Sanwaria Agro Oils - Multibagger

Sanwaria Agro Oils : Reco Price Rs. 67.90 CMP: Rs.74.65 (Gain 9.94%) by Deven Choksey, KR Choksey

Sanwaria Agro Oils has been growing at a rapid pace in the recent past and is expected to do so in the coming two-three years due to the economics of packaged edible oil sector.

Sanwaria Agro Oils Ltd (SAOL) is part of the Sanwaria Group, which has presence in energy (Sanwaria Energy Limited), infrastructure (Sanwaria Infrastructure Limited), edible oils (Sanwaria Agro Oils Limited) and foods (Sanwaria Foods Limited). SAOL is a solvent extraction and refining company. It is primarily engaged in Soybean processing for and Soy Oil & Soy Meal are its two main products. Soy Oil is one of the largest edible oils consumed in India Soybean Meal is mainly used for cattle feed. Besides, the company also produces and exports Soy lecithin, which is used as an emulsifier, used to increase product shelf life, reduce fat content, etc.

The Company has been growing at a rapid pace in the recent past and is expected to do so in the coming two-three years due to the economics of packaged edible oil sector. We are extremely bullish on the domestic packaged edible oil sector in general and companies like SAOL in particular. We like SAOL for the following compelling reasons:

• Capacity expansion to fuel volume growth – SAOL is planning to further increase its processing capacity through organic as well as inorganic route. It plans to enhance/modernize its existing Soy seed crushing capacity from 1000 Tonnes Per Day (TPD) to 3000 TPD and refining capacity from 150 TPD to 450 TPD by 2009. The expansion includes setting up of facility for manufacturing value added products i.e. Soya Flour (200TPD), TVP (400 TPD), either by setting up of new plants at the existing locations or acquisition of existing plants in the surrounding area.

• Transition from loose oil player to branded player – With strong brands under its fold, SAOL has ascended from manufacturing & selling loose oil to manufacturing & selling branded oil. The Company plans to focus on Retail and Branded Product Market in order to increase its retail presence. As a part of its Retail Strategy, the Company will expand its retails product basket by foraying into Mustard Oil, Cotton Seed Oil, Soy Flour and
other value added Soy products.

• Edible Oil sector at crossroads – Indian packaged edible oil industry is expected to continue its high growth rate due to lower per capita consumption of oil, rising population, increasing disposable income from buoyant economic conditions, growing health & hygiene awareness promoting demand for packaged products and a boom in organized retail fuelling demand for branded products.

• Economies of scale – SAOL is expanding its capacities and thus it would benefit from economies of scale, which is one of the important factors in improving profitability of the edible oil manufacturers in India. Besides, both the production units of the Company, located respectively at Mandideep and Itarsi, have been awarded the ISO 9001:2000 TUV NABCB QM002 Certificate with effect from 13th June, 2007, ensuring quality standards, which is a must for branded edible oil companies.

• Savings from inhouse power generation – SAOL has set up and commissioned a 2.4 MW Wind Power Generation Plant at Dewas in Madhya Pradesh for captive and commercial use. Captive use of power would bring down the overall operating costs while commercial use in form of selling the power would generate additional revenues for the company.

• Diversification into bio-diesel business – SAOL with its increased capacities is planning to foray into Jatropha cultivation and crushing. Jatrohpha is a highly lucrative high margin business and its successful implementation would place the company on a different growth trajectory.

With all the factors in favour of SAOL, positive outlook for the sector and strong management vision, we believe it would grow by double digits in sales and profits for next three years with an improvement in profitability, thus creating sustainable shareholder value.

Key Developments and Impact
Capacity expansion to fuel volume growth
SAOL is planning to further increase its processing capacity through organic as well as inorganic route. It is planning to enhance/modernize its existing Soy seed crushing capacity from 1000 Tonnes Per Day (TPD) to 3000 TPD and refining capacity from 150 TPD to 450 TPD by 2009. The expansion includes setting up of facility for manufacturing value added products i.e. Soya Flour (200TPD), TVP (400 TPD), either by setting up of new plants at the existing locations or acquisition of existing plants in the surrounding area.

Raising of additional capital to fund its aggressive expansion plans: SAOL is planning to raise additional funds to the tune of Rs75 crore either through private or public placement of equity shares or Bonds/Debentures in domestic or international markets. It would be either a fresh issue or allotment of GDR, ADR, FCCB, or Bonds/Debentures.

Financials:
Net Sales of the company increased at handsome double digits in Q1FY2008 on the back of higher volumes following a robust demand scenario and increased capacity. However, Operating Profits have grown at a lower rate due to substantial rise in prices of Soybean. Lower interest outgo and depreciation has resulted into a handsome profits growth for the company.

Valuations:
At the CMP of Rs 67.90, SAOL is trading at EV/Sales of around 0.60x and EV/EBITDA of 10.4x its TTM Sales.