Sunday, 28 January 2018

Sanwaria Consumer Ltd: Read the offer Document carefully

Sanwaria Consumer Ltd: This one, once again, is getting the attention. In the past (2010-11) also, it grabbed huge interest and run up from 8 to some 60-70 but only to witness a sharp fall to Rs. 10, then to 4 and then to 2 last year. Now it is at 30 again and I am getting regular queries on this one as most of people want to invest big in this citing it being the next big story in Indian FMCG. I don’t track this company but I am always having the doubts on this one. So I am just sharing my views on the basis of third party sources like annual reports, news etc. Please remember that these are just my views and if anyone has some data, information which is relevant and will result in me changing my views then they are most welcome to share the same otherwise you can simply ignore my views.

Actually the story of Sanwaria began when the company decided to choose the difficult path of entering branded staple food products as they couldn’t see any future in their earlier domain expertise of soybean processing business. And since then company is throwing branded goods one after the other…their products incudes (although nothing excluded)- Rice, soyabean oil, Chakki Atta, maida, suji, besan, daliya, Dal, Soya chunks, Poultry and aqua feed!!!

Now there are legends how sanwaria has shown great growth after the Brand saga. But in spite of outsourcing almost all of its products, it just earns 115 cr PBT on turnover of 3500 cr. LT Foods (Dawat rice fame) earns 313 cr PBT from 3300 cr topline. LT has employee cost of 116 cr while that of Sanwaria is just at 4 cr!!
I mean, well, we are still quite some time away from the age of superman at the earth. LT depreciation is at 54 cr and Sanwaria’s at 7 cr, LT Interest cost is 150 cr but Sanwaria is at 65 cr!! LT has assets base of 700 cr with Sanwaria at 160 cr!! I am comparing it with LT foods because LT foods is also in a transition phase (Just as claimed by SCL), against the mighty KRBL it'll just blow away. Lt Foods is a rice player and SCL claims a turnover of some 2000 cr from Basmati Rice, 700 cr from Food grains. So 2700 cr out of 3500 cr means that it is not a soy processor and 2700 cr is not a startup type of turnover, it belongs to mature players.Its Rice turnover was just 68 cr in 2015 but rose to 1650 cr in 2016. Its old domain Soy processing, went down to 400 cr in 2016 form 2200 cr in 2015!!! I wonder what happened to the resources/plant/machinery etc. which were being used for soy business!! or simply turnover of Soy is now being shown as Basmati Rice??  In 2015 AR, there was a Misc item turnover figure of 388 cr but in next year AR, the same has been shown at 35 cr with balance added to other items like Rice, soy!! I am surprised (Shocked actually) at just 4 cr employee cost (may be some 50-100 employees) because how on the basis of this paltry human capital, it manages to do the most complex functions of marketing and distribution of a branded product company that too when it has its own “Retail chain” (LT has none). I think the retail chain is outsourced to Amazon!!

Can anybody think that this is because of Sanwaria’s outsourcing model as it outsources all the production and only does the marketing/distribution. Then why it has high figures of Inventory at 500 cr and debtors at 727 cr, where is the working capital management? With just 4 cr employee cost I wonder how many employees take care of the inventory and debtor management! Sanwaria’s ROE is just 10% but LT has 20% although due to low investments into assets, working capital etc. (courtesy outsourcing model) sanwaria should have much higher ROE. Where is the discipline of a branded FMCG Giant? Our another pick, Bajaj Electricals, has the similar outsourcing model and it has ROE of more than 100% !!!

With the great growth it has achieved in last 3-4 years (as is claimed) it has been able to “reduce” cash in the books from 45 cr in 2013 to 16 cr in 2017. It earned net profit of 165 cr during the period. So where has it gone? Let’s see…Its assets base is stagnant at 160 cr! But Debtors have been increased from 500 cr to 700 cr, inventory from 200 cr to 500 cr. Surprisingly, debtors have been increased but Creditors have been decreased from 300 cr to 160 cr!! What a working capital management by a branded company with low employee base?? Its debt has been increased from 370 cr to 900 cr…another sign of visionary management. So in all these 5 years its funds flows from Debt 530 cr+ NP 165 cr+ Depreciation 30 cr = 725 cr which are utilized in Inventory 280 cr, Debtors 250 cr, creditors 135 cr and Investments some 30-35 cr, totalling 700 cr!!! And here we have the grand schema of brand. Nothing real has been created in actual.

Another aspect which appears dubious is the tax outgo. Tax outgo percentage is around 30%- 35% of NP for players like LT Foods and KRBL and most of the other companies across sectors. Like LT has paid a tax of 64 cr on NP figure of 195 cr in 2017, same for KRBL is at 138 cr on 538 cr but Sanwaria has managed to keep its tax outgo around 10%-15% like it has paid 6 cr on NP of 50 cr in 2017!! I wonder how greatly they are planning their tax outgo?

Another mysterious figure is Deferred tax liability (DTL) of 16.28 cr. This figure is around this level since 2009 (I couldn’t check before 2009) and as per the annual reports it is mainly on account of timing difference for depreciation rates as per company law and tax laws. However in my view this figure should have been started to decline after initial period of 5-6 years i.e. around 2014 or 2015 because its assets figure is fairly consistent since 2009 mainly its Plant and machinery figure which accounts for majority of gross assets (100 cr out of 160 cr). Its gross assets were around 150 cr in 2008 so nothing much has changed since then. So in my view timing difference of depreciation rates should have been over by initial 5-6 years but this figure of DTL is consistent around 16-17 cr. At present due to lack of time (I am not that much interested either) and non-availability of old annual reports, I couldn’t dig deeper but I think it needs explanation. 

Ohh…I think I have found the reason. It is its wind power plant. I found a separate line item for the same in 2010 annual report which shows Rs. 42 cr against wind power generator. The same has been transferred to the subsidiary in 2012. I don’t know the year of capitalization of this wind plant but accelerated depreciation rate was 80% for wind power plants since 2002. So this DTL looks like due to accelerated depreciation impact of wind power plant. After this wind plant point discovery, I thought to leave this DTL issue but then decided to keep it for academic purpose especially for the readers. Also, I feel with the transfer of asset to the subsidiary the corresponding DTL liability in the books should also have been transferred to subsidiary otherwise holding company won’t be able to utilize the balance in DTL because it (Holding company, sanwaria consumer) won’t have any tax liability related to profits of wind business as the same has been transferred (But need to check further). But i still wonder what this fund trapped company was doing with investment of 42 cr in Wind power when their plant and machinery base was just 60-70 cr!! To save taxes?? But they never were a big profit making company...always shortage of funds due to high working capital and saddled with debt. They should have, first of all, invested in creating and expanding the capacity of underlying business to take care of the future profits.

Another dubious entry was the write off of 18.41 cr in 2016 due to fire. I wonder why there wasn’t any insurance claim although they have incurred insurance expenditure of Rs. 60 lac in 2016. Also, even surprisingly it appears that this 18.41 cr was adjusted against capital work in progress in the books as in 2016 beginning they have some 38 cr of capital work in progress and only some 20-21 cr was capitalized!!! I even doubt over the genuineness of this work in progress.

Some people tell me that high inventory may be due to storing of rice for ageing but this is what the likes of KRBL and LT Foods do; they are the real rice processors but Sanwaria has outsourced all its branded staple food requirements so I see no need for it to accumulate rice as raw material as the same is to be done by the suppliers of Sanwaria. Out of 500 cr inventory 285 cr is the raw material and there is no break up of type of raw material whether it is soy or other, it is not there in the annual report.

Company says that they have opened some 25 exclusive retail outlets under “Sanwaria Kirana” and will be opening 10-15 this year but I do not find any new asset created for these outlets as no assets has been added this year. Yes, there is one entry against lease rent (1.68 cr against last year figure of 50 lac) but employee cost has declined from 4 cr last year to 3.76 cr this year so who is running these stores. In the company website, they are showing the names of places in MP having Sanwaria outlets but when you click on the links nothing happens and it leads to nowhere. So I doubt whether there are any such retail outlets as I couldn’t find any on the google search. I could only find local “saawaria” Kirana shops and general stores at google and you tube. If anyone has seen and visited these then please clear my doubts. Also, Retail business means high working capital investment for inventory that too for finished goods. But here its inventory has been reduced to 500 cr this year from 534 cr last year. Also, its raw material inventory is at 284 cr out of total inventory of 500 cr with finished goods inventory just at 148 cr (30% of the total)...a bit difficult to understand!!

As I have shared earlier many times, the biggest challenge for an FMCG brand is the marketing and distribution not the product (As is evidenced from the outsourcing model of Sanwaria). No retailer and wholesaler is going to push/keep/sell my product just because I have decided to launch a brand. Doing business and establishing brands is not that easy. There are Hundreds of big established brands with established consumers. It is very difficult to break the consumer loyalties especially in staple foods as nobody is going to leave their trust and use a new branded product just like that. And Sanwaria claims easy victory here…just like that!!!   Huge investment, time and thought are required for Distribution and marketing function. I see people investing madly in those stocks when they declare that they are going to launch their own brands. People think that this is end of the game and the brand will see the success. But it is never so and 90% of the times new brand will be a failure. But most of the dubious companies try to take advantages of investors’ over enthusiasm by declaring paper plans of retail and brand play.

I always liked Tata chemicals’ foray into new consumer brands ( Tata Sampann) for Pulses and Spices because it already has big established distribution and marketing chain due to Tata salt and Tata tea. So it is very easy for Tata to push its new consumer products especially because people trust it. I have invested big in Tata chemicals (Shared at this blog also) and it is already a double but i think this will be the stock of Tata group in next 5 years. On the same lines, i am expecting Parag milk to do well in its pursuit to establish new FMCG products as it already has big distribution clout.

Sanwaria promoter Anil agarwal has dubious past. He has been fined by SEBI earlier. It has issued generous bonus and splits in the past just to increase the trading volume to rig the stock prices  ( They have even declared another bonus in july-17). Due to these bonuses it was reduced to just a penny stock. IT raids have been conducted and it is during these raids that its links with Baba Ramdev have come into public domain. What was in it to hide for? As now they are talking about the same in annual reports…it all seems fishy. IT raids reveals tax evasion of 200 cr! This figure of 200 cr may balance out the low profit margins.

These are enough reasons for me to avoid this one and these are serious issues requiring serious explanations and one Baba Ramdev alone may not be able to do the same.

(Views are personal and are only for Information and Education purpose only and should not be construed as a recommendation for Investing or trading. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified SEBI Analyst and not holding the stock discussed in this Post).


  1. Wow.wonderful postmortem analysis of the company

  2. Great Analysis. Good to have people like you on our side during bull markets

  3. Hi stumble across your blog , very detailed analysis of multi year Balance sheet , i am a learner , want to learn more about accounting ,can understand basics to read -annual repots , bs /cash flow for an year , but get confused or never worked on how to find out intricacies year on year or how balance sheets are consolidated based on joint ventures or subsdaries
    if you will be kind enough to share some good books to understand with real live examples given in book else it only theorotical book will be googly for me

    1. Hi Dear, Stock markets are a place where learning never is endless. You can read some marquee books like Intelligent Investor, Security analysis etc.
      But internet is a gold mine of knowledge, so you just pick the subject and read as much as you can. Understand the business model. Accounting these days is very complex and will need considerable amount of time to understand the nuisance.

  4. Good that this article and analysis raises some serious questions on how the company is working, managed and how figures are not co-related and how they are camouflaged and changed every year.
    I think investors should stay away from such dubious companies.

    1. Right Dear...There is not easy money in the market but only easy risks.

  5. Dear Gurpreet ji. You have excellently analysed the Company vis a vis others alongwith figures. Becoz the performance of Companies in the name of Sanwaria is itself should be doubted. Anil Agarwal itself a CA, know how to cook.. Great job done.

    Any how, I also want to know whether is it right time for getting into LT (Daawat)??

    1. Thanks Dear. Regarding LT foods-it was advised around 5/- (Bonus adjusted)at this blog. Not it is around 90, I am still holding it. So sort of neutral at current price although nothing bad at current price, still worthy of investment. I think it is better to go for some other emerging food companies like Agro tech foods, Parag Milk foods. Zydus wellness is also good so as Tata chemicals. You can find the study of these at this blog.

  6. Sir, have a look at LEEL ELECTRIC.
    Its peers DIXON and Amber enterprises are trading at very very rich valuations.

    pls share your views
    thank you

    1. Hi Pruthvi, never studied LEEL in detail. Once made a small look into it when you posted a query on this earlier also. But will try to cover this soon. But i feel Amber is looking good due to their manufacturing prowess although i am yet to study it also. But if LEEL has any serious plans to manufacture complex parts in India then sky is the limit. Will try to study both and will share my views


    2. sir,
      please have a look at LEEL ELECTRICALS . It has recently sold its consumer durable bussiness to Havells around 1550 Crores. Its book value is above 400 and cmp is 270. It's peers which are recently listed DIXON AND AMBER WHO ARE CONTRACT manufactures of white good consumer durable products are trading at very very high PE multiples (above 60 PE). flipkart has recently entered to sell the AC products manufactured by LEEL under the brand MARQ. LINK GIVEN BELOW.. ITS A GREAT BUY at cmp .The company is debt free and cash rich. pls offer your view.

    3. Hi Dear, i have kept LEEL into my watch list for study later on as right now busy in some other study. If you have any info then please share the reason for LEEL to sell their consumer business and their current growth plans.


  7. Please check Himalya International too this way. This company is also making news these days.

    1. Hi Dear, Same story same cooked up performance. I have cautioned all the email group members last year to avoid this one. Just sharing some parts of that email:

      ---------- Forwarded message ----------
      From: Gurpreet Singh
      Date: 4 February 2017 at 00:03
      Subject: Fwd: Himalya International

      Hi Dear, Actually whenever i see this looks like a fraud to me. In 2011 they were shouting with big turnover plans...Gujarat Almond plant etc. etc...then all of a sudden everything stopped....nothing came from the promoters. They doubled their assets base from 122 cr in 2012 to 245 cr in 2014 but credit to great promoters their turnover faltered to 100 cr from 190 cr. Still these people are showing 50 cr as capital work in progress for last 3-4 years. Almost 100 cr is blocked in Inventory and debtors for last 4-5 years...turnover is erratic...but this 100 cr figure is almost constant!!!

      And in bull market...all of a sudden they are Mushrooming again...Exports of Indian sweets!!!They are planning for exporting french fries !!!
      In last real estate bull market, every company was saying that they had valuable real estate....factories were sold in real cases also...but in most cases it was just a cheap trick. Here promoters are trying the trick now...just to lure poor people. Huge land bank!!! 13 acres!! Highway developing. Why they bought this land? when they were in their difficult times? never used it, why? They couldn't plan their business but great land acquisition!!

      They say that they started Gujarat plant as exports from their Extreme North India plant caused high freight costs!!! So funny. They couldn't sustain in Indian market and they talk about Exports. Once i found their Yoghurt pack in the crowded space with Nestle, Amul, Verka, Milkfood in a store in Bathinda (punjab)...may be around 2011...but i never saw anything of their after that....where are their products?? Their products have high Indian demand...Maccain is selling huge qty of french fries. So they have become exporters of french fries!!

      Have you seen their quarterly results for Dec-16? Most innovative way of hiding the details. There are no separate items for raw material, power, labour costs etc...all these are shown under one item...Manufacturing expenses!! why?? why this innovation? and then they added decrease in stock in trade to the turnover figure!!! I mean what the hell is this?? Their depreciation for this qtr is 287.9...but this was same for previous two quarters 863.7 for 9 month.
      If you want to pick an emerging FMCG company...then go for Future consumer or go for Agro tech.


      Gurpreet Singh.

      --------- Forwarded message ----------
      From: surya
      Date: 3 February 2017 at 23:08
      Subject: Himalya International
      To: Gurpreet Singh

      Gurpreet Ji,

      This small growing company has posted great numbers this quarter. They have some good fmcg products like mushroom, ready to eat etc. Demand for these foods are growing fast. They are demerging their company into some three units...they have some unused land of 13 acre to be used for real estate development. They will focus on exports of Indian sweets etc.

      I think it is a new story emerging....we should buy it.

      please share your view