Modi Naturals is a small cap Delhi based company having a market capitalization of around Rs. 125 crores. Incorporated in 1974 as an oil mill manufacturing rice bran oil in Punjab; the company has grown from strength to strength to become the largest processor of rice bran in India.
The increase of the health fad among the people today has created a deep rooted desire to be in vogue with branded products and count themselves among the fit and the healthy. Modi Nturals realized this shifting trend of the consumers from unbranded commodities to branded products. As such, the company too transitioned its business from the commoditized non-branded manufacturing and marketing of edible oils to making unique branded edible oils and in the process became India’s third largest blended oil brand.
About the Business
As of 2016, 29% of the revenues of the company comes from branded products; while the rest comes from the unbranded commodities. The share of the branded product in the total pie has been consistently increasing since 2010. In fact, the company plans to increase the share of the branded products to 70% of its total business by the end of 2020. This will significantly improve the margin profile of the company, which is an issue currently like all unbranded oil manufactures. The branded product portfolio of the company includes brands such as Oleev Olive oil, Oleev Active oil (Blend of Olive oil and Rice Bran Oil), Rizolo Rice bran oil, Tarai shudh Mustard oil, Tarai Tasty+ (Blend of mustard and rice bran oil), Miller Canola Oil and Olivana Wellness Oil.In the unbranded space, the company manufactures and markets sunflower oil, rice bran oil, mustard oil, rice bran wax and de-oiled cakes.
Modi Naturals have always strived on technological advancement and continuous improvement. The plant set up at Pilibhit, Uttar Pradesh in 1985; today has evolved into a fully integrated 100 Tons per day refining capacity, a 300 Tons per day crushing capacity and a 400 Tons per day solvent extraction capacity.
In terms of its distribution network also, the company boasts of 20 own depots and more than 400 distributors across the country. The products of the company are today available in all the prestigious and popular retail outlets such as Spencers, Big Bazaar and Reliance Retail as well as in the online retail space such as Big Basket and Grofers.
Ever since the company has ventured into the branded segment, it has left no stone unturned to ramp up its marketing strategy to strengthen the brand presence and improve brand recall; particularly important in the highly commoditized edible oil industry in India. Advertisements on televisions and digital marketing on youtube (https://youtu.be/Zyina-qgpi8) , facebook and instagram is testimony to the same.

The Big Opportunity
There are no second thoughts about the fact that the mindset of the Indian consumers is in the cusp of change as far as their lifestyle and health consciousness is concerned and it is not just restricted to any class of the society. Various reports from health organizations like WHO have already pointed out that the India is the cradle of all the cardiovascular diseases. As such, the consumers are shifting from the purchase and consumption of local commoditized edible oil to branded healthy edible oils. Now, it is important to note here that the purchasing power of the consumers continue to be low and the imported edible oils from abroad come with a huge pocket pinch.
This is the sweet gap that Modi Naturals is poised to fill in – providing affordable healthy edible oil to the Indian market.
The potential of the Indian market is magnanimous – Indian edible oil is fourth largest in the world; and per capita consumption is in a fsat growth trend. India continues to be world’s largest importer of edible oil and there is huge scope to fill the gap of domestic demand and supply. To add to it, the Indian market is essentially characterized by unorganized players; with only a handful of organized players. This further exerts the fact that a huge value creation is still to be done in the industry by big oganized players like MODI Naturals.
We believe with improving margins; increased capacity and strong focus on marketing and distribution; Modi Naturals can create huge value in next few years.

Concerns
  • The management of the company is relatively unknown. Though; the experience of the management is unquestionable; not much is known about their integrity. More so, since the company has not been giving out dividends despite earning profits
  • Modi Naturals is on for uphill task of converting unbranded market to branded one, this needs deep pocket and sustained brand building efforts. How much time and resourse they can afford is a poin to watchout for.
Outlook
As per our internal estimates, company’s branded business is expected to generate close to Rs. 125 crores in the FY2017 and double from thereon by 2019. Entire distribution channel expansion exercise is also expected to be completed by the end of FY2017; improving the gross margin to close to 40%. The company has the potential to post PAT of around Rs. 15 crores in FY2018 and improve by 40% from there in the following year with a ROE of around 30%. 25x multiple to branded segment and 6x to trading; would translate into a market capitalization of around Rs. 380 crores.
However, this is just for information, investors must do their own due diligence or consult their advisory before making any investment.

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