Sanwaria Consumer Ltd: Read the offer Document carefully

Sanwaria Consumer Ltd: This one, once again, is getting the attention. In the past (2010-11) also, it grabbed huge interest and run up from 8 to some 60-70 but only to witness a sharp fall to Rs. 10, then to 4 and then to 2 last year. Now it is at 30 again and I am getting regular queries on this one as most of people want to invest big in this citing it being the next big story in Indian FMCG. I don’t track this company but I am always having the doubts on this one. So I am just sharing my views on the basis of third party sources like annual reports, news etc. Please remember that these are just my views and if anyone has some data, information which is relevant and will result in me changing my views then they are most welcome to share the same otherwise you can simply ignore my views.

Actually the story of Sanwaria began when the company decided to choose the difficult path of entering branded staple food products as they couldn’t see any future in their earlier domain expertise of soybean processing business. And since then company is throwing branded goods one after the other…their products incudes (although nothing excluded)- Rice, soyabean oil, Chakki Atta, maida, suji, besan, daliya, Dal, Soya chunks, Poultry and aqua feed!!!

Now there are legends how sanwaria has shown great growth after the Brand saga. But in spite of outsourcing almost all of its products, it just earns 115 cr PBT on turnover of 3500 cr. LT Foods (Dawat rice fame) earns 313 cr PBT from 3300 cr topline. LT has employee cost of 116 cr while that of Sanwaria is just at 4 cr!!

I mean, well, we are still quite some time away from the age of superman at the earth. LT depreciation is at 54 cr and Sanwaria’s at 7 cr, LT Interest cost is 150 cr but Sanwaria is at 65 cr!! LT has assets base of 700 cr with Sanwaria at 160 cr!! I am comparing it with LT foods because LT foods is also in a transition phase (Just as claimed by SCL), against the mighty KRBL it'll just blow away. Lt Foods is a rice player and SCL claims a turnover of some 2000 cr from Basmati Rice, 700 cr from Food grains. So 2700 cr out of 3500 cr means that it is not a soy processor and 2700 cr is not a startup type of turnover, it belongs to mature players.Its Rice turnover was just 68 cr in 2015 but rose to 1650 cr in 2016. Its old domain Soy processing, went down to 400 cr in 2016 form 2200 cr in 2015!!! I wonder what happened to the resources/plant/machinery etc. which were being used for soy business!! or simply turnover of Soy is now being shown as Basmati Rice??  In 2015 AR, there was a Misc item turnover figure of 388 cr but in next year AR, the same has been shown at 35 cr with balance added to other items like Rice, soy!! I am surprised (Shocked actually) at just 4 cr employee cost (may be some 50-100 employees) because how on the basis of this paltry human capital, it manages to do the most complex functions of marketing and distribution of a branded product company that too when it has its own “Retail chain” (LT has none). I think the retail chain is outsourced to Amazon!!

Can anybody think that this is because of Sanwaria’s outsourcing model as it outsources all the production and only does the marketing/distribution. Then why it has high figures of Inventory at 500 cr and debtors at 727 cr, where is the working capital management? With just 4 cr employee cost I wonder how many employees take care of the inventory and debtor management! Sanwaria’s ROE is just 10% but LT has 20% although due to low investments into assets, working capital etc. (courtesy outsourcing model) sanwaria should have much higher ROE. Where is the discipline of a branded FMCG Giant? Our another pick, Bajaj Electricals, has the similar outsourcing model and it has ROE of more than 100% !!!

With the great growth it has achieved in last 3-4 years (as is claimed) it has been able to “reduce” cash in the books from 45 cr in 2013 to 16 cr in 2017. It earned net profit of 165 cr during the period. So where has it gone? Let’s see…Its assets base is stagnant at 160 cr! But Debtors have been increased from 500 cr to 700 cr, inventory from 200 cr to 500 cr. Surprisingly, debtors have been increased but Creditors have been decreased from 300 cr to 160 cr!! What a working capital management by a branded company with low employee base?? Its debt has been increased from 370 cr to 900 cr…another sign of visionary management. So in all these 5 years its funds flows from Debt 530 cr+ NP 165 cr+ Depreciation 30 cr = 725 cr which are utilized in Inventory 280 cr, Debtors 250 cr, creditors 135 cr and Investments some 30-35 cr, totalling 700 cr!!! And here we have the grand schema of brand. Nothing real has been created in actual.

Another aspect which appears dubious is the tax outgo. Tax outgo percentage is around 30%- 35% of NP for players like LT Foods and KRBL and most of the other companies across sectors. Like LT has paid a tax of 64 cr on NP figure of 195 cr in 2017, same for KRBL is at 138 cr on 538 cr but Sanwaria has managed to keep its tax outgo around 10%-15% like it has paid 6 cr on NP of 50 cr in 2017!! I wonder how greatly they are planning their tax outgo?

Another mysterious figure is Deferred tax liability (DTL) of 16.28 cr. This figure is around this level since 2009 (I couldn’t check before 2009) and as per the annual reports it is mainly on account of timing difference for depreciation rates as per company law and tax laws. However in my view this figure should have been started to decline after initial period of 5-6 years i.e. around 2014 or 2015 because its assets figure is fairly consistent since 2009 mainly its Plant and machinery figure which accounts for majority of gross assets (100 cr out of 160 cr). Its gross assets were around 150 cr in 2008 so nothing much has changed since then. So in my view timing difference of depreciation rates should have been over by initial 5-6 years but this figure of DTL is consistent around 16-17 cr. At present due to lack of time (I am not that much interested either) and non-availability of old annual reports, I couldn’t dig deeper but I think it needs explanation. 

Ohh…I think I have found the reason. It is its wind power plant. I found a separate line item for the same in 2010 annual report which shows Rs. 42 cr against wind power generator. The same has been transferred to the subsidiary in 2012. I don’t know the year of capitalization of this wind plant but accelerated depreciation rate was 80% for wind power plants since 2002. So this DTL looks like due to accelerated depreciation impact of wind power plant. After this wind plant point discovery, I thought to leave this DTL issue but then decided to keep it for academic purpose especially for the readers. Also, I feel with the transfer of asset to the subsidiary the corresponding DTL liability in the books should also have been transferred to subsidiary otherwise holding company won’t be able to utilize the balance in DTL because it (Holding company, sanwaria consumer) won’t have any tax liability related to profits of wind business as the same has been transferred (But need to check further). But i still wonder what this fund trapped company was doing with investment of 42 cr in Wind power when their plant and machinery base was just 60-70 cr!! To save taxes?? But they never were a big profit making company...always shortage of funds due to high working capital and saddled with debt. They should have, first of all, invested in creating and expanding the capacity of underlying business to take care of the future profits.

Another dubious entry was the write off of 18.41 cr in 2016 due to fire. I wonder why there wasn’t any insurance claim although they have incurred insurance expenditure of Rs. 60 lac in 2016. Also, even surprisingly it appears that this 18.41 cr was adjusted against capital work in progress in the books as in 2016 beginning they have some 38 cr of capital work in progress and only some 20-21 cr was capitalized!!! I even doubt over the genuineness of this work in progress.

Some people tell me that high inventory may be due to storing of rice for ageing but this is what the likes of KRBL and LT Foods do; they are the real rice processors but Sanwaria has outsourced all its branded staple food requirements so I see no need for it to accumulate rice as raw material as the same is to be done by the suppliers of Sanwaria. Out of 500 cr inventory 285 cr is the raw material and there is no break up of type of raw material whether it is soy or other, it is not there in the annual report.

Company says that they have opened some 25 exclusive retail outlets under “Sanwaria Kirana” and will be opening 10-15 this year but I do not find any new asset created for these outlets as no assets has been added this year. Yes, there is one entry against lease rent (1.68 cr against last year figure of 50 lac) but employee cost has declined from 4 cr last year to 3.76 cr this year so who is running these stores. In the company website, they are showing the names of places in MP having Sanwaria outlets but when you click on the links nothing happens and it leads to nowhere. So I doubt whether there are any such retail outlets as I couldn’t find any on the google search. I could only find local “saawaria” Kirana shops and general stores at google and you tube. If anyone has seen and visited these then please clear my doubts. Also, Retail business means high working capital investment for inventory that too for finished goods. But here its inventory has been reduced to 500 cr this year from 534 cr last year. Also, its raw material inventory is at 284 cr out of total inventory of 500 cr with finished goods inventory just at 148 cr (30% of the total)...a bit difficult to understand!!

As I have shared earlier many times, the biggest challenge for an FMCG brand is the marketing and distribution not the product (As is evidenced from the outsourcing model of Sanwaria). No retailer and wholesaler is going to push/keep/sell my product just because I have decided to launch a brand. Doing business and establishing brands is not that easy. There are Hundreds of big established brands with established consumers. It is very difficult to break the consumer loyalties especially in staple foods as nobody is going to leave their trust and use a new branded product just like that. And Sanwaria claims easy victory here…just like that!!!   Huge investment, time and thought are required for Distribution and marketing function. I see people investing madly in those stocks when they declare that they are going to launch their own brands. People think that this is end of the game and the brand will see the success. But it is never so and 90% of the times new brand will be a failure. But most of the dubious companies try to take advantages of investors’ over enthusiasm by declaring paper plans of retail and brand play.

I always liked Tata chemicals’ foray into new consumer brands ( Tata Sampann) for Pulses and Spices because it already has big established distribution and marketing chain due to Tata salt and Tata tea. So it is very easy for Tata to push its new consumer products especially because people trust it. I have invested big in Tata chemicals (Shared at this blog also) and it is already a double but i think this will be the stock of Tata group in next 5 years. On the same lines, i am expecting Parag milk to do well in its pursuit to establish new FMCG products as it already has big distribution clout.

Sanwaria promoter Anil agarwal has dubious past. He has been fined by SEBI earlier. It has issued generous bonus and splits in the past just to increase the trading volume to rig the stock prices  ( They have even declared another bonus in july-17). Due to these bonuses it was reduced to just a penny stock. IT raids have been conducted and it is during these raids that its links with Baba Ramdev have come into public domain. What was in it to hide for? As now they are talking about the same in annual reports…it all seems fishy. IT raids reveals tax evasion of 200 cr! This figure of 200 cr may balance out the low profit margins.

These are enough reasons for me to avoid this one and these are serious issues requiring serious explanations and one Baba Ramdev alone may not be able to do the same.

(Views are personal and are only for Information and Education purpose only and should not be construed as a recommendation for Investing or trading. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified SEBI Analyst and not holding the stock discussed in this Post).

MCX India Ltd: Updates

I am getting queries regarding the future growth prospectus of MCX in the back drop of falling business and the fear of competition from the likes of NSE and BSE in the commodity exchange business after SEBI has approved the uniform exchange concept in India.

Today MCX has given muted set of numbers with top-line declined to 61 cr from 69 cr and PBT at 26 cr from 46 cr. However if we remove the impact of higher other income from last year’s results then PBT will be at 11 cr vs 14 cr last year and it starts to look much better in the difficult times. I think muted results are on expected lines; high growth in equity market has resulted in low volumes at commodity exchanges, Low commodity prices like Gold and low volatility, China's demand for commodity is low (means low volatility) so arbitrage opportunities are low in Indian commodity exchanges which generally are not doing much for actual price discovery in India. India is not a price setter for most of the commodities even where it is the global leader in production. We are just a price taker mainly because of low volumes at our commodity exchanges. Very few producers turn up to Indian exchanges for hedging. MCX has also launched option trading in Gold. Options are cheaper to trade so it is also possible that this might be (but not sure) one of the reasons for decline in top-line although in the long term option trading will grow the volumes big time.

But I think market was aware of the same, that’s why the price of MCX had fallen to 930 from 1200 levels in recent times.

But I am not investing in MCX for more growth in “these” factors (except options)….these are for big analysts. But just let me tell you the status of our commodity market; our commodity futures market is just 7% of equity futures turnover compared with 60% in USA and 110% for most of Asia like China, Japan. 

Most of the market in commodity trading is in the hands of Dabba traders. Daily Commodity turnover is around 20000 cr but unorganized daily Dabba trading in commodity is much more than 1 lac cr. CTT (the master stroke by our Govt) has resulted in shifting of even more trading to Dabba. Trading volumes at MCX after the introduction of CTT are still at some 30-40% of peak volume. This difference trading has not stopped but shifted to Dabba.

Barring few commodities like Gold, Crude Oil, silver nothing trades due to very low volume. No serious price discovery takes place at Indian exchanges, people just try to take benefit of arbitrage due to mismatch between global and Indian prices. Agriculture commodity trading is even lower…I think it is effectively non-existent. 

So for me, growth in these factors is the main catalyst. We’ll see more trading in Commodities, real price discovery, growth in Agriculture trading (Although the same is not the forte of MCX yet), shifting of Dabba trading to organized trading because the new regulator SEBI is much more powerful than earlier one, FMC (SEBI has penal powers of raid, search, fine and to take actions against criminals). Downward trend in commodities world over is also showing signs of revival. Any action related to abolition of CTT will be a big factor in volume growth. Also, CTT impact is very low for options as compared to futures as transaction value in case of options is very low at just premium paid and so the same will spurt the growth in volumes.
Equity markets are at high and may cool a bit and may not offer that high returns which it did last year. So investors will shift to commodity market and volume will pick up. But i am not betting on these trivial factors because scope of scale is way bigger than the current scale.  

SEBI has taken some major long term steps like Option trading and allowing players like banks, Mutual funds to trade in commodity exchanges. These steps will pave the way for long term growth in commodity trading.

So for me, the commodity trading is yet to be started in India. Current state is just an illusion and does not warrant any attention for quarterly type of things. So in my view, it is just wait and watch on policy and other fronts for another 2-3 quarters…no need to panic. As most of us are already invested but after some time more investment can be made in MCX (My Avg is 1050).

On the issue of impact of uniform exchange on MCX business by NSE and BSE, I think MCX can battle it out. Moreover this is not the first time the fight is being fought. NSE is already the biggest investor in NCDEX and it has tried everything to capture the volumes from MCX for non-agri commodities but it has failed miserably so far. Even during the times of NSEL fiasco, NCDEX couldn’t dent any meaningful breach in commodity trading. BSE is also trying hard to taste success in F&O for years by offering low charges although it worked for a while but eventually BSE had to stop bleeding money (although I am positive on the future of BSE and it is one of major investment). Networking effects play big role in exchange business and it is not easy to capture the volumes from rival exchanges by offering low costs. Volumes are the big factor. However, even MCX can enter equity trading on the same lines which it always wanted. BSE and NSE can try to capture volumes by offering low prices but MCX can lower its prices too. 

Moreover the fight between these three should not be seen as the one for getting the bigger piece of the pie because the size of Pie at present is very small which means that there can be a case that all three may end at having big piece when the size of the pie will grow big. So just watch the game.

Further I am yet to check what will happen to the earlier SEBI norm of maximum of 15% shareholding in a commodity exchange by a single entity. Whether the same will applicable on NSE and BSE also? I am yet to check this one. I also feel that consolidation will take place in Indian commodity exchange scene and smaller ones may choose to drop their guns. So Kotak may choose to back out from MCX as they are shouting ever since that their investment in MCX was just financial. So it is better if weak hands stay out and some bigger and serious player will come and take the game head on.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post).