Visit Note Manorama Industries Ltd. Manorama Industries Ltd. (Manorama) is a leading global producer of specialty fats and butters from tree-borne and plant-based seeds. It is a major producer of cocoa butter equivalent (CBE) from shea, sal and mango seeds collected by the forest tribal community (~18,000 collection centres operated across India by Manorama) and converts them into products used in premium chocolates, confectionary, and cosmetic products. Manorama has a total installed capacity of 15,000 MTPA for end products (fractionation capacity) through a vertically integrated capacity set up in Birkoni, Raipur. Manorama generated ~38% of FY22 revenues from exports while 62% came from domestic sales (FY19–22 average exports are ~48% of revenues) with marquee clients such as Ferrero, Mondelez and Barry Callebaut in the chocolate and confectionary space, and The Body Shop, Lush and L'Oréal in the cosmetics segment. The company made a preferential allotment of INR102cr in July 2021 for expansion of Birkoni facility capacity to 40,000 MTPA, which the management expects to go online by Q3FY23. Considering the full utilization of the current capacity is likely to generate close to INR 350-375cr of sales, the ~1.6x increase in capacity under the ongoing expansion should lead to near doubling of the turnover on full utilization of the expanded capacity. Jigar Jani Research Analyst [email protected] CMP: INR 1,216 Date: July 20, 2022 Bloomberg: 52-week range (INR): MANORAMA:IN 911 / 1,864 M-cap (INR crore): 1,450 Promoter holding (%) 57.26 Leading player in specialty butters/fats supplying to chocolate and cosmetics industry Approximately, 80% of revenues are derived from the chocolate industry and the remaining 20% from the cosmetics and other industries. The production process yields products which are further processed and sold under the flagship Milcoa and Milcospread brands. Fatty acids and de-oiled cake are produced as by-products, which provide incremental revenue streams. The major raw materials used are shea nuts (imported from Africa), sal seed and mango kernel. Manorama generates majority of its sales from shea nut-based products and sal seed based products while the remaining sales come from mango kernel-based products. Stearin is then blended with palm mid fraction to produce CBE. CBE market faces supply shortage, while demand remains strong CBE is used in combination with Cocoa Butter in the manufacturing of chocolates without changing the taste, texture and quality of chocolate. In India, CBE can replace maximum 5% of the cocoa butter content in products registered as chocolates. Most other regions such as Japan, Europe and Russia currently have higher permissible limit for replacement of Cocoa Butter by CBE. Indian regulations allow usage of only Indian tree borne seed based CBE. Globally, demand for CBE is close to 1,60,000 - 1,80,000 tonnes, while the supply is close to 70,000 - 80,000 tonnes. Customers are currently using cocoa butter instead of CBE because they need a guaranteed supply of CBE (whose supply is currently short) for any product since they have to register the product and display its content accordingly. Brownfield expansion to boost sales and profitability Manorama is operating at a fractionation and refinery capacity of 15,000 MT, which is running at 65-70% utilisations after Covid-related disruptions last year. To further enhance the manufacturing capability, the company made a preferential allotment of INR102cr in July 2021, of which INR65cr is expected to be dedicated towards increasing the production capacity of refinery and fractionation by 25,000 MT to 40,000 MT, along with the supporting infrastructure. The new capacity is expected to be commissioned by the end of Q3FY23. Full utilization of the new brownfield expansion which is likely to more than double the refining capacity would lead to a similar increase in sales assuming similar asset turnover. Moreover, considering the current expansion is brownfield, operating leverage should kick –in and lead to further improvement in EBITDA margins. Working capital intensity to remain elevated as it is inherent to sourcing model Seed picking is seasonal in nature, and the company has to collect and keep the inventory for the entire year of sales in those three months. This leads to inventory days of over 220 days and hence a very long working capital cycle. The management expects better sourcing management and production schedules (with the implementation of SAP/ERP) which will help to reduce inventory days and working capital cycle going forward. However, the company does receive packing credit incentive for export sales which helps to secure working capital debt at extremely low rates of 3.5% to 5.0%. 1 Visit Note Manorama Industries Ltd. Focus Charts Exhibit 1: Sales expected to inch higher on full utilisation of existing capacity Exhibit 2: EBITDA margins to expand by 100–200 bps* 350 - 375 60 40 203 188 28% 54 - 58 23% 50 INR Cr INR Cr 279 102 30 44 28 25% 39 17% 14% 20% 15% 15% 35 20 10% 10 5% 0 0% FY19 FY19 FY20 FY21 FY22 FY20 FY23E Exhibit 3: Healthy mix of domestic and export sales 30% FY21 FY22 FY23E EBITDA Margin (%) (RHS) EBITDA Exhibit 4: Chocolate and confectionary account for majority of sales 36% 55% 57% 62% Cosmetics, 20% 64% 45% 43% FY19 38% FY20 FY21 Export Sales FY22 Domestic Sales Exhibit 5: Inventory collection for entire year makes it working capital-intensive business 400 300 Days 200 100 0 -100 FY19 Inventory Payables FY20 Chocolate, Food & Confectionery, 80% FY21 FY22 Receivables Working Capital Exhibit 6: Core RoCE higher (adjusted for CWIP of upcoming capex) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 45% 18% 13% FY19 FY20 RoCE (%) 11% FY21 14% FY22 RoCE adjusted for CWIP (%) * Based on average management estimates for FY23 Source: Edelweiss Wealth Research, Company 2 Visit Note Manorama Industries Ltd. Overview of the company Incorporated in 2005, Manorama Industries Ltd. (Manorama) is a global leader in the production of specialty fats and butter using tree-borne and plant-based seeds and is a major manufacturer of CBE from shea, sal and mango seeds. The company operates on a unique business model of converting waste to wealth by collecting seeds from the forest bed as raw material from the tribal community and by converting them into products used in premium chocolates, confectionary and cosmetic products. A leader in specialty fats and butters segment Manorama is a one of the leading producers of specialty butters and fats from tree-borne sources and a key supplier to the world’s leading companies in the chocolate, food, confectionary and cosmetic industries. Chocolate, food and confectionary products account for 80% of revenues and cosmetics the remaining 20%. The production process yields products which are further processed and sold under the flagship Milcoa and MilcoSpread Brand. It also produces fatty acids and de-oiled cake as by-products, which provide incremental revenues. Stearin is blended with palm mid fraction to produce CBE. Exhibit 7: Manufacturing process Source: Edelweiss Wealth Research, Company CBE is used in combination with Cocoa Butter in the manufacturing of Chocolates without changing the taste, texture and quality of chocolate. In India, CBE can replace maximum 5% of the cocoa butter content in products registered as chocolates. Most other regions such as Japan, Europe and Russia currently have higher permissible limit for replacement of Cocoa Butter by CBE. As per the management, globally, demand for CBE is 1,60,000 - 1,80,000 tonnes, while the supply is close to 70,000 - 80,000 tonnes. As per Verified Market Research, the market size of CBE is approximately USD1.5bn and its demand in India is expected to be around 18,000 tonnes. Customers are using cocoa butter despite it being more expensive than CBE. This is because customers need a guaranteed supply of CBE (currently in short supply compared to demand), as they have to register the product and display its content on packaging based on whether cocoa butter or CBE or combination of both is used in the products. 3 Visit Note Manorama Industries Ltd. Unique raw material sourcing model Manorama manufactures specialty fats and butters derived from natural resources such as sal seeds, mango kernels and shea nuts (procured from Africa); it also uses kokum and mowrah seeds. Sal seeds scattered across the forest bed are collected by tribal women who undertake the pre-processing and cleaning of the seeds. The company then collects these seeds by its vast collection network of 18,000 centres across the key states of India. Mango kernels are also collected in a similar manner. Sal seeds and mango kernels are sourced at/near MSP (INR18–22/kg for sal seed and INR15-18/kg for mango kernel). Exhibit 8: Raw material procurement of sal seeds Source: Edelweiss Wealth Research, Company Shea nuts are sourced by an associate company, Manorama Africa Ltd., from Western African countries. They are sourced from Ghana, Burkino Faso, the Ivory Coast, Togo, Benin, Mali, Nigeria and Savana forest regions through social organizations, women’s groups and local markets. The landed cost of shea nuts is INR50-60/kg. Exhibit 9: Raw material procurement of shea seeds Source: Edelweiss Wealth Research, Company From a revenue mix perspective, shea and sal based products account for majority of the revenues while mango based products account for the remaining which is currently used in cosmetic products. However, the R&D team is currently working to further enhance mango based products application to other industries. 4 Visit Note Manorama Industries Ltd. Capacity expansion to further boost sales and margins The company is operating at a fractionation and refinery capacity of 15,000 MT, which is running at 65-70% utilization after Covid-related disruptions last year. To further enhance the manufacturing capability, Manorama made a preferential allotment of INR102cr in July 2021, of which INR65cr is expected to be dedicated towards capex and the remaining would be used for working capital purposes. As part of capex, the company plans to scale up the production capacity of refinery and fractionation by 25,000 MT to 40,000 MT, along with the supporting infrastructure. Exhibit 10: New brownfield capacity expansion of 25,000 MTPA, along with supporting infrastructure Exhibit 11: Various capacities being expanded under brownfield expansion Process Seed Milling (Expeller) Existing Capacity (MTPA) Proposed New Capacity Expansion (MTPA) Total Capacity (MTPA) 60,000 60,000 1,20,000 90,000 90,000 Solvent Extraction Plant Refinery 15,000 25,000 40,000 Interesterification 15,000 - 15,000 Deodorisation 15,000 10,000 25,000 Fractionation 15,000 25,000 40,000 Blending Station & Packing 10,000 20,000 30,000 Source: Edelweiss Wealth Research, Company The new capacity is expected to be commissioned by the end of Q3FY23. The management believes ramping up existing capacity and partial utilization of the new capacity would result in sales of INR350–375cr in FY23, with EBITDA margin expanding 100–200 bps. Considering the brownfield expansion is increasing capacity by ~1.6x, assuming similar asset turn we should see a proportionate increase in sales on full utilization of the capacity. Operating leverage should also lead to some more benefit on the EBITDA margins. 5 Visit Note Manorama Industries Ltd. Working capital intensity to remain elevated as it is inherent to sourcing model While the unique business model of turning waste to wealth is accretive in terms of profitability, it does come at the cost of higher inventories as seed picking is seasonal in nature, and the company has to collect and keep the inventory for the entire year of sales in those three months. Inventory needs to be maintained for the finished goods for 2–3 months as customers demand inventory based on their requirements. As a result, inventory days are well in excess of 220 days, leading to a prolonged working capital cycle. The management expects better sourcing management and production schedules (following implementation of SAP/ERP systems) which will help to reduce inventory days and working capital cycle going forward. Exhibit 12: Long working capital days inherent to business model 386 400 350 300 250 276 280 FY21 FY22 188 Days 200 150 100 50 0 -50 -100 FY19 Inventory FY20 Receivables Payables Working Capital Source: Edelweiss Wealth Research, Company However, the company does receive packing credit incentive for export sales; hence, it is able to secure working capital debt at extremely low rates of 3.5% to 5.0%. The incremental sales growth due to the new capex and ensuing working capital requirement can therefore be easily funded by this low-cost debt from banks. This would lead to a nominal increase in working capital-related interest costs compared to incremental profitability. Long-term growth plans In the long term, the management plans to enter the Indian B2B hospitality and semi-retail segments with 1 kg loose chocolate bars made using its own products. As of now the management’s aim is to ramp up and leverage the current capacity of 40,000 tonnes and achieve optimum revenues from the same. If any future capex is required, then that will be in a different location from Raipur and will be situated near a port to save on logistics and transportation costs. Overall, the company aims to become one of the leading player in CBE, Specialty fats and butter market globally. 6 Visit Note Manorama Industries Ltd. Financials Income Statement Year to March (INR cr) FY19 FY20 FY21 FY22 102 188 203 279 Direct Costs 50 87 120 155 Gross Profit 53 102 83 125 Income from operations Employee costs 4 7 7 10 Other expenses 21 51 41 76 Total operating expenses 74 144 168 240 EBITDA 28 44 35 39 Depreciation and amortisation 1 8 8 8 27 36 27 31 4 6 6 8 31 42 33 39 Interest expenses 5 10 10 6 Profit before tax 27 32 22 34 Provision for tax 8 9 8 9 19 23 15 24 EBIT Other Income PBIT Core profit Extraordinary items 0 0 0 0 19 23 15 24 Equity shares outstanding (Crore) 1.11 1.11 1.11 1.19 Adjusted EPS (INR) 17.1 20.3 13.1 20.8 Year to March FY19 FY20 FY21 FY22 Operating expenses 72% 77% 83% 86% Depreciation 1% 4% 4% 3% Interest expenditure 4% 5% 5% 2% EBITDA margins 28% 23% 17% 14% Adj. Net profit margins 19% 12% 7% 9% FY19 FY20 FY21 FY22 Revenues 84% 8% 38% EBITDA 55% -21% 12% PBT 22% -31% 50% PAT 22% -38% 66% EPS 18% -35% 59% Profit after tax Common Size metrics - as % of net revenues Growth Metrics (%) Year to March 7 Visit Note Manorama Industries Ltd. Balance Sheet As on 31st March FY19 FY20 FY21 FY22 Equity share capital 11 11 11 12 Reserves & surplus 93 116 134 256 104 127 145 268 24 119 85 108 Trade Payables 1 33 7 8 Other Liabilities 4 10 16 11 Minority interest 0 0 0 0 Sources of funds 134 289 254 396 PP&E 6 51 57 55 CWIP 16 0 0 42 0 0 0 0 Investments 13 12 16 6 Inventories 37 150 123 181 Trade Receivables 14 16 22 25 Cash and Cash Equivalents 42 36 0 49 0 0 17 4 Shareholder’s funds Total Debt Goodwill & Other Intangible Assets Bank Balance Other Assets 5 23 18 34 Uses of Funds 134 289 254 396 Book value per share (INR) 120 259 228 332 FY19 FY20 FY21 FY22 23 42 30 34 WC Changes -34 -102 3 -68 CFO -11 -60 33 -34 CFI -50 -10 11 -35 CFF 63 85 -45 117 2 15 0 49 Cash Flow Statement Year to March Operating Profit After Tax Before WC changes Total Cash Flow 8 Visit Note Manorama Industries Ltd. Profit & Efficiency Ratios Year to March FY19 FY20 FY21 ROE (%) 18% 18% 10% 9% ROCE (%) 45% 18% 13% 11% 50 32 40 33 132 291 222 237 Debtors (days) Inventory (days) Payable (days) FY22 5 64 13 11 Cash conversion cycle (days) 177 259 249 259 Debt/EBITDA 0.85 2.71 2.46 2.78 Net Debt/Equity -0.18 0.65 0.47 0.21 Year to March FY19 FY20 FY21 FY22 Adj. 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