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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


7 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