Analysis: Jayant Agro Organics Limited

Modified on July 23, 2018

This article provides in-depth fundamental analysis of Jayant Agro Organics Ltd, the leading player in castor oil and castor-oil-based specialty chemicals & derivatives business.

 

Jayant Agro Organics Ltd

Q: Sir, Regarding: Jayant Agro Organics Ltd. I have invested in the shares of Jayant Agro Organics Ltd due to following reasons:

  • The book value of the share is 152.54 whereas I bought at 105.
  • The co. has been consistently paying dividend since inception/listing, current dividend yield is 3.08%
  • Equity is very low, only 7.5 crores, of course face value is 5/-
  • Jayant Agro Organics Ltd has issued bonus shares twice in ratio of 1:1 in 2003 and 2006
  • However, the company has recently increased borrowings to fund increased working capital requirements and consequently interest burden has increased.

Sir, kindly give your esteemed opinion about Jayant Agro Organics Ltd.

Thanks and Regards,

 

Author’s Response

Thanks for writing to me!

 

Financial Analysis of Jayant Agro Organics Ltd:

Jayant Agro Organics Ltd equity analysis research report

Jayant Agro Organics Ltd has been growing its sales at a moderate pace of 10-12% year on year since last 10 years (FY2005-14). However, profitability margins (both OPM & NPM) are very low and have been fluctuating wildly. Operating profit margins (OPM) have been varying from 4-6% and net profit margins (NPM) have been fluctuating from 1-3% over the years.

Such low fluctuating margins are characteristic of companies, which have low value adding businesses. Such companies have low bargaining power with their customers. In such businesses, like Jayant Agro Organics Ltd, companies find it difficult to pass on the increase in raw material costs to their customers quickly. Therefore, companies have to take a hit on their profitability margins.

Over the years, the tax payout ratio of Jayant Agro Organics Ltd has been fluctuating from 22% to 45%. An investor should study it in detail to understand the reasons for the same.

 

Operating Efficiency Analysis of Jayant Agro Organics Ltd:

Operating efficiency parameters of Excel Industries Ltd reflect that it has witnessed deteriorating operating efficiency over the years. Net fixed assets turnover has decreased from 11.1 in FY2011 to 7.0 in FY2014. Similarly, inventory turnover ratio of Jayant Agro Organics Ltd has also deteriorated from 15 in FY2012 to 9 in FY2014. These are not good signs of any investment opportunity. Moreover, Jayant Agro Organics Ltd is not able to collect money from its customers in a timely fashion. Receivables days have increased from 19 days in FY2012 to 32 days in FY2014.

Jayant Agro Organics Ltd has not been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 183 cr. whereas the CFO over the similar period is INR 132 cr. This is evident by increasing receivables days as well. Deteriorating inventory turnover has further contributed to tying of funds in working capital.

Low profitability associated with deteriorating working capital management has made Jayant Agro Organics Ltd to rely on alternate sources of cash like equity dilution & debt, to fund its day-to-day operations and capital expenditure.

Jayant Agro Organics Ltd has diluted equity at multiple occassions in the past and raised additional debt every year since FY2009. Debt levels of Jayant Agro Organics Ltd have increased from INR 65 cr. in FY2005 to INR 357 cr. in FY2014.

Investors should be wary of investing in companies, which have continuously increasing debt levels, as high debt leads to reduced profitability and increases bankruptcy risk under tough business situations.

Jayant Agro Organics Ltd has generated a market value of only INR 118 cr. from the earnings of INR 137 cr retained by the management over last 10 years (FY2005-14). Management has effectively, eroded shareholders’ wealth over the years.

 

Margin of Safety in the market price of Jayant Agro Organics Ltd:

Jayant Agro Organics Ltd is currently available at a P/E ratio of about 12.3, which does not offer any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

Also Read: Hidden Risks of Investing in High P/E Stocks

 

Conclusion:

Overall, Jayant Agro Organics Ltd seems to be a company growing at a moderate pace but with very low & fluctuating profitability margins due to low bargaining power with its customers. Jayant Agro Organics Ltd has seen deteriorating operating efficiency over the years, leading to tying up of funds in working capital. Jayant Agro Organics Ltd has been relying on equity dilution and debt to meet the cash shortfall. An investor should keep a close watch on the profitability, operating efficiency and debt levels of Jayant Agro Organics Ltd so that she can update her views on any further deterioration in them.

These are my views about Jayant Agro Organics Ltd. However, you should do your own analysis before taking any investment related decision about Jayant Agro Organics Ltd.

You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company

Hope it helps!

Regards,

Readers’ Queries – Jayant Agro Organics Ltd

Query

Dear Vijay ji:

I liked the idea that “Shareholders’ money” is/should get reflected in share price of the stock. Also another point of interest that I would like to point out is “Return on Capital Employed”

ROCE = Earnings before Interest and Tax (EBIT) / Capital Employed

where Capital Employed = (Total Assets – Current Liabilities)

I calculated this figure for Jayant Agro Organics Ltd (Standalone/Consolidated) and got the following numbers:

  • 2009: Standalone: 22.34%/Consolidated: 27.57%
  • 2010: Standalone: 13.89%/Consolidated: 13.89%
  • 2011: Standalone: 21.15%/Consolidated: 21.08%
  • 2012: Standalone: 40.51%/Consolidated: 39.80%
  • 2013: Standalone: 33.39%/Consolidated: 34.48%
  • 2014: Standalone: 29.55%/Consolidated: 28.62%

6 yrs. AVG ROCE (2009-2014): Standalone 26.80%, Consolidated: 27.57%

=============

So even though Jayant Agro Organics Ltd looks like a very low profit margin business. ROCE is pretty high consistently

I think this is one of the reason the company has been paying dividends every year for last 21 yrs. clearly showing that they have the ability to earn profits consistently (surely would have faced number of issues in 21 yrs. which could have impacted earning potential)

So are we just too much concentrating on Net Profit margin. Are there businesses with low net profit but high ROCE and how do they achieve this?

Because 27.57% avg ROCE over 6 yrs. is definitely attractive for a company when Market cap is ₹150Cr and 3 yrs. avg PBDIT is ₹95Cr

=============

Would like to get your views on this High ROCE low Net Profit margin and how to evaluate this type of business.

=happy investing

Author’s Response:

Thanks for writing to me!

Capital employed is effectively Equity + Non-Current liabilities including debt. ROCE suffers from the shortcomings of ROE in the manner that by increasing the leverage, a poor profitability can be shown better as high ROCE.

Over past 10 years (2005-14), it has made total profits of ₹183 cr. and had to do capex of about ₹250 cr. Its profits are not sufficient to meet business requirements, therefore, it had to raise incremental ₹290 cr. of debt. One way of looking at the company can be that all the dividends have come from debt.

Low profitability can only be made to look good by using leverage. Derivatives are a good example of it. Low NPM with high ROCE is a game of leverage, which I believe should be looked very cautiously.

Stock market seems to have recognized it and therefore, against ₹215 cr. of retained earnings in last 11 years (2005-15), the increase in market cap is only ₹99 cr. The company seems to have failed to generate wealth for shareholders.

Hope it clarifies the point.

Regards,

 

Query

Dr. Vijay ji:

Here’s my take on High Return on Capital Employed (ROCE) on Low Profit margin business.

=================

Let’s look at a hypothetical business with 2% profit margin and say your investment is ₹100/= and you make 2% profit on it. That’s Sales: ₹100/= Net Profit ₹2/=

Net Profit Margin: Profit/Sales = 2/100 = 2%

Return On Capital Employed: Profit/Capital employed = 2/100 = 2%

Well now consider one small change suppose ₹100/= is the sales done in 1 month then.

Annual (12 months sales) = 12 x 100 = 1,200/=

Annual (12 months profit) = 12 x 2 = 24/=

Now the key is to understand how much capital is employed,

here the ₹100/= bucks capital is free after the first month to be used again in next 11 months so actual capital employed is only ₹100/= , lets calculate Net Profit margin and Return on capital employed

Net Profit margin = Profit / Sales = 24/1200 = 2%

Return on Capital Employed = Profit/Capital employed = 24/100 = 24%

So the 2% profit margin business, since it can sell its inventory & reinvest the capital again 12 times a year, capital employed actually gets a return of 24%

=================

So a low Profit Margin (+) high turnover of Capital = High Return on Capital Employed.

With regards Jayant Agro Organics Ltd debt:

================

2012 Long term debt: 50.60 cr

2012 Short term debt: 189.94cr

=================

2013 Long term debt: 48.40 cr

2013 Short term debt: 236.76cr

============

2014 Long term debt: 35.06 cr

2014 Short term debt: 322.42cr

======

2015 Long term debt: 16.33 cr

2015 Short term debt: 221.75cr

=====

So debt is generally short term and long term debt is just ₹16cr and even in 2012 Long term debt was just ₹50.60cr so long term debt is minor part of short term debt.

================

In 2004 revenues was ₹267.9cr which grew to ₹620cr in 2005. Annual report shows ₹202.49cr is diamond trade related sales. Actual castor related sales in 2005 was ₹417.87cr

So from 2005 sales of ₹417.87cr to 2014 ₹1,538cr it’s a 4 times increase in topline in 9yrs. which is pretty fast. Company has been expanding its capacity.

2005 segment Assets castor oil: ₹60.97cr

2005 segment Assets castor derivatives: ₹42.08cr

2005 total Assets: ₹103.05cr

============

2014 segment Assets castor oil: ₹326.82cr

2014 segment Assets castor derivatives: ₹361.17cr

2014 total assets: ₹687.99cr

==========

Consolidated Gross Block 2005: ₹35.95cr

Consolidated Gross Block 2014: ₹283Cr

==========

As one can see in this 9 year period assets have increased from ₹103.05cr to ₹687.99cr that’s 6x.

So in the given period 2005 to 2014 (9 yrs.) sales (castor & castor derivatives) have increased 4x.

Castor & Castor derivatives sales have increased 4x from ₹417.87Cr to ₹1,538Cr

9 yrs. Asset have increased 6x from ₹103.05 to ₹687.99Cr

9 yrs. Debt has increased 5.5x from ₹65cr to ₹357Cr

==============

In March 2014 Annual report for Jayant Agro Organics Ltd Management Discussion:

============

“Your company is in the cusp. It is in between a small size and a midsize company. It is important to recognize that companies need to reinvent themselves at the different stages of their growth in order to have a sustainable growing future. Though these initiatives are leading to additional cost in the initial years, we believe that the pay-off will be well worth the cost and the efforts in the future. Your company is willing to sacrifice some profits in a short for long term benefits.”

============

Conclusion: Jayant Agro Organics Ltd seems to be in growth mode in the period under discussion where sales and assets have increased substantially along with Debt.

A closer look at the debt shows long-term debt is very small part of the total debt (10% of the total debt) and decreasing.

My take is the asset creation phase is coming to an end and which has strained the balance sheet for Jayant agro. However, in the future we could expect the next phase of growth where the capital expenditure drops and we could see higher free cash flows. Lower working capital requirements. Yes that still does not answer the problem of low profit margins. But we could see a drop in working capital requirements & debt.

So I think the key is reduction in working capital requirements and debt which will directly add to the bottom-line. Higher gross margin would be a great profit multiplier(X Factor) if the company can achieve that with higher value add we have a multibaggers.

What adds comfort to all this is the confidence other Specialty chemical MNC have placed in Jayant Agro Organics Ltd.

=========

Arkema (7 billion Euro sales) forming a JV with Jayant Agro Organics Ltd taking a 24.9% stake in Jayant agro subsidiary Ihsedu agrochem for ₹30Cr

=========

Mitsui Chemicals & Itoh Oil: (JV: Jayant Agro Organics Ltd: 50%, Mitsui: 40%, ITOH OIL: 10% – Vithal Polyol India Pvt Ltd) to manufacture Green Plant based Polyol for Asian Automotive sector

==========

Tail Wind:

Govt regulations like REACH which prohibit low cost plasticizers derived from crude oil as they are categorized as “Substances of Very High Concern” and can cause Cancer and Birth Defects. These regulations are going to come into effect from Feb 2015 in Euro Zone

Companies based on these new regulatory requirements are adopting Castor oil& its derivatives: Ford cars use Castor derivatives, Nike Shoes use castor derivatives, other consumer Products are replacing crude oil derivatives by Castor derivatives

=======

Castor oil and its derivatives are well established green chemicals, castor oil derivatives are used for the preparation of thousands of chemical intermediates to replace crude oil in the chemical industry – Indian institute of Chemical technology – Hyderabad

————

I would suggest investors to do a deep dive and then only start investing. My personal opinion is Jayant Agro Organics Ltd is the world’s largest producer of castor oil and castor oil Derivatives. And @ Market Cap of around ₹150Cr is a steal. Considering the fact that it’s reported ₹95Cr PBDIT in past 3 yrs.

One needs to be a long term investor to really get the maximum benefit as the stock could go up 10x from these levels as Jayant enters the next stage of growth.

Sorry for the long post I hope it is beneficial to all readers and investors.

=happy investing

Author’s Response:

Hi Prahalad,

Thanks for your inputs and sharing your opinion about Jayant Agro Organics Ltd (JAO)!

Low profitability margins and high asset turnovers are usually found in trading companies, which have business models around high volumes and low margins. Trading companies usually do not have high sustainable business advantages.

Coming to the case of Jayant Agro Organics Ltd, its asset turnover has been declining continuously with major capex being completed in FY2012. This is not to indicate that the turnover might not increase in future or the management is wrong in showing optimistic picture. In fact, I wish that things improve and all the stakeholders come out happy. However, investor need to keep a close watch on its operating efficiency.

Having high amount of short term debt is not a desirable feature for any company. Short term debt is usually repayable on demand and in any case payable within one year. Therefore, most of this debt is refinanced/rolled over every year. During tough times like economic slowdown or credit crunch, if the lenders refuse to refinance/roll over their debt, then the company is bound to face a tough situation.

I advise investors to prefer low or nil debt companies.

However, as is true for markets, no one knows which way the tide is going to turn. No one knows what would be the level of any stock in future. I wish that your predictions of price rise of Jayant Agro Organics Ltd comes true and the shareholders of Jayant Agro Organics Ltd be proved right in their decision of investing in Jayant Agro Organics Ltd.

Regards,

 

Query

Vijay, regarding analysis of Jayant Agro-Organics Limited, I am trying to understand the below statement and your thought process behind saying shareholders’ money is eroded. Isn’t the retained earnings, shareholders’ money?

“Jayant Agro-Organics Limited has generated a market value of only ₹118 cr. from the earnings of ₹137 cr retained by the management over last 10 years (FY2005-14). Management has effectively, eroded shareholders’ wealth over the years”

Author’s Response:

As an individual shareholder, I cannot sell the company and realize the value of its assets to claim retained earnings, which you rightly said, is shareholders’ money.

Value for an individual shareholder is the market value of shares she has in her demat account. If a company is retaining profits, then it should create market value for shareholders from it, otherwise distribute profits as dividend.

Value creation from retained earnings may differ from year to year, but over long periods, say 10 years, at least value equal to retained profits should be created.

Read: How to do Business Analysis of a Company

Hope it clarifies.

Regards,

 

P.S.

DISCLAIMER

  • 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.

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