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Saturday, March 8, 2014

Piccadily Agro Ltd - Can it be a Dark Horse?

Dear Reader,

We are pleased to inform you that Piccadily Agro Ltd (BSE Code: 530305) was the small cap stock recommended by our team as Hidden Gem - Nov'13. We suggested our members to accumulate it in the price range of Rs. 23 to 28, the same stock was recommended by our team 3 years ago also. We recommended this stock again in Nov'13 as stock was trading at same price with dirt cheap valuations. Total revenue and net profit of the company has been doubled during last 3 years where as it has not performed well for investors in terms of giving returns on their investment during the same period

Top line has almost doubled from 169 Crores to 330 Crores and net profit also increased to 20.8 Crores from 9.8 Crores during last 3 years.

Today, Piccadily Agro closed at Rs. 38.85, giving returns of more than 50% to our members in short span of 3 months. We suggest our members to stay invested as stock valuations are still cheap and have the potential of giving multibagger returns in next couple of years.

Our team believes that stock is currently available at attractive valuations and can reward medium to long term investors in big way.

Below is the Company Background, Recent Development and Investment Rationale:

1. Company Background

Piccadily Agro Industries Ltd is an India-based company. The company's principal activity is to manufacture sugar and their by-products. They operate in two segments, namely sugar, which is engaged in the production of sugar, molasses and bagasse, and other, which is engaged in the manufacturing of liquor. Their plant is located at Bhadson in Haryana. Piccadily Agro Industries Ltd was incorporated in the year 1994. Haryana State Investment Development Corporation and Piccadily Hotels Pvt Ltd and their associates promoted the company. They set up a new plant for the manufacture of white crystal sugar refined sugar with the installed capacity of 2500 TCD along with the facilities for co-generation of 6 MW power at Bhadson in Haryana.

During the year 2002-03, the company completed the erection of semi kesener and boiler and functioning from February 2002. During the year 2002-03, they expanded the crushing capacity from 2500 TCD to 5000 TCD at their plant in Bhadson, Haryana. The company started commercial production in their ENA unit with effect from April 28, 2009.

At the end of FY07, the company was only into sugarcane crushing and thus into the production of raw sugar, however they had started with the setting up of liquor facility. So, till FY07 they were largely a loss making company. 

Turning point came in FY08 when company entered into distillery business. For FY08 the company had started with the liquor production and sold some 2.17 million cases. In that year the company made a net profit of just Rs 12 million but that was on account of 50 million loss from Sugar Division. At the end of FY08 the company had some 270 million capital work in progress, so they were still expanding their liquor facility.

In FY13, company has sold nearly 8.4 million cases of country liquor (almost 4 times of what company sold in FY08) and their brands of the distillery i.e. Malta, Sofia, Ginn and Marshal continue to be well accepted by the people and have become popular brands in the state of Haryana. The distillery division has achieved a turnover of  Rs. 2050 millions (205 crores) in FY 2013 and contributed 62% to total sales of 3317 millions (331 crores). 

Now, if we look at first 9 months performance of 2014, company has achieved total sales of 2765 millions (276.5 crores), out of which sales of 1725 millions (172.5 crores) is achieved from distillery division where as sugar division contributed 1115 million (111.5 crores) of sales. Distillery division contribution in sales of first 9 months of FY 2014 is increased to 65% from last year contribution of 62%.

Below is the snap shot of Annual Results (in Crores):
Since 2009, company is making profits and sharing it by paying regular dividend to share holders, dividend payout average during last 4 years is above 15% and dividend yield is above 3%.

Compounded sales growth during last 3 years is 25.04%, same during last 5 years is 23.25%. Compounded profit growth is also impressive, profit CAGR during last 3 years is 25.71%, same during last 5 years is 70.4%. ROE (Return on Equity) is above 25% during for last 5 years.

2. Recent Development

Purchased 89% share holding of M/s. Nirvana Biosys (P) Ltd.

Piccadily Agro Industries Ltd has informed BSE that Company has purchased 89% shareholding of M/s. Nirvana Biosys (P) Ltd, which has become a subsidiary of Piccadily Agro Industries Limited.

M/s. Nirvana Biosys (P) Ltd incorporated in the year 2008 has set up a plant of winery at Bawal, Distt. Rewari in the State of Haryana as a joint venture with E.C. Oxenham & CY. Ltd lle, Maurice-winemakers for over 75 years with a French Lineage. The Company has a distinction of setting up of a first such winery in the Northern India.

M/s. Nirvana Biosys (P) Ltd is committed to producing affordable table wines for the Indian markets that are comparable to French & Italian Levels and has also introduced other unique variants that have never before produced in this region. The range includes Red, white, Sparkling, Port, Lychee, Mango , Rose & Herbal wines.

The products of Company are selling in more than 12 states of India along with various CSD canteens. This will enable the Company to expand the product range of the Company & will substantially affect the profitability of the Company.

On back of this news, Piccadily Agro stock has seen a sharp rally during last 2 weeks and stock price is appreciated by more than 50%.
3. Investment Rationale 

i) Company operates in 2 segment - sugar and distillery. In current financial year, profits are mainly because of distillery unit where as company incurred losses from its sugar business. Knowing the fact that sugar is a commodity and is a cyclic business in nature, entire sugar industry is going through the bad phase due to depressed sugar prices due to excess supply of sugar and increased in raw material cost (sugarcane). Once sugar prices turn favourable, we will see company delivering strong bottom line.    

ii) Looking at valuations, we find Piccadily Agro extremely cheap compared to peer companies and currently available below its intrinsic value. Considering the fact that company is generating profits from its liquor business and incurred loss from its sugar business which is cyclic in nature, stock looks undervalued and offers good upside potential with limited downside risk in medium to long term.

iii) Company is making profits since last 3 years and has paid regular dividend to share holders, dividend payout for FY 2010 was 20% and 10% for FY 2011, 2012 and 2013. At current market price of 38.5, dividend yield is at 2.6%.

iv) Our team believes that management can declare 20% dividend for current financial year based on strong earnings posted in first 3 quarters of current financial year, dividend yield in such a case will increase and can bring good price appreciation in stock price.

v) Promoters holding is 70.9% since last 3 years, need to mention that Promoters have increased their share holding aggressively in 2009 and 2010 from 59.2% to 70.9% at higher stock price which shows the confidence of promoters in their business.

vi) On equity of Rs. 235.85 million the estimated annualized EPS works out to Rs. 14.5 and the Book Value per share is Rs. 50.65. At a CMP of Rs. 38.50, stock price to book value is 0.76. The scrip is trading at 3X FY 2013-14 and 2.1X FY 2014-215 estimated earnings which make it attractive buy at current market price.

vii) We have interacted with management and believe that results will meet our expectations for FY 2013-14. In last financial year, company has achieved total sales of 330 crores with profit of almost 21 crores where as company market cap is only 92 crores, market cap to sales ratio stands at 0.3. 

viii) We expect company will continue to deliver similar growth in top line and bottom line like that of last 3 years from its distillery business. Sugar business may not perform well in near term due to depressed sugar prices but can add significant bottom line from second half of FY 14-15 which will help company to improve its operating margins.

ix) It seems that Piccadily Agro is overlooked by investor fraternity considering that this company belongs to sugar industry, where as company is now generating more than 65% of its revenue from its liquor business. If we compare Piccadily Agro with small cap companies from distillery business like Tilaknagar Industries, Som Distilleries, Jagatjit Industries and Globus Spirits, we find huge gap in terms of valuations. All these companies have lower profit margins and are trading with PE above 10, where as Piccadily Agro which also belongs to the same industry is having trailing PE of 3.3. If we consider PE of 10 like other companies from the same sector, fair stock price for Piccadily Agro works out to be Rs. 118, where as today's closing price of Piccadily Agro is Rs. 39.

x) History of Promoters could be one of the reason why this company stock is available at cheap valuations. We would like to inform our members that the former director of the company is the infamous Manu Sharma who is serving life imprisonment for the 1999 murder of model Jessica Lal. But under his leadership the company was a loss making unit.  Under the new management the company has turned around, paid regular dividends and has moved into high growth liquor business. 

Saral Gyan Recommendation: We suggested our members to accumulate Piccadily Agro Ltd in the range of 23 to 28 and hold it for time period of 12-15 months for price target of 52. Stock is giving returns of more than 50% in short span of 3 months, we advice our members to continue holding this stock. Piccadily Agro Ltd is still a decent buy at current market price of Rs. 38.85  for long term investors who can stay invested in the stock for 12 to 24 months.

Suggested Allocation: 5% of your Equity Portfolio.

Wish you happy & safe investing!

Team - Saral Gyan

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