Good results

https://nsearchives.nseindia.com/corporate/WHEELS_20052024144420_WILReg30PressrelaseMay2024.pdf

How can material cost be negative. Can someone please help

VINATI ORGANICS LIMITED Concall Summary Date: 17 May 2024

FINANCIAL HIGHLIGHTS

• During the quarter, the National Company Law Tribunal (NCLT) sanctioned the scheme of
  amalgamation with Veeral Additives Private Limited (VAPL) into Vinati Organics with effect from 1st April 2021 and accordingly the comparative financial result and other financial information for the quarter, year till date, and year ending March 2023 has been restated taking into account the full effect of the merger.

• On a QoQ basis, the revenue from operations grew by 23% and net profit grew by 30% QoQ to ₹104 crore.

• In FY24, the EBITDA declined by 18% YoY to ₹509 crore as compared to ₹620 crore in FY23.

BUSINESS HIGHLIGHTS

• On a QoQ basis, the company witnessed volume recovery in ATBS (2-Acrylamido 2-Methylapropane Sulphonic Acid) and butyl phenols. The ATBS sales are now normalized and de-stocking is over.

• In FY24, the revenue contribution from ATBS was ~32%. The sales were down compared to last
  year.

• The company’s global market share in ATBS remained unchanged at 60%-65%.

• In FY24, the revenue from butyl phenols business was ~₹300 crore. The company witnessed good growth in this business and it was a major contributor to the revenue during the year.

• During the year, the capacity utilization of butyl phenols was ~65%-70%.

• The performance of Iso Butyl Benzene, Iso Butylen, and other customized products remained flattish YoY.

• Over the last four years, the basket of customized products doubled in revenue to ~₹150 crore. The company expects good growth in the coming years as well.

• In FY24, the revenue from the antioxidants (AO) business was ~₹130 crore. The demand for antioxidants is still going through a weak period. The company anticipates scaling up of antioxidants sales in FY25.

• During the year, the capacity utilization of antioxidants was ~25%. The company expects to touch a 50% utilization level this year.

• The research and development (R&D) department is also working on adding more antioxidants to its product portfolio and the long-term outlook of antioxidants remained positive.

• In FY24, the company incurred capital expenditure of ~₹360 crore. Some part of the capital expenditure was incurred towards Vinati Organics for capacity expansion & addition of some new products and the balance was constituted for its subsidiary company Veeral Organics Private Limited (VOPL).

• Veeral Organics Private Limited (VOPL) is a 100% owned subsidiary of Vinati Organics Limited for manufacturing niche specialty chemicals. The total capital expenditure in VOPL will be ~₹500 crores mainly consisting of anisole, MEHQ (Monomethyl ether of hydroquinone), Guaiacol, 4-Methoxyethyl phenol, and a couple of Iso Amylene derivatives. These products are used in polymerization inhibitors, flavors & fragrances, pharmaceuticals, and personal care. The asset turnover would be ~1x.

• One plant of MEHQ (Monomethyl ether of hydroquinone) and Guaiacol was commissioned in March 2024. The company is still working on getting its product tested and sampled with customers. It is also working on enhancing the yield and efficiency of the plant.

• The other products, i.e., anisole, 4-methoxyethyl phenol, and two more products to be commissioned in H2 FY25.

• The ATBS capacity expansion from 40,000 to 60,000 metric tons per annum is proceeding well. It is expected to be completed in H2 FY25.

• As of date, the company commissioned a total of ~33 megawatts of solar power plant. This will help in reducing the energy dependence on non-renewable sources.

FUTURE OUTLOOK

• The company expects revenue growth of ~20% CAGR over the next 3 years mainly driven by the new products and some of its existing products.

• The management anticipates an EBITDA margin of ~26% on a sustainable basis.

• For FY25, the company plans to incur capital expenditure of ₹550 crore including the subsidiary.

• The management anticipates the demand for ATBS to remain strong and expects double-digit sales growth in the next financial year.

• In antioxidants business, the company expects sales of ~₹280-₹300 crore in FY25. Antioxidants business is expected to be a growth driver for the company. The peak revenue potential of the antioxidants business is ~₹700 crore.

• In Veeral Organics Private Limited, the company expects sales of ~₹50 crore in FY25. It expects some sales from its recently commissioned MEHQ and Guaiacol plant.

Please provide your views on the company as well as the research. I and a friend of mine have taken value investing over the last 5-6 months and this is one of the first reports I have made

LT Foods

LTF, established in 1990, mills, processes and markets rice (largely basmati). The company has established brands such as Daawat, Royal, Devaaya, Rozana, Heritage, and Chef’s Secretz, varying from basic to premium quality, both in the domestic and overseas markets. It has facilities in Haryana, Punjab, and Madhya Pradesh, with combined milling capacity of 106 tonne per hour (tph) and individual capacity of 58 tph

Business Model and Industry Analysis

Overview:

Company produces Basmati and other speciality rice (Contributing 81% of FY23 sales). They have 2 more segments, viz. Organic foods and ingredient (11% of FY23) and Ready to heat segment (2%)

Core business is working capital intensive (220-230 days is normal working capital), as rice must be purchased and aged for 1-2 years before sales. It also exposes company to price risk since rice purchased in up-cycle might be sold in down-cycle. Company appears to have managed both the risks well over time, given margin consistency and expansion

New business segments are in line with company’s current strengths and weaknesses. They use existing distribution network and cash flows to build the brand while removing cyclicity of paddy prices with branded products. Further, with increasing trend of health-conscious eating and ready to heat/cook foods with both partners working, the two segments can get good growth according to us.

Industry Growth:

India produced ~134 MnT rice in 22-23, of which 9.5 MnT was Basmati rice. 4.6 MnT Basmati was exported. Indian Basmati exports have grown by 7% over last 10 years. Iran, Iraq, UAE, Yemen and US are the top 5 consumers of Indian rice. Pakistan is the only other Basmati producing country (Owing to GI protection)
Domestic Basmati rice market is expected to grow at 1% CAGR over next 5 years, while international at 2.7%. Currently, 40% Indian market consumes Basmati (19% consumes packaged Basmati rice)

Basmati rice prices are not growing linearly, with all value growth coming from volume

Indian Basmati Export Market

Capacity Utilisation:

The company has 14 facilities in India, USA, Uganda and Netherlands engaged in rice production (5), rice packaging (6), Organic foods production (2) and Ready-to-heat products (1). Its capacity utilization for FY23: 80%; FY22: 65.3%; FY21: 65.1%. Utilization is expected to go up in FY24 for rice products, given consistent increase in topline despite volatile prices. Organic facility will show drop in utilization in FY24 due to ADD in US

Opportunities:

Company is expected to grow Organic products segment (Currently contributing 11% to sales) and ready to heat segment. Both segments appear to be in correct direction, and we will monitor their execution. Further, they have mentioned no capacity expansion plans currently, and strengthening only distribution and brand in FY23 reports as well as con-calls. It seems prudent given 80% cap utilization currently

Risk:

• Policy risk – India banned non-basmati rice exports (15% of total revenue). Similarly, US also imposed ADD on soya products from India. While ban didn’t impact the sales much, and ADD was mitigated with a facility in Uganda, company is still exposed to policy risk
• Geopolitical risk – Middle East is the largest market of Basmati rice globally. Currently, it contributes 5% of total sales but the company has future expansion plans in the region, which will be impacted owing to the ongoing wars. Also, increased freight costs have impacted profitability (Given India and Pak are the only Basmati rice producers, this impacts all players)
• Business model risk – Bulk of RM are commodities (Melamine, phenol, ethanol, kraft paper, coal, acrylic). They also carry significant rice inventory (200-220 days) and hence are exposed to rice price cycles. Concerning pt is somehow they have managed to maintain 10-12% OPM over 10-12 years. KRBL, C Setia have both shown OPM fluctuations, which is expected in agro-product company where both RM and Sales are commodity prices, and 1-2 year inventory holding period is also present
• Exchange rate risk – Since company is export oriented with bulk of paddy procured from India, currently it is not exposed to significant forex risk. However, company hedges its open exposures using derivatives

Future Expansion:

No major capacity expansion plans currently. In terms of margin expansion, target is to expand EBITDA% by 1.5% over the next 5 years

Competion:

KRBL is the biggest domestic player, followed by LT Foods. KRBL competes only in Basmati rice. Chamanlal Setia, Sarveshwar foods and GRM Overseas are other major competitors. LT Foods enjoys dominant position against all of them in exports, and it is catching up in domestic as well. Given Basmati industry’s domestic and global growth rates, it is clear LTF is capturing market share

Basmati and other rice products (Core operating segment)

Management:

• Management is clear and genuine on communication. Further, their acquisitions are all on point, and fit well in overall story.
• Positives: Salary in line with profits, no anti-minority shareholder decisions, RPT (LTF has <1% of sales and purchases from RPT), resignations, family and succession planning, excessive salaries and other extravagant spends, civil/criminal cases, fraud/scam involvement, royalty/brand fees/other means to defraud minority holders, complex business models, unnecessarily complex/flowery language in communications, large number of subsidiaries with no operating presence (Company has large number of subsidiaries (20+), however given span of their business, it might be possible that most of them are operating
• Concerning points: Constant margin maintained, despite no rice price hedges and no explanation. No trend matching between KRBL and LT Foods’ OPM

Institutional Investor:

FII and DII continue to hold 18% (Including 9% of Saudi Arabian quasi-govt investment)

Historical Data and Financials

Profit N Loss Account:

• Sales have historically grown at 12% over last 10 years and at 19% over the last 3 years
• Margins are constant b/w 10-12%
• Ready-to-heat is currently making loss and is expected to grow profitable with increased utilization

Balance Sheet:

• LTF has been consistently reducing debt for the last 5 years. Their current liabilities were upgraded by CARE recently; Interest coverage 10
• Inventories & receivables are constant. Inventory turnover is improving slowly from 2.0 to 2.6 over last 8 years

Cash Flow:

• CFO/PAT good (140%) over long term, although given such huge WC requirement, I am not sure how they are managing this
• Company has managed to convert 66% of its PAT into FCF post capex over last 10 years

Valuation and future potential:

Industry median is calculated from LT Foods, KRBL, Chamanlal Setia and Sarveshwar Foods

Valuation:

• Company is growing revenue (19% CAGR over last 3 years) and profits (29% CAGR over last 3 years) at good rate, however, it is still valued at a PE of 14, which signifies good scope of re-rating
• Risk for this band being company might revert to mean-valuation of 10 (Last 3 years) which presents a downside of 25-30%
• In a scenario where company does fall to PE <= 10, expected EPS growth of > 20% will prevent significant downside
• In my opinion, company appears to be valued so for being in RM industry, but given the strong and good quality earnings growth company has delivered and expected to do in future, there is a good scope of re-rating

Future Potential:

• Company is expected to do hit 10.4k Cr revenue by FY26 in an optimistic scenario and 9.8k Cr in base scenario, while gaining 1.5% EBITDA margin (Management goal for next 5 years)
• At current valuation, there is a scope for re-rating as well from PE = 14 to PE of ~ 20-22

Soft factors for consideration:

• Company has good management and has executed capex well in past
• Geographically, it’s operations are concentrated in US and India
• ~85% revenue comes from rice, and company can expect re-rating as FMCG if the other two segments kick in
• Debt reduction is key focus for management. Business is WC intensive however, and is open to commodity price risks since there is ~1.5-2 years gap b/w buying paddy and selling rice
• Company has prudently used inorganic acquisitions to grow (However their cost of acquisition is not public and hence, IRR can’t be commented upon)
• Good part of the growth has come from price growth, and to a lesser extent from volume growth. When basmati and non-basmati rice prices fell down from 2014-2017, company still managed to increase revenue by ~10% CAGR. Given that currently Basmati rice prices are at a peak, there is a chance it can fall down. However, going by past track record, good chances of management able to manage this

Disclaimer: This is a study report, not for any decision making or investment advisory.

Date:16th May 2024

@LarryWink The daily moving averages are more about closing prices (rather than volumes).

Even DMA or EMA that we plan to use is still a lagging indicator. It will not be able to spot a change in direction before it happens, but it can tell you quickly that it has changed. Further, EMA may be better than DMA as it will give more importance to recent data.

There are some other leading indicators like RSI, but my understanding is that they can generate a lot of false indications.