Manorama Industries. Strong Growth potential. Target Price Achieved
With the cocoa seeds on the brink of deficiency, substitute products are an emerging segment. Cocoa Butter Equivalent (CBE) is a quality substitute to cocoa in chocolates. Manorama is a pioneer in the same. Incorporated in 2005,Manorama Industries initially was engaged in the supply of exotic and specialty oils. Their product is extracted from Sal seeds, Mango Kernel, Shea nuts, Kokum kernel and other naturally procured raw material. Manorama has expanded into manufacturing, processing and supply of extracting oil, butter and proteins.
PAT recorded a robust growth of 83.98% YoY at Rs 19.06 crores FY19 as against Rs 10.36 crores FY18. EBITDA margin witnessed YoY increase of 72.12% and stood at Rs 31.86 crores. Revenue declined by 53.24% at Rs 102.87 crores FY19. The bottom line figures were maintained with the expenses being curbed at 63.50% FY19. The short term borrowings increased by Rs 17.81 crores FY18 were utilized in the purchase of inventories that stood at Rs 18.03 crores. The contribution of manufacturing segment to revenue stood at 27.83%. The maximum contribution to the revenue segment was of 98% by Sal based products.
|PAT (in crores)||0.94||1.08||1.38||10.36||19.06|
|Sales (in crores)||132.53||131.04||145.48||219.38||102.87|
|EBITDA (in crores)||4.32||4.31||3.67||18.51||31.86|
|EBITDA Margin (%)||3.26||3.29||2.52||8.41||30.97|
|Net worth (in crores)||9.64||13||14.37||24.72||103.91|
Cocoa Butter Equivalent (CBE) :
They are the largest Indian manufacturers of Sal/Mango based specialty fat CBE(Cocoa Butter Equivalent) which is an alternative to the Cocoa butter utilized in the manufacturing of confectionery and cosmetic products. The extracted exotic products and specialty fats are essential raw materials for cosmetic, confectioneries and health industries due to their properties. Extracted from seeds found in the tribal areas, their main suppliers are the tribal community who consist of over 7.8 million individuals residing in 18000 villages.
Along the way Manorama has earned its goodwill with over 4 decades of relationship with global chocolate giants. Their client list consists of Mondelez/Cadbury that contributes about 60% to its total revenue. Along with being the largest manufacturer they are also tagged with being the largest Indian exporter of Sal and Mango based specialty fats & CBEs to the Asian and European markets.
Manufacturing Process :
Tree borne seeds are purchased through the established market village centers. Manorama industries are one point vendor for the tribal. It currently has 18000 collection centers operational. There are two manufacturing processes namely solvent extraction & pre-processing and the second one is refining and fractionation. Solvent and pre-processing has been outsourced to a third party. Whereas, refining and fractionation is carried out at the manufacturing facility in Nagpur. The key source of raw material is sal seeds and mango kernel. The product segment has been bifurcated into mainly 4 parts; personal care, specialty fats, commodities and feeds.
|BSE SME Ticker||541974|
|Face Value||Rs 10|
|52w H/L||Rs 219/180|
Shareholding Pattern :
|Shareholder||No of share-holder||Total no of shares||% of share||Voting Rights %|
|Promoter &Promoter Group||3||67,91,203||61.03||61.03|
Raipur Facility :
For improving the efficiency an all integrated facility has been set up in Raipur. The entire process of extraction of Indian exotic fats inclusive of the labor intensive process will be carried out at the Raipur facility .The Capex incurred for installing the machines amounted up to Rs 45.61 crores. The electrical installments expenditure stood at Rs 1.84 crores. The plant is expected to enhance the solvent extraction capacity of Sal by 26% at 33,750 metric tonnes (mt). Manorama has undertaken the decision to shut the Dry Factorization and continue solvent factorization at the new installed facility. Dry factorization has the efficiency of 60% and wet factorization has the efficiency of 90%. As per the company estimates production capacity is supposed to increase to 11,250 tonnes.
- Dry Factorization : The process is carried out by simple cooling which is called crystallization. Executed in over 48 hours it undergoes the process of pressing wherein the liquid Oleine is released. The hard product left is called stearine. it is the main ingredient for CBE component. During the process Stearine gets mixed with the Oleine part which makes the process inefficient. Oleine contains 35% of the Stearine due to which it has go through re-factorisation.
- Wet/Solvent Factorization : It is a high investment process that gets completed in about 3- hours. The yield of stearine extraction is higher. The quality of stearine extracted is better as it is completed separated from Oleine and re-factorization is not required. The solvent stearine can be easily blended to manufacture CBE. This curbs its manufacturing cost and makes it more profitable as against dry factorization.
- Manorama Resources Pvt Ltd
Incepted in 2009 engaged in the international trade of oil cake, de-oiled cake, various types of oil seeds, wheat, maize,rice, wheat, raw cotton, etc. Along with these products soy meal, cotton seed meal, rice bran meal, etc. are also being traded on the international market.
- Manorama Energy Pvt Ltd
Renewable energy projects are undertaken. Focused on green energy initiatives like jatropha farming and industrial production through solar or wind energy. No significant projects has been undertaken as yet.
Industry Overview :
Exhibit 1: Retail Consumption of Chocolate confectionary worldwide (000 Metric Tonnes)
Source: Company, Equity Right
Overview on the chocolate market :
- Confectionery forms a key part of the market in the developed countries. The chocolate we consume is the sweetened product of the cacao seeds that are processed to form solid blocks or paste used as an ingredient in chocolates.
- The average global consumption growth was recorded over just 2% p.a in the past decade. From FY12-17 the global chocolate market recorded a CAGR of 3%.
- Mars ranks as the largest manufacturer globally with over 42% of the American confectionery market.
- European and the American markets have per capita consumption of more than 5 kgs that outweigh the per capita consumption of Asian markets.
- Japan government has increased to 7%. Along with the advancing economies such as Brazil, Russia, China and specially India are expected to have an annual growth rate of 20%.
Exhibit 2: Per Capita Consumption of chocolate confectionary
Source: Company, Equity Right
Overview on Cocoa :
- Cocoa being a cash crop is of prime importance to the countries that export and import it. Countries importing it usually exist in regions where the climate does not support cocoa production.
- Largest producing country by volume is Cote d’Ivoire that accounts for 33% of the global supply. Netherlands stands to the largest processing country by volume that handles almost about 13% of the global grinding process.
- Average annual production of the cocoa beans is recorded at 4 million metric tonnes. In the past decade the grindings have delivered growth of 1.7% p.a.
- Demand for Cocoa Beans is estimated to increase at 3% over and above the 5% growth recorded in 2016-17.
Exhibit 3: Cocoa Prices
Demand and Supply in India :
- Cocoa tree demands about 40-50% shade for cultivation which makes it an intercrop grown primarily in the states of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala.
- The total area under cultivation in the above mentioned states is a total of 2.47 acres of land.
- India harvested 17,200 metric tons of cocoa beans as per the data released by Cocoa Organization in 2015-16 which stands to be only 1.1% of the harvest in the Ivory Coast which is the largest cocoa bean producer.
- In the past half a decade cocoa bean production in India has grown at a CAGR of 3.6%. The total consumption of cocoa beans in FY15-16 stood at 37,000 metric tonnes out of which 57% was imported.
- Food Safety and Standards Authority Board of India(FSSAI) on 1st June’18 has relaxed the norms for usage of CBE in the production of chocolates. The consumption is likely to be 8,000 tonnes in 2018 which expected to grow to 22,000 tonnes by 2022.
- It is estimated that the international market of specialty fats and oils will grow to a value of US$ 142.1 Bn by 2026.
- In line with the growth trajectory the CAGR has been estimated at 6.6% with the forecast data from 2018 to 2026.
- The specialty oils and fats consist of 0 trans-fat. With the growing heath concerns globally this could be a market driver for the chocolate industry.
- FSSAI Jan’18 circular :
In a circular enforced in Jan’18, 5% CBE produced from Indian exotic fats can be used in manufacturing of chocolates. The relaxation is confined for manufacturers procuring their raw material domestically. Manorama stands to gain the most from the CBE deregulation. It is the only player in the market that has the resources to fulfill the increased demand.
- Import Export Policy :
As per the new import export policy the new input-output norms for export of cocoa butter equivalents has announced an import exemption of 1.02 MTs of Crude Palm Oil & .10 Mts of Mid Fraction against the export of 1.02 Mts of CBE. Manorama currently has 75% of its imports covered under this norm.
- CBE (Cocoa Butter Equivalent): Used as a low cost alternative to cocoa butter in confectionery. Cocoa butter is originally utilized as a core ingredient in manufacturing chocolates. But due to its depleting reserves the cost of procurement has increased prominently. Therefore the companies are opting for alternatives for curbing their expenses. The global CBE demand is currently 1,80,000 tonnes.
- CBE is a blended component of sal, mango kernel, shea nuts and palm oil. It improves the stability of the fat phase of chocolate product thereby combating undesired fat.
- Sal Fat : Sal seeds contain 12-14% fat with are extracted in the presence of hexane. Sal Oil is extracted using conventional extraction methods. Solvent extraction plant has been de nationalized in major states like Chhattisgarh, Odisha, Madhya Pradesh and Jharkhand. This acts as a catalyst for the private players to expand their business. The market is open pan India and is liberally traded.
Exhibit 4: Estimated Sal Production in India (000 tonnes)
- Sal Stearine : Fractionated product of Sal Fat. It is 56-70% of the Sal Fat originally obtained. Its properties make it a harder ingredient than cocoa butter making it an easy alternative for manufacturing chocolates. The global Stearine demand is 90000 tonnes. The current production capacity of Manorama is 3000-4000 tonnes which is approximately 3-4% of the global market share. The facility of Raipur is expected to increase the capacity to 10,000 tonnes which will result in market of 10%.
- Organic Castor Oil :
- Sal Oleine : Sal Oleine is the fractionized part of Sal Fat. The oil is emollient making it useful for cosmetic and skin care products. Sal Oleine is liquid at room temperature. It has 0 transfat and is used in making edible oil.
- Mango Butter :
- Kokum Butter
- Sal Butter
- Sal Meal
- Mango Kernel Meal
Exhibit 5: Product wise Revenue
Currently the chocolate manufacturing arm of Manorama Industries accounts for 80% of its business. Once the Raipur facility becomes operational the company will shift its focus to the cosmetic segment of the business.
Manorama caters to domestic as well as international clients. Their international footprint holds more prominence. Japan, Italy, Malaysia, Indonesia, Singapore, are the major clients of manorama. Its domestic list is limited to three states Maharashtra, Madhya Pradesh and Chhattisgarh. The major brands that they supply to in Europe are Mondelez/Cadbury (60% of revenue), Ferrero (Italy), Unigra (Italy), Walter Rau ( Germany), Oleva Vegetable and Oils(UK). In Asia the customers are based out of Japan namely Mitsui and Adeka Corporation. The current buyers approximately consume 25,000 tonnes p.a.
Management of Manorama Industries has decided that Agro-Product trading segment of the company is supposed to be discontinued from FY19. The breakup provides the contribution of the manufacturing segment as against the trading segment.
Segment wise breakup of revenue and expenses as per the restated financial statements
Revenue from Manufacturing activities (Rs in Crores)
|Other Operating Income||1.2||1.2|
|Depreciation and Amortization||0.81||9.4|
|Profit before Income tax||26||16.4|
|Income Tax Expenses||6.9||60|
Revenue from Trading activities (Rs in Crores)
|Other Operating Income||–||–|
|Depreciation and Amortization||–||–|
|Profit before Income tax||–||(0.47)|
|Income Tax Expenses||–||–|
Bifurcation of manufacturing and trading revenue in domestic and export segment (Rs in Crores)
|Manufacturing Break Up|
|A. Export revenue||4034.25||3524.64||2736.74|
|As a % of total manufacturing revenue||65.89||61.77||56.34|
|B. Domestic Revenue||2088.15||2181.8||2120.96|
|As a % of total manufacturing revenue||34.11||38.23||43.66|
|Total Manufacturing Revenue||6,122.40||5706.44||4857.7|
|As a % of total revenue from operations||27.83||39.23||37.07|
|As a % of total revenue from operations||71.78%||60.24%||62.67|
|Other Operating revenue||84.46||77.34||33.55|
|Total Revenue from operations||21977.83||14547.77||13103.74|
Directors of the Company :
- Mr Ashish Saraf : He is the President of Manorama Industries since January 2005. He expanded the business to foreign markets thereby adding fortune 500 customers in their list. 30 years of worldwide work experience in managing the business feasibly. Has favourable relations with the promoters of the Industries.
- Mrs Vinita Saraf : Daughter of noted promoter and Executive Director Kedarnath Aggarwal, is equipped with 12 years of experience in the industry. She has her bachelors in commerce from Mount Caramel Girls College Bangalore. She resides on the position of Managing Director and Chairman. She is said to be the guiding force behind the operations of Manorama Industries. She shoulders the responsibility of the overall management along with the daily operations of the company. She holds 36.74% shares of the company. She is involved in the development, design, operation and improvement of systems on daily basis.
- Mr Kedarnath Aggarwal : Experienced in the senior level capacity in processing, quality control, marketing and company law. Exposure to the food processing industry for the past decade.
- Mr Gautam Kumar Pal : His academic qualification includes MBA in Production and Marketing along with B.Tech (Chemicals) with a specialization in Oil and Fat Technology. Mr Pal is the Director and Chief Technical Officer and is responsible for the management, production and operation of the products. He has been a part of Manorama Industries for the past 18 years.
Cash Flow Statements : :(Rs in Crores)
|A) Cash Flow From Operating Activities :|
|Net Profit before tax||1.24||1.44||1.67||2.05||15.91||25.93|
|Adjustment for :|
|Interest Income / Other Income||-0.9||-0.84||-0.6||-0.87||-1.43||-3.13|
|Provision for Gratuity expenses||0||0.03||0.03||0.04||0.04||0.08|
|(Profit)/Loss on Sale of Assets||–||–||–||0||0.24||–|
|Operating profit before working capital changes||1.9||3.4||3.19||2.72||17.11||28.81|
|Changes in Working Capital||-1.06||7.72||-1.19||8.92||-25.43||-32.45|
|Cash generated from operations||0.83||11.12||2||11.64||-8.32||-3.64|
|Less:- Income Taxes paid||-0.67||-0.72||-0.69||-0.98||-3.55||-5.56|
|Net cash flow from operating activities||0.16||10.39||1.31||10.66||-11.87||-9.2|
|B) Cash Flow From Investing Activities :|
|Net Purchase of Fixed Assets/Capital WIP New Project||-0.2||-0.95||-0.93||-0.54||-2.34||-25.5|
|Investment made/Sold during the year||–||–||–||–||0.1||–|
|Increase/(Decrease) in Long Term Loans and Advances||0.05||-0.02||-0.01||0||-0.1||–|
|Net cash flow from investing activities||0.74||-0.14||-0.33||0.33||-0.9||-22.37|
|C) Cash Flow From Financing Activities :|
|Proceeds from Issue of Share Capital||0.32||0.06||2.27||–||–||60.55|
|Proceeds from Long Term Loans and Advance||0||0||0||0||0||0.42|
|Increase/(Decrease) in Short Term Borrowings||0.44||-7.9||1.36||-4.65||17.82||5.67|
|Increase/(Decrease) in Long Term Borrowings||-0.2||0.05||-0.17||-0.09||0.09||0.42|
|Net cash flow from financing activities||-0.41||-9.87||2.23||-5.44||16.16||61.97|
|Net Increase/(Decrease) In Cash & Cash Equivalents||0.49||0.39||3.21||5.55||3.39||30.4|
|Cash equivalents at the beginning of the year||6.1||6.59||6.98||10.18||15.74||19.12|
|Cash equivalents at the end of the year||6.59||6.98||10.18||15.74||19.12||49.53|
Standalone Restated Balance Sheet : (Rs in Crores)
|EQUITY AND LIABILITIES|
|(a) Share Capital||1.75||1.76||2.16||2.16||7.55||11.12|
|(b) Reserves and Surplus||6.9||7.88||10.84||12.21||17.17||92.79|
|(a) Long-term Borrowings||0.22||0.27||0.09||0||0.09||0.51|
|(b) Long-term Provisions||0.04||0.06||0.09||0.12||0.15||0.22|
|(a) Short-term Borrowings||11.2||3.3||4.66||0.01||17.82||23.5|
|(b) Trade Payables||0.45||1.3||1.52||7.17||1.03||0.37|
|(c) Other Current Liabilities||0.45||1.9||0.64||0.85||0.35||1.4|
|(d) Short Term Provisions||0.2||0.14||0.23||0.09||2.59||2.29|
|(a) Fixed Assets||2.48||2.73||2.8||2.51||3.95||21.84|
|(b) Non-Current Investments||0.01||0.01||0.01||0.01||–||0|
|(c) Deferred Tax Assets (Net)||0.11||0.22||0.35||0.46||0.65||0.6|
|(d) Long-term Loans & Advances||0.03||0.06||0.06||0.06||0.16||0.34|
|(b) Trade Receivables||3.16||1||0.38||1.07||1.58||13.98|
|(c) Cash and Cash Equivalents||6.59||6.98||10.18||15.74||19.12||49.53|
|(d) Short-term Loans & Advances||1.17||2.73||0.44||0.6||1.09||8.37|
|(e) Other Current Assets||0.04||0.01||0.5||0.26||2.18||0.55|
Standalone Restated Profit and Loss Account :(Rs in Crores)
|Revenue: Continuing Operations||104.4||132.53||131.04||145.48||219.98||102.87|
|Cost of Material Consumed||10.65||43.69||36.09||29.78||34.4||67|
|Purchase of Traded Goods||84.18||59.27||74.96||91.22||160.01||0|
|Change in Inventory||-4.89||5.13||-3.39||3.61||-15.22||-19.13|
|Depreciation & Amortization||0.61||0.69||0.86||0.82||0.71||0.81|
Exhibit 6: Trend in Revenue from manufacturing
Manorama has decided to shut its trading segment from FY19. The revenue that is generated by the company will be purely through its manufacturing arm. Exhibit 1 is the representation of the growth trajectory for the previous 4 years. The highest growth was recorded in FY19. With the CBE allowance enforced the demand has risen considerably.
Exhibit 7: Profit after Tax
The PAT has delivered a CAGR of 17% FY19 and stood at Rs 19.06 crores. The 5% CBE allowance for India has increased the demand of the cocoa substitutes. This has resulted in the improved revenue figures and enhanced the bottom line figures.
Exhibit 8: Revenue v/s Expenses
With the trading activities being discontinued from FY18 the overall revenue has decreased. Though the revenue from manufacturing activities has recorded an increase with the additional allowance of 5% CBE in manufacturing chocolates. The bottom line figures were maintained with the expenses being curbed at 63.50% FY19
Exhibit 9: Profit before Tax
Even though the trading arm of Manorama has been discontinued the company has delivered robust Profit Before Tax at Rs 25.93 crores FY19. It recorded a YoY increase of 62.98% and delivered a CAGR of 12%.
Exhibit 10: EBITDA
EBITDA has been recorded at Rs 31.86 crores and delivered YoY growth of 72.12% FY19 as against 404.36% FY18. The growth recorded in FY18 was due to the increase in the CBE allowance of up to 5% in production in confectionery in India.
Exhibit 11: NET CASH FLOW FROM OPERATING ACTIVITIES
The cash flow from operating activities stood at Rs (9.2) crores FY19. The major increase was recorded in the interest being paid of Rs 5.11 crores. This was due to the short term borrowings being increased for purchasing more inventory due to the increased demand.The net cash flow from the operating activities was from Rs (11.86) crores FY18. The operating profit before working capital changes was Rs 17.11 crores FY18. It was adjusted by the payment of income tax of Rs 3.55 crores, increasing inventories by Rs 16.13 crores, increase in trade receivables in Rs 50.91 lakhs, increase in short term loans and advances by 49.29 lakhs.
Exhibit 12: NET CASH FLOW FROM INVESTING ACTIVITIES
Net cash Utilized for purchasing capital work-in-progress for increased demand increased the net amount invested. Rs 25.5 crores were utilized for doing so. Net Cash utilized in investing activities was Rs 90.36 lakhs during FY17-18. Majorly the funds were used for purchasing fixed assets worth Rs 2.34 crores and an increase in the long term loans and advances of Rs 9.69 lakhs. The investment was however offset with the disposal of non-current investments of Rs 10 lakhs and an interest income of Rs 1.43 crores.
Exhibit 13: NET CASH FLOW FROM FINANCING ACTIVITIES
Net Cash generated from financing activities stood at Rs 16.15 crores. While, this consisted of the short term borrowings worth Rs 17.81 crores, increase in long term borrowings of Rs 9.08 lakhs and payment of interest and finance charges of Rs 69.25 lakhs.
Investment Rationale :
Manorama Industries is a unique and niche company involved in Cocoa Butter Substitute. Despite separating the trading business from the manufacturing, company has shown exceptional growth in PAT numbers, which grew from Rs. 10.36 Crores in FY18 to Rs 19.06 crores in FY 19. A healthy growth of 83.97%. Revenue declined due to trading business being separated from the manufacturing, as manufacturing is the primary business with better growth prospects, profit margins and company’s main focus moving forward to which we agree.
As per the quote seeing is believing, we visited the company’s office at Raipur and nearby manufacturing plant. The company has robust management lead by Mr Saraf capable of guiding Manorama to new heights.
However, After the completion of mandatory 2 years interim period, company has a high probability of shifting from BSE SME to BSE main board. This coupled with tripling of capacity due to latest manufacturing plant equipped with wet extraction techniques can project a revenue of Rs 200 to 250 Crores. Due to niche business with no competition in foreseeable future we can give a PE multi of 20X FY21E with target price of 368 Rs per share.
Manorama Industries. Strong Growth potential. Target Price Achieved
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