IFB Agro Industries is in the business of producing alcohol (70% to 75%
of revenues) and marine products.
The company is based out of the state of West Bengal (WB),
which is well known for its regressive attitudes towards businesses.
In the alcohol segment, it distributes ‘Volga’ vodka,
‘Jubilation’ rum, ‘Benjamin’ brandy (latter two launched recently). Demand in the Indian Made Foreign Liquor
(IMFL) appears to have a promising outlook with growth estimated at about 20%
per annum. It has also installed a new
plant to enhance its country liquor production capacity since demand was
outstripping supply – however, licenses weren’t granted by the state as at the
end of last year.
In the marine segment, it distributes frozen marine products
in the major metros through retail chains under the “IFB Royal” brand. It also has a 48% market share in the shrimp
feed trading business. It had recently
enhanced capacities in the marine division including new IQF machines and cold
room facilities.
The company has reported somewhat erratic overall profitability
during the last five years on a growing revenue base – reporting a record high
of 50cr in operating profits on revenues of almost 600cr in the last financial
year. It operated with a net cash
position (including liquid investments) of over 15cr as at 31st
March, 2012.
One of the key risk factors that impact this business
appears to be its dependence on the state government in various aspects of its
business from reimbursement for molasses transport and CDM benefits for use of
rice husk in the grain distillery to allotment of ‘privilege’ land for country
liquor and export benefits in the marine segment.
The reimbursement for molasses transport and allotment of
privilege land were revoked by the state government last year and these should
be removed in any future estimate of earnings.
Other factors such as CDM benefits depend on the local availability of
rice.
Another key factor that impacts this business is the availability
of molasses, which is the raw material for the distillery. Due to the removal of above state benefit for
transport, this business is no longer viable since the price of rectified
spirit from nearby states is much cheaper.
Increases in costs of grain (due to lack of availability or
otherwise), fuel, electricity, and transportation reduce profit margins of the
grain distillery.
The state implemented MRP based pricing for country spirit,
which acts as a ceiling, and intensified the competition among existing bottlers who
are bringing out their own branded products.
This business is exposed to the whims of state government in providing
licenses despite installation of a new plant leading to idle capacity. The removal of the privilege area has reduced
barriers of entry for new competitors.
Moreover, additional capacity installation would be problematic due to
the difficulty in obtaining land for commercial use in WB.
The lucrative IMFL segment is exposed to intense competition
from large Indian and multi-national brands where the company does not yet have
any meaningful competitive edge.
The company is a net exporter in the marine segment and
likely to be adversely impacted by a strengthening INR. It is also exposed to rises in the cost of
raw materials for marine products.
Management expects to aggressively market its marine products to
penetrate the Indian retail segment – which is likely to entail large
expenditures in the near future that will reduce profits from this segment.
Hi,
ReplyDeleteLiked your blog & coverage of many small caps.
One thing i feel needs to be done - adding your personal RECOMMENDATION (Buy/Sell/Hold) with rationale, on the stock covered.
Do think about this.
Regds,
Bosco
Thanks for your feedback Bosco. I shall take it into consideration.
DeleteOriginally, I wanted the blog to focus on businesses with no regard to market valuations - to encourage intelligent discussion of businesses and mutual learning rather than market buys/sells.
I hope to get much more feedback on the analysis of the businesses and what I can do to improve this. Thanks.