Kriti Nutrients and Sanwaria Agro: Soya and Edible Oils back in focus

This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further

Soya products and the edible oils are areas I have been closely following. India imports  67% of its demand for edible oil. This is economically unsustainable due to several reasons. There are a few key factors about the industry:

  • The demand for edible oils is inelastic and insulated from macroeconomic conditions as cooking is a basic need for survival.
  • India has failed to be self-sufficient in edible oil production due to misaligned incentives for farmers and low agricultural efficiency, which causes Indian soya to be globally uncompetitive in prices.
  • Soya has applications beyond cooking oil in cattle feed (poultry), food proteins, value added products (like soy milk).
  • China is driving the global demand in soya and increase in prices of the raw material.

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The Indian government unfortunately has not recognized the importance of self-sufficiency in cooking oils and has not made it a policy priority. However with GST and the financial demise of large listed companies like Ruchi Soya, the space has opened up for smaller organized players with good balance sheets like Madhya Pradesh based Kriti Nutrients. I would prefer companies based in M.P and Maharashtra as they have the competitive advantage of sourcing Soya from local growth belts.

The financial health of Cooking Oil and Soya companies has been tenuous. Edible oil and Soya products is a low margin and commodity business. Bad macroeconomic and industry conditions have wiped out many companies big and small (e.g. Ruchi Soya). Only a few remain investment grade.

The cyclicity in the business is through the supply side – introduced by dependence on raw materials like Soya and Sunflower. The production of edible oils and soya products is subject to the vagaries of the monsoon and Indian agricultural conditions. The demand side itself is not cyclical as cooking oil is in demand around the year. This makes companies with good inventory management stand out.

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Kriti Nutrients : Improving on all parameters

Due to these factors discussed, it is also wise, when investing in the edible oil sector, to look for companies that are not pure play edible oil manufacturers but look to be mini-FMCG or food processing companies – thus diversifying their risk.

Kriti Nutrients: Offers products such as Soya flour, Sunflower oil and produces Soya liechestien for Nestle (probably for use in their baby food products). Kriti management though conservative has shown an intention to launch value added products albeit slowly. With access to M.P’s soya-belt, they are well positioned to capture new product categories like Soya milk and protein foods when the market is made. It also makes me believe they are a good acquisition or partnership candidate for large FMCGs like Britannia and Nestle. Fun fact: Inventory turnover of Kriti Nutrients is better than Nestle’s. All of this is not discounted in the price as Kriti trades at multiples that are normal to the edible oil industry.

Sanwaria Agro: The company is more of a food-processor than Kriti Nutrients, which leans more towards being an edible oil company. In addition to edible oil and soya chunks; Sanwaria offers flour and even basmati rice. The price has run up significantly in the past few months.

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Sanwaria Agro, Investor Presentation

In sum, a few reasons to be bullish about the edible oil/soya product businesses are listed below:

  • Unorganized to organized: GST pushes the unorganized market towards an organized market benefitting large and mid-sized listed players with low leverage and good inventory management
  • Push to pull: Domestic demand will see growth as the country moves towards self-reliance in edible oil and competitively priced soya products
  • The business has emerged out of a multi year down-trend, so valuations are reasonable
  • Reliance on monsoons is going to decrease and agricultural incomes are set to rise incentivizing farmers to grow soya and edible oil cash crops – securing supply side cyclicity
  • Protein intake increasing in a vegetarian country and the addition of value added products will see increased demand for soya chunks, tofy and other soya proteins as well as soya milk in the medium to long term
  • Health and quality consciousness: Soya oil is healthier than its counterpart – mustard oil, which is the dominant variety of cooking oil in India

DISCLAIMER:

This post is not BUY/SELL/HOLD advice but a statement of my personal analysis and opinion. I hold Kriti Nutrients since lower levels so my views are biased.

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”. No BUY/SELL/HOLD advice is offered on this blog, in any form whatsoever. Views expressed are my own and not of my employer. Stock Markets are very risky and can cause a permanent loss of capital. You should seek professional advice.

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