Agro Dutch Inds - Rs.68.50

Incorporated in 1992, Agro Dutch Industries Ltd. (AGIL) was originally incorporated as Indo Dutch Foods Ltd, by Punjab Agro Industries Corporation Limited in the joint sector along with Mr. Malvinder Singh Bhinder and his Associates and is engaged in producing fresh white button mushrooms. Since then, AGIL has emerged as India’s largest and the world’s second largest integrated producer & exporter of mushroom constituting 85% of India’s total production and exports. Ironically, the company’s production is also equivalent to around 9 per cent of the annual mushroom production in USA

AGIL’s 100% EOU plant is located at Punjab, which produces over 80% of India’s wheat and wheat straw is the most vital substrate for mushroom growing. Interestingly, AGIL is the only integrated producer right from composting, cultivation, processing, can making and canning the mushrooms. Importantly, its high tech unit is equipped with climate controlled, concrete growing rooms, which ensures availablility of mushrooms each day round the year whereas China produces mushrooms only in the winter season. It has a technical collaboration with Dalsem of Holland.

Apart from the various incentives granted in the Union Budget, the biggest positive for AGIL was the sharp reduction in anti-dumping duty to below 1% from whopping 30% by USA. Since AGIL is the largest exporter to USA this change will have a substantial impact. Besides, Mexico has increased the anti-dumping duty on imports from China due to which Mexican orders are now flowing to AGIL. To cater to the increasing global demand and to become the worlds largest mushroom processor, AGIL is going for a Rs.100 cr. expansion and modernization, which will be funded by equity, debt and internal accruals. In the next 12 months, the company plans to increase its production capacity from 36,000 TPA to 50,000 TPA. It also intends to set up a Rs.35 cr. facility to manufacture cans in Chennai and become the No.1 can manufacturer in India. AGIL will also expand its IQF plant and diversify its product range to include frozen mushrooms for which the realization is better than canned mushrooms.

AGIL is also taking various initiatives to restructure its debt and reduce the interest burden (including non payment of dividend), which is as high as 10% of sales and equivalent to Rs.10 per share. Its June’05 numbers were quite disappointing with Sales down 35% to Rs.28 cr. and it reported a loss as the plant was running partially for due to some technical problem in its cooling system. Despite this, the long term prospect of AGIL look very promising and it may post Sales of Rs.140 cr. and NP of around Rs.9~10 cr. for FY06. Since the impact of the expansion will be seem in FY07 only, it may report Sales of Rs.200 cr. and NP of Rs.26 cr. This works out to an EPS of Rs.3.50 and Rs.9 on its diluted equity of Rs.29.50 cr. And as the acquisition cost works out to Rs.48 post-right issue (i.e. 1:1 @ Rs.25) basis, its FY07 earning is currently discounted by only 5 times. Hence only long-term investors are recommended to buy this scrip at declines as it can give 100% appreciation in 15 months.