Dhunseri tea & industries limited

This stock caught my eye when i saw its trading at Rs 197 Cr and it did the profit of RS 27 Cr in FY17. It’s been making profits around RS 25 - 28 Cr from last three years , PE = 7 with dividend yield of 2.98 %.

If you see whole sector seems to be trading at fairly high valuation, most of its peer are near 52 week high. So, at least fair to assume sector is not facing any headwinds.

Stock seems cheap to me its trading at 0.25 times its book value.

Detailed Financial Analysis : Microsoft OneDrive - Access files anywhere. Create docs with free Office Online.

Company has the total long term Debt around Rs 68 Cr /- , Considering company do the net revenue of Rs 300 Cr /- It think its on the higher side.
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Ideally i like debt to be around 10% of the revenue 30Cr to be bit comfortable.

Again , As they have marked up the land prices the Debt/Equity went drastically down in FY17.

If you see the total short term debt is around Rs 118 Cr (revenue of Rs 300 Cr) , This shows the very high working capital requirement of the business. This they have mentioned repeatedly in annual report. Tea business require lots of working capital and manpower may be because you can’t run sophisticated agricultures machines (like Tractor etc) to do the job on the hills and that’s the reason availability of low cost labor becomes key differentiator (we will touch upon this later).

Liquidity Ratios doesn’t give me much comfort too, Ideally i would like all of them to be > 1.

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This shows company is barely able to manage its liquidity.

The days account receivables seems to be going up (48 to 63 days) , May be demonetization played its role in Fy17.

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The important thing to watch out is days payable are way too high, which makes the net trade cycle negative. One possibility could be the retailers who sell company tea are giving them advance payment as a contract to receive fix amount of tea bags every year, If that is the case then its great.

Company has been CFO and FCF positive, makes around Rs 25-27 Cr of profits on around 300 Cr of revenue. (for details please refer the spreadsheet)

Overall i see it as a assets for Rs 193 Cr /- , which generates 27 Cr of profits. Although i like debt to be on the lower side and return ratios to be on the higher side but again as this is available with high margin of safety which subdudes my concerns very much.

What could be the key trigger ?
They are pretty much in Rajasthan, There their products are known to the people and are well accepted.

The recent launch in the Orisa is interesting, If this works out they may start expanding into other states as well. Which could potentially drive the growth for the company and help them sell 100% of the Tea production as a value added product (right now it is 35%).

Recent launch in Orisa April 2017

Management Analysis :

Salary 52.7 Lacs seems to be adequate compared to 27Cr of profits company make.

// promoter’s stake has increased recently

They increased around 5% stake in the company in Fy17.

To me overall it seems to be low risk, Average reward type stock, I am hopeful it could give 14-15% return from current price as monsoon were good. Moreover their Orissa expansion could surprise on the upside and their focus / expansion into Africa seems like the logical thing to do.

Disc : Invested.

Following report gives a good overview of Indian Tea industry. (though, it’s a bit old)

http://www.onicra.com/images/pdf/publications/teaindustryrepor3.03.2014.pdf

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I have tracked some tea companies over the past few years. Tea business is having lot of volatility in the wholesale market. We see almost the same price (usually rising) on the retail end.

Due to volatility, wholesalers or manufacturers usually make lot of money or book loss during specific seasons.

You can see not very good performance from Dhunseri during last two quarters. The stock usually remains range-bound. I think there are better options in the market.

Last two Quarters were always been bad , Even in FY14 & FY15 , Fy16. I see this across the industry, We should not extrapolate it to the year.
One thing i understood tea industry should be seen year on year basis.

24 PM

Yes, There is lot of volatility in tea prices, That too happen in stock market as well :slight_smile:
wherever trading is involved you will have volatility.

PS: These are standalone numbers, They report consolidated numbers only yoy basis it seems.

Thanks Dheeraj … I was looking for something like that. So, far what i have read is Indian Tea companeis should not ignored , They add lots of value to GDP.

The ROCE is 5.9%. There is huge debt… borrowings + other liabilities (114 + 679) compared to sales of about 300.

Please refer to following articles. Dhunseri has diversified into food business, however, not sure if these would become subsidiary of Dhunseri Tea & Industries.

They earlier started packaged Atta business which was later shutdown.

ROCE should not be a concern as i am not looking at from the growth stock point of view …

other liabilities Rs.679crs ???

where did you find it ? I doubt your source over me doing some typo
https://1drv.ms/x/s!AsYQRDZFvppulIAKSQFBO_PDYjRS8g2

Total balance sheet size is some 990 Cr In which total Equity is some 740 Cr , so from where you get this 600Cr number ?

It would be gr8 if you refrain from throwing these one liner and actually be more interactive. This will help others understanding your point of view and will make the discussion more conducive.

I guess you looked into the screener.in , The spreadsheet gives you the actual breakage.

As i have mentioned this is a very high working capital intensive business, They have given detailed breakup in annual report about what these liabilities are.

This is CARE A+ for Bank Rated company. As its assets ( TEA ESTATES) are not depreciating in nature.
All their loans are backed by it, they had taken loans to buy 122USD worth of African Tea estate.

This is not a subsidiary …

yes… the figures were from screener… looks like data error in screener.

Very interesting articles Mr. Garg and thanks for sharing.

I find it little strange that a company dealing mainly with tea, planning to diversify in Pizza chain business. It would be quite a big project and if it is successfully implemented, Dhunseri could be seen as a fast food company instead of Tea and Beverages.

I would be skeptical about the company going in other sectors. And, there isn’t clarity on how these ventures would be funded.

Pizza is separate , His son doing on his own. Nothing to do with this company. Tea business is run by his father.

I am getting lots of Email with excitement that this is purely value buy , gr8 find etc … I would like to say lots of Graham stocks are Cigar butt … please be careful.

I would not have looked into this company but todays bull market kind of forced me as there is no value else where, Still i am not sure the story is great and will play out.

Thanks,
Dhruva

Dhunseri Petrochem worth 1100cr is more of a value buy

Something strange I have noticed about Tea Companies.

I am not sure if their management isn’t good at marketing their product or they are trying to cater to lower segment. I find these brand names really very stupid.

Lal Ghoda
Kala Ghoda
Bagh Bakri (what is this stupid name. What are they trying to present here ?)
502 Pataka Chai (I can still understand they want to related to their bidi brand with this)

I would surely not buy from the brands listed above.

If i invest in Dhunseri, I will surely shoot an email to their management to think of some better brands names unless they want to market it to labor class or rural segment.

Why can’t they learn from companies like Tata, Brooke Bond which sell under quality brand names like Taaza, Brooke Bond Red Label, Lipton.

Also, I see complicated investments made by this company and its parent company. In majority of cases, they are making investments via Dhunseri Petrochem & Tea. Sometimes, such groups do shift money from one company to other. (Have seen similar examples with Satyam Computers, Morepen’s Suri, Vijay Mallya). I am not trying to scare investors here but I would be carefully seeing all the transactions they do.

Hey @gdtechindia, whatever you are saying maybe right regarding complicated investments but I don’t agree with your thinking on brand names.
I also used to think that Wagh Bakri is no brand and nothing premium about it. But when I searched, I found it to be quite a premium brand. I then tried it and since then am hooked onto it. Same way Lal or Kaala Ghoda maybe brands in their own way. May have started small, catering to lower strata, but then it makes no sense to kill a brand which company have made over the years. Remember, when Coca Cola re-entered India, it killed Thumbs Up. Then re introduced it but it could never capture the numbers it sold earlier.

What I am saying here is that majority of middle class or higher end clients won’t be keen on trying brands with such names. But, there are a lot of such names in tea segment.

Most probably, you tried Wagh Bakri tea after they launched their recent ad campaign and spent lot of money on marketing a good product with bad brand name.

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