REI AGRO LIMITED
ANNUAL REPORT 2005-2006
In a mere 11 years, REI Agro emerged as the largest basmati rice processor
in the world with an aggregate installed capacity of 49 TPH. The second
phase of expansion will be implemented in the first half of fiscal 2007,
which will increase the capacity to 61 TPH.
Even as the company enhanced shareholder value in an attractive way through
this linear route over the last few years, the management considered it
prudent to diversify its business into the attractive area of wind energy
In doing so, REI Agro became the first basmati company to enter wind power
generation with capacities in the states of Rajasthan and Maharashtra.
For a number of observers, this diversification may appear to be unrelated
and conducted with the short-term perspective of capitalising on related
fiscal concessions. On the contrary, we have entered wind energy generation
with a serious business motive prompted by the following realities:
* India faces a demand supply gap of 8-9 per cent and a peak demand supply
gap of 12-13 per cent and this is expected to increase, which means that
there will never be any problem in marketing power.
* Wind energy generation can play a significant role in this scenario; a
wind farm can be commissioned in less than six months, is the cheapest
source of renewable energy and from a long-term perspective provides cheap
electricity across all forms on account of an established technology and
inexhaustible resources of free fuel.
* The capital cost of commissioning a wind farm comprises land, land
development and equipment. Besides interest and depreciation, there are no
major costs or provisions in the business as a result of which its
operating margins are higher than most businesses.
* Maharashtra is perhaps one of the most industrialized states in India on
the one hand and suffers from one of the largest energy shortfalls in the
country (estimated at nearly 5,000 MW) on the other.
* The Government of Maharashtra has encouraged the setting up of wind
turbines with a policy that promises attractive returns for power
In view of these realities, REI Agro invested in 29.9 MW of installed
capacity by the close of 2005-06, decided to invest nearly 75 per cent of
its capacity in Maharashtra, sourced turbines from two of India's leading
turbine manufacturers like Suzlon and NEG Micon, delegated operational
management and maintenance to these vendors and entered into attractive
power purchase agreements with the respective State Electricity Boards.
Our wind farm business is built around a compelling business rationale:
* It provides us with a profitable diversification of our revenues; it
represents a standalone business viability.
* It enables us to de-risk ourselves.
* It maximises return-on-time employed due to high returns with the
deployment of minimal management time.
* It provides us with fiscal incentives including depreciation benefits;
profits from this business will be free from income tax for 10 years; the
company retains the option to select any 10 consecutive years out of the
first 15 years of operation.
Contrary to what a number of observers may believe, there exists
complementariness between our basmati rice and wind energy businesses.
* Both businesses complement each other in fiscal resource availability;
the strength of our basmati rice business provides us with resources to
invest in the wind energy business; the free cash flow from the wind power
generation business will be invested in the working capital-intensive
basmati business, creating a virtuous cycle of sustainable growth.
* While our basmati rice business is working capital intensive, the wind
farm business is gross block intensive, which will enable us balance our
working capital to capital employed ratio as well as gross block to capital
* Wind energy is a stable business as it requires no fuel; the cost of
power is frozen at the time of project commissioning secured by a power
purchase agreement even before actual sale. This is exactly like basmati
rice business, which also enjoys stable paddy prices.
* Both the basmati rice business and the wind farm business are fragmented
as there are not too many large and focused wind farm companies.
Going forward, we expect to strengthen our leadership position in the
basmati rice business while gaining a stronger foothold in the wind energy
In our basmati business, we intend to focus on increased yield and value
addition through an extension of the ageing period.
In our wind farm business, we expect to extend our presence from
Rajasthan and Maharashtra to Tamil Nadu and Karnataka, increasing our
aggregate installed capacity in the process.
In doing so, we expect to grow our topline and industry leadership in one
business to two over the coming years.