India, irrespective of being the fifth largest producer of oilseeds in the world, behind the US, China, Brazil, and Argentina is the second largest edible oil importer in the world. The reason is the production and productivity of oilseed has been stagnant for several years. Another reason is that only a small share of oilseed production domestically undergoes solvent extraction and oil refining, which are used in the process to manufacture edible oil. Recently, the government has cut the import duty on imported edible oil to control inflation. This will make imported edible oil cheaper than domestic ones and could see an increase in the imports subsequently in the coming months.
Another important point is that most of the volumes come from trading activity, which works on very low margins. Very few companies are trying to improve margins by increasing brand-building activity and make the consumers brand conscious.
Business
Gokul Refoils and Solvents, a Gujarat-based leading edible oil company, is primarily engaged in the business of solvent extraction, refining of edible oils, and vanaspati manufacturing. The company has three plants in Gujarat and four 1.5 MW each windmills. The company has seed processing capacity of 680 tonne per day (TPD), Solvent extraction (600 TPD), refining of edible oils (1200 TPD), and vanaspati manufacturing (200 TPD). Its products include mustard oil, sunflower oil, groundnut oil, cottonseed, palmolein, vanaspati, and soyabean oil. And from this, the majority of the production came from palmolein (55.59%), followed by soyabean (24.28%), cotton oil (7.71%), miscellaneous (12.43%).
Objects of the issue
The company has incorporated a wholly-owned subsidiary in Singapore to negotiate with the local oil suppliers to procure raw materials at reasonable terms. It intends to invest Rs 25 crore in the subsidiary from the issue proceeds. Majority of the funds are intended to be utilised for working capital requirement (60.69 crore). As a part of backward integration it intends to invest Rs 51 crore in a new 1500 TPD soyabean processing plant near Gandhidham Gujarat, as currently Gokul Refoils only has solvent and refining capacity. Remaining funds would go in for expansion of the existing edible oil refinery, brand-building, and increasing warehousing capacity. The total issue size considering the higher band is Rs 135 cr.
Financials
From the financial side, the company has been consistently growing over the past five years. The total sale increased from Rs 414.96 crore in the FY02-03 to Rs 1562.48 crore in FY06-07. As refining edible oil companies’ sales includes significant trading activity, over the years, Gokul Refoils trading activity in value terms has been more or less stagnant.
The trading activity as a percentage of total sales has decreased from 38% to 15% due to higher manufacturing sales. Its exports share has gone up very rapidly in the less than three years from less than 1% to around 13% in the last eight months ended on November 2007. As far as product mix is concerned cake and refined edible/ non-edible oil contributes 85% of the total sales. The net profit also saw increased from Rs 6.78 crore in FY01-02 to Rs 26.93 crore in FY06-07. The net margins improved from 1.61% to 2.83% in the same period.
Valuations & concerns
From the valuation point Gokul Refoils fully diluted annualised earning per share is Rs 21.50. Considering the higher price band, the annualised price to earning of 9(x) is lower than the peer groups like Agro Tech Foods (25.25), KS Oils (16.56), Ruchi Soya Industries (16.86), and Sanwaria Agro (8.737). The company has a litigation case going on since 1994 on the intellectual property over the use of the trade mark ‘Gokul’ filed by a milk producer M/S Kolhapur Zilla Sahakari Dudh Utpadak Sangh. The revenues could get adversely affected if the result is against Gokul Refoils is major concern. One must take a note that there is conflict of interest between the company and Gokul Overseas a partnership concern involved in the similar business. Gokul Refoils and the promoters in the partnership holds stake in the company. Also the company has allotted pre-IPO placement to Granite Hill Capital Ventures and some other investors at a price of Rs 185 per share. Investors must consider above factors before investing.
