Stock Pick From The Food & Beverages Industry

HERE IS WHY:

• A consistent history of dividend payment
• It has diversified in other businesses like Potato chips and Table Margarine
• A capacity expansion is also on the cards to meet the higher demand

The Gujarat-based Vimal Oil and Foods (VOFL) is our low price recommendation for this issue. Despite a fall in Small-Cap stocks, VOFL has held on to its gains, which is one of the compelling reasons for this recommendation. We have also considered the fantastic results that it posted in the December 2012 quarter. Promoters of the company have not pledged any share which makes it a safer counter than many other Small-Cap companies. It has recently started selling Rice Bran and potato chips which will add notable revenues to its business in a few years. 

VOFL began operations in 1993 with a 50 tonnes per day (TPD) refining capacity in Mehsana, Gujarat. It has now become a fully integrated oil processing company with a turnover of Rs 1200 crore and a refining capacity of 300 TPD at the end of FY12. The company manufactures and markets Cottonseed oil, Mustard Oil, Groundnut oil, etc. under its own brand ‘Vimal’. It also markets table margarine under the same brand name. According to Jayesh Patel, CMD, VOFL, this is the second largest brand in the market signifying the company’s popularity among the consumers.

Unprocessed oil is its major raw material which the company buys from its domestic and international suppliers. The imported raw material forms only six per cent of the total raw material and hence VOFL will not be impacted by the adverse currency movement. It also shares a good relationship with its suppliers ensuring that the company does not face any raw material shortage. VOFL is currently operating its processing capacity at a 90 per cent utilisation rate. To meet this higher demand, capacity expansion is also on the cards, informed Patel. 

Shareholding Pattern as on 31-12-2012
Promoters	55
DIIs	8.93
Non Institutions	1.69
Bodies Corporate	23.39
Total	10.99

It has recently launched its new product Rice Bran oil which will bring significantly higher revenues going forward. It has already sold Rice Bran Oil worth Rs 27 crore within the first three months of its launch, which on annualisation would form nine per cent of its total revenues, thus indicating the immense potential of this product.

One major concern on the company’s business is its thin EBITDA margins (between two to three per cent). Patel explained that the raw material prices fluctuate on a daily basis. He, however, said that the company has an ability to pass on the higher prices to the consumers and hence the margins will not come under pressure. Due to low margins, the key to profitability is selling higher volumes. Despite having thin margins, the company has not reported any loss in the last ten years. 

Another worrisome area is that of its liquidity ratios which have become weak in the first half of FY13. The inventory level also looks on the higher side. The CMD said that the inventories were higher due to a rise in the sales. He also said that the current ratio looks low but is not a problem. Historically too, the current ratio has remained between 1x and 2x. As its products are in demand on a daily basis, liquidity is not a problem for the business.

On the financial front, the company has shown a growth momentum in sales and net profit over the last 10 years. Despite being a Small-Cap company, it has always paid regular dividends to its investors. Introduction of Rice Bran Oil and the proposed capacity expansion should help it in reporting a good performance going ahead.

On the valuation front, the stock at the CMP of Rs 99 is trading at a price to earnings multiple of 7.5x of its annualised EPS of Rs 13. Considering that the company maintains its growth momentum, the target price of Rs 112 looks achievable in the next one year and hence we recommend buying this stock.

Last Five Quarters (Rs/Cr)
	Dec '12	Sep '12	Jun '12	Mar '12	Dec '11
Total Income	537.68	486.31	479.11	479.11	294.67
Operating profit	11.45	8.77	8.13	8.13	2.55
Interest	2.16	4.48	3.82	3.82	1.58
Tax	2.03	1.27	1.13	1.13	0.22
Net Profit	7.25	3.02	3.18	3.18	0.81
Equity Capital	11.42	11.42	10.55	10.55	10.55