Recommendation from Edible Oils & Solvent Extraction

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

GOKUL AGRO RESOURCES: SURFING THE DEMAND WAVE

HERE IS WHY
✓ Increasing demand for its products
✓ New plant on the anvil
✓ Rising share of exports

FMCG stocks in recent times have shown good growth at the bourses. Better rural growth reflected in recent GDP data and softening of the commodity prices are the prime catalysts. These factors bode well for FMCG stocks. One such company that we saw will benefit from this is Gokul Agro Resources Limited (GARL). The company is an integrated agribusiness organisation processing various edible and non-edible oils (industrial oil) and meals. Its operations cover seed processing, seed crushing, oil refining and storage terminals. The company has a manufacturing facility in Gandhidham, Gujarat. 

The company’s portfolio includes more than 25 products. Vitalife, Zaika, Mahek, Richfield, Biscopride, Puffpride, and Pride are among the brands owned by the company. The company’s revenue is made up of 86 per cent edible oils and by-products, 10 per cent non-edible oils, 2 per cent vanaspati and the rest oil cake. In Gandhidham, the company has manufacturing facilities as well as self-owned tankers and storage terminals. Its edible oil refining capacity is 2,800 MT per day and its castor oil refining capacity is 600 MT per day.

The company undertook largely debtfunded capex of ₹230 crore in fiscal 2022 for establishment of an oil refining unit at Krishnapatnam, Andhra Pradesh, which has capacity of 1,400 TPD. The capex is expected to be funded through term debt of around 70-80 per cent and balance through internal accrual. The operations of the refinery are expected to commence by Q3FY23. The company currently has a network of more than 500 distributors and its product is marketed in 35 international countries and 17 Indian states. In FY22, export contributed 10 per cent of the revenue. It sells its products in the United States, South Korea, the European Union, China and other countries. The company reported consolidated revenue of ₹2,776 crore in Q2FY23 compared to ₹2,694 crore in Q2FY22, a YoY growth of 3.05 per cent. EBIDTA grew by 34.70 per cent YoY to ₹69 crore from ₹52 crore. Such growth was a result of improving margins that increased by 60 basis points. Net profit too saw better growth and for Q2FY23 this stood at ₹29 crore with a YoY growth of 35.12 per cent as against ₹22 crore in Q2FY22. For FY22, the company saw higher-than-expected increase in revenue to ₹10,407 crore and improved operating margin of 2.3 per cent.

This resulted in healthy cash accrual of ₹152 crore in fiscal 2022. All this helped GARL to improve its return ratios substantially. The ROE increased from 13.4 per cent in FY21 to 25.33 per cent in FY22. Similarly, ROCE increased from 31.67 per cent to 35.52 per cent in the last one year ending FY22. In terms of valuation, the shares of GARL discounted last 12-month earnings by 12.8 times. This is one of the lowest among the industry and much below the industry average. What also gives confidence in the company is that the promoters have recently increased their shareholding.

This has increased from 69.82 per cent for the quarter ending December 2021 to 72.17 per cent currently. Going ahead, there are various positives for the sector as there is a continuously increasing edible oil demand due to rapid urbanisation, changing dietary patterns and the growth of the food processing sector. We believe that GARL has huge potential to capture the domestic as well as international markets. Looking at its attractive valuation and growth potential we advise readers to BUY.