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Monday, December 8, 2008

Jhunjhunwala Vanaspati - A good value stock

A BEARISH market occasionally provides an opportunity to unearth some value stocks, which have been battered below their intrinsic worth. Jhunjhunwala Vanaspati (JVL) is one such stock.

This stock also appeared in the lead story titled ‘Cheaper By The Dozen’ in Economic Time's Invesor's Guide edition dated December 1, ’08. Click Here to checkout this article.

This stock is now lower than cash and other liquid investments net of long-term debt on its books. Considering the company’s strong fundamentals and growth prospects, the stock is a good value pick for investors interested in the small-cap space.

Beta: 0.27
Institutional Holding: 0.1%
Dividend Yield: 2.8%
P/E: 1.5
M-Cap: Rs 54.1 cr
CMP: Rs 72.10


BUSINESS:
Varanasi-based JVL is principally engaged in the manufacture of vanaspati and refined edible oil. Vanaspati accounts for more than 58% of the company’s revenue, while the remainder comes from other oils like soya, palm and mustard oil. The company is in the high-turnover, low-margin business of solvent extraction. It markets its products under the ‘Jhoola’ brand, which is the market leader in Uttar Pradesh and Bihar, enjoying 35-40% share each. The brand commands 5-10% premium over its competitors and is predominant in rural markets. On one hand, the company imports crude edible oil, while on the other hand, it exports de-oiled cakes to markets in South-East Asia.

JVL has also entered into deals to import crude palm oil and soya bean oil directly from plantation owners in Malaysia, Indonesia, Argentina and Brazil. The company has recently acquired a sick fertiliser company in Bihar, thus foraying into the fertiliser segment. It has also acquired 260 acres of land bank as part of the deal. The company has proposed real estate development of 333 acres in Varanasi, and plans to develop this into a multi-services SEZ.

GROWTH OPPORTUNITIES:
India imports nearly 50% of its edible oil requirements. So, there are significant growth prospects for solvent extraction units. To take advantage of this, the company has expanded capacities at its existing facilities and planned new units in Bihar and West Bengal. JVL aims to expand its total installed capacity from 2,67,000 tonnes per annum (tpa) in ’08 to 9,56,000 tpa by ’10. It plans to invest more than Rs 200-250 crore in capex via accruals and debt over the next three fiscal years.

The company is decreasing its dependence on vanaspati by increasing manufacturing capacities of other refined oils. Given the decreasing consumption of vanaspati, JVL intends to rationalise the proportion of vanaspati in its revenue to around 30% over the next two years. The company is looking at leveraging the strength of its brand to increase its market share in Bihar and penetrate new markets like Jharkhand, West Bengal, Orissa, MP and the North East.

FINANCIALS:
JVL’s net sales have seen a CAGR of 20.4% over the past five years to Rs 1,154.8 crore in FY08. Its net profit has posted a CAGR of 35% during the same period to Rs 23.6 crore in FY08. The company has seen rapid growth in the past three fiscal years, coinciding with the bull run in the edible oil market. JVL has been paying dividends since the past four fiscal years at an average payout ratio of 9% of its profit. It expects to hike its dividends in line with its growth.

Despite volatility in raw material prices, the company’s operating and net profit margins have improved over the past one year. A cut in import duty on oil and the rupee’s appreciation also made it possible for the company to control input costs, which account for over 80-85% of its total manufacturing cost. JVL commissioned a 3-mw agrobased captive turbine in FY07, which has helped it to reduce power costs. This has also enabled it to apply for sale of carbon credits.

VALUATIONS:
At its current valuations, JVL is one of the most attractive stocks among listed players in the solvent extraction business. Considering its growth prospects in the edible oil business, along with its foray into fertilisers and real estate, the company is an attractive investment bet in its segment.

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