SEBI (Research Analyst) Registration Number: INH200004471


2 June 2018

Sanwaria Consumer - The Red Flags

In this post, we will highlight the red flags that we noted in the financials of Sanwaria Consumer.

About:


Sanwaria Consumer is a part of the Sanwaria Group. Old timers in the stock market will remember this company as Sanwaria Agro Oils which was in the business of Soy (Soyabean, Soy oil, Soy meal). The company has re-branded itself into a pureplay FMCG company and has entered into rice, maida, besan, rawa, etc.

The company was incorporated in 1991 and is based out of Bhopal, Madhya Pradesh. The company has plants in Itarsi, Mandideep, Betul and Harda (All in MP). The product mix has drastically changed over the last 4 years as revenue share of Soya Meal fell from ~ 83% to ~ 20% and Basmati Rice's revenue share went up from 2.6% to 52.69% which means that the company sold roughly Rs 2,658 Crores worth of Basmati rice in FY18.


Apart from it's agents & distributors network, the company sells it's products through Sanwaria Consumer Shoppy across Madhya Pradesh. The company has 25 stores currently and plans to open 500 stores across India (Although the company has given no timeline on this).

Financials?

The company is declaring it's results within 3 days of quarter end. That is very fast for a company clocking sales of more than Rs 5,000 Crores a year!


This time, the company declared results for Q4FY18 on 11 April, 2018 and on 31st May, 2018 it publishes revised results. The PAT is lower by ~ Rs 15 Crores in the audited financials.


Further, the company has given loans of Rs 47.83 Crores (FY17 Balance sheet) to related parties. These loans have been outstanding since 2010. During the year, some repayment is done but similar amounts are given back as loan. The company has not received any interest on these amounts given as loan as disclosed under Related Party Transactions - Interest Received.



The associates & subsidiary include a company in Singapore which has done no business during the year.

Receivables?

The company has receivables of Rs 727 Crores. The company's PAT in FY 17 was ~ Rs 43.97 Crores! Even a 10% write-off in receivables can wipe out a years profits for the company.

Marketing Expenses?

The company has the lowest marketing costs when compared to it's peers KRBL and LT Foods which are big names in the Basmati Rice industry.


Sanwaria Consumer spends just Rs 57.3 Crores on marketing to generate revenues of Rs 5,000+ Crores while KRBL and LT Foods have to spend 3x to 5x of that amount to generate lesser revenues.

Freight?

Sanwaria Consumer has no expenditure on freight.


How does the company transfer it's stock from the plant / mills to point of sales. KRBL and LT Foods both spend > 1% of their revenues on Freight.

Employees?

Another interesting observation is that Sanwaria Consumer has an ultra low employee expense for a company that is generating > Rs 5000 Crores in revenues.


Sanwaria Consumer spends just 6.94% of what KRBL spends on employees and it generates a much higher revenue. LT Food spends 25 times more on employees to generate Rs 1,400 Crores less than Sanwaria Consumer.

What took KRBL (India Gate basmati rice) & L T Foods (Daawat basmati rice) decades to build, Sanwaria built it in just 3-4 years with such low employee expenses and marketing costs. It takes a lot of time and resources (Money, offers, etc) to build a strong distributor network, Sanwaria Consumer claims to have done the same with little money in a short time.

KRBL enjoys a ~ 35% market share in the domestic branded basmati rice market while L T Foods enjoys a 22% market share of the domestic branded basmati rice. Nielsen's market analysis shows this:


Sanwaria's reported numbers and the market data doesn't sync in. Further, this comes at a time when both KRBL and L T Foods are posting single digit growth rates. If Sanwaria's numbers are true, then it should have been the market leader in the domestic basmati rice industry!

Board works for free?

The company is promoted by the Agrawal family who have been in the milling of pulses and commodity trading since the 1950s. The company's executive chairman is Mr. Gulab Chand Agarwal. Surprisingly, no one - not even then independent directors charge a penny to work for the company.


Further, the company pays a total annual remuneration of Rs 6.74 Lakhs to the CFO and Rs 3.25 Lakhs to the CS adding upto an annual Rs 9.99 Lakhs. A company with Rs 5,000+ Crores of revenue pays less than what a fresher CA / MBA gets to it's CFO and CS!


The directors are more than happy to attend all meetings despite not getting paid a penny! Compare it with the attendance slips of other companies where most directors are not able to make it for a few meetings a year.



Shareholding?

The movement of the promoter holding has changed as given below:


The promoter holding has come down to 65.36% on 31st March, 2018 from 71.68% on 30th Sep, 2017. The % of shares pledged by the promoters has gone up from 6.94% to 15.21% in this period. The company is planning a QIP of Rs 400 Crores and will also issue shares worth Rs 35 (Re 1 paid up) to promoters to raise Rs 100 Crores apart from the QIP.

The promoters sold off 4,64,52,000 shares between 30th September 2017 and 31st March, 2018. Why would the promoters sell shares in the company if they were anyways planning to invest Rs 100 Crores on a preferential basis?

Verdict: Avoid

So many red flags in financials, bad history of promoters and too good to be true numbers are best avoided. The stock has been hitting circuits almost every other day and it could be tough to exit such stocks.

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