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An oil story that isn't scary

Buy into a sector that will remain relevant in market boom or bust; zero in on a stock that will grow aggressively over the medium term; buy it at a point where it represents attractive value.

Mudar Patherya | Print Edition: December 13, 2007

Mudar Patherya
Mudar Patherya

Just about every second hour I get a call: “Paisa idle chhe. Where do I invest?”

My safety-first response: buy into a sector that will remain relevant in market boom or bust; zero in on a stock that will grow aggressively over the medium term; buy it at a point where it represents attractive value.

Jhunjhunwala Vanaspati matches my wish list. This is the evidence:

• Top line has grown consistently across the past five quarters—from Rs 166.94 crore in July-September 2006-7 to Rs 267.24 crore in July-September 2007-8.

• Earnings before interest, depreciation, taxes and amortisation (EBIDTA margins) have strengthened from 1.75% in April-June 2006-7 to 2.96% in July-September 2007-8.

• EBIDTA has grown from Rs 38.42 crore in 2005-6 to Rs 46.70 crore in 2006-7; interest cover has been steady at around 9 in 2005-6 and 2006-7.

• Earnings per share has strengthened from Rs 17 in 2005-6 to Rs 18.9 in 2006-7 (on an equity capital of Rs 7.5 crore of Rs 10 face value); annualised EPS was a stunning Rs 31 with the best quarter yet to come.

The market capitalisation of around Rs 110 crore (as on 16 November) is attractive because:

• The company is the largest singleunit vanaspati maker in India today (installed capacity 1.13 lakh tonnes per annum); it accounts for 5.65% of the country’s vanaspati market.

• It is a market leader in Uttar Pradesh (70%) and Bihar (23%); its products are available across 11 states.

• The company’s “Jhoola’s” brand enjoys a distinctive consumer pull; receivables were equivalent to a mere 10 days of turnover in 2006-7.

Now look ahead:

• The company is extending beyond vanaspati in its intention to emerge as a complete vegetable oils provider.

• It has already commissioned its mustard and palm oil capacities and expects to diversify into the refined sunflower, coconut and groundnut oil categories as well as bakery vanaspati thereafter by June 2008.

• It expects to enter the business of agro-based packaged foods like flour, pulses, packet tea and juices.

• This will increase non-vanaspati revenues from 19.87% of turnover in 2006-7 to around 60% in 2009-10.

These businesses are expected to result in a top line of Rs 1,100 crore in 2007-8, Rs 1,800 crore in 2008-9 and Rs 2,500 crore in 2009-10. Meanwhile, the company’s equity will increase to Rs 14.5 crore following the conversion of recent preferential allotments. Even a fully diluted market cap of Rs 225 crore (in reality this will only transpire in 2009-10,) appears meagre compared to the projected revenue and margins.

And here is the final kicker: the company expects to leverage the 333 acres of real estate in Varanasi with the proposal to commission a multiservices SEZ. If that happens, then…

If you are about to grab this stock, keep the following caveats in mind: raw material prices could swing sharply, affecting profitability; there could be delays in commissioning of the new plant; and too aggressive a diversification can strain the balance sheet.

Mudar Patherya, Chief positioning officer of Trisys, an annual reports consultancy. He can be reached at mudar@trisys.com.

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