KN Agri Resources coming with an IPO to raise around Rs 49.38 crore

KN Agri Resources

• KN Agri Resources is coming out with a 100% book building; initial public offering (IPO) of 65,84,000 shares of Rs 10 each in a price band Rs 71-75 per equity share.
• The issue will open on March 15, 2022 and will close on March 17, 2022.
• The shares will be listed on NSE Emerge Platform.
• The face value of the share is Rs 10 and is priced 7.10 times of its face value on the lower side and 7.50 times on the higher side.
• Book running lead manager to the issue is HEM Securities.
• Compliance Officer for the issue is Akshat Sharma.

Profile of the company

Incorporated in 1987, KN Agri Resources is an agro-based company, involved primarily in the business of (a) solvent extraction & oil refining and (b) trading of various agro-commodities. Its wide range of processed and manufactured products includes soya de-oiled cake (soya meal), Hipro Soya Meal, soya refined oil, soya crude oil, degummed oil, soya lecithin, acid oil, soya husk, cotton seed oil, refined rapeseed oil and rapeseed de-oiled cake. Under the agro-commodities business, it trades in various agro commodities such as maize, gram, pulses, sugar, soyabean, wheat etc.

The company has three strategically located plants in the state of Madhya Pradesh comprising of three solvent extraction plants, two oil refineries and one flour mill. The location of its plants gives it the competitive edge over other players in terms of procurement and availability of major raw material (i.e. soyabean seeds). As on the date, the company has cumulative solvent extraction capacity of around 3,75,000 TPA, edible oil refining capacity of 60,000 TPA and flour milling capacity of 24,000 TPA.

The company’s two manufacturing units, namely, Khandwa Oils - Unit I and Unit II situated in Khandwa, M.P., are spread in the wide area of around 20 acres, while its another unit located in Kheda, Itarsi, M.P. is spread around an area of 10 acres. All its units have a well-equipped laboratory, modern technology and testing equipments with supporting environment and facilities, to ensure that the products conforms with the pre-determined food standards.

Proceed is being used for:

• Meeting working capital requirements
  
• General corporate purpose
  
• Meeting issue expenses.

Industry Overview

India’s food processing sector is one of the largest in the world and its output is expected to reach $535 bn by 2025-26. The Food Processing sector in India has a quintessential role in linking Indian farmers to consumers in the domestic and international markets. The Ministry of Food Processing Industries (MoFPI) is making all efforts to encourage investments across the value chain. The food processing industry engages approximately 1.93 mn people in around 39,748 registered units with fixed capital of $32.75 bn and aggregate output of around $158.69 bn. Major sectors constituting the food processing industry in India are grains, sugar, edible oils, beverages, and dairy products. The Indian food processing industry is primarily export orient. India's geographical situation gives it the unique advantage of connectivity to Europe, the Middle East, Japan, Singapore, Thailand, Malaysia and Korea. One such example indicating India's location advantage is the value of trade in agriculture and processed food between India and Gulf region.

India’s vegetable oil economy is the 4th-largest after the US, China and Brazil. India consumes 25.9 MMT of Oil, of which 60% comes from imports. Vegetable Oil is the top agricultural import item for India accounting for $10 bn. Of this basket, 55% is accounted for by Palm Oil. With increasing population and per capita consumption of vegetable oils in the country, the import bill is expected to reach $22 bn by 2030 if it continues to grow at the current rate of 7-8%. Meanwhile, Soybean is the largest oilseed in India by Area under cultivation and production, and 5th most in the world. India’s soybean cultivation is concentrated in 3 states - namely MP, MH & RJ covering 92% of the total soy bean area. The area under soybean cultivation is on a decreasing trend (from 147 lakh MT to 86 lakh MT) between 2012-16 - owing to erratic rainfall, higher biotic stresses, lower price realization and shift to competing crops. Indian Soy bean productivity is decreasing over the years and comparatively lower wrt world average. India is the largest importer for Soybean oil and the imports increased during 2013-16 to compensate for lower production. Indian De-oiled Soy cake has very high demand abroad, and fetches better value realization.

Meanwhile, India is fortunate in having a wide range of oilseeds crops grown in its different agro climatic zones. Groundnut, mustard and rapeseed, sesame, safflower, linseed, nigerseed, castor are the major traditionally cultivated oilseeds. Soyabean and sunflower have also assumed importance in recent years. Coconut is most important amongst the plantation crops. Efforts are being made to grow oil palm in Andhra Pradesh, Karnataka, Tamil Nadu and North- Eastern parts of the country in addition to Kerala and Andaman & Nicobar Islands. Among the non-conventional oils, rice bran oil and cottonseed oil are the most important. In addition, oilseeds of tree and forest origin, which grow mostly in tribal inhabited areas, are also a significant source of oils.   

Pros and strengths

Wide range of products: The company offers a wide range of soyabean products that includes soya de-oiled cake (soya meal), Hipro Soya Meal, soya refined oil, soya crude oil, degummed oil, soya lecithin, acid oil and soya husk. The company’s product portfolio allows its customers to source all soyabean related products under one roof, which helps it to expand its business to existing customers as well as to potential new customers. Further, it has necessary resources, experience, and network that can be customized and leveraged to produce even wider range of products at a later stage. With an operating history of more than three decades, the company is primarily known for its wide range of quality products at a competitive price.

In-house manufacturing capabilities: As on the date, the company has cumulative solvent extraction capacity of 3,75,000 TPA, edible oil refining capacity of 60,000 TPA and flour milling capacity of 24,000 TPA, which enables it to stream line inventory management and production process resulting into maintenance of high quality production standards, minimizing production time and bringing cost effectiveness. The company’s well established in-house integrated manufacturing unit would help it in achieving a high sales growth and an improvement in operating margins.

Strategic location of manufacturing units: The strategic location of the company’s manufacturing units allows it to cater to a larger consumer base, reduce logistic costs and achieve economies of scale. Its manufacturing facility at Itarsi (District Hoshangabad) and two manufacturing facilities at Khandwa lies in the state of Madhya Pradesh, which is a top-producer of Soyabean in India. This allows it to greatly reduce procurement costs and ensures perennial supply of raw material (Soyabean seeds). Further, both Itarsi and Khandwa are well connected by railways and roadways, which reduce transportation cost, save spillages and facilitate distribution of its products to the high consumption regions.

Risks and concerns 

Seasonal business: As an agro-based company, the company’s businesses are sensitive to weather conditions, including extremes such as drought and natural disasters. There is growing concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Adverse weather conditions may also cause volatility in the prices of commodities, which may affect growers’ decisions about the types and quantum of crops to plant and may consequently affect the sales of its products. Consequently, the occurrence of any such unfavorable weather patterns may adversely affect its business, results of operations and financial condition.

Geographical constrain: The manufacturing operations of the company are carried in the state of Madhya Pradesh through two units in Khandwa and one unit in Itarsi. Due to the geographical concentration of its manufacturing operations primarily in Madhya Pradesh, the company’s operations are susceptible to local, regional and environmental factors, such as social and civil unrest, regional conflicts, civil disturbances, economic and weather conditions, natural disasters, demographic and population changes, and other unforeseen events and circumstances. Such disruptions could result in the damage or destruction of a significant portion of its manufacturing abilities, significant delays in the transport of its products and raw materials, loss of key managerial personnel, and/or otherwise adversely affect its business, financial condition and results of operations.

Major revenue comes from limited customers: The substantial portion of the company’s revenues has been dependent upon few customers. For instance, the company’s top ten customers accounted for around 38% of its revenue from operations for FY21. The company has not entered into long term agreements with its customers and the success of its business is accordingly significantly dependent on it maintaining good relationships with them. The loss of one or more of these significant customers or a reduction in the amount of business it obtains from them could have an adverse effect on its business, results of operations, financial condition and cash flows. The company cannot gives assurance that it will be able to maintain historic levels of business and/or negotiate and execute long term contracts on terms that are commercially viable with its significant customers or that it will be able to significantly reduce customer concentration in the future.

Outlook

KN Agri Resources is an agro-based company, involved in the business of solvent extraction & oil refining and trading of various agro-commodities. The company offers a wide range of processed and manufactured products including soya de-oiled cake (soya meal), Hipro Soya Meal, soya refined oil, soya crude oil, degummed oil, soya lecithin, acid oil, soya husk, cottonseed oil, refined rapeseed oil, and rapeseed de-oiled cake. The company trade in various agro commodities such as maize, gram, pulses, sugar, soybean, wheat, etc. On the concern side, the company’s business is primarily dependent on the availability/supply and cost of major raw material, which it sources from domestic suppliers. Any significant increase in the prices of these raw materials or decrease in the availability of the raw materials, could adversely affect its results of operations. Moreover, the company derives a significant portion of its revenue from soya products, particularly Soya De-oiled Cake and Soya refined oil, any reduction in demand or in the production of such products could have an adverse effect on the business, results of operations and financial condition.

The issue has been offered in a price band of Rs 71-75 per equity share. The aggregate size of the offer is around Rs 46.75 crore to Rs 49.38 crore based on lower and upper price band respectively. On performance front, total income for the financial year 2019-20 stood at Rs 85,319.67 lakh whereas in Financial Year 2018-19 the same stood at Rs 129,246.84 lakh representing a decrease of 33.99%. Moreover, restated profit before tax for the financial year 2019-20 was Rs 1779.91 lakh as compared to restated Profit before Tax of Rs 3128.54 lakh during the financial year 2018-19. The company is planning to expand its domestic and international geographical reach through marketing network. Moreover, the company is aiming to expand its product portfolio and strive to provide differentiated offerings to its consumers. The company seeks to leverage its extensive experience to strengthen its market position, by offering new products, so as to capitalise on emerging trends. Going forward, the company intends to expand the existing product line of soya products such as soya grits, flour and toasted/untoasted flakes.