JVL Agro Industries Indian Equities

JVL Agro Industries Indian Equities
JVL Agro Industries manufactures edible oil.
Its edible oil product portfolio includes mustard, soybean and palm oil (which constitute about 75% of edible oil demand).  It also trades agricultural commodities, which constitutes about 30% of its revenues.
The company owns the ‘Jhoola’ brand, which is a leading brand in two of India’s most densely populated states.  It also operates the largest single manufacturing facility in India.
Management is optimistic about edible oil’s business prospects citing demand/supply gap, demographics, urbanisation, essential nature of product, low per capita consumption, cost effectiveness, current large imports, etc. to make its case for the company’s products.  Management also intend to scale up its agricultural commodities trading operations to leverage its distribution network.
The company reported strong growth in revenues and operating profits over the last five years – reporting about 2,700cr of revenues and generating 90cr of operating profits in the last twelve months.  Despite its debt load of 223cr, it had cash resources to cover it.  However, the impact of the debt load will be felt depending on the success of the expansion programs in place (see above).
The business is a large importer of palm oil from South East Asia such as Malaysia and Indonesia and is therefore adversely impacted by cost increases as a result of inadequate harvests.  This is a result of the lack of oilseed and cultivation land in India.  Moreover, high crude oil prices result in greater use of bio-fuels, which also increases palm oil costs.
The cost structure is impacted by imported palm/soybean (raw material) costs, as a result of local factors.  However, the selling price of edible oil (finished product) is influenced by global demand/supply factors.  Therefore, the business could be squeezed from both ends due to factors outside its control resulting in unsatisfactory profitability.
The company is a large net importer and hence, its performance is hurt by a weakening INR.
It is adversely impacted by import duty increases in palm oil as well as import duty reductions in edible oils – and hence, government regulations constitute a key risk affecting the business.
The company is exposed to high competition domestically from a large number of unorganised players who provide cheaper alternatives of lower quality in loose packet form, which less well-off consumers prefer.
Management intends to expand edible oil capacity with a 1,200MT plant in Haldia, West Bengal as well as ramp up its agricultural commodities operation (see above) – apart from other expansion projects in the pipeline.  This could result in overstretching the company’s finances particularly if there is failure in execution or economic conditions turn for the worse.