Received this pretty informative note on the Co., from a reliable source, that I found to be quite an eye opener.
Disc: Virat forms a part of my core portfolio.
** Interesting spportunity to mall-cap olook at – Virat Crane Industries Ltd...**
Virat is a play on the largest value-added dairy products – Ghee, which accounts for 28% of the dairy industry.The dairy industry in India is highly fragmented and regional, and so is Virat. However, the industry is growing at around 13% and organized sector, which accounts for one-fourth of the industry, is growing at 20%.
Virat’s ghee, marketed under the brand “Durga”, is a 25-year old brand and a household name in Andhra Pradesh. The brand is perceived to be rich in quality, known to have a distinct aroma and flavor and is sold at a premium of 5-30% to other ghee brands in the region. It has a very strong brand recall in South India, especially Andhra Pradesh.
Over the last 3-years, higher marketing spends, geographic expansion into Karnataka and Orissa has resulted in revenue compounding at a CAGR of 36% (much higher than the industry growth of 20%) and EBITDA increase by 3.5x. This is on the back of –
Steady improvement in operating margins from 3.6% in FY12 to 13.5% in FY15, despite the increase in advertising spends from 0.2% in FY12 to 3.5% in FY15.
The robust growth in revenues was against negligible capital investments thereby leading to higher asset turns of around 13x, and healthy cash conversion cycle of 10 days. This helped the business generate healthy operating cash flows averaging at 89% of the profits over the last 3-years. ROE and ROCE also stood solid at 35% and 51%in FY15, with negligible debt on the books.
Until now Virat’s sales were “naturally” driven by the dealer network with no push from the company’s end. The management is now pursuing a three-pronged growth strategies to leverage on the premium positioning of the brand “Durga” – 1) continue to penetrate deeper into Andhra Pradesh, Orissa and Karnataka through the vast dealer network, 2) setup a new plant in Orissa to strengthen its presence in the state and also get access to new regions like West Bengal, Maharashtra and Chhattisgarh, and 3) diversify into new value-added products like curd and paneer through brand extension.
The company is hence well poised to scale its business and transform itself into a dominant value-added dairy company in Southern and Eastern part of India. Despite the healthy profitability, returns and other operating metrics, Virat trades cheap at 13x ttm earning and 8.2x EV/EBITDA, against all the other publicly traded dairy players in India.
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