Freshtrop Fruits Ltd


(eyesice) #101

Thanks for the in depth analysis. Really helps a lot. Yes the business is quite seasonal with the first 2 quarters being the most profitable. Since you brought up the discussion on grape production, I did a quick google search and found out a lot of articles stating a boost in seedless grape export from India in the recent past -

A good monsoon and excellent weather conditions are going to yield a bumper harvest of grapes. India had exported grapes worth Rs 1551 crore during the 2015-16 season.

The number of grape orchards registered under Grapenet has more than doubled to 19,801 2016-17 from 18,327 in 2015-16. Incidentally, only those farmers, who have registered their orchards under the traceability system of Grapenet, are eligible to export grapes to Europe.

A good monsoon and excellent weather conditions are going to yield a bumper harvest of grapes. India had exported grapes worth Rs 1551 crore during the 2015-16 season.

Indian exporters are expecting to get more orders as Chile has shifted its focus towards the USA and Canada. According to Mahindra’s estimate, around 6,500-7,000 containers will be exported to Europe, up from the 6,200 containers last year.

Freshtrop mainly exports to UK and EU. So as you said, lets wait and watch the march quarter numbers. I totally agree with your view point though.


(Bheeshma Sanghani) #102

Hi @eyesice

Thanks for putting me onto the grapenet website. The overall grape export data looks interesting. However share of grapes in FT total revenue has been decreasing at least for the 3 years that i have looked at it.

Having said that, there may be an opportunity here. I will post my findings here after i compile them

Sincerely
Bheeshma


(Bheeshma Sanghani) #103

I had a further look at the charts since the grape export data to EU was looking interesting and the broadening formation i alluded to earlier while possible seems very unlikely now.

tabling the EU grape export data from grapenet for the last 4 years i divided it into the first 10 mths ( apr to jan) and the last 2 mths ( feb & march ). The data for the last 2 months of 2016-2017 ( feb & march ) is not out yet so it needs to estimated.

The last 2 months account for a majority of the exports to EU compared to the first 10 months of the yr. So its possible to come up with a multiple to estimate the exports for the final 2 months. for example in 2013-2014 the first 10 months did 304cr of exports and the last 2 months did 622 crores, so the last 2 mths did 2x the exports of the first 10. The multiples are as follows

I have taken an average of the 2013-2014,2014-2015 & 2015-2016 multiples to estimate the last 2 mth exports in feb17 & march17. By my estimate it should do 842 crores in feb&march. The first 10 mths of '17 have done 291 cr. So the total export to EU of 2016-2017 should be 1134 cr

I estimate Freshtrop fruits revenue for 2016-2017 to be ~190cr. ( comments are in yellow )

This means the final quarter of 2017 should do a revenue of 114cr since the first three have a combined revenue of ~76cr ( 76 + 114 = 190 cr ). This represents a QoQ increase of ~90% over the march16 quarter ( 59.65 cr march16 & 114 cr march 17 estimated ) - leading to a significant rerating upwards.

Assuming the PAT margin of ~7% holds this means a PAT of ~13cr . Applying the current PE multiple of ~15 would mean an expected market cap of 195crs from the current 136 cr offering a nice margin of safety.

The price pattern that has evolved confirms the expected developments.

The prices shot up from a cup and handle formation ( pls note : this is not strictly a cup n handle as the handle formation time is not shorter than the cup formation time - i missed that & manythanks for @manish962 for pointing that out!)

and after a steep rise and as correctly pointed out by @eyesice are consolidating for sometime. A closer look at the daily for the last two years reveals unmistakable shakeouts. Weak hands being “shaken out” of their positions.

A bullish ascending triangle has evolved as a result. Also a note to myself from this - dont look at the price patterns in isolation. Look at the context. Going back in time, the cup and handle base from which the prices shot up changed my mind.

The news on grape exports has been really bullish and several reputed sources have mentioned the bumper grape exports to EU in 2016-2017.

I think this is a good opportunity. However there are risks

  1. The share of grapes in the Freshtrop revenue has been declining. So the thesis may not pan out if the share drops even further

  2. The entry of biggies like mahindra who can easily take away share. The business has no moat.

  3. 60% of the company is inventory and receivables.

  4. India is not the first choice for europe. The quality of the grapes plays an important role. There is a worldwide focus on quality of food being imported. Grapes contain pesticides.

  5. Unseasonal rain in May / June can kill the crop.

Disclosure - invested at 114 levels

Sincerely
Bheeshma


(Ayush Mittal) #104

Hi @bheeshma,

Good work once again. Having tracked this company from several years before, I do keep a tab on the story. As per the industry people, this season had been doing very good and there were expectations of high volume growth (as your data is pointing) however I think there were some problems in the month of Feb or March. So not sure. Here is an article - http://www.freshplaza.com/article/172901/India-Grape-exports-suffer-from-quality-issues-and-market-surplus

Regards,
Ayush


(Rupesh Tatiya) #105

I have a friend who has exported 200 containers of grapes this season. I haven’t had detailed chat with him but it seems that prices in export market are down quite a bit due to over-supply of grapes. He was complaining that there is no entry barrier in this business. So prices should also be tracked in conjunction with volume.

Disc - No Investments


(eyesice) #106

Thanks for doing all the hard & dirty work. Really helps for newbies like me to analyze these kind of stocks.I shall also try to find out more on the future of fruit exports - one of my friend is working in fruit exports in the OPEC region.

Disc : Invested @113 levels today.


(Bheeshma Sanghani) #107

http://www.financialexpress.com/market/commodities/indian-grapes-season-turns-bitter-as-chilean-fruit-hits-european-markets/653263/

From the article it is clear that export volume to EU has increased by ~34% over the last yr. However from mid march the rates have dropped with the influx of Chilean grapes. So it will be interesting to see what the final export value to EU will be. FT results should be out by end of may.


(eyesice) #108

Thats interesting. Let’s see how the results pan out. Btw I was looking into the AR and have a few queries.

(+) Inventory days have come down from 206 days to 154 days.
(+) I see the reduction on weight-age of grapes on the revenues as a positive sign. They are slowly increasing the production of mango pulp, pomegranate and processed food while keeping the revenue somewhat constant. Quoting from this link - http://www.freshplaza.com/article/174910/Bumper-summer-harvest-lifts-Indian-fresh-fruit-exports-by-18.5-procent

Prabhakar Chandane, president of All-India Pomegranate Growers’ Association, said, “This year’s pomegranate production could be the highest ever, while the prices are also lowest in about a decade."

The above statement could prove to be a double edged sword as well.

(-) However I feel receivables have gone up by 130 % to 25.1 cr against 10.9 cr. This has brought down the Operating cash flow by a huge margin ( 35 cr v 12.5 cr ).

Is this because the company is trying to force sell their inventory in credit too much? If that is the case, isn’t this a red flag?


(Bheeshma Sanghani) #109

The Feb 17 grape export to EU data has been added to the APEDA website and it is looking great!!

in Feb 17 india exported 402.29 cr worth of grapes to EU. March 17 data is not out yet but in the past 3 years the march exports have always been greater than the feb exports. The average is March is 1.54 times the feb sales. Which gives us an estimate of 620 crs for march 17.

Therefore the march17 + feb17 export figure comes to a whopping 1022.08 crs as against my previous estimate of 842 crs.

I cant see how freshtrop results are not going to spring a positive surprise. But will wait to see if this analysis is reflected in their numbers ( as per various news sources mid march is when chilean competition came in)

Disc - Invested


(Rupesh Tatiya) #110

Did some scuttlebutt over the phone, please take following with a pinch of salt ->

Volume of grapes exported increased this year but prices are severely down in EU. Usually there are two types of contracts with importers of EU - variable price and fixed price. In fixed price, a minimum amount is paid upfront and rest is paid after supermarkets sell the produce. Fixed contract is usually given to premium tier players of which Freshtrop is. This year payments are delayed quite a bit from EU side and exporters who have taken debt are finding it hard to service debt obligations. Also there is general feeling that exporters might not make a lot of money this year.

It seems that Freshtrop foresaw the price decline in EU markets and have reduced supply to EU. They have focused on non-EU markets where price realizations might be better. Freshtrop shall report volume growth and better than industry profit margins. But overall profit margins of entire industry might take a hit this year.

Disc - No Investments


(Bheeshma Sanghani) #111

Thanks for the important scuttle. Helps to recalibrate the investment thesis! Will you be able to provide any clarity on the price realizations for exporters?

The freshtrop board is supposed to meet may end to finalize results. So 1st week of June we will know what has happened. In this run up to result day, it will be interesting to see how price and volume play out. As per my calculations of the last 50 days. There have been 3 price contractions with the 4th underway as we speak. The first contraction was 12.17% ( from a high of 115 to a low of 101) , the second one 13.4% (from a high of 119 to a low of 103), the third one was 10% (a high of 120 to a low of 108). The 4th one is panning out.

The interesting thing is that on each contraction the volume has been scant.

Heres what i mean

Best
Bheeshma


(Bheeshma Sanghani) #112

Trade_Map_-_List_of_importing_markets_for_a_product_exported_by_India.docx (32.0 KB)

Grape export from India to the world has grown at a super CAGR of 21.3% from 2001 to 2016.


(jagjit8277) #113

Thanks @bheeshma for sharing this information. I have been closely following this thread from sometime and am invested here. Waiting to see the results next week to see the story play out.

Just couple of things and apologies if you already have covered it somewhere.

  1. Do you know why exports dropped a lot in 2015?
  2. Any idea about which are the other top 2 countries in grape exports?

Appreciate your feedback.


(eyesice) #114

Q4 Results out.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/5e9ae85e-94dd-438e-87b7-3488f1967cb1.pdf


(Bheeshma Sanghani) #115

The topline of 18% growth is encouraging. In line with historical grape export rates. Now to see how mr market views it. He is the final authority and one doesnt argue with his verdict!


(Aksh) #116

I would be surprised if the q4 nos. doesn’t disappoint the already weak market tomorrow. The topline for q4 is higher by some 10% or so but that’s matched by higher proportionate growth in expenses leading to considerable decline in OP and OPM on YOY basis. If not for higher OI and lower taxes for q4, bottomline would have taken a severe hit. Even full year nos. tell the same story. March and June are historically best quarters for the co. and this may very well be the precursor to the June nos.

Disc: Tracking


(Bheeshma Sanghani) #117

The results clearly are way below my expectations. The topline did grow by a healthy 18% but the operating yearly profit has been flat. Gross margins have also reduced to 8% from 9.4% a year ago.

So a mixed set of results. In time however i think operating performance will normalize and adjust itself to the topline and till such time that happens i hold a tracking position.

Best
Bheeshma


(Bheeshma Sanghani) #118

@jagjit8277

The top two places that Europe imports grapes from are italy ( 20%) & South Africa (16.5%). The others are Spain (9.2%), Chile (7.8%) , India ( 6.6%), Peru (6%)

The export value to europe from India roughly ranges between is 1500cr +/- 20% and is dependent upon a lot of moving variables. So the size of opportunity is large enough. However as one can see from the results, exporting grapes is a fiercely fought game and it is not possible grow margins at a sustainable rate. The only way to grow is to take market share away from your competition - again easier said than done or hope for a bumper demand from europe which happened this year but i think most of the demand was fulfilled by other more preferred countries.

Best
Bheeshma


(sn123) #119

The freshtrop website lists at least 8 different certifications including FDA, ISO, BRC and Halal enabling it to export quality produce to big markets like Europe, US and Gulf countries all of which have exacting standards. I think this is the major barrier to entry. This was a small part of my rationale for investing when I did. Why do you think there is no barrier to entry?


(Bheeshma Sanghani) #120

Hi @sn123

I think these certifications, while necessary, are also available with others who export to these markets. I was banking on the record grape crop which happened but unfortunately margins came under severe pressure. Also from the data i have been able to gather india is not the first choice its not even the second or third choice. From this i infer that the product quality has to improve for india to compete with the big boys of grape export. Since the opportunity size is big enough freshtrop is well placed but there seem to be too many moving parts.

Best
Bheeshma