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Friday, February 11, 2011

Sabero Organics Gujarat Ltd: buy at Rs 40 or below

I was consistently asked for the tips by some of you. I was consciously avoiding any tips but have to succumb to the constant follow ups. Here is my find Sabero Organics Gujarat Limited. I believe it’s a fundamentally good company and can be bought at the CMP of Rs 40.

I am providing below my findings and request you to share your thoughts on this.

About the company:
Sabero Organics Gujarat Limited was established in the year 1991 to manufacture specialty and crop protection chemicals. With its manufacturing facilities located in Gujarat, India, Sabero is an ISO 9001 and ISO 14001 certified company with a diverse product portfolio, manufacturing and marketing a variety of fungicides, herbicides, insecticides & specialty chemicals. Sabero is among the lowest cost producers in the world for its key products and its chemical complex in Gujarat has been recognized as a pioneer industry by the government of India.

The company has employee strength of over 700 people possessing competent managerial, technical, supervisory and administrative skills. The Research & Development department boasts of sophisticated analytical equipment and a well qualified team of scientists. Technologies of all products manufactured by the company have been developed in-house and are well accepted and acclaimed by customers.

Sabero has extensive manufacturing facilities with state-of-the-art sophisticated equipment and PLC based process control. The company has offices and subsidiaries in Europe, Brazil, Argentina, Philippines and Australia. It is also a recognized export house with over 60% of its revenues from international sales.

Sabero Organics Gujarat looks attractive from the long term perspective. The stock is trading at a price of Rs 40 (PE: 3.91, Dividend yield: 2.96). The 52 week high and low of the stock is Rs 89 and Rs 39 respectively. I expect the company to show at least double digit growth (15-17% growth) in top-line. Sabero is in the business of Pesticides / Agrochemicals. Let’s look at all the key aspects of this company:

The trailing 12 months PE of Sabero is 3.91 (average PE of last 3 years 6.63) and the dividend yield is 2.96%.This is positive. The book value is 34 and stock is trading at 1.17 times of book value (Graham would not pay more than 1.25 times book value and Sabero is available 1.17 times book value). The Net Current Assets Value (NCAV) is Rs. 34. The NCAV determines if the company was worth its market price. This gives a significant cushion while buying the stock. In simple words this is the cash available per share.

The shareholding pattern of Sabero suggests that out of the equity of 3.38cr shares promoters have 42%, other corporate 8%, institutions & FIIs 18% and public 32%. But more importantly promoter group companies (Karville Company, Harvard Finance Company and Kalah Corporation) have acquired 27,70,396 shares between 29 March 2010 to 26th April 2010.

The sales of the company have never gone down in last 5 years. In 2010, the sale was Rs 461cr and it was Rs 126 cr in 2005. Similarly Net Profit has never come down during last 5 years except in 2006.

It is a low debt company with just Rs 82 cr in debts. The D:E ratio of just 0.71. Also more importantly the entire debt is secured debt and the company does not have any unsecured loans which must have kept the interest cost in check.

Sabero, with revenue of Rs 461cr, is available at just Rs 135cr (market cap).

Negative: the company does not have a history of paying the dividends. But it has paid the same for the first time last year. May be because now it’s making comparatively bigger profits/margins.

Sabero Organics markets & sells its products through a network of distributors worldwide under its brands and also the brands of distributors. In addition, the company has a robust B2B business and is a main supplier of formulations and active ingredients to many reputed companies including multinationals.

The main products, namely Acephate, Mancozeb, Chlorpyriphos, Glyphosate, Dichlorovos, Methamidophos, Propineb, are the largest selling generic products in their respective segments with markets in most regions of the world.

The Segment wise percentage break up of Sales in 2008-2009: Herbicides: 20%, Fungicides: 39%, Insecticides: 34%, and Pesticide Intermediates / Specialty Chemicals: 7%.

The Company has exposure in all three segments of the crop protection industry i.e. Fungicides, Insecticides and Herbicides. In order to have diversified portfolio, the Company has strategically concentrated on one or two key products in each of the segment. The Company has also made its presence in these segments in such a way that the products have different selling seasons which ensures fairly stable and uniform sales throughout the year to overcome historical seasonality of the business.

The major barrier to entry in the agrochemical business is product registration for sales in most international markets. Obtaining registrations and approvals of different countries takes time, but Sabero Organics has comprehensive registration dossiers. It has over 200 registrations completed in around 65 countries and another 200 are in process.

Key Management:
Mr. Hero J. Chuganee, Chairman
Mr. Mohit H. Chuganee, Vice Chairman & Managing Director
Mr. Sumit H. Chuganee, Executive Vice Chairman & Whole-time Director
Mr. S.R.B. Nair, Whole-time Director & Chief Operating Officer (Upto 31/07/2010)
Mr. Rajesh Sharma, Whole-time Director & Chief Operating Officer (W.e.f. 31/07/2010)
Mr. Kishore Dudani, Director (W.e.f. 30/07/2010)
Mr. John R. English, Director
Mr. Raj Tandon, Director
Mr. Anand Swaminathan, Director (upto 26th May,2010)
Dr. Mahendra S. Kothari, Director

Hero J. Chuganee

Founder of Sabero. More than 40 years of experience as a technocrat and has been a CEO of Rohm and Haas, India for 15 years. His educational qualifications are equally impressive as he completed his post graduation from the University of Surrey in UK, in the year 1960 after which he graduated from an Advanced Management Programme at Harvard in the year 1987. Mr Hero J Chuganee has also been associated in leadership positions with trade organizations like President, Indian Chemical Manufacturer’s Association and Indo-American chamber of Commerce.

Mohit H. Chuganee
(Vice Chairman and Managing Director)

Co-founder. Been with the company since its foundation and has experience in multinationals and has worked in the USA and Europe. In the year 1988 he completed his graduation in engineering from Virginia Tech University in USA after which he also completed an MBA programme from the Thunderbird University, USA in 1989. He has been instrumental to the growth of the company.

Sumit H. Chuganee
(Executive Vice Chairman & Whole-Time Director)

Co-founder. Has been with the company since its inception. He has extensive experience in USA with multinationals. Sumit is an electrical engineer from Virginia Tech in USA and also has an MBA in Finance from the Fuqua School of Business at Duke University, USA . His previous experience includes co founding Sabero Document Management Limited, along with Mohit, which was built up into a nationwide business with document management centers in Mumbai, Delhi, Chennai, Bangalore, Gurgaon and subsequently sold to Brambles, Australia, a Fortune 500 company.

Expansion program:
The Company is currently in the process of setting up an export-oriented unit for technical active ingredients, their formulations at Dahej SEZ in Gujarat with an estimated capacity of 2650 tonnes per annum to be commissioned by November, 2011. The capital cost of the said scheme of Rs.55 Crores will be financed by combination of external commercial borrowings of USD 9 million and internal accruals. The Company expects to generate additional sales revenue of 2-3 times of the investment after commissioning of this new project in Dahej SEZ.

Global Agrochemical Industry:
There is great potential in the global agrochemical industry,which has grown from USD 25.8 billion in the year 2001 to USD 41.7 billion in 2008. The industry is expected to be worth USD 196 billion by 2014, with Asian markets accounting for nearly 43% of the total revenues.

Indian Agrochemical industry:
As the Company directly depends on Agriculture Industry, the Agrochemical Industry's performance is based on the success and performance of the Agriculture Industry. The Indian Agriculture Industry provides significant support for economic growth and social transformation of the country. As one of the world's largest agrarian economies, the agriculture sector (including allied activities) in India accounted for more than 15% of the GDP and contributed approximately more than 10% of total exports. Notwithstanding the fact that the share of this sector in the GDP has been declining over the years, its role remains critical as it provides employment to around 60% of the workforce. Agriculture Growth Rate had grown earlier but in the last few years it is constantly declining. Still, the Growth Rate of Agriculture in India in the share of the country's GDP remains the biggest economic sector in the country Inspite of its decline in the share of the country's GDP Agriculture Growth Rate plays a very important role in the all round economic and social development of the country. Agriculture Growth Rate in India's GDP has slowed down as the production in this sector has reduced over the years. The agricultural sector had low production due to a number of factors such as illiteracy, insufficient finance, inadequate marketing of agricultural products and the average size of the farms being very small. Secondly, growth in production of agricultural crops depends upon acreage and yield. Further, multiple cropping can be used as a means to increase the gross cropped area. It is clear that the main source of long-term output growth can only be improvement in yields. Improvement in yield, which is a key to long-term growth, depends on a host of factors including technology, use of quality seeds, fertilizers pesticides, micronutrients and irrigation. Each of these plays an important role in determining yield level and in turn augmentation in the level of production.

The Indian Agrochemical Industry which is estimated at USD 1 billion ranks 2nd in Asia and 12th globally. It is estimated that India loses approximately 18% of its crop yield, valued at Rs.90,000 Crores, due to pest attacks each year. In value terms, the size of the Indian pesticide industry was estimated at Rs.7,400 Crores in 2007. Agrochemicals are classified as Insecticides, Herbicides and Fungicides. In India, insecticides contribute the largest share at 62% compared to global consumption of 28%. Globally herbicides constitute the largest consuming Agrochemical with a share of 48%.

Demand for Agrochemicals is expected to be very strong in the coming years due to the following reasons:

* International comparisons reveal that the average yield in India is only 30% to 50% of the highest average yield in the world. Shortage of food across the world has already pushed the demand for agrochemicals to a huge extent.

* The World's population is currently 6.7 billion and 750 million people are born every year. The population is expected to reach 9 billion by 2050. To keep pace with the growing population, food production, especially in developing countries will have to double by 2050.

* The farmers will have to boost their yields. This will encourage the demand for agrochemicals, being one of the key inputs to increase in yields.

* Crop prices remain stable and are on an uptrend for the last one year, improving the profitability of the farmer.

DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective. The information contained herein is based on analysis and up on sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations above. I sincerely request you to do your homework before you take any position whatsoever. I, my relatives or friends may have position in this company.

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