MVK Agro Food Product
- MVK Agro Food Product is coming out with an initial public offering (IPO) of 54,90,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 120 per equity share.
- The issue will open for subscription on February 29, 2024 and will close on March 04, 2024.
- The shares will be listed on NSE SME Platform.
- The share is priced at 12 times higher to its face value of Rs 10.
- Book running lead manager to the issue is Horizon Management.
- Compliance Officer for the issue is Swapna Rajaram Bansode.
Profile of the company
MVK Agro Food Product is an integrated sugar and other allied products manufacturing company operating from Nanded District in the State of Maharashtra. It operates a single location sugar unit having licensed crushing capacity of 2,500 TCD. In addition to sugar, the company also commercialises and sells its by-products and waste products, namely, Molasses, Bagasse and Pressmud. It is also engaged in the generation of Power for captive consumption. The company’s business can hence be broken into two segments, namely Sugar and its by-products/waste products. In the year 2020, it commenced operations of manufacturing of Sugar. In the year 2020, the company implemented backward integration and began commercial operations of the by-products and waste products of Sugar along with Co-Generation capabilities. The company has in the Fiscal 2023, completed three crushing seasons, i.e., 2020-21, 2021-22 and 2022-23. Over the years, it has expanded the production / manufacturing capacities of all its products.
The company proposes to further diversify its product portfolio by setting up a greenfield unit for manufacturing Ethanol and Bio-CNG and Fertilizer. Ethanol is produced after fermentation and distillation of Molasses and can be further purified into Fuel Ethanol, by removing the water content. It intends to create an additional revenue stream using backward integration of its waste material, i.e., Molasses for manufacturing Ethanol and marketing and selling the same for industrial usage.
Further, in the said greenfield unit, the company proposes to set up a separate bio CNG bottling and fertiliser plant for bio-gas generation and bottling. The by-product generated from the manufacturing of bio-gas is mainly used as a fertiliser, therefore the company proposes to market and sell such by-product as a fertilizer to third parties. It proposes to generate bio-gas by processing Bagasse and Pressmud further marketing and selling the same for industrial usage. The company follows a diversified marketing approach for marketing and selling its products. It markets and sells its products through domestic brokers and export-oriented commodity traders.
Proceed is being used for:
- Setting up a greenfield unit in Nanded, Maharashtra for (i) manufacturing Ethanol and (ii) generation and bottling of Bio-CNG and Fertilizer.
- General Corporate Purposes.
Industry overview
The sugarcane and sugar sector in India ranks second among the country’s agro-based industries, after cotton. India ranks first globally in sugar production. It produced about 37 million metric tons of sugar in 2022. It is not only responsible for the livelihood of sugarcane farmers in rural areas but also provides employment to about 500 thousand workers in the sugar mills. Additionally, the gross value added from the sugar crop was about 806 billion Indian rupees in 2020. Apart from being the leading sugar producer, India was also the third-largest exporter of sugar in the world in 2022. Sugar production is estimated to be 340 lakh tonnes in SS 2022-23, as compared to the peak of 358 lakh tonnes produced in the previous SS 2021-22; with the highest ever diversion towards ethanol estimated at 45 lakh tonnes (higher by 41% y-o-y), according to the Indian Sugar Mills Association (ISMA). This increasing diversion towards high realisation ethanol is likely to support 8-12% revenue growth for sugar mills this fiscal. By the year 2025, the government is targeting to divert 60 lakhs tonnes of excess sugar towards ethanol annually.
Meanwhile, India has the second-largest arable land resources in the world. With 20 agri-climatic regions, all the 15 major climates in the world exist in India. The country also has 46 of the 60 soil types in the world. India is the largest producer of spices, pulses, milk, tea, cashew, and jute, and the second largest producer of wheat, rice, fruits and vegetables, sugarcane, cotton, and oilseeds. Further, India is second in the global production of fruits and vegetables and is the largest producer of mango and banana. During 2019-20 crop year, food grain production reached a record of 296.65 million tonnes. Agriculture is the primary source of livelihood for about 58% of India’s population. Gross Value Added by agriculture, forestry, and fishing was estimated at Rs. 19.48 lakh crore ($276.37 billion) in FY20. Share of agriculture and allied sectors in gross value added (GVA) of India at current prices stood at 17.8 % in FY20.
The agriculture sector in India is expected to generate better momentum in the next few years due to increased investment in agricultural infrastructure such as irrigation facilities, warehousing and cold storage. Furthermore, the growing use of genetically modified crops will likely improve the yield for Indian farmers. India is expected to be self-sufficient in pulses in the coming few years due to concerted effort of scientists to get early maturing varieties of pulses and the increase in minimum support price. In the next five years, the central government will aim $9 billion in investments in the fisheries sector under PM Matsya Sampada Yojana. The government is targeting to raise fish production to 220 lakh tonnes by 2024-25. Going forward, the adoption of food safety and quality assurance mechanisms such as Total Quality Management (TQM) including ISO 9000, ISO 22000, Hazard Analysis and Critical Control Points (HACCP), Good Manufacturing Practices (GMP) and Good Hygienic Practices (GHP) by the food processing industry will offer several benefits.
Pros and strengths
Wide range of products: The process of production of sugar produces various residual materials and by-products like Bagasse, Molasses and Pressmud. These residual materials are used by the company as raw materials for manufacturing further products. The Bagasse, which is a dry residue after the sugar production process is used to generate electricity by burning the same in the Boilers. The company markets and sells its Sugar through brokers, with whom it shares long term relationship. The company’s brokers further sell its products to a wide range of industrial sectors like renowned FMCG manufacturers such as, PepsiCo Holdings India Private Limited, Parle Biscuits Private Limited and Britannia Industries Limited among others and food industry, to name a few. The wide range of products gives the company a large market for each product. Its brokers also sell its products to wholesalers and large retailers all over India. The marketing initiatives of its brokers have enabled the company in creating a brand presence in the domestic market.
Integrated operations and economies of scale: The company has integrated operations enabling it to meet the time, cost efficiency, quality and quantity requirements. The residual material and by-products generated from the production process of one product is used as a raw material for power generation and are commercialised to third parties for manufacturing sustainable products. Thus its diversified but integrated business model provides most of the necessary raw materials in-house for the power generation and has created additional revenue streams for the company, thereby adding to its revenue from operations. Its business model and its products are completely sustainable in nature. It sources its raw materials directly from farmers to ensure that it uses absolutely natural ingredients in its products. Since, it sources its raw materials directly from the farmers, it is able to offer its products at a lower range than its competitors, thereby having a unique pricing model. Further, it procures its sugarcane produce from local farmers, uninterruptedly till date, it is also able to achieve economies of scale by bulk buying from the farmers. This provides it seamless flow of raw material and also enables it to transport the surplus waste materials, if, any, for direct sale.
Fully equipped manufacturing facility: The company operates through its manufacturing facility located in Nanded District of Maharashtra. It operates a single location sugar unit having licensed crushing capacity of 2,500 TCD. Its manufacturing facility is also capable of segregating its by-products and waste products, namely, Molasses, Bagasse and Pressmud and generation of Power for captive consumption. Its manufacturing unit is equipped with processing and milling facilities, for manufacturing sugar from sugarcane. The value chain is capital intensive and follows highest standards of hygiene and automation. The company’s processing technology gives it a competitive edge over most of its competitors. The company’s processing technology offers high operational efficiency and provides higher yield to the company. The company’s high level of modernization, trained work force and managerial expertise results in a consistent high level of productivity.
Risks and concerns
Depend on its domestic brokers for significant portion of revenue: The company follows a diversified marketing approach for marketing and selling its products. It market and sell its products through domestic brokers and export-oriented commodity traders. It market and sell its Sugar through brokers, with whom it shares long term relationship. Its brokers further market and sell Sugar to institutional confectionary manufactures, such as PepsiCo Holdings India Private Limited, Parle Biscuits Private Limited and Britannia Industries Limited, etc. In addition to its association with brokers, it also sells its products to export oriented commodity traders, such as, Sakuma Exports Limited, Indian Sugar Exim Corporation, Garden Court and HRMM Agro Overseas Private Limited. Its commodity traders have built longstanding relationships with international buyers of various grades of raw sugar, and therefore it sells Sugar in bulk quantities to its commodity traders, who further market and sell it in both bulk and containerised forms in global markets. In the event, it is unable to retain its intermediaries or if its intermediaries continue to decrease, it may have to associate with new intermediaries, on terms and prices which may not be acceptable to it. Further, it cannot assure that the new intermediaries appointed would be reliable and contribute to its revenues in the same manner as its current intermediaries. On the occurrence of any of the aforementioned events, its business and results of operations could be adversely affected.
Limited experience of manufacturing Ethanol and Bio-CNG and Fertilizer: The company proposes to further diversify its product portfolio by setting up a greenfield unit for manufacturing Ethanol and generation of Bio-CNG and Fertilizer. It proposes to utilise the Net Proceeds of this Issue, towards funding the expenses proposed to be incurred towards setting up of the proposed manufacturing unit. While, the company has a longstanding experience in manufacturing and selling of Sugar and its by products, however it has limited experience in manufacturing and selling of Ethanol and Bio-CNG and Fertilizer. Further, its experience of manufacturing Sugar and its byproducts may not be fully relevant or applicable to its proposed operations and hence it may face limitations to growth of business. Given its limited operating history in manufacturing the said products, it may not succeed in addressing certain risks pertaining to such products in an early stage of growth, including its ability to acquire and retain customers/intermediaries or maintain adequate control of its costs and expenses.
Seasonal business: The company’s business is seasonal in nature and as a result, its operating results may fluctuate. Since its business is influenced by the availability of its basic raw material, i.e., sugarcane, its production schedules are operational only according to such availability. For example, in the Nanded area, the crushing season generally starts from November each year and remains till March. It is during this period that its majority of the sugar production takes place. During the non-crushing season, i.e. April to October, not only is its sugar production affected but also its co-generation and distillery units are affected for the lack of bagasse and molasses. Further, other seasonal factors such as irrigation, seed quality, area of sugarcane production and amount of rainfall also play a role in determining the quantity and quality of sugarcane produce. Consequently, the results of one reporting period may not be necessarily comparable with the preceding, succeeding or corresponding reporting periods. The company’s revenues recorded during planting and harvesting seasons (i.e. 1st half of any financial year) are typically lower or even in losses as compared to revenues recorded during the crushing season (i.e. 2nd half of the financial year).
Outlook
MVK Agro Food Product is a manufacturer of integrated sugar and other related products. The company has a licensed crushing capacity of 2,500 TCD and sells its by-products, Molasses, Bagasse, and Pressmud. The company operates a zero-waste manufacturing facility. Waste generated is either sold or used to generate power. On the concern side, the company has limited experience of manufacturing Ethanol and Bio-CNG and Fertilizer. Hence, it has limited exposure in manufacturing products outside of its existing product portfolio, which may make it difficult to evaluate its past performance and prospects with respect to the same. Moreover, it depends on its domestic brokers and export-oriented commodity traders for a significant portion of its revenue, and any decrease in revenues or sales from any one of its key intermediaries may adversely affect its business and results of operations.
The company is coming out with an IPO of 54,90,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 120 per equity share to mobilize Rs 65.88 crore. On performance front, total revenue has decreased 28.62% from Rs 13,067.11 lakh in the fiscal year ended March 31, 2022 to Rs 9,327.65 lakh in the fiscal year ended March 31, 2023. The decrease in revenue was on account of decrease in manufacturing of finished products due lack of availability of sugar canes on account of lack of rainfall in the western part of India. Moreover, Net Profit has increased 18.03% from profit of Rs 319.81 lakh in the fiscal year ended March 31, 2022 to profit of Rs 377.46 lakh in the fiscal year ended March 31, 2023.
The company has over the years diversified its product portfolio and increased its production capacities through consistent growth and innovation. The company proposes to further diversify its product portfolio by setting up a greenfield unit for manufacturing Ethanol and Bio-CNG and Fertilizer. Ethanol is produced after fermentation and distillation of Molasses and can be further purified into Fuel Ethanol, by removing the water content. It intends to create an additional revenue stream using backward integration of its waste material, i.e., Molasses for manufacturing Ethanol and marketing and selling the same for industrial usage. Further, in the said greenfield unit, it proposes to set up a separate bio CNG bottling and fertiliser plant for bio-gas generation and bottling. The by-product generated from the manufacturing of bio-gas is mainly used as a fertiliser, therefore the company proposes to market and sell such by-product as a fertilizer to third parties. The company proposes to generate bio-gas by processing Bagasse and Pressmud further marketing and selling the same for industrial usage. Its strong presence in the Indian market positions it well to capitalize on the anticipated growth of Sugar and its by-products. The strategic decision to expand its product portfolio will enable it to create additional revenue streams, diversify its business operations and reduce its dependence on a single product.
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