PN Vijay bets on Thangamayil Jewellery, Agro Tech Foods

For Agro Tech, Vijay says that the company is set to benefit largely from its plan to enter the peanut butter and the possibility of food inflation falling. “I am anticipating a price of about Rs 550 for the share in the next 15 months,” he said.

Thangamayil Jewellery

Thangamayil has a long history. It was promoted as a partnership with Balu Jewellers way back in 1984, but then later converted itself into a company and then went public. It is concentrated in the southern part of Tamil Nadu from where it covers Kerala also; Tamil Nadu and Kerala account for more than 30% of the jewellery purchases in the country.

Thangamayil in the recent past has expanded rapidly and now has 14 outlets and also has a very strong branch expansion program. It’s had a sizzling last quarter where its sales went up by 80% to Rs 310 crore helped ofcourse by gold prices. Its EBITDA and profits doubled and even its EBITDA margins went up by more than 200 basis points.

Now the triggers for the stock are ofcourse the huge branch expansion plans. Even with its size now, it accounts for a very small percentage of the gold retail market in the South and the fierce brand loyalty it enjoys from its customers. The second advantage is it essentially deals in gold jewelery. 94% of its turnover comes from gold jewelery and so it’s not subject to the vicissitudes of diamond prices. It’s also a local player and is not in the international market.

One of the concerns is that it’s got a very strong branch expansion program and has borrowed money for that. Its debt equity is more than 1:1, so it has interest costs which are a bit of risk, but the cash flows are very strong. It’s expecting a CAGR of more than 45% in the next five years.

In terms of valuations, at the current price of Rs 160 it is trading slightly above 3.5 times its expected price earnings for financial year 2012. This is a very low PE even for a midcap company so I am predicting a 50% increase in its price to Rs 240 in the next 15 months.

Agro Tech Foods

Agro Tech Foods is a multinational company which is in the area of production and sale of branded and packaged foods. Its main product is Sundrop Oil and it also has Crystal and it has recently gone into the line of peanut butter. Till recently, Agro Tech Foods was a 48% associate company of ConAgra, the multi national food major, but recently ConAgra has taken over majority stake which is a huge positive for Agro Tech Food. Last year, it divested off its Vanaspati business and so its profitability has improved.

In the last quarter, the sales went up by about 14% and EBITDA margins also improved. The company had been incurring a loss in the third quarter of 2011 which has now turned positive. The ad spend has also gone down dramatically from 9.4% to 5.2% and the company has turned into net profit after a long time. This has been achieved by a strong price increase they have taken about four months back to offset the price of raw materials.

Going forward, I feel that the triggers for this stock are opening of the peanut butter manufacturing line where it’s a world leader. Its plant is expected to get commissioned in the next three months and that’s a high margin business for the company. Also most importantly with the reduction in food inflation the raw material prices of grain and raw edible oils will come down substantially for the company, while it will be able to reduce the price reductions or probably not go for price reductions. So the EBITDA margins, which are already turned from negative to positive, are expected to go up pretty dramatically.

In the case of Agro Tech Foods, it is now quoting around Rs 415 or Rs 420 and it is not cheap. It is trading at about 28 times its 2012 expected earnings per share, but it is still at a discount to Nestle which is the closest competitor to Agro Tech Foods. Since the market perception of it is not yet a multinational company, it’s not getting the type of valuation that Nestle gets. The big triggers, namely the opening of peanut butter and the fact that food inflation has really come off to negative should improve the profitability of Agro Tech Foods dramatically. One is expecting an EPS growth of about 35-40% in the coming year. So from the current price of about Rs 415-420, I am anticipating a price of about Rs 550 for the share in the next 15 months.