The market are trading at its peak, most of the popular quality stocks are already trading at stretched valuations, this makes difficult for an investor to find good opportunities to invest for long term. If one is willing to dig a bit deeper, there are plenty of investment opportunities waiting to be explored for an investor who is willing to take risk. Companies that present these opportunities are usually small cap companies that have strong fundamentals and great financial history, but remain ignored by the market for a long time. We like to call them hidden Gems. One such hidden gem is a company named Kriti Nutrients.
Incorporated in 1996, Kriti Nutrients is engaged in processing of soybeans, refining oils, and producing soya based edible products. Company has solvent extraction plant, vegetable oil refinery, and also has in house tin and glass jar making facility. The products manufactured or refined by the company are:
Vegetable oil refinery, refined soybean oil, defatted soya flakes, cattle feed, poultry feed, confectionery and dairy products, and soy products that act as raw material for pharmaceutical preparations and nutrition industry. ?
Companys biggest contributor to the revenue is refined oil, which contributes 60.76% of the total sales of the company. The second biggest contributor to the companys topline is soy meal which includes meal suitable for human consumption and dairy and poultry consumption. This product segment contributes 34% of the companys topline. Other products such as raw material for pharmaceutical preparations and nutrition industry contribute about 4.78% to the sales of the company. Below is a detailed pie chart of Kriti Nutrients revenue breakup:
Company has given good financial performance in the past 5 years. Here are the main highlights of the financial performance of Kriti Nutrients:
Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.
Company has seen good growth in basic EPS in the last 5 years, form an EPS of 0.21 per share in 2013, EPS of Kriti Nutrients have grown to 1.26 per share in 2017, a growth of 43% CAGR.
Cash EPS is a measure that looks at how much cash flow the company has generated during the financial year. Cash EPS shows how much cash the business is generating in a year. Cash EPS not only includes Cash received by the business for the products sold or services provided, it also includes any upfront payments, such as cash advance received by the business.
Kriti Nutrients has seen good growth in cash EPS in the past 5 years. From Cash EPS of Rs. 0.74 per share in 2013, to Rs. 1.74 per share in 2017, a growth of 18.6% CAGR.
Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.
The revenue of the company have been stable. Company had seen a fall in the ?revenues in the years 2014 and 2015, but the company soon recovered and is now back on its growth track. In the past 5 years, companys revenue per share has seen a fall from Rs. 93 per share in 2013, to Rs. 91.12 per share in 2017. Company is working on expanding its revenue by introducing new products that will also fetch high profit margins to the company.
Net Profit Margins:
Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.
Although companys Net profit margins are thin, but they have seen a significant growth in the past 5 years. In the year 2013, companys Net Profit Margin was 0.22% which grew to 1.38% in 2017, a CAGR growth of 44%.
ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.
Companys ROCE has seen a significant growth in the past 5 years. In 2013, Kriti Nutrients posted an ROCE of 2.81% which grew to 13.89% in 2017, a growth of 37.66% CAGR.
Debt to Equity:
Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds).
This is the only area of concern for me. Kriti Nutrients has accumulated debt in the past 5 year. While in 2013, company had debt to equity ratio of 0.69 in 2017, it grew to 0.89, which is higher than my thumb rule. If you are investing in Kriti Nutrients, do keep an eye on its debt levels.
Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.
Kriti Nutrient has been consistent in its dividend payments for the past 5 year. It has doubled its dividend per share in the past 5 years, while in 2013, company paid a dividend of Rs. 0.6 per share, in 2017, it paid a dividend of Rs. 0.12 per share.
Future Expansion Plans:
- Company is investing heavily in strengthening its distribution network. ?
- Company is investing in modernizing its refining plant and improving its efficiency.
- Company is working on identifying high margin, value added products for food, pharma and nutrition industry.
Kriti Nutrients SWOT Analysis:
Below is the SWOT (Strength, Weakness, Opportunities, Threats) analysis of Kriti Nutrients:
- Location advantage: Company is operating from Indore Madhya Pradesh and has its refining plant located in Dewas, Madhya Pradesh. The state of Madhya Pradesh contributes around 50% of the total soya bean produce in the country. Since the plant is located nearby, procuring fresh soya bean produce is easier for the company, which allows it to produce quality soy products.
- Soybean has a wide variety of uses. It is used to extract refined soya oil, soya sauce, it’s a great nutritive supplement, and is widely used in pharmaceutical preparations. Company produces wide variety of soy products used in different applications, due to which there is always a consistent demand for its products.
- Company’s entire business is operated from a single processing and refining facility located in Dewas, Madhya Pradesh. In case of a severe breakdown in its refinery, or a strike by workers ?will completely halt the operations of the business.
- With growing awareness about health among middle class consumers, there will be a growth in demand for soybean based products. Soya bean is also a good cattle feed. Because of its such a wide usage, there will always be a demand for soya products and its extracts.
- Production of Soya bean is highly dependent on monsoon. A delay or shortage of monsoon may create a shortage of raw material for the company, leading to increase in input costs, and the company may not be able to maintain its profit margins.
Why Kriti Nutrients is a good investment:
Strong Promoter Holding:
Kriti Nutrients has strong promoter holding, promotes hold 66% of the total shareholding of the company, rest 27% is held by general public. Mutual funds and financial institutions do not have any holding in this stock.
Strong past financial performance: ?
- Kriti Nutrients has seen good, stable growth in its sales and profitability. Kriti Nutrients net profit has seen a good growth in net profit in the past 5 years from Rs. 1.05 crores in 2013 to Rs. 6.31 crores in 2017.
- Company Net profit margins have improved in the past 5 years from 0.2% in 2013, to 1.2% in 2017. With addition of high margin products, the net profit margin of the company will improve in the future.
- Company has posted encouraging ROCE. This shows company is utilizing its capital efficiently to maximize profitability.
Company is undervalued compared to sales:
- Companys market value is way below its annual sales, making it an undervalued company. The annual sales of Kriti Nutrients is Rs. 456 crores while the market cap of the company is Rs. 133 crores.
Should I Iinvest In Kriti Nutrients At Current Levels?
The answer to this question depends on the time horizon of your investment.
Short term investors:
If you are a short term investor, price point of around Rs. 24 is a good entry, point with a short term view of one month to three months. You can exit the stock at Rs. 26 per share, if you have invested with a time horizon of one month. For those with a investment horizon of three months, can enter at price of Rs. 24 per share, and buy more at Rs. 22 per share. After three months, the investors can exit at Rs. 27 per share.
Long term investors: ?
Kriti nutrients is a pure long term player as it is undervalued. Investors with patience to hold a stock for long term and higher risk appetite can buy the stock at Rs. 22.5 per share and keep adding to the current position on every dip especially at Rs. 20 per share and below.
Investors with long term horizon can see ?multifold returns from the company in the next 3 to 5 years. I expect Kriti Nutrients to touch a price of Rs. 104 per share in the next 3 to 5 years, giving a return of 32% CAGR.