Srivari Spices and Foods Limited

The Company:
Incorporated in 2019, Srivari Spices and Foods Limited is engaged in the business of manufacturing and marketing spices and flour (chakki atta) across Andhra Pradesh and Telangana. In August 2023, the company came out with IPO at Rs.42 per share. Total equity of the company is 7.14 crores. Promoters hold 69.9% of shares.
At current market price of around 225, the company is commanding a market capitalization of around 160 crores.
Narayan Das Rathi (Presently MD) is a serial entrepreneur and a visionary, who dreamt of taking spices, foods, and sharbati and regular atta to the discerning Indian consumer. The company claims to have a single-minded focus on QUALITY, and on providing the purest most authentic ingredients to customer’s kitchens. From their website [https://srivarispices.com/], it appears that the company is focussing on quality.

Financials:
The company has been incorporated only in 2019, and hence financials for a long period is not available.


On a half yearly basis, the company has shown 30 crores topline and 2.6 crores PAT in H1- 2024.

The management has said that they are running Rs.8 crores revenue presently. They are operating on 26% to 27% of the gross margin overall. Thus, we can expect a topline of 50 Crores and PAT of around 4.5 crores in H2-2024 by extrapolating the numbers. Thus, I expect an eps of Rs. 10 in the current financial year.

Business:

The company has two manufacturing locations in Shad Nagar and Katedan in Telangana. These are state-of-art plants which manufacture spices, masalas and sharbati and regular atta.

The manufacturing plant, made by Choyal, in Shadnagar, manufacturers over 3 tonnes of sharbati and regular atta every day. The freshly ground atta is then packed and sent to over 15000 retail outlets across Telangana and Andhra Pradesh. The plant at Katedan manufactures spices and masalas. It has a capacity to produce over 3 tonnes of spices and masalas every day.

It looks like atta, spices and masala are commodity business; but in the present scenario a slice of population is willing and capable of paying premium prices for purity and quality. It looks like the company is tapping in that market. All communication from the company is insisting on quality and purity, including procurement of raw materials only from accredited farmers.

Future Plans:

In the latest investor meet the company has said that they are coming out with the new 15 masalas which are into the pipeline which are delayed because of our penetration into atta was very high. They are also planning to come out with pure safflower oil as well as groundnut oil. The are planning a unit for it, and they expect to launch the product by June this year. They are also eyeing export market. In the oil segment, they are expecting a gross margin of 15-18%.

The company plan to concentrate on Telangana and Andhra market only. It said,

“We are only in Andhra and Telangana and next financial year we will be focused on Andhra and Telangana only with the potential of the product and the category is very high. So, apart from going to geographic expansion, it’s better to focus on our current market, which will help easily to penetrate the market as well as maintain the profitability. If we make an expansion in other states too fast it will affect our profit margin also. So, we want to first capture the market here and we want to be in the top three numbers, then we will open the new location…… We will not focus on the other geographical area expansion in other states. So, we have huge potential in Andhra, Telangana itself. So, you can see after 400 crores to 500 crores of revenue we will think about the next stage for the geographical expansions.”

The management further says-

“By 2030, we will be the best company in India, we are giving the healthy product out of all the other with quality check as well as you can check the lab reports. Today also all the parameters if you check we are the best in the industry throughout India, if you compare with all the national brands we are above all the national brands of Tata or Aashirvaad and other MDH, MTR, we are maintaining the high quality, we are focused on the healthy product line as well as quality product. So, this is our objective to make. By 2030 our brand will be there. It’s too early about the next first, two years, three years. We are coming out with a lot of products in the pipeline. We have planned almost 300 products to launch overall into the next till 2030.”

New Initiative:

They are increasing the dealer’s network- from 15k dealers to 50k dealers. Further, they are also starting to distribute the product on EVs, which will gibe better visibility to the company and brand. Their direct to customer initiative will result in lower working capital requirement and better margin for the company.
A copy of the investor meet is enclosed herewith.
SSFL.pdf (923.8 KB)

Investment Thesis:

  • A food company, growing at a very high pace is available at a reasonable valuation [22.5 times current year eps], or 2 times current year sales.

-Taste of Indian consumer is changing and some consumers are willing to pay higher price for purity and quality.

-Growth story looks promising based on past performance of the company.

-First generation entrepreneur [my personal preference is first generation entrepreneurs].

-Sensible strategies like sticking to small area, expanding the portfolio, maintenance of margins etc.

Risk:

-Micro cap stocks are risky by nature and one can lose 100% of invested capital.

-Company has already seen sharp upside and deep correction cannot be rules out.

-The company has very ambitious growth plans, and will need huge capital outlays for financing such growth.

-Cash flow of the company is negative.

[Disclosure- Invested]

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However I am shocked at their production manager’s review.

Other concerns as you rightly pointed out cash flows are negative.
Borrowings, debtor days and working capital days are on increasing trend.

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On balance sheet figures, operating cash flow of the company looks a bit dangerous- however when we analyse the figures based on month to month sales- it looks okay. Let us compare the balance sheet figures of March 23 and September 23- sales per month was almost 4 crores per month and sales in September 23 was almost 8 crores per month.

On an absolute basis, inventory was almost 2 times sales in March 23 and September 23. Trade receivables are also in the same proportions, slightly more than 2 months figures. Trade payable has gone up sharply in current liabilities figures- which shows that probably the company is getting more and more raw materials on credit.
2 months of inventory is a great figure, it shows that the company can maintain an inventory turnover ratio is 6, which is excellent [Nestle has an inventory turnover between 4 and 5]. This inventory turnover, coupled with 25% gross margin can give a great return on equity.
Still, this is a phase where management has to be prudent in cash flow management.

Please avoid , I can’t talk more than this .

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What is the potential margin in the spice business, and how should it be valued?
-ITC acquired Sunrise Food for 2150 crores 2021- at that time Sunrise Food was doing a revenue of 591 crores with operating margin of 88 crores. OPM of Sunrise was around 18%.
-Based on news reports of HUL acquisition of MDH- MDH is working on 42% OPM. almost 500 crores operating profit on 1200 crores topline.
-Badshah Masala was working on 25% OPM, when acquired by Dabur.
-Eastern Condiment was acquired by Okra [MTR Foods] for around 2000 crores.

Based on these reports, a spice company can work on 20-25% OPM. A strong brand equity, purity and quality of products may also result in higher margins.

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Detailed video on business segments, working capital, future growth from management.https://youtu.be/EM_0CeuHtAE?si=4PpmTFvFBgGgZm3X

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The company has successfully placed its products in 50 Reliance retail stores and 13 Balaji Grand Bazar stores.
SSFL_01022024162937_Reg30.pdf (193.1 KB)

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Please avoid this stock , I can’t write beyond a point .i am from Hyderabad this co also from same place .

It will be great if you can provide details on why we should avoid this? This is FMCG business and can have a potential to grow. What is your anti thesis?

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Traveling to Hyderabad to attend a family event and see that Srivari has put up ads in Secunderabad railway station. Good to see small cap company spending on advertising and Meena was a popular South Indian actress in 90s.

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The stock has seen a sharp runup, from 270-80 level to 370-80 level. Is it justified?
In H1 Sep,23; the company did 30 crores topline with 2.6 crores net profit.
Later, the company declared in Nov. 23 that they are doing almost 8 crores of monthly sales with 20+ percentage margin. Lately the company also declared placement of its products in Reliance retail, balaji grand bazaar, SOLV, Ushodaya etc. Keeping these development in mind, we can estimate [purely my estimate] a topline of 80 crores with around 7-8 crores net profit. Thus, today the company is being traded at around 40 times p/e based on estimated 2023-24 earning per share.
In Q1, the company is planning to introduce healthy unrefined oil. Thus, even the current financial year growth plans of the company remains intact, and a price earning ratio of 40 for such a fast growing company is not exorbitant.
[Disclosure: Invested]

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Your info is correct.
Our sentiments can be shaken in fast moving stocks due to fear of loss of unbooked profits.
However, I consider this stock as low float stock
There are only 312 public shareholders (as per Zerodha Kite) out of which we may assume some are relatives and friends of promoters.
In such low float stocks P/E can go very high.
Some egs PNGS Gargi, Insolation, Exhicon (These stocks now may have high float but during post listing the float was cornered)
Even for main board stocks also low float stocks can get very high P/E as no sellers might be there. (Avenue Supermart post IPO & Varun beverages currently)
According to me our focus should be more on management integrity, results and accounting practices. Untill these are taken care of (with good results) I dont think stock will correct much. time correction cant be ruled out after such a move.
Disc : Invested & may be biased

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I live in hyderabad and i could nowhere see the brand… They are basically playing the bull run… It is very hard to believe the numbers given no brand visibility… Also have tried some scuttlebutt in local kirana stores but nowhere available…

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Srivari is coming out with right issue, plan to raise 25 crores by issuance of 25 lakhs shares. Thus, I think they will issue rights shares at @ Rs.100 per share, on 3:1 ratio. It will give a much needed capital to the fast growing company, as working capital requirements is increasing with increasing sales.
Record date has not been announced as yet.
SSFL.pdf (338.5 KB)

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That means new 25 lakh shares will come to the market, considering 70% promoter holding 17.5 lakh shares will be with promoter and around 7.5 lakh new shares free float with public [ 21 lakh old +7.5 lakh new].
Still liquidity is low…

How exchange/regulators allowed these companies to do right issues since these are traded in lots.

All shares of retailers will be in different multiple and then no body will be able to sell his right share untill company goes to main board

Hence please avoid applying rights

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Company has placed its products on D Mart online (Hyderabad only I guess).

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The company has come out with stellar results- the topline has gone to 78 crores (an increase of more than 100%) and net profit has gone up to more than 7 crores, an increase of more than 100%. EPS is Rs. 10 on a fully dilutes basis.
Srivari_compressed.pdf (4.0 MB)

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The company is expanding its distribution channel continuously. The company’s products have been successfully placed on “BigBasket”, an online grocer in India owned by
Innovative Retail Concepts Private Limited. This strategic initiative is in line with the strategy of expansion of distribution channels.
SSFL_14062024173337_Reg_30_Discl_placement_of_Products_on_Bigbasket.pdf (286.9 KB)

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Has company came up with Oil SKUs? In concall they mentioned by June 2024 they will sell Oil. Didn’t find on their website about oil.