Stock Review: Sanwaria Agro Oil

 

The 1,724-crore food processing company, Sanwaria Agro Oil, has been the best performing mid-cap stock on the bourses. The stock has more than quadrupled in the last one year – gaining more than 75% since the beginning of this year.
The interest in the stock has been triggered by the company's better performance compared with its peers and a shift in its strategy to focus on high-margin retail business by building brands.

The Bhopal-based Sanwaria Agro is one of the largest soybean processing companies in the country. It is involved in solvent extraction and manufactures refined soy oil and de-oiled cake. Over the years, the company has increased its installed crushing capacity to process soybean oil. It sells its soy oil through brands such as Narmada, Sulabh and Sanwaria. It has also diversified into the manufacture of vanaspati – for which it is expected to import palm oil. At 5-6%, Its EBIDTA margins are better than most of its peers.

With Soybean prices rallying in the international market, the solvent extraction industry is bearing the brunt of rising raw material cost. Raw material cost constitutes more than 90% of Sanwaria's annual revenues. The company plans to raise the prices of its products by 2-3% in the first quarter of this fiscal to ease the pressure on profit margins.

The company plans to raise . 200 crore through the qualified institutional placement (QIP) route. The funds would be used for expanding into the category of value-added soy products like soya flour and soy nuggets. A successful expansion is likely to be a key growth driver for the company in the coming years. However, this may lead to an equity dilution of 10-11%.
The company commands the highest valuations in the solvent extraction industry.
Trading at a market cap of . 4,357 crore, it is valued at more than twoand-a-half times its net sales of the trailing four quarters. In contrast, its peers such as Ruchi Soya, KS Oils and JVL Agro Ind trade at very low valuations of less than one third of their sales.

Since the stock has rallied exceptionally in the last one year, investors need to be cautious in adding it to their portfolio now.
With equity dilution in the offing, the company's EPS is also likely to decline.