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Thursday, October 15, 2015

Jayant Agro Organics: Short Term Debt..is it really Bad/Good Debt??

Jayant Agro Organics:
CMP: 112
Market Cap: 168Cr
Book Value: 146.78 (consolidated), 124.49 (stand alone)
Sales March 2015: 1580.71Cr
Net Profit: 10.52Cr (Consolidated)
Cash Flows From Operations (March 2015): +175Cr
7 yrs Avg. ROCE: 26.32% (Consolidated), 25.34%(Stand Alone)

Whenever I suggest Jayant agro to other investors stating all the Strong points of Jayant agro.
- Largest Player in castor oil and castor oil derivatives space in the world.
- Unique advantages as India produces 80% of world's castor seed
- Consistent dividend payout since inception ie more than 21yrs of dividend payout.
- JV with market leaders like Arkema, Mitsui Chemical, ITOH Oil.
- Castor oil & its Derivatives are well established as Green Chemicals
- Promoters hold US Patent for efficient production of Sebacic Acid.

One of the question almost always get pushed back at me was..
just look at the Debt 250Cr Huge!!
add to that low Net Profit margin 1-2% its not worth the risk..

Well today lets look at the Huge debt !! and try to understand why its there and is it really Good/Bad Debt??

If you go to CRISIL which is the credit rating agency that has rated Jayant Agro's Debt. We get the following info (link)

Jayant Agro:
Long Term Rating: BBB+/Stable (Reaffirmed)
Short Term Rating: A2 (Reaffirmed)

Bank Facilities:
Letter of Credit & Bank Guarantee: 70 million (7Cr) Rating: A2
Long Term Loan: 492.8 million (49.2Cr) Rating: BBB+/Stable
Packing Credit: 2539.7 million (253.97Cr) Rating: A2
Proposed Long Term Bank Loan Facility: 2.2 million (22 lakhs) Rating: BBB+/Stable
Standby Line of Credit: 395.3 million (39.5Cr) Rating: A2
Total: 3500million (350Cr)


If I look at the various bank facilities listed in the CRISIL rating for Jayant Agro, the largest component is a short term 253.97Cr Packing Credit with A2 credit rating. Considering the total rated debt is 350Cr 253.97Cr is like 72% of the credit line for Jayant agro. if we understand Packing Credit we will understand Jayant Agro's Debt..

What is Packing Credit?
According to RBI (Reserve Bank of India): Packing Credit is credit provided by a bank to an exporter on the basis of Letter of Credit opened in his favour...


Letter of Credit : The LC should be irrevocable and issued by our correspondent bank abroad or a bank of international repute. Genuineness or authenticity of the LC should have been verified.

So the 72% of the Short term loan (254Cr) actually indicates that Jayant agro has a Confirmed Export Order (Letter of Credit) in hand worth 254Cr and this is a credit scheme for exporters provided by RBI.

Now that we know "Short Term Debt" is nothing but an export credit backed by a letter of credit issued by a bank? So is Jayant agro "Short term Debt" Good Debt or Bad Debt?

Another thing worth observing is the type of rating Jayant Agro debt has.. A2 & BBB+

According to CRISIL: (Rating Definition)
Short Term A2: Instruments with this rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk.

Long Term BBB+: Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.

Export related finance that Jayant has got (Rating: A2) has a higher degree of rating than its "long term Loan" (Rating: BBB+). the RBI guidelines are helping Jayant get export "Packing Credit" at an attractive interest rate.

The return on capital employed (ROCE) is a better measurement than return on equity(ROE), because ROCE shows how well a company is using both its equity and debt to generate a return.

If you see Jayant Agro 7 yrs ROCE its 26.32%  indicating a pretty efficient financial setup..
Even in year ending March 2015 ROCE is: 18.76% which is pretty good considering 2015 Net Profit was the lowest in past 6 yrs.


Conclusion: Jayant Agro Debt is 90% short term in nature and is "Packing Credit" which indicates the debt is backed by a "Confirmed Sale" in the form of Letter of Credit. 

ROCE of Jayant agro for 7 yrs on average is: 26.32 % which indicates that Jayant agro is pretty efficient in allocating its capital (Equity + debt) High short term debt is acting like a smoke screen... 

Jayant's Cash Flows from Operations for Year Ending March 2015 is: +175Cr, longterm debt: 16Cr  Current Market Cap of Jayant Agro is 170Cr.. which means you have a world class castor oil & castor oil derivatives player you can buy 100% stake for less than its "1 year Cash Flows from Operations!!

Jayant agro high short term debt and low profit margins are acting like a smoke screen .. hiding a very efficient allocator of capital (ROCE: 26.32% 7 yrs avg). Jayant agro is very very attractively priced and a Deep Value Buy!! A true Hidden Gem!!


Link: Jayant Agro: Why I Love this 2% Net Profit Business


14 comments:

Anonymous said...

Hi Whatsupji,

Have you ever studyied AVT Natural ? Looks interesting to me..what is your view

What'sUp Prahalad said...

Anonymous ji:

AVT is already fairly valued..
A dark horse in food space could be: Himalya International.

another stock which looks interesting and attractively priced is "Bharat Seats"
(supplier to Maruti and Railways)

Universal Cables in power/telecom cable space..

=happy investing
whatsup-indianstockideas

Anonymous said...

thanks for your reply whatsupji,

I think AVT expansion plan will help stock to re rate.
Himalaya international management quality is not good i think

Venkatesh Govindaraju said...

Dear whatsup ji

Hope all well. I m still holding Jayant agro. What will be the ideal sell price for Jayant. Many thanks for recommending Jayant. It has wiped out all my losses since 2008 and given me a big profit Regards Venkatesh

What'sUp Prahalad said...

Venkatesh ji,

Stocks always exceed expectation on the upside and downside.. so to really pinpoint the exit price is difficult..
having said that .. I have always maintained that Market Cap of 1 times Sales is a fair valuation for any company [FAIR Valuation].. Jayant assuming has a sales of 1500Cr.. so 1 times sales is Market Cap of 1500Cr for jayant Agro... that translates to Rs 1000/- per share stock price.

Please understand that Stocks always outperform on the upside and downside..

So actual price where Jayant will turn South is definitely going to be higher than 1000/- infact I would say substatially higher price than 1000/-

Hope that Helps and Congratulations on your profits.. you certainly deserve it for the patience to hold on to Jayant agro stock for a long time..

=happy investing
whatsup-indianstockideas

Anonymous said...

Thanks Whatsup ji for your guidance.

Regards
Venkatesh

Anonymous said...

Dear Whatsup ji

Today I exited completely from Jayant agro @ 975. Thanks for ur multibagger pick.
Please have a look at Nahar Industrial enterprises. Seems undervalued. Its turnaround stock with profits for the past few quarters.Debt is continuously reducing. Dollykhanna has recently purchased the stock.

Regards
Venkatesh

Ttk555 said...

Sir with castor seed going to see lower production in 2017 18 will this be dampner to jayant agro or beneficial.since then it has to buy at higher prrices from farmers but then pricing pressure for end product may effect the bottom line.yoyr views pls sir.thanks.

Ttk555 said...

And are you still invested in jayant agro.disclaimer pls and if yes how long you would be holding it considering commodity play.

What'sUp Prahalad said...

TTK ji,
Still invested in Jayant agro.. the key is Jayant consuming all its castor oil for producing higher value added derivtives...

With china closing down chemical industry setup in China we could see India taking center stage in castor oil derivatives.. Sebacic acid is one of the most used castor oil derivatives.. jayant just has to debottleneck its capacity as well as find uses for other products that are generated as sebacic acid is produced..

all said and one I expect long term investors will be well rewarded but need patience..

=happy investing
whatsup-indianstockideas

Ttk555 said...

Thank you sir for your inputs.with new sebacic acid plant coming in Oman and already I think rolled out which will be 30000 mt largest in world.oman can produce castor seed naturally. So any threat in medium to long term.this news was found on goggling also more players entering the market.morever concern is shyam shekhar seems have exited in March or June 17 quarter reason don't know.understand one needs patience but considering the stock already 10x from 16 to 17 in year.how do u view this.also retail holding which was any 6k now stands at 11k.

Ttk555 said...

https://businessgateways.com/news/2018/02/13/Sebacic-Oman-to-build-bio-based-nylon-project

Sir any views on this setup and how it's going to affect jayant in long run.this will be the largest sebacic acid plant in the world and from importer country it's going to be a exporter.your expert views really appreciated.

What'sUp Prahalad said...

TTK ji,
Largest consumer of sebacic acid & the largest producer of sebacic acid in the world is Arkema. Jayant Agro is the largest processor of castor oil and has recently setup (2012 I think) 8000Metric tonnes..

the question comes down to economics.. of cost and production..

though most plants are automated to a large extent... castor seed production is still a labour intensive activity.. this is because the castor seed pods donot mature at the same time.. so like wheat or soyabean production the whole process cannot be mechanized.. and is still labour intensive..

so the real threat is mechanization of castor seed production.. if that happens then countries like brazil with large tracts of agriculture land holdings will take over the production of castor seed from india..

Jayant as such already has upstream and downstream connectivity.. (agreements) ie Arkema for castor oil.. and mitsui chemical for downstream (nylon 66 or other speciality chemicals)
-------------------
All in all the real problem will be to look for castor seed production .. shifting base from india which will be the real problem.. Oman does not have labour force to grow castor seed at competitive terms.. with labour from india..

I think the real problem could be that Jayant Already has a strong hold over the whole lifecycle of castor oil & its derivative.. players like Arkema who first bought sebacic acid plants in china (only to discover the real bottleneck is castor oil ) .. then their JV with Jayant .. but then the JV with Mitsui by Jayant could have made the japanese more competetive .. so maybe Arkema is the real hand behind the growth of oman setup..
(I am speculating here..)
==================
Considering jayant position in the whole castor oil lifecycle.. this is not the end of jayant agro infact its just the begining..

I would dare to say we can expect another 10x level return from here.. with jayant reporting net profit of 100-200Cr per annum.. (GAEL is reporting 100Cr so dont understand why not Jayant which has a much better control over castor oil and its derivative lifecycle..)

All in the hands of the management.. They need to think big.. look at godrej group..

Picture tau abhi baaki hae..

=happy investing
whatsup-indianstockideas

Ttk555 said...

Deer sirji,

Agree with your views to some extent.as I understand castor seed production in natural with repeat crop,less water,grown naturally without much attention.may be I may be wrong but after research.(even ktk government pushing farmers to grow castor in its dry areas).
Now coming to jayant vs Oman saoc..
1. Omani government involvement in the project.
2. JV with indian firm sebacic acid india for expertise.
3. With oil no more an alternative for pg countries alternative would be castor oil.(petrochemical substitute).that means they have the needed infra for downstream,and lot of land for upstream.
4. Economies of scale will reduce there cost of production even if we assume the cost of raw material ( castor seed) higher will negate and be competitive.
5. As per the last annual report and recent management on tv said there derivatives or polyol setup is working to only 50% capacity (mitsui) invested.
6. Logistics better off from Oman to Europe.

Anyways will continue to hold jayant for 2 to 3 qtrs and see how they fare.

Now worries looking fwd.
1. Jayant fiance cost high wow.
2. New player entry.
3. Jayant derivative segment not kicking off as expected.
4. Government withdrawing export incentives.
5. Management not giving a clear picture in commentary.last commentary they said 80% products export, but when asked how did the margins affected they said impact due to gst(which is domestic).

Again thanks for your inputs.since my 40% of portfolio is jayant.hope to see at least 2x conservative happy if 10x.best of luck..