This article provides fundamental analysis of AVT Natural Products Ltd, an Indian manufacturer of marigold oleoresins, spice oleoresins & essential oils and value added teas.
AVT Natural Products Ltd Research Report by Reader
Q: Hi Dr. Vijay Malik, I have made an high level analysis of AVT Natural Products Ltd- a world leader in the manufacture of “Nutraceutical grade Marigold Oleoresins”. The said product is used in food & beverages as a coloring agent and as a feed additive in cosmetics for perfumes & skin wash products. It is also used in pharmaceuticals for eye care and skin health.
Key Financial highlights of AVT Natural Products include:
- SALES . Compounded Annual growth over 10 years = 18.85%
- NET PROFITS. Compounded Annual growth over 10 years = 32.37%
- RoE. Average of 26% and recent year has been 29.5%
- Operating Profit Margin – well above 20%
- Net Profit Margin – significantly improved from single digits until 2011 to 18% in 2013-14
- Tax % – averaging at over 30%
- Debt free company
- Asset Turnover – 5.43 times
The company has been increasing its sales and profits year on year though this financial year may see a dip in profits. Let me know if you have any specific views on this company. Thanks with regards,
Dr Vijay Malik’s Response
Thanks for writing to me!
I appreciate the effort put by you in analysis of AVT Natural Products Ltd and bring out the key financial feature, which are important for analysis.
Financial Analysis of AVT Natural Products Ltd:
You have rightly pointed out that it has been growing at a good pace and with good profitability margins. Operating profitability margins (OPM) has been fluctuating a lot over the years, nevertheless are at good levels. An investor should understand the reasons for such high fluctuation in OPM from 17% to 41% to be more aware about the business dynamics faced by the AVT Natural Products Ltd. Similar trend is visible in net profit margins, which also requires further understanding.
Operating Efficiency Analysis of AVT Natural Products Ltd:
AVT Natural Products Ltd has been growing fast; however, it is not able to maintain the same level of operating efficiency. Asset turnover ratio and inventory turnover ratios have declined over the years.
The tying up of funds in inventory is reflected in the fact that AVT Natural Products Ltd is not able to convert its net profits into free cash from operations. Cumulative CFO over last 10 years (FY2005-14) is INR 196 cr. against cumulative PAT of INR 207 cr. over the same period.
However, AVT Natural Products Ltd is able to generate good amount of free cash because of its good utilization of investments as indicated by good level of asset turnover. It has utilized its cash accruals to repay all its debt.
Management has been sharing the fruits of growth with shareholders as it has increased its dividend payout in line with increasing profits. Dividend payouts have increased at an annual rate of 26% over last 10 years (FY2005-14), which is almost in line with net profit growth rate of 30% over the same period. This is a sign of a shareholder friendly management.
Company is rated A by credit rating agency ICRA Ltd. Credit rating “A” represents low probability of default in repayment obligations, which is a good sign about fundamental strength of AVT Natural Products Ltd. ICRA rating rationale also points out some very pertinent issues with respect to its business, clients, suppliers etc, which are very essential for any existing or potential investor to know and keep in mind:
“However, the ratings are constrained by the high customer concentration, with Kemin contributing to more than half of AVTNPL’s revenues in 2013-14. AVTNPL’s key products (which contributed to 61% of revenues in 2013-14) are marigold oleoresins, which are sold to Kemin; following the expiry of the patent for certain key products under FloraGLO® Lutein (a brand held by Kemin) the margins and profitability of AVTNPL are expected to taper in 2014-15 and 2015-16. ICRA notes that AVT plans to further focus on Marigold oleoresin business operational efficiency with additional focus on spice oils and value added beverages, going forward. ICRA also takes cognizance of the inherent requirement of high inventory levels necessitated by the seasonal availability of raw materials, and vulnerability of AVTNPL’s profits to agro-climatic risks and competition; however, the Company’s established linkages with farmers and its geographic diversity in farming mitigate the risk to an extent.”
Overall, AVT Natural Products Ltd seems a company, which has been growing at a good pace with good profitability margins. I would not be a lot concerned about subdued growth in any particular year if the company is able to resume its growth subsequently. However, wide fluctuations in margins need further analysis.
AVT Natural Products Ltd seems to be losing its grip on its operating efficiency; however, the company has used its cash generations efficiently for debt reduction, shareholder payouts and capacity increase. However, an investor needs to keep a tab on the operating performance of AVT Natural Products Ltd in light of various issues it is going to face in near future.
Margin of Safety in the market price of AVT Natural Products Ltd:
AVT Natural Products Ltd is available at a P/E ratio of about 11, which offers very low margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
These are my views about AVT Natural Products Ltd. However, you should do your own analysis before taking any investment related decision about AVT Natural Products Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.