms. The profit after tax for the 9-month period stood at INR 367 crores.Moving on to the balance sheet. I would like to take this opportunity to explain how the debt moves through the year. We have very little long-term debt. Most of the debt is working capital loans. The net debt starts riding with the commencement of procurement of credit at the beginning of quarter 3 every year and becomes insignificantly low by September of the next year. This is a cycle which results into near zero debt by September every year for the company. The inventory days follows the other brand.Moving into additional disclosure we made in our stock exchange filing along with our results, but the company has received a demand notice under Section 153 of the Income Tax Act, 1961, with respect to assessment year 2010-'11 to 2016-'17, amounting to INR 757.44 crores and interest bear on of INR 511.76 crores. The demanding on the back of additions are INR 2,220.79 crores, made by department to the total income of the company for the said year. The majority of additions are on account of this alliance, under Section 40a Bracket C of Income Tax Act, 1961, for paddy purchase from farmers. We would like to mention that the above paddy purchase has been duly disclosed in the books of account for respective year and has also been accepted in the assessment proceedings of the respective years. We would like to elaborate that all the purchases of paddy were made on the platform of the U.P. Mandi Samiti yard. As for the prevalent law in UP where the farmer can sell and the factory owners can purchase paddy only in the Mandi Samiti Campus. The Mandi Samiti of UP have also confirmed the same to the Income Tax department. Since it is mandatory for all farmers to sell their agriculture produced in the platform of Mandi Samiti yard, the paddy purchased by the company could only be from the farmers. No evidence has been brought on required by the IT department for the alleged breach of law by the company or the farmers or even by Mandi Samiti government officials. No region has been given an assessment order on disallowing the practice, which is prevalent for the case. The company has filed writ petition before the Honorable High Court at New Delhi seeking its intervention and Honorable High Court has ordered that no quality lesson shall be taken against the company to enable legal remedies in accordance with the applicable law. The company has been paying all taxes promptly and is taking all the necessary legal steps to defend the case. We would like to reiterate that based on the considered legal opinion, the management is confident that it has a strong case in favor and this demand will be scrapped at separate level as it is erroneous and has no basis. I would like to conclude by saying that we are excited about the long-term growth opportunity for our business, driven by strong industry dynamics for rice industry, KRBL's strong brand positioning, manufacturing and distribution strength and integrated business model. With this, I now open the floor for questions.
[Operator Instructions] We take the first question from the line of Sachit Khera from Smart Equity.
Maybe just one small question, sir. The additions made by the income tax department was approximately INR 2,200 crores. Out of that, I think your press notes says that only about INR 2,000 crores pertains to the purchase additions. What was the remaining addition of that? Is there any detail there?
Yes. It is INR 1,995 crores on the purchase account, and the balance is INR 162 crores is in respect of disallowance of purchases of rice, alleging unverifiable purchases. And this is only on guesswork and surmises. It is on some purchase of rice, they have -- they say it's unverifiable.
Okay. Is the management confident of only this INR 2,000 crores addition? Or is it also confident of the remaining INR 200 crores addition?
We are confident that it will be 0 because all the additions doesn't have any legal standing.
We take the next question from the line of Varun Goenka from Reliance Capital.
Main question at around the difference between our sales growth, our revenue growth and EBITDA growth. So, for example, we've done some large tax spend this quarter. If you could explain the key differences here of why the EBITDA growth is much slower than sales growth? Their ad spend or anything else that is...
You see, as already told by CFO, EBITDA -- why the EBITDA growth is less is mainly because of the India standards. The difference in interest is almost INR 30 crores. There was a gain of INR 13 crores, if you talk of year-on-year quarter. And this time, there is a loss of INR 17 crores. So there is a difference of INR 30 crores only on the account of interest. And number two, there was a gain of INR 12 crores in the power. And about, there is INR 8 crores difference in the taxation rates. So in total, about INR 50 crores money, there is a difference between year-on-year results. So EBITDA, if you talk in real term, according to me, EBITDA is higher than the year-on-year quarter.
Yes. So just one thing, power business, Rakesh, you said there was some onetime income last quarter. So how was that onetime income versus -- so what is our run rate in quarter to...
I'll tell you, we -- it is a 2015, '16, we have put up a plant in Maharashtra. And Suzlon -- there was some problem with Suzlon, they could not sign the PPA. So we have claimed the amount of INR 12 crores on Suzlon because for 1 year my machine was sitting idle. So we were able to claim that INR 12 crores in last year Y-on-Y. So that was a onetime income, no?
Okay, okay. Right. And on ad spend, we spent around 2% of sales this quarter. But for the 9-month and for the last year, [Foreign Language] ad spend [Foreign Language] if you'd give us some idea?
Generally, you see my budget is between 2% to 2.6%. This is my budget. But annual budget is 2.5%. We will end up the year with 2.5%.
Okay, okay. So there's no onetime ad investment [Foreign Language] -- sorry, in quarter 1?
There's no onetime ad spend kind of thing. Only thing is we are going back on regular basis. In some quarter, it's shaping on the higher side and in some quarter, it may be less.
But Rakesh, last quarter [Foreign Language] -- last year same quarter [Foreign Language], if you have some number?
I don't have the ready number, but it was almost same.
Okay, okay. My main thing now on Q4, do we have any large export order at hand or some outlook on the export orders at Q4? Maybe some outlook can be given, sir?
We have very good orders in hand, and we are expecting a robust results in the Q4. And actually, one of the shipments we were expecting, it might take place in December. Unfortunately, we could not reopen, so we have to ship that turnover in January. But in the last quarter, it will be -- I don't know what way it will be, very good results -- very good numbers with very good results.
Okay. But sir, what is driving our export realization such as large jump in export realization?
There were 2 reasons and so we got the premium quality orders more than the normal segment. That was one reason. And other reason was of that during October to December, the last quarter -- the third quarter, the paddy prices started jumping up from October onward. So when that was in the season, the paddy prices jumps, we get a little advantage in the prices because it is correlated with the new crop, new paddy, so we immediately increase our prices also.
Okay, okay. Just one request, sir. [Foreign Language] you were giving our inventory data, our inventory cost finished and paddy [Foreign Language] maybe we could continue to give that data, it will really help us.
We have -- I have the numbers. If you -- should I give it?
I'll take it off-line, Rakesh.
Or you can send me a mail version, I'll follow -- send it today.
We take the next question from the line of Viraj Mehta from Equirus PMS.
Yes. Sir, my question was majorly regarding what is the cost of inventory for both paddy and for rice currently?
Yes. We have paddy stock -- our cost is INR 33,485 per metric tonne for the paddy. And for rice is INR 46,905 per metric tonne.
Okay. And as far as this demand for -- from income tax is concerned, are we going to see anything -- any write-offs on the P&L in the near term? Or you believe it's completely prevalent and we don't need to make any provisions?
No, I don't need to make any provision. We have taken the opinion from our statutory auditors, which is Grant Thomson (sic) [ Grant Thornton ]. It will be -- and we don't have to pay anything. I mean, we just -- we have to pay till 31st March only INR 50 crores, and that will be shown as...
Advanced tax under progress.
Advanced tax under progress.
Okay, okay. And sir, as far as your growth, if I look at India's volume growth in rice -- basmati exports this year, as can be seen, we have seen considerable market share increase in exports. What will be our current market share in exports?
See, there is normally -- I'll tell you there are 2, 3 bottlenecking exports. One is that Europe, the exports to Europe are very, very slow compared to 2017, '18 and '18, '19, I think that the total exports to Europe will be just 40% or 35%. And presently, there are no exports to Europe and everybody is concerned. And that market was of 300,000 tonnes for India. And for KRBL, that market was around 40,000 tonnes for brown rice. But let me tell you, profit by that purchase is very profit center. The profits were very low, but we will -- we were interested and we were doing in the -- we were in that business because Europe remained a prestigious business, and everybody used to say why KRBL is not active in Europe, that was one reason. So that 300,000 tonnes was that loss. Another loss which came through the business was of Iran. Iran from July -- September up to December, they never purchased anything because of the sanctions. Now Iran sanctions have been opened up, up to 5th of May 2019, and we have a surplus of $10 billion from Iran to export anything. So Indian government and Iranian government, both are interested that this business should increase. So from 1st of January, it has started -- the business has started moving to Iran. That is one thing, but we lost the business of 3 to 4 months, that is number two. Number three, there used to be, every year, a growth of about 6% in the global arena. Every year, the market used to jump 6%. But recently, because of problems in Syria, in many Middle East countries, including Yemen and all, that has also affected the exports. Besides, there has been lot of expatriates, which have left these countries, including Saudi, Doha, these countries. So the growth which used to come 6% every year might not be seen this year. So these are the 2, 3 reasons, but actual, I would say, touch wood, as far as KRBL is concerned, we will cross everything. Our EBITDA will also be much improved over the last year. Our quantums will also be improved, and our top line, bottom line will also be improved.
Okay. And here, the grounds of general market sentiment plus there are several allegations against the company which are not true in your opinion. The stock price of the company is at a very attractive level for both to consider a buyback. And in the past in the media interaction, you have said that you have considered, but it is just nothing -- any firm decision of this by the board and the promoters. Is there any change of view in that now?
See we have discussed this, naturally, in the board and every member has a different opinion. But I'm quite confident that in the next board meeting, which will happen in the first quarter of the year, we will take some decision on this issue.
We take the next question from the line of [ Jaspreet Singh from VA Capital ].
I just want to understand, the Delhi government had approved Swaminathan Committee report, which apparently feels that cost of paddy should be C plus -- C2 plus 50%. So do you envisage the same thing to be happening in Punjab and Haryana because apparently a lot of political organizations are creating noises out there. Now that's question number one.
Jaspreet, let me tell you, basmati rice is out of the inbreds of any type of controls of the government. It is nonbasmati rice and other cereals the governments include and they have a MSP policy and they do not want that the Mandi yard should sell less than the MSP. So all these, whatever are there from region and statement made by the other political or by the minister or by some outsider, they are on those commodities which have got MSP and which are procured by the government. That's number one. Basmati is a -- which is free from all -- see, if you look the last 20 years, many times government wanted what we should bring some MSP for basmati rice, but they don't -- they could not because law doesn't permit because they don't procure it. Till the time government procure this commodity, they cannot fix the MSP or they cannot bring the provision of Swaminathan Committee.
But in case -- I am taking it to be a bit positive in case it happens because if MSP of paddy goes up then definitely MSP of -- there is no MSP for basmati, but yes, the cost of production of basmati would also go up, which means that your inventory would be valued at a much higher price than it used to be.
So you're absolutely correct. What is the reason of this year price is -- see, basmati, if you look at 2016, the price was INR 28, INR 27. Then in 2017, it became INR 30. Then this year, it became INR 32, INR 33. What was the reason of INR 33? Because the MSP of parmal was increased to INR 1,800-something-odd by the government. So definitely, there is no doubt there is a set principle, if parmal rice increases, basmati price will also increase. There is no doubt about it.
It will be positive only for KRBL because if we -- if the kind of stock inventory we are carrying, it will help us. It will help...
And sir, what is the inventory you're carrying right now?
We are carrying -- just a second, 5 lakh tonnes of paddy -- 5 lakh 392 metric tonne of paddy.
This is as of Feb, right?
Pardon?
This is as of today?
As of 31st March -- 31st December.
How much would it be valued as of today -- into valuation?
I can tell you, valuation is on 31st December. Is it -- if you want to know that 31st December?
31st December, I already know it. It is around INR 33 crores as given in the presentation.
Yes, yes. So as on 31st December, my inventory -- paddy is valued at INR 1,675.58 crores, and rice is valued at INR 1,581 crores and rice inventory is seen at 37,000 metric tonnes.
Sir, you would have sold some rice and paddy apparently in January. Did you buy some paddy in January?
Yes, small quantities we purchased, both rice and paddy, both we purchased in the month of January.
But this season, it is a record purchase for KRBL. Total, we have bought around 670,000 tonnes of paddy. We should talk of the seasonal. I'm talking from October to January. October to till the date, we have bought 675,000 tonnes of paddy.
Okay. And would it be right to say that by end of February, you would be debt-free as far as short-term loan is also concerned?
By end of September 2019, yes. Even before that.
I'm talking about February because you will be selling something in January and February, right?
How can we -- February -- today, I am on an inventory of INR 3,300 crores, INR 3,400 crores and my bank borrowing is about INR 1,500 crores, INR 1,600 crores, how can I be 0 in February. I will be 0 in August, September.
Okay, okay. I was assuming that you would be making some sales of INR 1,000 crore or so, INR 1,200 crores maybe in this quarter and...
No, no, then I'd be buying some rice also. It's not like that. That 100%, the goods will go from my inventory.
Okay, okay. Sir, buyback again, the same question is appearing [Foreign Language], why not go for a buyback on the equity prices [Foreign Language]
See we have discussed this thing in the board meeting also and we are discussing on this. I think this decision of buyback, we will -- in the next board meeting on the first quarter of 2020, we'll discuss and finalize it.
Particular reasons of not doing it right now?
Well, there is a tax demand also. There are other demands also. We do not want to put ourselves because we do not -- we want to be comfortable as far as our liquidity is concerned. We do not want to enter into any bank pressure or borrowing pressure and all that.
Jaspreet, we are on a inventory of INR 3,300 crores, INR 3,400 crores. And already the bank borrowing is INR 1,500 crores, INR 1,600 crores. We want to be -- we want to run our business in a comfort zone, no? Credit rating agencies, banking trust, everything. Why we are able to get, today, bank rate of less than 250 basis point less than the market? Because of my balance sheet. Because today, margin what I am -- looking at the margin, I'm just giving a 50% margin. Against a INR 3,300 crores stock, I have just borrowed INR 1,500 crores, INR 1,600 crores.
Next question is from the line of Manish Bhandari from Vallum Capital.
Sir, my question is, one, regarding quinoa. What corrective action we have taken on our product? We started with lot of fanfare and how our ambition has changed on this because I -- as a user, I can tell you our product has not been of a great quality versus the other products in the market -- other international products. So is there a change what we have done in our strategy? And what kind of target we can assume on the sales in next 2, 3 years?
See, you're right that quinoa, because it was a very initial stage, we didn't knew that quinoa quality will not be too bad, actually, what it's been grown in Bolivia but when you will find that quality of quinoa this year in 2018, '19, it is excellent, and we are at par with Bolivia. That's number one. And because of the quality issues, what we were expecting the pace that the growth in the market, we do agree that we could not achieve that. But I think from 15th of February -- by first week of March, we will be in the market again. But now we came to know that the quinoa market, as far as India is concerned, is not that big, what was we were thinking it's a very small market. And as far as the growth of quinoa is concerned, France has started growing, Spain has started growing, Bolivia quantities have doubled out, market prices have come down. When the market prices come down globally in everywhere, then the -- then it is -- it becomes many a time for newcomer to penetrate in the market. But this year, the interest stabilize, we are confident that this year we should show some progress into quinoa.
Sure. Sir, my second question is regarding the volume growth apart from the Iran contracts and the new market which has opened. What kind of volume growth we can assume and we should assume in the Indian market in the basmati segment that we operate for next 2, 3 years -- maybe 3 or 4 years, looking at the production of basmati versus our sales capacity and the demand?
I'm looking at a growth of minimum 10% to 15% per annum.
Sir, this should be the industry growth and we would be taking market share from others? Or how we should dissect this growth?
You see, it will be industry growth. If industry grows by 10%, then KRBL grows by 15%. My growth should be 50% more than the industry. This is the benchmark of KRBL.
So by this standard, we should be close to 25% market share in domestic market in next 4 years or so -- 3.5 to 4 years?
Yes, we are looking at that. 45%, because today we are 34%, 35%, so we should increase another 10% next 4 years, definitely.
Sir, this brings to a very important point that with a 45% market share in a single product with maybe multiple brands, but still if I look at from a basmati as a segment, there is a dire need for us to diversify or maybe to bring other lines of business in whichever line you choose from a consumable point of view. So is there -- there were some thoughts which you had a discussion internally on some acquisition. And how do we see now -- is there any some thought process which has been built in the board and yourself?
In 4 years, if I say 40% market share, that means my top line would go to INR 5,000 crores. And even export will grow in only 1 segment, our top line, we are expecting next 5, 6 years to go to INR 6,000 crores. And we know the trade. We know everything. We are in and out of it. Why to go for a new product? I think we are doing very good in basmati, and there's a lot of opportunity in basmati. A lot of opportunity in basmati. Day by day, biryani culture is coming in South India. Day by day, biryani culture is increasing everywhere. And everybody wants to eat basmati biryani. And people are brand-conscious, quality-conscious. I think we have a big, big, big chance too in our -- this field only.
Next question is from the line of Varun Goenka from Reliance Capital.
Yes. So just to continue on the export part. I think our issue with the Saudi distributor probably is resolved now. So in addition to our already very good export growth, can you comment anything on how our Saudi exports can now normalize or [indiscernible].
Varun, actually, the problem in Saudi is that many people, expatriates, have left the country. So there used to be, every year, a growth of 6% to 7% in Saudi Arabia. I still know when we started Saudi Arabia, the total consumption was 180,000 tonnes. And last year, the consumption was 850,000 tonnes. So year-by-year, it was increasing. But from last year, it has little come to a stagnant point. That's number one. As far as the Saudi customers are concerned, we used to sell them, let us say, 5,000 tonnes a month. Between the first months, in February and March, they have given me orders to as close to 7,000 tonnes every month. And I'm expecting, with the problem depleting and things coming into normal, we will come back to 10,000 to 12,000 tonnes a month within maybe 1 year, 1.5 years or 2 years.
Okay, okay. Fine, sir. And on domestic, we had very bad period in 1 year due to that GST tax rate confusion. But now our volumes seem to be coming back. So if you could give us how aggressive we are going to be in domestic? What is working for us? Without dropping our realizations, we are able to get our volumes back. How big is the demand opportunity here? Because the competition also, I would assume, is the maximum domestic side, not the export side.
Yes. Where due to GST, rate run -- again, what we got from GSTs in finance today are very less. Now we are competing only with 4 brands: Daawat, [ Lal Qilla ], [indiscernible] and [indiscernible] Kohinoor. Otherwise, there's not much competition because all the brands are registered for GSTs. The maximum percentage of share of those small brands, I think 70% of that share of small brands, which are 0.5%, 1% of India, 70 to -- 60% to 70% has come in the city of [ Jihad ]. So that is where we probably will be gaining on that stuff.
Okay. So just 2 more questions on this side. Sir, do you need to invest or expand anything substantially on our distribution site now that you have a brand advantage or manufacturing advantage? Distribution [indiscernible] scope have a major increase, can make...
Sir, actually, can't. Distribution from [ Pasquid ] to [indiscernible], we have 484 distributors, and I think that cover all of India. We have to invest now on our sale team and our sale systems, where we are investing now.
Okay. Just to talk further, sir. Wholesale dependence distribution faced a lot of challenges during GST. So when you said 450-odd distributors across the country, this would be super stockists. So...
These are distributors who are selling the product to retailers.
Okay. But we are not planning to go directly to retailers in any way, so that will be our...
No, that is not possible. The thought of delivery -- delivery quantities are too small.
Okay, fine. Right. And then just a high-level thing. You just said that you're looking at, let's say, INR 5,000 crores, approximately, turnover in 4 or 5 years out of one of the segments. That's the domestic. So according to the vision of promoters, in terms of volume, do you think we'll be able to handle, let's say, over 1 million tonnes or 2 million tonnes? You can scale up easily over the next 4 or 5 years?
You see, today, we have a challenge here. We had -- have had this capacity to mill around 1.2 million tonnes of paddy. As far as capacities are concerned, everything is in place. It is only the question of market.
Okay. But sir, [indiscernible] at this INR 3,500 crores of sales, we are able -- we are carrying INR 3,000 crores to INR 4,000 crores of inventory. Is it operationally possible to carry INR 10,000 crores worth of inventory or buy back quantity of paddy and hold it as inventory?
Yes, yes. We'll be buying some. We have to make certain warehouses. We have to buy certain land. That's very minimal. As far as the capital, as far as the machinery, process machinery supports us.
Next question is from the line of Amit Doshi from Care Portfolio Managers.
Sir, you did explain about the international realization improving on account of rise of paddy prices, and you could gain on that front. But similarly, if I -- I don't see it in the domestic realization. Can you share the reason for the same?
Domestic realization has also increased from -- marginally, but it's both -- the [indiscernible] price has increased faster because of the [ original seamless...
Price [indiscernible] export tonnes of the premium rice goes into exports. And the treaty in this quarter, as a percentage of premium rice, was more. You see in domestic market a lot of broken rice being sold. So that is the difference between domestic and exports.
But the rising paddy price is part only in the premium segment is what you...
Yes. It's -- 70% of it goes into premium segment, only the pricing. The broken pricing doesn't affect that much.
Okay. So do you believe that we will see improved realization in the coming quarters for that domestic part as well or it will be in the similar range? I mean, there was the distinction a [indiscernible] because not a distinction between the domestic and the international is significant?
The domestic realization for the fourth quarter would be of the similar range.
Okay, okay, okay. So -- and second, on the demand front, you mentioned that INR 50 crores is what you have to pay by March for [ potash ]. So that will be the -- I mean, that's all or do we anticipate more than what I think is coming from that full year, from 15% to 20% of the demand has to be paid.
We have taken the order from the Indian tax department.
Okay. So that INR 50 crores is the final. There's nothing else that you have to pay till the time this appeal...
We have to pay INR 12 crores per month after 31st March. It is the hearing of appeals.
INR 12 crores per month?
After 31st March. It is the hearing of appeals. I'm expecting my appeal to be heard in March, obviously.
Next question is from the line of [indiscernible] from Transcend Capital.
Sir, regarding the income tax addition. Sir, as explained in the notification you announced on the exchanges that the company has been in full compliance with the UP Krishi Mandi Laws and the 2 period statutes which are there. Was this addition made specifically regarding the purchases from UP? Or is this regarding purchases from all the state's side, Haryana, Punjab and others? Or is it [ expecting ] here regarding UP?
You see, we have a big contract forming up recently in UP, and we have registered ourself in every Mandi of UP. And Haryana, Punjab, we are buying through our peers, not directly from farmers. In UP, we are allowed to buy directly from the farmer as per UP-issued [indiscernible] committee [indiscernible]. And I tell you very strong point, [indiscernible] government of UP issues 2 type of [ prongs ]: one is [ nayna ], one is [ jipsha ]. When [ jipsha ] is issued, it is issued that this purchase is from a farmer. When [ nayna ] is issued, it is proved that this purchase is from [ RCM ]. So whenever KRBL purchases it through [ nayna ], the payment is paid through proper banking channels. Whenever the company purchases it through [ jipsha ], which according to rupees issued by [indiscernible] is a purchase from a farmer, the company pays the farmer in cash because it was the prevailing practice in that state. So that is INR 2,000 crores is the purchase of 7 years from the farmers.
From UP? [indiscernible] [ prong ], [indiscernible] [ prong ], the purchase from farmers...
[indiscernible] [ prong ], wherein we have paid 2% Mandi sales on the government of UP. And it doesn't -- the [ jipsha ] proves itself that this is a purchase from a farmer. It's a legal strategy [ prong ]. And why government had made 2 [ prongs ]? [indiscernible] farmer lineup for [ RCM ] related [indiscernible]. That proves itself that government is also doing the farmer in separate and [ RCM ] separate], and it proves itself when I purchase [indiscernible] the farmer purchase. Sir, I fought a very, very strong case. It will go away in the first hearing at CIP. This is not my opinion. This is the legal opinion I've heard from every advocate. I must have gone through [indiscernible].
Yes, yes. Because it is a big demand that I'm sure it must have caused you to get like every active more.
Yes. For the whole January, we were working on this only. That is, we were working on this. So why -- how come there's so much of addition has come?
Sure, sure, sure. And sir, secondly, so this is regarding the [indiscernible] which you mentioned in the disclosure. And in the current practice, have you made any sort of modifications to...
[indiscernible] in 2017 came out that you cannot pay more than 2 sets in a year. Now, any farmer is -- every farmer is cashing checks. No, there is no problem, we are paying by checks. At that time, during [indiscernible] to '16, '17 and that way everyone was giving cash, and there was no bank account for farmers. Today, every farmer has a bank account.
Okay. So currently, the purchases you are making [indiscernible] the farms, to buy directly from the farm. Most of it to be...
Is paid by checks.
Okay, okay, most of them. Let's say above 90% or below that?
We are paying by checks 100%. But the purchase in UP, still from farmer, is about 70%, 80% of the purchases from UP.
Our next question is from the line of Sachit Khera from Smart Equity.
And this question is more an industry question, especially in the context of your competitor. As I understand, a few of your competitors don't really have too much financial strength. So would it be safe to assume that KRBL has actually added disproportionately to the paddy inventory and the competitors have really not added much? And I understand it's not a specific question that the company receives.
I just wondered, I don't understand your question, could you repeat?
Sorry, sir. So basically, as we understand that KRBL has been quite aggressively adding inventory for the next -- for this quarter, and it also transacts more. But the -- as I understand that to be industry's financial position, except for some big players, it's not really that savvy. So would it be safe to assume that KRBL has added much more inventory than the industry in general?
You see, we are a company wherein we require minimum for certain SKUs. We require 2-year aging for certain SKUs. We require 14 months aging. So being a company which is directly selling to the consumer, we want to have stocks, comparable stocks for aging because brand hampers. Sometimes if you're out of aged stock, brand hampers. So we have to maintain our inventory irrespective of what the price is.
No, I completely understand that. In fact, I was actually asking of whether the competitor are actually getting weaker in that context because maybe they don't have the financial strength. In fact, I've heard that a few of them actually have [ branding ] at a much higher rate on their books of accounts.
Definitely, our cost of inventory is always true to the industry. There's no doubt about it. Number one, because of the contract farming operation; number two, we have -- we are, I mean, financially quite strong so we pay within 24 hours; and number three, our system of procurement and our offices throughout Northern India competitive procurement. We think that's much, much better than the competitor.
Okay. And does KRBL have any systematic kind of adding, let's say, x thousand farmers every year in contract farming or there's no such hard and fast rule?
No, we are trying. We are trying every year. We are trying every year. No doubt about it. We are trying every year.
Next question is from the line of [ Lihit ] Kiran [ Sankit ] Prasad from Karvy Stock Broking.
This is regarding import order from Iran. Can you receive the order or do you still import? Can you receive orders from Iran? Or do you still import?
No, no. We receive the [ CLD ] order, both.
So what is the size of order, sir?
What is the...
Size of order?
The order is 33,000 tonnes.
33,000 tonnes, it's to say [indiscernible] for business.
I don't see you put a total here because these are all competition answers, and it is not advisable to give an internal secret. I do not know what other men and what form environment to be openly to the market. I tell you [indiscernible] having this conference call, then it goes to the public domain. These are not the information to be given in public domain, by how much order, what price. These are secretive talks.
Okay, sir. And secondly, you talked about free open market getting the same end or so. I believe, that brown rice is very much --- I mean, putting an order in. So what is it that can be read [indiscernible] brown rice order?
No, no. We are selling brown rice. It is not we are not selling brown rice. But yes, the quantum, maybe another company has a better quantum than we. But we are selling brown rice. It is not that we are not selling brown rice.
[indiscernible] And the reorder [indiscernible] finance cluster [indiscernible] for this time around, can I have more clarity on this please?
For which?
The finance cluster, interest cluster, has [indiscernible] this time around.
Yes. On interest costs, it is seeing the foreign exchange loss, foreign exchange [indiscernible] loss of INR 16.71 crore during this quarter.
MTM.
M to -- sorry, about that. MTM loss of INR 16.71 crores as compared to gain of INR 13.82 crores same quarter last year. If we remove this, then our interest cost is just -- actual interest cost is just INR 11.91 crores in this quarter as compared to INR 9.83 crores in quarter last year. So this is just because of the notional entries. This is accounting practices, okay?
[indiscernible] market [indiscernible]
Mr. [Lihit ] Kiran, I'm so sorry to interrupt, sir. Requesting you to please use the handset mode while speaking as we are unable to hear you clearly.
The impression that I had dreaded, that Saudi Arabian market has become stagnant in terms of basmati rice. First of all, [indiscernible] because [indiscernible] becoming more [indiscernible].
No. It sure has been taken off, but it has been resolved. It's so sad that [indiscernible] without any problem. I'm told that why it has become stagnant because about more than 3 million, 4 million people and now 2 years of [ invest ] Saudi Arabia [indiscernible] fields because they have come out with the new laws that the employment will be given to the local Saudi and not to the outsiders. Because of that, only about 6% growth which was coming every year in Saudi, for last 2 years, it has stopped. But now, what happened to that is, there were more than 60, 70 importers in Saudi Arabia who were importing rice. Now out of that 70-30 [indiscernible], 30 have vanished and 30 has left and, out of that also, 10, 15 will go away. So the major business will remain to the whole big players.
Okay. So it's a severe concern going forward then.
Next question is from the line of Varun Goenka from Reliance Capital.
I have final 2 questions, sir. The kind of growth that we're seeing forward and our ad spend investments are going to be in the range of 2% to 2.5%, and we don't need any fixed capital investment. So our margin should actually significantly increase from the current 20%, 21%.
Well, no. If I'm talking of taking a market share of another 10%, I have to be -- I have to do something to the pricing also. I mean, I have to take the pressure on the margins also. If I have to go for a top line of INR 5,000 crores or a market share of 45%, maybe EBITDA -- I have to take EBITDA hit of 1%, 2%, [indiscernible].
And this National Bulk Handling Corporation has released some data out. They're talking about a very large decrease in acreage in basmati, 9.5% or something there. Over the period of time, if you can give us a 2-, 3-year view of the industry. The acreage gets a move [indiscernible], how will that impact us in procurement and basmati prices, et cetera? That would really help.
So Varun, it's a very good question, the most intelligent question in front of me. As far as basmati production is concerned, it is directly connected to the farm income. If the farmer feels that we have achieved -- see, he calculates his income based on income per acre. For example, if the peak [indiscernible] production of parmal and government has picked up MRP of INR 18,000, [indiscernible] INR 54,000 per acre is the income of the farmer. Now same way, if the 1121 [indiscernible] and the price is INR 33, when it is about INR 58,000, INR 59,000 per acre. So he's making INR 6,000 acre more profit on basmati rice over parmal rice. That's number one. Number two, the parmal rice has one advantage, that is it is being purchased by the government. So there is -- so people -- so the farmer says, whatever I will grow will be taken away by the government, and I will get the price in time because government pays within 1 or 2 days. Yet as in basmati rice, the problem is that if the quality is lower, then you get a lower price. And if the prices are good, then you get a better price. Moreover, there are about 20% of big rice millers or paddy purchasers who make the payment to the Mandi in 1 month, 2 months, 3 months. So that is also a big question mark. But on the other side, the cost of production of basmati is lower than the cost of production of parmal rice. So many things are minus, many things are plus. So I think we're clear that the income profit, what the farmer gets, for example, [indiscernible] the farmer is very happy in the growth of 1509 [indiscernible] variety, where, really, farmers and everybody has made money. Next year, we are thinking that this crop might jump to another, whatever was the production. This year, it might jump by 20% because this is how the farmer decides to sold the farm -- to sold the peaks.
Okay. But in our contract farming operations, do we guide the farmers, sir? Or the farmer makes a choice, sir, on the seed, depending upon our end market demand?
Actually, there are about 50% farmers who agree what we tell them to grow this, grow like this. 50% of the farmers who say, no, Mr. Mittal, we want 1509, we want Pusa basmati. So 50% is 100% what we'd say and 50% is the farmer's demand.
Next question is from the line of Resham Jain from DSP Mutual Fund.
Yes. Sir, just one question. And there's a posted GST, we have seen the tax rate being different from -- for a branded guy versus someone who is just selling basmati rice. So has there been any developments on that side?
Well, definitely, we have a challenge, especially on the bulk [ brand ], we have a challenge of 5%. But you see, after GST, my sales have gone up. There's more of consumer demand and in consumer market, as I called before also, that there are various brands. So my competition is limited to 3, 4 brands. So demand of India [ wheat ] has increased. But GST has really -- the wholesale trail, which is very [indiscernible] sale, which is [indiscernible] biryani rice. It has created some problem for us.
Okay. So has the margin got impacted? Because you have said volume is almost same. So has the margin got impacted because of the...
We have added total GST to the principal.
Okay, okay. How big is this category, sir, in your overall scheme of things in the domestic [indiscernible].
You mean [indiscernible].
Yes.
It's 50% of the top line.
Okay, okay. And sir, one more question. I don't know whether you answered this during the call. But there's European pesticide-related issues, which we have been reading in the newspapers and all. Has -- how is the current status in terms of the overall -- the European retail as a [indiscernible], how are they seeing the pesticide issue?
They have become more stringent, exports have definitely fallen. This year, their purchase is 70% demand from Pakistan. Pakistan is not able to offer to any other country other than Europe. And in recent [ gulf ] food already be -- Brexit -- the Basmati Rice Association of Europe has got one meeting. It will begin next quarter, and let us see what they have to say during that meeting.
So what is the issue there, buying in India versus buying from Pakistan?
Pesticides [indiscernible] because people do not use pesticide in Pakistan because farmer is much poorer than India. In India, the farmers, actually, the Basmati [indiscernible] Punjab and Haryana, and you'd see us competitively much, much richer. And they use pesticide because the cost of the pesticide is less INR 1,000 an acre. So what the farmer is doing there to save his farm is using 1.5x, which is less than INR 500, even more, but my farm should be saved. Which we have been teaching them for the last 2 years, that you are losing INR 500, plus you are spoiling your crop. So this year, we find that, comparatively, we see 4 or 5 years, the pesticidal figures are much lower, but not in confirmation to the European standard. I think it might take another 1 year, we'll come to European standards.
Okay. And is it possible for you, when you procure the rice, to check and verify whether how much residue is there or not?
No. It can be through contract or maybe at the time of purchase, which is not possible. We have drawn addenda worldwide that if somebody can give us a lab [ model ] on the spot, we can find out the pesticide residue. But we are not assured there'll be positive [indiscernible].
Next question is from the line of [ Ashi Shakani ] from [ Cota Asset Management ].
Yes. I had a question with regards to this demand notice that you mentioned. From what I understand, you mentioned that the primary reason for the demand notice has been on disallowance for the paddy purchase. So just wanted to understand if you had any information whether this kind of practice was used for other players as well, where -- because -- I mean, it's something which -- is it an industry issue that's come up or only specific to KRBL?
Tell me -- I told you in Punjab, Haryana, I am buying through proper banking channels. But those are [indiscernible] paying to the farmer cash. According to their income tax, those all are [indiscernible] income should be added and [indiscernible] would be [indiscernible], 2010 to 2017, in India. Payment for agriculture produced to the farmer must be to the tune of INR 2 lakh crores, INR 3 lakh crores, even more. So everybody agree, but the industry is giving cash for -- to the farmer only. It is only Mr. Modi -- due to Mr. Modi in 2018 when all farmers [indiscernible] '16 or'18, work hard...
Just '18, sir.
Where all farmers got their bank accounts opened and everyone started accepting checks.
Sure. No, my only reason to check was that disallowance only -- I mean, you only see it with regards to KRBL? Or is also some other industry people have also witnessed the same?
No, according to [indiscernible]. Seeing for the first time, I was surprised [indiscernible].
[indiscernible]
Let me tell you, it's also because it should not be told in public domain. Even people who have written the [indiscernible] was confused [indiscernible]. I don't want to discuss this thing on telephone too much. The people tend to become more confused.
We take the last question from [ Jaspreet Singh ] from [ VA Capital ].
Sir, I just wanted to ask, are we supplying to these new e-comm biryani guys, Biryani By Kilo and Behrouz? And if so, can we gain some advertising marketing leverage through these guys?
Just quickly, many people are so commercial. I tell you openly, I have signed a contract with Behrouz. And it is for the full year, and the contract is 3,000 tonnes, big quantity. Adani, they are saying if we want the advertisement, give us 1/2 the [indiscernible]. It's not commercially viable. I said go to hell with the advertisement. This is the rice, this is the price, do you want to take it or not? I don't want any equity.
But is it not true that only we are doing 2 years and maybe we can do some marketing partner, we supply them 2 years old rice under [indiscernible].
They don't want to spend their money. They don't want to spend their money for buying 2 years aged rice. These are all related to sales. They want the cheapest rice and they want the best rice. So we are also smart. They are also smart.
Jaspreet, do not look out to domestic, but these are the questions. When you come, we will tell you many stories in the past of [indiscernible] who wants INR 2,000 for biryani. And when they come to buy rice, what they thought, it is not [indiscernible]. The customer [indiscernible] will come [indiscernible].
Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Amandeep Singh for his closing comments. Over to you, Mr. Amandeep Singh.
I thank Mr. Anil, Mr. Anoop and Mr. Rakesh for taking out the time in answering everyone's questions so patiently. On behalf of Ambit Capital, I wish you all the very best for the remainder of the year, and thank you, everyone, for joining the call. I now hand over the call to the management for their closing comments. Over to you, sir.
Thank you very much for attending the conference, and it was our pleasure to answer your questions. If any concerns remain unanswered or you need any more details, you are most welcome to write to us, and we'll attend to your mail as soon as possible. Thank you very much.
Ladies and gentlemen, on behalf of Ambit Capital, we conclude today's conference. Thank you for joining. You may disconnect your lines now.