Our Multibagger Recommendation Sanwaria Consumers 100%+ Return in 4 months. What’s next?
While a commodity business transforms into a branded FMCG play, it creates lots of wealth for shareholders. Apart from bottom line growth, margin expansion and improved cash flow result in P.E re-rating that multiplies investor’s return. Based on the same theme, we had recommended Sanwaria Consumers (previously known as Sanwaria Agro Oils) to our Advanced Package members on 22nd June 2017 at around Rs 7 (bonus adjusted) with a target of Rs14 by June 2018. However, with the better than expected numbers in H1FY18, the target has been achieved within 4 months (CMP 16). Further, we had revised our target Rs 20 as we are expecting the company to continue the stellar performance in upcoming quarters based on expansion plans in India & abroad, Govt support and surge in the demand for processed food. Moreover, the company aims to become leading FMCG player in the next few yrs and has already introduced 25 branded products in the category of basmati rice, soyabean refined oil, rice bran oil, suji, maida, atta, poha, soya flour, etc. Further, it also targets to introduce 100 more branded products in the next 2-3 yrs.
To understand the future potential of Sanwaria Consumers, let’s have a look at the rationale presented to our members at the time of recommendation:
Investment Rationale presented at the time of recommendation (22nd June 2017)
We had recommended Sanwaria Consumers primarily due to the expected P.E expansion (re-rating) considering the company transiting itself from a commodity player to a branded FMCG player. Here goes our short investment rationale –
- Commodity play to Branded play – Sanwaria Consumers is one of the largest integrated food processors in India and is engaged in the business of manufacturing and selling of edible oil and other staple food products like Soya, Rice, Pulses and Wheat etc. The company was earlier engaged primarily in foodgrains trading (commodity-based business). However, it is now transforming into a branded FMCG player. They already introduced 25 branded products within the category of basmati rice, Soyabean refined oil, Rice bran oil, Suji, Maida, Atta, Poha, Soya flour etc. Within the next 2-3 years, they are targeting to introduce 100 branded products. The transformation itself is the primary investment rationale.
- Strong distribution network- From raw material procurement to the distribution, the company is present in the entire value chain. Being 25 years+ old company, they already have the strong distribution network in Madhya Pradesh. The Company is poised to leverage its distribution network venturing into branded segments across a wide product basket. As a result along with strong topline growth, margin and cash flow would be improved significantly. (The management is targeting 25%-30% topline growth over the next 2-3 years)
- Concern – No single high growth FMCG stock can be traded at the PE of 11-12 without any concern. The only concern for the company is high debt and resulting subdued return ratios. However, the bright point is that the Debt to equity ratio is reducing at a great pace over the last 3 years. From the high of 4.11 during FY14, D/E ratio now stands at 2.20 at the end of FY17. We believe that within the next two years it will fall below 1. With the improving balance sheet, return ratios will also look good over the next 1-2 years.
- Attractive Valuation – For a company which is transiting itself into a branded FMCG player, the PE ratio of 11.63 is very much reasonable and attractive. Once the balance sheet improves with higher cash flow the stock would demand minimum PE of 15. The management is targeting for the topline of 5,000 crores within the next 2-3 years with 25%-30% growth. Considering 25% growth, our estimated FY18E and FY19E revenue stand at 4411 and 5510 crores. Considering the same net profit margin FY18E and FY19E EPS comes at 0.75 and 0.92. Multiplying FY19E EPS with the fair P.E of 15 our target price comes at Rs. 14.
(The above is a short investment rationale that was shared on 22nd June 2017. The full write-up is visible to the paid members under “Members Zone”)
Sanwaria Consumers – 100%+ return already achieved- What’s next?
Sanwaria Consumers has already achieved our previously set target. However, with a diversified portfolio, company’s transformation into branded FMCG player & expansions plans, good performance by the company is expected to continue in upcoming quarters too. The management of Sanwaria Consumers is targeting a turnover of 5000cr within next 2-3 yrs with 25-30% CAGR growth and the strong procurement and distribution network is expected to help the company in achieving the same without affecting the margins & cash flow. To create the presence globally the Company has also come up with the proposal of establishing a subsidiary Company in Dubai and Singapore. All these steps by the company are expected to re-rate both EPS & PE of the company, leaving room for further upside at the stock price. During October 2017, many FIIs including Morgan Stanley, Goldman Sachs, Acadian Asset Management started investing in the stock around the price level of 12-15. Entry of FIIs in any smallcap stock is a huge sentiment booster. So the chances of further P.E re-rating can’t be ruled out. During our initial recommendation, we had expected fair P.E of around 15. Now within the next one year if Sanwaria Consumer quotes P.E of around 20-22 then the re-rating alone would result in 30-40% price appreciation (EPS growth extra).
Looking for a similar recommendation?
We recommend stocks having strong fundamentals after thorough analysis and due diligence. Our Team is dedicated for providing optimum service. Apart from Sanwaria Consumers, many of our past recommendations which have generated multi-bagger returns are Bodal Chemicals, Future Enterprises, Century Ply, Can Fin Homes, Caplin Point Lab, Ajanta Pharma, Suprajit Engineering, Atul Auto, Mayur Uniquoters, Torrent Pharma etc. The success list is huge! The best among all was Can Fin Homes which was recommended around Rs. 150 during 2013 and now in October 2017, the price is around Rs. 542 (adjusted for the stock split from 10 to 2). In spite of multiple “repeat buy” and “partial profit booking” we are still holding Can Fin Homes for the long term!
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Full profit booking update that was shared with paid members on 7th February 2018 –
- 3rd Feb 2018 – Promoters Group sold around 3.02 crores (4.11% approx) shares around an average cost of Rs.23-25 per share.
- 5th Feb 2018 – Promoters group announced preferential allotment to themselves shares worth 100 crores at Rs.35/share to be finalized on 20th Feb board meeting. On the same date, another announcement showing promoter group sold another approx 3.68 crores shares during October – December 2017 period in the open market.
- After that, on another 5th Feb 2018 announcement, they declared positive impact on financial numbers due to import duty hike.
- On 7th Feb 2018, they announced an agreement for supplying Soya Chunk to Patanjali.
Here is the red flag in very simple language – Since June 2017 after posting 3 quarters of the great result (also up to 4 times price jump in the same period), in February 2018 it revealed that Promoters Group sold total approx 6.70 crores of shares in the Open market. From this sell, they got approx 170-190 crores depending on the exact sale price. After that, they announced the intention of buying shares worth 100 crores at Rs.35/share and just after the announcement slew of positive announcement like Patanjali tie-up, positive impact for import duty hike maybe to shoot up the market price again to 30/35 level.
Profit Booking Call – In spite of past corporate governance issue and negatives, our investment rationale in Sanwaria played out very well and as a result, we are suggesting for full profit booking around the current market price.
Important Note- It might happen that the above-mentioned red flags are just incidental events but originally the company is in strong growth path. Promoters can also sell any part of their holding as after all their hard work push the company forward. Only the promoters know what is their real intention of doing all those. If their real intention is to take the company forward then obviously the stock price can reach higher level over long term, but if the intention is different then nobody knows what is awaiting.
Overall our members should be very happy after making approx 3 times return on investment in the quick 6 months which rarely occurs.