Thursday, March 29, 2012

>ANIL: High growth potential for Indian starch industry compared to global average (STARCH APPLICATIONS)

Well placed to cash in on the potential opportunity

  High growth potential for Indian starch industry compared to global average: The starch industry in India is at a nascent stage with the per capita consumption of starch in the country being the lowest at 1.3kg compared with 64.5kg in the USA and over 10kg in many comparable Asian countries. However, the same is likely to improve in the coming years, as
starch finds diverse applications in the food and beverage, paper, pharmaceutical, textile and animal feed industries. Thus, with the rising demand for starch products from various industries, the Indian starch industry is expected to grow by around 15% per annum in the coming years.

■  Anil, largest player with wide product portfolio: Anil is one of the top three players in the domestic starch industry with an organised market share of close to 20%. However, in the high-margin value-added starch products it has a market share of 40-50%. Research and development (R&D) has played pivotal role in Anil’s success, helping the company to gradually shift from a commodity product business to a business of value added products. The company has reputed clients including players like ITC, Nestle India, Amway, Dabur, Heinze, Lupin, Arvind Mills and Raymond.

Robust track record with aggressive expansion plans: Anil has grown its revenues at a robust 31% compounded annual growth rate (CAGR) in the tough period of FY2008-11. The improving revenue mix in favour of value-added products has enabled it to double its operating profit margin (OPM) to 17.2% from less than 10% earlier, resulting in an exponential growth at
76.7% CAGR in its earnings during the three-year period. Going ahead, we expect Anil’s revenues to grow at a CAGR of 25% over FY2011-14 and the increasing proportion of the value-added products would further boost the margins to around 19% in the next two years.
To achieve the same, the company is expanding its manufacturing capacities to 1,000 tonne per day (tpd) in a phased manner, aims to launch new products and enhance its geographical reach to newer overseas markets.
■ Additional triggers—food processing park and land bank: The Anil group of companies received the approval from the ministry of food processing industries of India to set up a Mega Food Park project in Gujarat. The group will form a special purpose vehicle (SPV; a
consortium of companies from the food processing, logistic and infrastructure businesses) in which Anil will have a majority stake of 40%. The group will bring in land of 87 acres (valued at around Rs25 crore) for its 40% stake in the SPV. Once the project is completed it will add tremendous value to the stock of Anil. The company’s manufacturing facility is located at
Bapunagar, Ahmedabad in an area covering 1.5 lakh square metre. In future the company could shift its manufacturing facility to a special economic zone / tax benefit zone, thereby unlocking value in terms of land bank (the Bapunagar land area is currently valued
at Rs800-900 crore).

Outlook and valuation: With the enhancing capacity, Anil is well poised to cash in on the opportunity created by the increasing demand for starch in the domestic market. With most of the starch consuming industries growing at a healthy rate we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. Further, with an expected improvement in the OPM, the bottom line is expected to grow at a CAGR of 37.0% over FY2011-14. At the current market price the stock trades at 3.5x its FY2013E earnings per share (EPS) of Rs70.4 and 2.3x its FY2014E EPS of Rs106.1 (rough estimates). We see potential for a substantial upside in the stock over the next 12-24 months. Historically, the stock has traded at price/earnings (PE) multiple of 4-5x its one year forward earnings.

Company background
Anil is the flagship company of the diversified Anil group. It is a leading player in the Indian corn wet milling industry having a robust manufacturing infrastructure as well as R&D and application development capabilities. The company, established in 1939, manufactures a varied range of corn-based products, such as native starch, chemical starch, modified starches, dextrins, dextrose monohydrate, liquid glucose, corn syrup and sorbitol. Anil’s manufacturing facility is located in a prime locality in Ahemdabad spanning an area of 150,000 square metre and is close to an international airport. Its core strengths are R&D, technology and product development, which led to a strong improvement in its profitability in a short span of time. Anil’s top line and bottom line grew at CAGR of 31% and 77% respectively over FY2008-11.

Starch industry: an overview

Global starch market
Starch is one of the most popular biomaterials having diversified applications in the food and beverage, paper, pharmaceutical, textile and animal feed industries across the globe. The present global starch market is around 70 million metric tonne (MT) and is expected to grow and reach around 80 million MT by 2015. The modified starch market is expected to be the fastest growing segment over this period, thanks to the rising health awareness across the globe and the growing functional and nutritional needs in the global economy that are resulting in a higher usage of innovative modified starches. Though corn starches, wheat starches and potato starches are popular starches across the globe, corn starches are the most popular and most widely used across applications. China has the highest production of starch with 17.5 million tonne production, surpassing the USA with 13 million tonne of starch output.

Indian starch industry
The Indian organised starch industry has an estimated size of around Rs2,000 crore. The industry is at a nascent stage comprising around 40 products from corn derivatives while the international market comprises more than 800 starch and derivative products. With companies globally focusing on innovations in their product portfolio through R&D, the demand for starch sweeteners and other derivatives has picked up in a number of industries in India as well as in the international markets. During the period 2005-10, the Indian starch industry grew at a CAGR of 21.81% and is expected to grow at 15% per annum in the coming years.

Key positives
 Anil, largest player with wide product portfolio: Anil is one of the top three players in the domestic starch industry with an organised market share of close to 20%. However, in the high-margin value-added starch products segment it has a market share of 40-50%. The company’s capacity utilisation in FY2011 stood at 75%, which was an improvement over the 60% capacity utilisation recorded in FY2008. To grab a larger share of the domestic starch market and meet the increasing demand, Anil is planning to enhance its capacity to 1,000 tonne per day in a phased manner. R&D has played a pivotal role in Anil’s success, helping the company to gradually shift from a commodity product business to a business of value-added products.
It has strong clients such as Nestle India, Dabur, Heinze, Lupin, Raymond, Vardhaman, Arvind, Century Textiles and BILT. The top five clients contribute close to 10% of the company’s top line.

Top line growth to sustain at 25% in the coming years: Anil manufactures a varied range of starch products used in various industries, such as food processing, beverages, confectionery, textiles, pharmaceuticals and paper. Most of the industries are growing at 15-25% per annum. With an increase in the demand for value-added products in the domestic and international markets, we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. The growth will be driven by a mix of volume growth and improved sales realisation over the same period. While the volume growth is likely to remain in mid single digits, the realisation growth would be in the 16-18% range in the coming years.

OPM to stand at 19% in FY2014: The company has increased its focus on selling value-added high-margin products which has helped it to clock better realisations. The contribution from the value-added products has risen from 30% in FY2008 to 70% in FY2011. This along with stringent cost reduction measures has aided the company to achieve a strong improvement in the OPM. The OPM of the company improved to 17.2% in FY2011 from 9.1% in FY2008. The company expects the contribution from the valued-added products to go up to 80% in FY2014, which will help it to achieve an OPM of around 19%. Thus, the company is expected to post a strong operating performance in the coming years.

Key risks and concerns
A working capital intensive company: Being in a commodity-linked business the company has a high conversion cycle of around 180 days. Since most of Anil’s value-added products are in the introductory phase, the credit period given to the customers for such products is high in comparison with that for some of the other products in the portfolio. Unless these value-added products attain certain maturity, we don’t expect the cash conversion cycle to improve
substantially and hover in the range of 180-190 days in the coming years.
Debt/equity ratio stands at 2.0x: The company’s debt/ equity ratio currently stands at 2.0x, as it requires short-term debt for its working capital requirement. Also, the company is planning to fund its capacity expansion plan by raising funds through debt. Hence, we expect the debt/equity ratio to stand at around 2.0x in FY2012E. The higher interest cost is likely to
put some pressure on the bottom line growth in the near term. However, we expect the debt/equity ratio to improve to 1x by FY2014.
Increase in raw material prices to affect marginsMaize is one of the key raw materials for manufacturing starch. The maize prices have gone up to Rs13.5 per kg in March 2012 from Rs12.9 per kg in March 2012. The prices have currently stabilised at around Rs12 per kg. However, any significant upward movement from the current level would put pressure on the
company’s margins if Anil is not able to pass on the entire hike in the raw material prices.

Outlook and valuation
With the enhancing capacity, Anil is well poised to cash in on the opportunity created by the increasing demand for starch in the domestic market. With most of the starch consuming industries growing at a healthy rate we expect Anil’s top line to grow at a CAGR of 25% over FY2011-14. Further, with an expected improvement in the OPM, the bottom line is expected to grow at a CAGR of 37.0% over FY2011-14. At the current market price the stock trades
at 3.5x its FY2013E EPS of Rs70.4 and 2.3x its FY2014E EPS of Rs106.1 (rough estimates). We see potential for a substantial upside in the stock over the next 12-24 months. Historically, the stock has traded at PE multiple of 4-5x its one-year forward earnings.