Category: case study

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.

Taneja Aerospace: Speculation’s swift knife, whither will it turn?

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

  • Taneja Aerospace and Aviation Limited (TAAL) operates the Hosur Airstrip, 30 minutes from Electronic City Bengaluru
  • The airstrip is 2km long and can accomodate Boeing and Airbus class of narrow-body aircraft, with in-house hangar and repair facilities
  • The government under its low cost flying or UDAN (Uday Desh Ka Aam Nagrik) scheme recently airmarked TAAL’s Hosur Aerodome as a hub for low-cost domestic flights
  • Inspite of many triggers in place TAAL has historically failed to produce returns on assets making it a speculative grade stock

Continue reading “Taneja Aerospace: Speculation’s swift knife, whither will it turn?”

Grauer and Weil: Are the Risks worth the optionality of future growth?

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

  • Grauer and Weil is one of India’s largest companies in the Electroplating and Coatings chemicals business.
  • It is a diversified conglomerate of both commodity and speciality chemicals, with interests in paints and real estate.
  • The diversified businesses may be holding down growth in the core chemicals business
  • Management decisions need to be closely monitored

Continue reading “Grauer and Weil: Are the Risks worth the optionality of future growth?”

The New World: Karuturi Global and how (not) to invest in Ethiopia

The African nation of Ethiopia is famous for its cuisine, long distance runners and arabica coffee. Few however think of Ethiopia as a rising African power.

  • Since 1990, the rate of return on foreign direct investment in Africa has averaged 29%, nearly tripling FDI in Europe.
  • The Ethiopian economy has grown at a rate of 10% over the last 10 years.
  • Ethiopia has its own space program.

Continue reading “The New World: Karuturi Global and how (not) to invest in Ethiopia”

Speciality Restaurants: Narrative Bias and the need for a focussed strategy

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

Speciality Restaurants Ltd, the owner of the popular Oh! Calcutta, Mainland China: Asia Kitchen and Hoppipolla brands is going through bad times.

2012 was its best year – when it went IPO. Things have tumbled downhill.

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D-Mart IPO: Business Quality Premium or Smart Timing?

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

With all the hype around it, the D-Mart IPO sounds like a noisy baarat plodding through Dalal Street. The promoter of D-Mart is R. K Damani, who is a stock market heavyweight. The legend goes on to say that back in 1992, R.K Damani was shorting the stocks that Harshad Mehta was buying.

R.K Damani has since done the unthinkable: quit the stocks markets and entered the gritty world of retail business. Today Damani’s Avenue Supermarts, the parent of D-Mart, runs brick and mortal retail stores selling mostly Food and Beverage categories that generates 23% ROE.

Continue reading “D-Mart IPO: Business Quality Premium or Smart Timing?”