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Thursday, July 03, 2014

Jayant Agro Organics: Why I love this 2% Net Profit Margin Business

As you are well aware Jayant Agro is one of my "Best Buy's" along with GAEL, Tata comm and NHPC.

While duscussing the pro's and cons of Jayant Agro Organics as a stock worth investing, everybody's concern is: "its a 2% Net Profit margin business.." One wrong step all your profits are "Zero" Its a high risk investment.
Well lets look at a hypothetical business with 2% profit margin and say your investment is Rs100/= 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 = 1200/= 
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%
Lets look at Jayant Agro's Net Profit Margin and Return on Capital employed (ROCE)
Consolidated 5 yrs avg data:
Net Profit Margin: 1.656%
ROCE = 16.798%

So as can be seen Jayant Agro has a wafer thin margin of 1.65% (5 yrs avg)  but ROCE is healthy 16.79% (5 yrs avg). The question is.. is Jayant just like the Business which has a 2% profit margin but turnover is every month? How do we know that..

Look a little lower at Inventory turnover ratio.
5 yrs Avg Inventory turnover ratio: 13.022
Lets calculate inventory holding period in days = no of days in a year/Inventory turnover ratio 
= 365/13.022 = 28.02 days..

So Inventory Turnover Ratio indicates that Inventory holding period for Jayant Agro is 28Days (5 yrs avg) so within 1 month Jayant is able to sell all its inventory and (make 1.65% profit) and restock again this happens every year 13 times (inventory turnover ratio) this helps the company get a respectable ROCE even when the profit margins are just 1.65%
Similarly is you look at the Debt turnover ratio:
5 yrs avg Debt turnover ratio: 20.126

Debt turnover in days = no of days in a financial year/Debt turnover ratio = 365/20.126 = 18.13 days

WOW!! so Jayant has a 5 yrs avg debt turnover rate of 18.13 days.. clearly matches with the Inventory turnover ratio.. of 28.02 days..
So we can conclude looking at 5yrs data avg for jayant agro consolidated..
1.65% Net Profit Margin and ROCE = 16.79% and Inventory turnover ratio of: 13.022 (28 days) and Debt turnover ratio of 20.126 (18 days) we have a company which has a very efficient supply chain.. and it can turnover its inventory and its debt very very quickly(less than 1 month).. at wafer thin margins( keeping competitors at bay as well as ensuring its customers get competetive prices..) .. getting a respectable ROCE of 16.79%
Getting back to the rs100/= example.. say we have an option of an FD of 15% Per annum return or another FD of 2% per month return..Assuming equal risk levels which one will you choose? its very simple we know the 2% per month translates to 24% per annum and it wins hands down!!

Comparing 15% Per Annum and 2% per month is not correct way we need to look at per annum return
15% per annum and 24% per annum (2% per month * 12 months)

Clearly we can see that 24% return is better than 15% per annum.. Similarly looking at just profit margin gives us the wrong picture.. we need to look at ROCE.
Again.. its all great that Jayant is competetive and its able to turn over its inventory and debt at an amazing pace of less than 30 days .. I still need another confirmation.. to be convinced that Jayant is not a High Risk business..

According to the management : Jayant has been paying dividends since inception ie 20+ yrs of uninterrupted dividends since inception and uninterrupted profits..
From Annual report 2004-2005

From Annual report 2012-13

 Clearly the company has built a moat around itself based on its efficiency and its providing attractive return on investment (ROCE=16.79% 5yrs avg)  as well as competetive prices to its customers (Net Profit Margin: 1.65% 5 yrs avg)..

Another interesting point: Net profit since inception: 201.22cr
dividend payout since inception: 48.08cr
Avg dividend payout ratio (20+yrs): 48.8/201.22 =  24.25%

latest dividend payout (2013-2014): 5.17cr (Rs 3/= per share + dividend tax 15%)
Latest Net Profit (2013-2014): 39.75cr
Latest dividend payout ratio: 13.01%

Clearly if dividend payout reaches its 20+yrs avg payout ratio(24.25%) we should receive:  9.63cr (including div tax) which translates to 5.58/= per share (high probability of increase in dividend payout)

Conclusion: Dont go by the ultra low profit margins and debt in its books.. (most of it is short term) as we have seen Debt turnover is 18 days (5 yrs avg) Inventory turnover is 28 days(5 yrs avg) we have in Jayant agro a well oiled company running flawlessly (great supply chain) keeping competitors at bay. 

This is attracting speciality chemical majors (Arkema, Mitsui Chemicals, ITOH oil) to build strategic partnerships as Joint Ventures further cementing its position by locking in big customers (Arkema is the largest importer of castor oil and castor oil derivatives in the world!! 7 billion Euro sales &  Mitsui Chemical is one of the top Chemical companies in the world , 14 billion dollar sales, ITOH oil is a 100yrs old company in castor oil based speciality chemicals business).

Jayant Agro
CMP: 128
MCap: 190cr
ROCE: 19.45%, ROE: 22.61%
3yrs CAGR Sales: 21.49%
3 yrs CAGR inNet Profits: 43.88%
PE: 4.83 (March 2014)
EV to Sales: 0.30
EV to EBIDTA: 4.96
7 yrs 588% increase in profits and 335% increase in sales
Consolidated Sales/NP/dividend numbers.
March 2007 Sales 462.49Cr Net Profit: 6.76Cr Div:1.25
March 2008 Sales 605.96Cr Net Profit: 9.51Cr Div:1.25
March 2009 Sales 875.86Cr Net Profit 7.49Cr Div: 1.25
March 2010 Sales 904.01Cr Net Profit: 12.47Cr Div:1.50
March 2011 Sales 1,175.26Cr Net Profit: 24.92Cr Div 1.75
March 2012 Sales 1,832.26Cr Net Profit: 31.35Cr Div: 2.00
March 2013 Sales 1,624Cr Net Profit: 36.24Cr Div: 2.25
March 2014 Sales 1,550Cr NProfit: 39.75cr Div: 3/=


ttthakur said...

Thanks for reiterating/analysing the excellent fundamentals of Jayant Agronomics for busy/lazy investors like me. You are doing excellent social service free.
I am holding about 800 shares bought at average of 105/- and shall hold for very long term, as a conviction stock.
God Bless.
Thanks and Regards,

What'sUp Prahalad said...

TTThakur ji:

Thank you for your kind words and blessings..

you might as well buy some more stock.. recently jayant agro has called for a special postal ballot for 700cr loans.. well reading between the lines it looks like the special Postal ballot is actually to get approval to sell stake in Ihsedu Agro Chem..

read here all the details..

Jayant CMP: 121, MCap: 181Cr

=happy investing

ttthakur said...

Thanks a lot Sir, I read your latest article(should have been titled"head s i win tails you lose"!).Brilliant analysis.
I am waiting for markets to open tomorrow to buy more of Jayant Agro.
Once again, lot of thanks.

Anonymous said...

excellent analysis.

any view on the management .

also any gut feel on whether they will share proceeds of subsidiary sell off, assuming it happens with minority.

thank you


What'sUp Prahalad said...

jayendra ji:

I am just another indidvidual investor..(so dont know how much will be shared..) from the look of its almost all the stake is held by family and friends.. so most likely they will share some of the proceeds (I am hoping)
Promoters have been pretty good at sharing profits and generally shared about 25% so 700Cr on an equity of 7.5Cr (5Rs face value) translates to= (700/7.5)*5 = 466 bucks Earnings per share..
25% would be: 116/= assuming 15% dividend tax.. that's about 100/= per share..

Also the AGM is on Sept 27,2014.. most likely the deal will be done before the AGM so that the AGM is one big happy family of shareholders..

..else there will be a large number of shareholders who would like to know what this 700Cr debt is?..

So my hunch is that from now july 7,2014 till Sept 27,2014 we should get the announcement for the deal

=happy investing