Stock Review: Jayant Agro

Jayant Agro is a Gujarat based company which is into the manufacturing of castor oil and castor oil derivatives. India is the largest producer of castor seeds in the world and accounts for roughly 60% of the world's production of castor seeds. Gujarat accounts for roughly 70% of India's production of castor seeds.

This means that Gujarat accounts for roughly 40% of the world's castor seed production. So companies involved in the castor business based out of Gujarat or having their manufacturing plants located in Gujarat are sitting on a huge competitive advantage.

Jayant Agro is the largest listed company in the castor oil space and probably the second largest castor company in the country. If we look at their financials, for FY10, sales were close to Rs 900 crore with a profit after tax (PAT) of about Rs 12.5 crore. For the first nine months of the current financial year, sales have grown by roughly 30% to about Rs 840 crore. PAT has increased by 70% to about Rs 20 crore. It has almost less than doubled over the same period last year.

So EPS on an annualized basis comes to about Rs 17-18. The current price of less than Rs 100, the stock trades at a P/E multiple of about 5.5. But the problem with Jayant Agro is that this company is a low margin business. They crush castor seeds, convert it into castor oil and export most of the castor oil. The value addition happens elsewhere in countries like China, Japan, US and Europe.

What the company has realized over the last few years is that value addition is the way to go forward. They are putting up a new plant for value added derivatives of castor oil in collaboration with Mitsui Corporation of Japan where Jayant Agro holds about 76% stake and Mitsui holds 24% stake. This plant has recently gone into operations and hopefully should contribute significant revenues and profits in FY12.

Going forward, we can see the average margin of the company which is currently at about 4% improving too much higher levels because the margins in the new business are expected to be quite good. If we look at a similar deal which happened in the castor oil business two-three years back, I would like to admit that I don't have the exact contours of the deal but whatever I could get from publically available sources, Morgan Stanley Private Equity had taken a 25-30% stake in a company called Biotor Industries which is the largest company in this business for about Rs 182 crore.

This values Biotor at close to Rs 800 crore. Biotor at the time of the deal had revenues of close to Rs 1,000 crore. I don't have the profitability figure for Biotor but it was valued at roughly 80% of the sales. Here even if we assume that the sales of the company for Jayant Agro are going to be about Rs 1,100-1,200 crore this year, the marketcap is just about Rs 140 crore at the current market price.

Even if the profits are much lower compared to Biotor, the valuations are much lower when you compare it with the Biotor. In Jayant Agro, we are currently sitting on a base case scenario; turnover for FY11 is going to be about Rs 1,100-1,200 crore with a PAT of about Rs 26-27 crore and EPS of about Rs 17-18.

You have a company which is sitting on a huge competitive advantage available at a P/E multiple of just about 5.5. The profits and the profit margins for the future, we believe, will be much more than what they had been doing for the past few years. They can surprise on the upside if held for a couple of years. I would say this is a stock to just buy and keep for a few years.