Screening Three More Companies in Agriculture Business

Today is the second part of the screening of companies in agriculture or food related businesses. While there are hundreds of companies out there, as individual investor, it is just not possible to read about each one of them. I am presenting summary of few more that I have read about over last few months. After these two screens, I think I have shortlisted four companies which, for now, is enough to focus on.


Lakshmi Energy and Foods Ltd (LAKSHMIEFL): It is engaged in manufacturing and processing food grains and related products. The product includes rice, basmati rice (branded as Lakshmi Foods), parmal rice, rice bran edible oil, wheat flour, de-oiled cake, refined oils, and cattle feed (branded as Heera Moti). It also as 30MW biomass-based power generation business using rice husk as fuel. The company was formerly known as Lakshmi Overseas Industries Limited and changed its name to Lakshmi Energy and Foods Limited in February 2006. I came to know about this company after reading Supreme Court and agri minister’s tussle over grains rotting in FCI.

  • Operating Cash flow (quite a few negative instances)
  • Debt (yes, increasing, higher than cash flow)
  • Dividends (yes, extremely low payout)
  • Reported Net Profit (positive)
  • Margins (positive, improving trend, but not likely sustainable)
  • Capital usage (positive, reducing trend)
  • Based on what I could read, so far, I like this company because of its management.
  • Company is in transition. So far, it has been fully depended on Food Corporation of India (FCI) to take its product. The selling prices are determined by government. There was no room for growth other than capacity.
  • In last few years, it has taken quite a bit of debt. As a result, its capital usage seems to be going down. This debt is likely to be funding capacity expansion, and entering new markets.
  • It’s new business plans include, capacity expansion of existing rice process business, capacity expansion for biomass-based power generation (rice husk as fuel is by-product and free), basmati rice, rice-based oil products, and selling pre-packaged branded rice directly to retailers. It is good to know, it does not want to enter retail business per se.
  • This would be a new domain from company, meaning, it will have to go through learning curve. When and how will this pan out? How will company manage debt servicing?
  • Overall, an intriguing company, which could be an opportunity, depending upon price paid. Since it is in transition, stock price in the market is battered down.

Jayant Agro-Organics Ltd (JAYAGROGN): Jayant Agro-Organics Limited, an oleo-chemical company, engages in the manufacture and sale of castor oils and its derivatives in India. Products include hydrogenated castor oil, castor refined oil, and 12 hydroxy stearic acid/fatty acid. The company’s products are used by agriculture, cosmetics, electronics, food, lubricants, paints, inks and adhesives, paper, perfumeries, pharmaceuticals, plastics and rubber, telecommunications, textiles, and chemicals industries. It seems company also engages in Agri-trading business.

  • Operating Cash flow (quite a few negative instances)
  • Debt (yes, higher than cash flow)
  • Dividends (yes)
  • Reported Net Profit (positive, but volatile)
  • Margins (all margins are less than 5%)
  • Capital usage (not great, too many preferential allotments)
  • Very focused company and business in niche market. Management looks like a family enclave.
  • Margins are not something to cheer about. Why would you want to invest in a business where margins are less than 5%?
  • I am staying away from this company.


Zydus Wellness Limited (ZYDUSWELL): This Company is subsidiary of Cadilla Healthcare. The consumer business of Cadilla was divested and integrated into Carnation Nutra Analogue. This merged business was renamed as Zydus Wellness Limited. It provides health care conscious food products and skin care products. The food products include low cholesterol butter, margarine spreads, and sugar free. The skin care products include face wash and scrubs. To me, this is another commodity business directly facing the consumer; something like an FMCG business. Branding, operational excellence and economies of scale play significant role in company’s profitability.

  • Operating Cash flow (overall increasing, but not consistent, most of the time higher than profits)
  • Debt (no debt, I like such companies)
  • Dividends (yes)
  • Reported Net Profit (positive, and overall increasing trends)
  • Margins (positive, overall improving trends)
  • Capital usage (positive, and decent)
  • I like this company because of its debt free balance sheet, cash flow, and branding in the market. To me, it appears that management is doing good job of maintaining decent margins and use of capital.
  • One aspect that makes me take a pause is future growth plans. Does it plan to go health conscious driven consumer products in food segment OR does it plan to become run-of-the-mill personal care Products Company? Need to read more.


Among these three, I will continue to read more about Lakshmi Energy and Foods, and Zydus. While Lakshmi Energy does not meet my long term buy and hold criteria (high debt and erratic cash flow), it could present as an opportunity.


After looking at few companies in agriculture businesses, I will focus on Rallis India, Agro Tech Foods, Lakshmi Energy and Foods, and Zydus.


What are your thoughts? Do you agree? What are your observations?


[Side Note: It is a shame that our agri minister let’s food rot in warehouses when millions in our country go hungry. Talk about priority. It’s more important for a central minister to run around money minting cricket organizations than worry about food rotting in warehouses.]









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17 Responses to “Screening Three More Companies in Agriculture Business”

  1. Raja says:

    Hi TIP Guy,
    coincidentally i too have been reading about zydus and jayant agro. So, here are few thoughts. You can take them as questions too and answer from your perspective.

    Zydus –
    I find it’s margins almost too good to be true to be lasting for long time. I mean, their mainstay product sugar free is nothing revolutionary and can be easily copied by others. Nowadays we can see sugar free from Wipro and other companies in stores. Of course zydus still enjoys 80% market share (mostly driven by it’s advertising) rather than any real niche in the product itself. I think people are just waiting for a better alternative at lower price (personal experience 🙂 )
    Sometime back I had also read about a comapny which has already found a good alternative to the sugar free product and will be able to sell it 1/10th of the price of zydus sugar free.
    Also it’s currently priced almost 50 times it’s earning. Not sure when it will be cheap enough to buy.

    Jayant Agro –

    Debt remains a real concern. Margins like you pointed out also are very thin. But probably margins are on a upward curve because of the new subsidiary ‘Ihsedu Speciality Chemicals Limited’ a JV with Mitsui & Co. which has commenced production of value added castor oil derivatives from this year march. Also the castor oil in my limited understanding is a product for which not many alternatives are avaialble and india produces apprently 60% of world’s produce and Jayant is the industry leader. The company made a profit of 12.63 crore last year and has already made 13.08 crore in the last 6 months of this year. The company is available for a market cap of 209 crore. Do you think it can be opportunity buy ?

    Regards
    Raja

    • Raja says:

      Got the link i was talking about with respect to Zydus. http://economictimes.indiatimes.com/news/news-by-industry/healthcare/biotech/biotech/Alkem-Lab-develops-low-cost-sweetener/articleshow/6471411.cms

      The company name is alkem and the cost factor reduction possible over zydus is 40 times and not 10 times like i had mentioned earlier.

      Regards
      Raja

      • TIP Guy says:

        Hello Raja,

        Thanks for the link. As mentioned in other comment, I agree Zydus is a one wonder product company. But I am not wary of competitions. What I am looking for is how Zydus company/management respond to it. And surely its not a buy at this price.

        Best Wishes,

    • TIP Guy says:

      Hello Raja,

      First about the company….
      On Zydus…. I agree with your thought process. For now, it is one wonder product company (at least so far!). That’s why I mentioned that its future plans makes it take a pause. In general, every company will face competition. The effect is much more pronounced and visible when it is direct-consumer facing company. In my thought process, I do not have any bias against such a competitive environment. It’s good. Such situation or competitive environment actually brings out quality of management. For example, LNT is facing onslaught of Chinese power equipment suppliers (who are cheap – supported by China govt). But its the quality of management that does not let it become a show stopper in its business.

      On Jayant Agro… Agreed it has a majority market share in this business, and focuses on small market segment. But I would stop short of calling it a niche company. Niche (i.e. moat) is characterized by margins. It does not have any! Even if it improves, I doubt it would cross beyond 20% in next few years. If you see graphite, all of its margins are 20%+. I would call that a niche.

      Second about pricing
      Zydus.. too young a company to figure out buy and hold or opportunity types. I would give it one brownie point for backing of Cadilla. I have not talked about pricing yet. But I would tend to agree with you, it is very and very expensive.

      Jayant….. this is not a buy and hold type. Is it an opportunity? for the current price, I do not think so. You mentioned market cap of 209 crore. Let us think it over. It has debt of Rs 244 crore. Almost 40% earnings goes to interest payment. Equity is less than Rs 10 crore (i.e. owners rely on debt, they do not want to put their money). Profits are approx. Rs 26 crore (doubling it). So yes, it may seem to be an opportunity because profits are not being valued right now. And that’s what this family enclave is doing. Taking profit, without putting any equity. Being small market focus, if business slows down, it will again go for increasing capital (i.e. debt). Summary is, yes, it could be a speculative opportunity in the market. But not an opportunity that I am looking for. Had management more equity, and management little more diversified, had little less debt, then yes, it would fit in.

      Currently, reading about Lakshmi Energy and Foods and I think that would fit into opportunity, not sure yet.

      Hope this helps!

      Best Wishes,

      • Raja says:

        Hi TIP Guy,

        Very to the point answer. I got to learn a lot from the reply and hopefully my thought process is evolving with more clarity 🙂

        One point though:
        I checked last years balance sheet. Jayant Agro’s debt is roughly 164 crore as mentioned under the heading ‘Loan Funds’. Do i have to add something else ?

        Also, the interest payment of around 9.72 crore for the past 6 months fits in the range of 13-14% interest for roughly 164 crore.

        I am not getting the calculation for 244 crore. Am i missing something ?

        Also i see that they have inventory of 92 crore and ‘loans & investment’ of 94 crore under investment heading. Do you think the loan amount of 164 crore(roughly) and inventory could be related ? I mean, is it possible that they are stocking up the raw material and have to take loans for that. If it is so, can the loan amount be seen li’l more favorably ?

        Regards
        Raja

  2. Sam says:

    I found some info on Lakshmi Energy on another website . I’m pasting it here . Hope it helps :

    [comment removed]

    • TIP Guy says:

      Hello Sam,

      No, copy paste from another site does not help. Comments Section is for your own comments and not a space to be copy pasted from another website.

      If you come to this blog, AND see all commentators doing the same thing, copying and pasting from another website, would you like to read them? Will those type of repetitive copy pasted info help anybody? Probably not!

      Best Wishes,
      TIP Guy

  3. Chandru says:

    On the side note,
    Our well educated, clean-handed Prime Minister too has supported to let food rot.

    • TIP Guy says:

      Hello Chandru,

      Yup. I agree with you, let us give “responsibility” of everything that happens in our country to prime minister’s seat. Because rest of us are too busy “claiming our rights”.

      Best Wishes,

  4. ramesh says:

    Hi TIP Guy,
    will u recommend any smallcap
    1)warehouse
    2)cold storage
    stocks
    (concor is big daddy government but looking for small cap emerging stock with ambitious management as these two industries likely to ROCK in future)

  5. Praveen says:

    Regarding Lakshmi Energy., I think FCI wont buy Basmati rice., it will only buy normal rice. So Lakshmi Energy must either sell its basmati rice locally or export it.

  6. Praveen says:

    Regarding Lakshmi Energy., I think FCI won’t buy Basmati rice., it will only buy normal rice. So Lakshmi Energy must either sell its Basmati rice locally or export it.

  7. Raja says:

    Hi TIP Guy,

    I quite liked the idea of reading similar type (Agri) of companies in one go or one after the other. Do you think it helped you putting things in perspective better ?

    Regards
    Raja

    • TIP Guy says:

      Hello Raja,

      Once or twice per year, I do that type of sweep on a single sector. It take about 3 months and you end up looking into 10+ companies. Yes, it does help put things into perspective. After you have done that, the next time it becomes easy.

      Best Wishes,

      • Raja says:

        Hmm.. that sounds like a good way to do it.

        If i may suggest one sector for that kind of read, it would be the hospital chains. Was at the wrong end recently and couldn’t help but realize how helpless/vulnerable a customer/patient is at those times and also how arbitrary pricing power they have. Yet as a customer i can’t help but go to them again and again when need arises.
        Also get a feeling that India has a huge need for quality hospitals and this business is still at a nascent stage with huge growth potential. Hospital chains should do well with the growth of economy in general and be more resilient in economic downturns too.
        What do you say ?
        So, currently started reading about Fortis and Appolo hospitals. Are there any other listed ones as per your knowledge ?

        Regards
        Raja

  8. Hi,

    Good stock picks.

    The only problem is this sector is ignored by even most of the brokerages and the coverage starts only when the stock has appreciated quite a lot.

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