Jayant Agro Value Buy?

Jayant Agro Oragnics
Current Market Price: 81.55
Market Cap: 122Cr
Free Float: 55Cr
Sales March 2010: 863.72Cr
PBIT March 2010: 27.23Cr
Interest March 2010: 12.05Cr
Profit Before Tax 2010: 15.18Cr
Tax: 7.09Cr
Net Profit 2010: 8.08Cr
ROCE March 2009: 19.62%
Debt Equity Ratio March 2009: 0.92
Long Term Debt Equity Ration March 2009: 0.63
The profits declared by Jayant Agro Organics is not that great and does give an impression of a fairly valued company in a low margin industry. But we need to dig a little deeper to get the real information about Jayant Agro Organics.. Lets start with the consolidated numbers  for Year ending March 2010:

Yes consolidated profits are double of standalone profits but before that I would first like to look at the percentage of public shareholding.(Point 1) It has decreased from 45.06% last year 2009 to 40.07% in 2010 thats a decrease of 4.99% in public shareholding.. Incidently SEBI has an upper limit to creeping acquisition by promoters of 5% every year and Jayant Agro Organics promoters have used up that limit completely.

Now lets look at the PBDIT numbers (Point2) on a standalone and consolidated basis. PBDIT numbers have increased from 29.70Cr Standalone to 41.04Cr (consolidated)  for year ending march 2010 an increase of 38.19% considering the fact that sales have increased from 863.72Cr to 887.17Cr for the same period an increase of 27.14%. So the subsidiary company has:
 Sales March 2010: 23.44Cr (887.17-863.72)
PBDIT March 2010: 11.34Cr (41.04-29.70)
That gives an operating profit margin of 48.38% for its subsidiary.. WOW!!.

Personally I feel the numbers are not really that good and what we are seeing is a supressed standalone numbers (to depress the stock price) and hence the consolidated numbers (Operating margins of subsidiary) are high. This has been done to allow the promoters to accumulate the stock when the prices are still low (as standalone profit numbers are low). The other reason is because the high value added subsidiary is expected to commence production only in March 2010.

Jayant Agro Organics is the largest listed Castor based speciality chemical company in India. India is the largest castor producing nation in the world with 60% of the world wide production of castor seeds. Consumption of castor is highest in european countries, USA and Japan.

Castor oil is a triglyceride with 90% of fatty acid chain is ricinoleic acid. Ricinoleic acid is a monosaturated, 18 carbon fatty acid and ricinoleic acid has a hydroxy functional group on the 12 carbon.

This functional group causes ricinoleic acid (and castor oil) to be unusually polar, and also allows chemical derivatization that is not practical with most other seed oils. It is this hydroxyl group which makes castor oil and ricinoleic acid valuable as chemical feedstocks.

Compared to other seed oils which lack the hydroxyl group, castor oil commands a higher price. As an example, in July 2007 Indian castor oil sold for about US$0.90 per kilogram (US$0.41 per pound)[3] while U.S. soybean, sunflower and canola oil sold for about US$0.30 per kilogram (US$0.14 per pound).[4]

Castor Oil and its Bio-derivatives is used as a raw material in the manufacture of Lubricants, Greases, Polyurethanes (Coatings Adhesives, Sealants Elastomers & Foam), High performance Polyamides[HPPA] (Nylon), Plastizers, Personal Care Products, Pharmaceuticals and Fragrances.

Castor Oil is a Natural Oil Polyol-There is no substitute in nature for its unique Biochemical structure. Modification of the Molecular Structure by dehydration yields a unique drying oil-that is superior to any other vegetable oil. Castor Oil Derivatives are unique to high performance greases and cannot be substituted. Castor Oil and Castor derivatives are Bio-Renewable, Biosustainable and where necessary Bio-Degradable.

Principally, Castor Oil & its bio-derivatives applications can be found in following industries:

Lubricants: Hydrogenated Castor Oil , 12 Hydroxy Stearic acid and Sebacic Acid are used in the manufacture of greases.

Polyurethanes: Polyester Polyols are used in the manufacture of polyurethane Coatings, Adhesives, Sealants, Elastomers and Flexible & Rigid Foams.

High Performance Polyamides (HPPA): Sebacic Acid and C10-Diamine are the building blocks for Nylon 6-10 and Nylon 10-10 . Sebacic Acid is available in Granular and Powder forms.

Pharmaceuticals: Castor Oil BP / USP / EP / DAB 10 grades are used in a range of pharmaceutical products.

Paints & Coatings: Dehydrated castor oil is a unique drying oil used in high gloss, non-yellowing paints Dehydrated Castor Oil Fatty Acids are used to make high solids alkyd, acrylic and epoxy ester resins for coating applications. Castor based reactive polyamides are used in high performance coatings.

Cosmetics: Special de-odorized castor oil, Hydrogenated Castor Oil, & ethoxylated derivatives are widely used in a range of cosmetics & toiletries. Undecylenic acid is used in anti-dandruff applications.

Plastic Polymer Rubber:  HCO is used in plastic master batches. Blown castor Oil is used as a plasticizer for synthetic rubbers. Nylon 11, a very important engineering polymer with a wide range of applications is made from Castor Oil.

Electronics & Telecommunications: Castor Oil BSS (COFSG) & electrical grade is used in the manufacture of capacitors used for electronic applications. Nylon 11 is used for sheathing of optic fibers in broadband networks.

Perfumery: Heptaldehyde & Undecylenic acid are used to make key aroma chemicals used in perfumes. An important aroma chemical is Undecylenic aldehyde used in many fragrances.

Agriculture: Undecylenic Acid, a derivative of Castor Oil is an important input for the growth of mushrooms. Castor Meal is used in organic farming.

Paper & Inks: Non reactive polyamides are used for lamination of paper. Castor derivatives are used in making special resin coatings used in various types of printing inks. Blown Castor Oils are utilized in many Bio-based Ink Formulations.

Country wise production numbers:

As can be seen India is the largest producer and EU, USA and Japan are the largest consumers.. Even China is now consuming more that its production capacity and is a net importer.
Let us look at the value addition that is happening.

Castor Seed - > Raw Castor Oil  ---------------126% price difference.
Castor Seed - > Pharma grade Castor oil ------------186% price difference
Castor Seed - > High Performance Polyamides (HPPA)------2122% price difference.

China is now the largest producer of HPPA in the world and infact imports castor oil from India. Indian manufacturers have been happy selling raw castor oil.

Jayant Agro Organics has two subsidiaries: Ihsedu Agro-Chem Private Limited and Ihsedu Speciality Chemicals Limited.
Ihsedu Agro-Chem Private Limited is located in Banaskantha which is one of the largest castor growing districts in Gujarat. Gujarat produces 71% , Rajasthan 16% of India's total castor seed production.

This plant has a crushing capacity of 350 MT oil / Day and also have solvent extraction plant. Jayant Agro Organics had acquired the crushing unit from Gujarat Agro Industries Corporation Limited.

Ihsedu Speciality Chemicals Limited is a speciality chemicals manufacturer with 24% stake with Mitsui and co. Ihsedu speciality chemicals limited is going to manufacturer HPPA product Sebacic Acid. The recent March 2010 result has disclosed that "Ihsedu Speciality Chemicals Pvt limited a subsidiary of the company has commenced production with effect from March 27,2010"

So what we have happening in Jayant Agro is:
1. Company has backward integrated by acquiring the seed crushing unit from Gujarat Agro Industries Corporation Limited in the largest castor growing district in Gujarat. Jayant Agro has increased capacity of the unit and has also installed a solvent extraction plant (which helps in extracting more oil from the Castor seeds) This step has helped Jayant Agro to consolidate its hold on raw material (castor seeds)
2. Company has forward integrated and tied up with Mitsui of Japan to manufacture high value added product sebacic acid which is a HPPA product and has a high profit margin (2122% price difference between castor seed and final HPPA product Sebacic acid)
3. Jayant Agro Organics had a preferential capital of 3Cr which has been paid off and additional equity capital has been issued 1,110,000 shares at Rs 60 per share to promoters. Equity capital has increased to 7.5Cr from 6.95Cr
4. Promoters have bought in the past 12 months 4.99% of equity from the market reducing the available traded shares by 9,45,097.

Conclusion: Jayant Agro is a strong buy for the long term and is a multibagger for sure. BITOR (Jayant Oil) a private castor oil company run by Kapadia's (different promoters) was the largest player in castor oil in India till 2004. With the acquisition of seed crushing capacity in the heart of the castor produucing region Jayant Agro has become the largest player. BITOR a private company had a private placement of shares and 23% stake was valued at 300Cr giving BITOR a market capitalization of 1304Cr. (link)Jayant Agro with revenues of 800Cr+ is valued in the market at 122Cr..Jayant is at the begining of its journey. With the commencement of production by its special chemicals division of sebacic acid we will see the consolidated numbers sky rocket..

Jayant Agro due to its strong leadership position and relatively cheap valuation is a Best Value BUY recommendation along  with Gujarat Ambuja Exports.