We all want to succeed in investments, but there are very few us who are willing to prepare for this success. Preparing and positioning yourself to take advantage of opportunities is something that is not learnt easily. It takes time and effort. I am not competing for allotment of IPOs and Bonds. Instead I am spending time and effort to continue expand my watch list and my buy list. I would like to be prepared for what I want to buy at next opportunity or when they fall in my fair value range. Following are four companies I screened recently in the agriculture sector.
In general, agricultural business is a low margin business and hence, there is no room for error. In our country, it still continues to be heavily dependent on monsoons. Having said that, I believe a company with good management, combined with buying at decent price, can provide good down side risk for individual investors.
Agro Tech Foods Ltd (ATFL): It is subsidiary of ConAgra Foods of USA. It is engaged in the business of marketing food and food ingredients to consumers and institutional customers. The company has a portfolio of branded edible oil, popcorn, cocoa mix, dried green peas, chocolate pudding and frozen potato products. The edible oil brands include Sundrop, Crystal, Rath and Sudham. The company sells popcorn under ACT II brand. Under healthy world brand the company sells dried green peas. It sources frozen potato products from Lamb Weston, another subsidiary of ConAgra Foods and sells them to institutions like hotel chains, quick service restaurants.
- Operating Cash flow (positive for last 9 years)
- Debt (no debt, I like such companies)
- Dividends (yes, very low payout)
- Reported Net Profit (positive, and slow increasing trends)
- Margins (positive, improving trend)
- Capital usage (positive, and slow improvement)
- I like this company because of its debt free balance sheet, cash flow, and competitive market position. .
- Liquidity is a concern; share trading volume is too low.
- Lack of robust dividend is a concern. No room for error due to low margins.
- This could be a good company to hold in long term portfolio depending upon at what price it is bought at. I will continue to read more about it.
ADF Foods Ltd (ADFFOODS): The company engages in manufacture, marketing, and distribution of food products in India and internationally. It’s products include Indian pickles, chutneys, canned foods, frozen foods, spices, ready to eat curries, snacks, parathas and naans, curry powders, and cooking pastes and sauces. These products are branded as Ashoka, Camel, Aeroplane, Khansaama, Truly Indian, and ADF Soul through distribution networks in Europe, the United States, the Middle East, and Canada.
- Operating Cash flow (positive, overall increasing with nets profits)
- Debt (negligible debt)
- Dividends (yes, but low payout)
- Reported Net Profit (positive, overall increasing trend)
- Margins (net margins have improving trend, double digits)
- Capital usage (stable and decent)
- From the point of view of financial and business operations, this is good company to have in ones portfolio.
- However, management is sketchy. The way management played games by issuing warrants to promoters, directors, friends and relatives, it makes me believe it operates more like a private company. The shareholding pattern is more like a private company. Banks or FIIs do not have any significant holdings, and hence management gets way with whatever they want.
- Retail investors will keep getting squeezed in this process. The warrants issued in 2009 to promoter group, was basically, cashing out on market trend. The promoters issued themselves shares (under the disguise of warrants – i.e. capital investments) at low market price. These shares were then exercised in less than three months in markets at higher prices. Classic case of navigating loopholes in regulations! What about retail investors? Why didn’t they get warrants? Generally, warrants are issued with exercise options after few years of time – not immediately!
- I am staying away from this company.
REI Agro (REIAGROLTD): This company is, primarily, a basmati rice producer. It also operates wind farm. The Company has three brands: premium, mid-range and economy. The Company offers a range of rice brands, including Kasauri, Real Magic, Mehrab, Mr. Miller, Hungama, Hansraj and Nausheen with choice at all the price points. The Company has a wind farms in the state of Rajasthan, Maharashtra, Tamilnadu and Gujarat, and its installed aggregate capacity is 46.1 megawatts (MW). During fiscal 2010, the company produced 5,56,039 million tons of processed rice and 46.10 megawatts of electricity.
- Operating Cash flow (consistently negative)
- Debt (extremely high debt)
- Dividends (yes, but not of good quality)
- Reported Net Profit (cyclical, volatile)
- Margins (net margins in low single digits, gross margins in double digits)
- Capital usage (reducing)
- This company currently in a debt quagmire. On its expenditure list, the highest is allocated to interest outflow. To put a little perspective; REI Agro pays approximately Rs 340 crore as interest on its debt (net profit is Rs 157 crore). That is, REI is paying more in interest than it can make profits.
- This essentially means, this business is continuously sucking in capital without generating any quality profits.
- While I acknowledge that pure agricultural business is low margin business and have no moats, but it still does not mean negative margins and keep sucking capital.
- Management is sketchy (putting is mildly). It went into retail business – couldn’t make a difference – so demerged. It then started Wind Farm – will it be demerged? Or will remain as a power hedge. Making/Selling rice is way off than wind farm!
- I will follow this company like I do follow Suzlon – not for buying shares but to see how it evolves as a business and its debt situation. The recent rights issue from REI Agro will not solve the problem, it is just a band-aid.
Rallis India Ltd (RALLIS): The company’s product portfolio consists of three major segments, (1) Agricultural Inputs – typically pesticides for crop protection, for seed protection; (2) Fine chemicals – consists of plant growth formulations and plant nutrients. In this business unit, the company prepares its own formulations for selling in domestic market, selling raw molecules to other business like Bayer, Syngenta, Excel, UPL, and other agrochemical manufacturers ; and (3) Seeds – consists of BT cotton, hybrid paddy, and hybrid maize seeds. It has also started selling chemical products for household and/or building pest control. In past, I have read news bits about Rallis, but never realized that it was a TATA enterprise.
- Operating Cash flow (very good, higher than net profits)
- Debt (low debt, near zero)
- Dividends (yes, decent payout)
- Reported Net Profit (overall increasing)
- Margins (overall increasing, decent margins)
- Capital usage (overall improving and high, but not likely sustainable)
- In last few years, the company has evolved into business with good operating cash flow and low debt. This allows company to position for good shareholder returns, assuming it continues that way. Dividends will likely increase. Rallis has positioned itself as the top-tier company in Indian Agro-chemical business.
- It is showing significant increase in operating cash flow, margins, and capital efficiency. At first pass, I believe majority of this improvement seems to come from internal improvement in areas of working capital and cost management.
- The growth from revenue or by selling exists (probably less than half), but not as significant as the numbers will make you believe. For example, the recent quarterly results will make you believe the net profit growth of 28%. However, half of this growth is likely to be coming from reduced depreciation, reduced interest outflow, and high one-time expenses last year.
- Overall, even with tempered expectations, Rallis appears to the good company which needs more work to determine what price to buy.
This screen is not my buy list, but it was time well spent on narrowing my list. I will stay away from REI Agro and ADF Foods. Shortly, I will have a separate post on issuing warrants to promoters in the context of ADF Foods.
I will read more about Rallis India and Agro Tech Foods. Assuming they are good, I hope to come up with by buy price and add to my buy list.
What are your thoughts? Do you agree? What are your observations?
500215, 500355, 519183, 532106, ADFFOODS, Agro Tech Foods, Agrochemicals, ATFL, food processing, Pesticides, Rallis, Rallis India, REIAGROLTD, rice producer