Manorama Indsutries IPO Analysis (Neutral)

Review By on September 19, 2018

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Manorama is in the business of selling exotic and specialty fats which are manufactured from tree borne seeds such as Sal seeds, mango kernel etc. The company began its journey with extracting oil from Sal seed and Mango Kernel and gradually forayed into more exotic products. The company procures these seeds from tribals living in the forests of Jharkhand, Chhattisgarh, Odisha and MP through their collection centres. These seeds are further processed to make products like stearine & Olein which is sought after highly in the chocolate and cosmetics Industry.

Point of Interest 1: Well, the company is also involved in trading of agro commodities like rice, maize, soya etc. and its major revenue is derived from trading operations but it has made consistent losses in such operations over the  past few years and has decided not to pursue it further.

            ' We earlier harboured the ambition of becoming agro-product trading house along with manufacturing. However, the trading business could not yield results as envisaged by our management. Though we have implemented better operational controls and systems, as a part of our future business strategy, our Company may not pursue the trading business. '- DRHP

Particulars(in Cr)	FY18	FY17	FY16	FY15	FY14
Revenue from Trading (% of revenue)	158 (72%)	87 (60%)	82 (63%)	54 (41%)	85 (82%)
Operating Income from Trading	-0.47	-8.26	7.2	-7.9	-0.08

 

So profits are a result of the Manufacturing business alone?

Yes, the Manufacturing business has been the only profit source for the company.

Particulars(in Cr)	FY18	FY17	FY16	FY15	FY14
Revenue from Mfg. (% of revenue)	62 (28%)	58(40%)	49 (37%)	79(59%)	19(18%)
Operating Income from Mfg.	18.1	11.9	-1.9	10.5	2.6

 

Point of Interest 2: Around 60 % of manufacturing revenue is from exports.

But what happened in FY 18?

Although revenue from manufacturing business fluctuated a lot, operating margin during FY 18  increased as operating expenses reduced considerably. According to the company increase in margins is due to A reduction in raw material cost & increase in oil yield recovery.

So how is the Overall Scenario?

 Manorama’s revenue has been consistently growing at a CAGR of 19 % since 2014. From 104 crores to over 220 crores, the company has shown considerable initiative in expanding their top line.

Particulars(in Cr)	FY18	FY17	FY16	FY15	FY14
Total Revenue	220	145	131	132	104
PAT	15.9	2	1.7	1.4	1.2
PAT Margin (%)	7.23	1.41	1.3	1.06	1.15

 

Why IPO?

The company wants to raise money to set up an integrated state of the art manufacturing plant where, all processes including Crushing, Extraction, Refining, Fractionation & Interstification will take place. This new integrated plant will largely process Indian exotic tree borne seeds like Sal, Mango, Dhupa etc. to service the CBE (Cocoa Butter Equivalent) demand within India & Globally.

'Our Company is in the process of setting up an integrated manufacturing facility at Raipur with a capacity of around 11,250 tonnes p.a. of specialty fats and CBE; which shall enable us to carry out the entire manufacturing operations under one roof'- DRHP

Particulars ( in Cr)	Amount Required	IPO Proceeds	Internal Accruals
Establishing new manufacturing plant	80.00	56.00	24.00
General Corporate Purposes	8	8	-
Net IPO Proceeds	64

Can new manufacturing facility pave the way for Manorama’s Growth?

The company wants to fulfill two objectives by establishing this manufacturing plant

1. Reducing logistics cost

The current business operation of the company involves two processes:

(1) Solvent extraction and pre-processing: The company outsources this activity to third parties in Chhattisgarh who operate under the supervision and guidance of company.

(2) Refining and fractionation: This process is carried out at their manufacturing facility in Nagpur. This distributed set up with processes and warehouses at multiple locations including Nagpur and Raipur and other parts in Chhattisgarh is leading to very high logistics cost & loss on account of wastages.  Hence setting up an integrated state of the art manufacturing plant where all processes will take place at one location will definitely help in reducing cost.

2. Increasing Production of CBE

The Company has largely been focused on the manufacturing of stearin, an intermediate product, which needs to be mixed with Palm oil to obtain CBE. By setting up this new facility, the current combined installed capacity will increase from 4500 MT p.a to 11500 MT p.a the company wants to manufacture more of CBE than Stearin and grow the business.

'As India has opened for 5% CBE consumption with effect from 1st January 2018 & hence the demand from MNC has gone up & to cater to this demand, setting up this integrated manufacturing facility seems to be a good strategy for the company’s long-term growth'- DRHP

So should you buy?

Based on the annualized earnings the asking price of Rs 188 translates to PE of about 20. We don’t know what’s a good company to compare this with. The company’s decision to focus on manufacturing and giving up trading makes sense. This could help in improving its foothold in exotic and specialty fat market if it sees growing demand from cosmetics and chocolate industry. But whether this demand will increase? We don’t know. We will let you decide.

We here at Finception, wish the company all the best in its future endeavor.