ICRA maintains fundamental grade of 3/5 for Sanwaria Agro

In Q3, 2011-12 SAOL’s revenues witnessed 23% decline (y-o-y) due to significant decline in sale of traded imported oils. The lower sales coupled with weak pricing environment & higher fixed costs resulted in a decline in EBITDA by 39% and decline in PAT by 49%. Overall for 9M, 2011-12, EBITDA has declined by 28%, while higher interest costs led to a decline in PAT by 52%. The EBITDA margin at 3.3% for 9M, 2011-12 is lower than our estimate of 4.45% for 2011-12. The domestic soybean production in the Oct 2011-Mar 2012 season is expected to be lower by 12% (y-o-y basis), which has pushed up the price of domestic soybean, thereby adversely impacting crushing parity vis-à-vis imported refined soybean oil.

However, this is expected to be partly mitigated by expectations of lower than expected soybean output in two major producing nations: Argentina and Brazil, which could help in recovery of global prices. Exports of soymeal during Q4 FY12 are also expected to decline at the industry level due to recent ban imposed by China on import of soymeal from India. As a results, SAOL’s sales & profit growth for Q4 FY12 is expected to be moderate for an otherwise peak quarter for soybean processing. We marginally revise our earnings estimate for 2011-12 following underperformance in Q3.

In Nov 2011, SAOL’s board had approved buyback of shares from the open market upto a maximum share price of Rs 40 and share value of Rs 16.98 crore. However, the same has not materialised till date. The company’s ambitious plans for capex through private equity infusion have been delayed due to uncertainty in the equity markets; and the same could be partly curtailed and met by debt funding through ECB in the near term

We maintain the fundamental grade of “3/5” assigned to SAOL, considering the company’s long track record and sizeable position in the domestic soya industry. However we continue to maintain sustained impact on crushing margins due to possible adverse price movements and SAOL’s management’s inventory & working capital management practices in a volatile price regime as sensitivities for possible downward pressure.

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