AVT has a unique business. Wait for the price to cool off
Moneylife Digital Team
AVT Natural Products is a small dormant stock that suddenly started moving up sharply in mid-June—unfortunately, just around the time we stumbled upon its attractiveness. AVT Natural is into cultivation, harvesting, processing and extraction of crops. It makes marigold oleoresins, spice oleoresin and essential oils, and value-added tea. As it is situated in the port city of Kochi, it enjoys the advantage of proximity to the source of raw materials and logistics benefits of import & export facilities.
The company’s main product, marigold oleoresin, is a key ingredient used in eye healthcare. It is also used widely in the poultry sector. Formed in 1994, AVT Natural started marigold cultivation on 200 acres of land that has gone up to 35,000 acres producing 100,000 metric tonnes (mt) of flowers. The marigold business is an integrated project, starting from seed development and going on to oleoresin with capability to produce nutraceutical-grade products. AVT Natural has also ventured into the safe food natural flavours and colours production business. Its product range includes paprika oleoresin, turmeric extracts, marigold extract, rosemary extract, green tea, paprika capsicum and other specialties. Credited with being the largest exporter of marigold oleoresins, the company also exports cured vanilla beans.
The manufacturing plants are located in Tumkur and Bydagi (Karnataka), Sathyamangalam (Tamil Nadu), Hindupur (Andhra Pradesh), Chichkeda (Madhya Pradesh) and Aluva (Kerala). The company has a wholly-owned subsidiary AVT Natural Pte, Singapore (including its subsidiary, Heilongjiang AVT Bio-Products in China).
To meet the objectives of maximising net farm returns, de-risk the business from the vagaries of nature affecting the availability of marigold and ensuring quality produce at optimum price, AVT Natural has adopted backward integration programmes—the contract farming model—in various geographical locations. The post-harvest processing centres are also located close to agricultural areas to reduce cost of transportation as well as to cut down the loss of the active ingredients. These centres are spread across various locations in Tamil Nadu and Karnataka.
AVT Natural has two large continuous extraction plants that can process up to 100mt of raw materials per day, a medium-sized batch plant that can process about 4mt of raw materials per day and small pilot plants that can process 15kg per day. The company’s R&D team focuses on seed development that maximises net farm returns. It also works in collaboration with Illinois-based Ball Helix in seed development to suit local agro-climatic conditions. It has also formed alliances with Iowa-based Kemin Health, a nutritional ingredient manufacturer. AVT Natural is also planning to diversify further into other crops, to produce raw material for flavouring and colouring. It is also working on a couple of new crops.
Since November 2010, AVT Natural has outperformed the benchmark Sensex. For the financial year ended 31 March 2011, AVT Natural recorded a standalone net profit of Rs10.69 crore against Rs6.52 crore in FY09-10. In the same period, the company’s standalone net revenues increased to Rs138.41 crore from Rs82.97 crore. In FY10-11, the company’s standalone earnings per share (EPS) rose to Rs14.04 from Rs8.56 in FY09-10.
For the March quarter, net profit increased to Rs5.12 crore from Rs2.99 crore in the corresponding period last year. The company’s standalone net revenues for the March 2011 quarter stood at Rs53.64 crore compared to Rs24.49 crore in the corresponding period last year. Its standalone EPS for the March 2011 quarter increased to Rs6.72 from Rs3.93 in the corresponding period last year.
Over the past five quarters, AVT Natural has reported an average growth in revenues and operating profit of 55% and 40%, respectively. Its average operating margin is 17% and return on net worth is 13%. Its market-cap to revenues is just 0.78, while its market-cap to operating profit is just 4.33 times. The stock price has shot up recently. Wait for it to cool off and buy for the long term.
Promoted by AV Thomas group, AVT began as a 100% export oriented unit—as a single-product, single-customer company—but has now become a multi-product, multi-customer company. The AV Thomas group of companies has diversified businesses that include tea, rubber, and consumer products such as spices, food ingredients, leather and healthcare products.