Today we are going to do a brief coverage on – White Organic Agro Limited (educational purpose article) which produces and supplies organic products, it is a B2B company mainly, has small retail presence (only for branding purpose) which hardly contributes 5% in topline. The company was incorporated in 1990. It was started as a diamond trading company and stepped in to organic farming in September 2016 (almost 1 year from today). The company has leased land of 530 farmers for own farming which accounts 30 percent revenue, trading via subsidiary Future Farms LLP which contributes 70 percent revenue. It operates in six retail stores in Mumbai, Surat, Baroda, Morbi, and Anand.

Reason why one should invest in this company?

1) According to India Organic Food Market By Product Type, Competition Forecast and Opportunities, 2011 – 2021”, the market for organic food in India is anticipated to grow at a CAGR of over 25% during 2016–2021, on account of changing food consumption patterns and increasing instances of contamination of farm produce with chemical fertilizers and pesticides, surging investments in organic food market and rising use of bio fertilizers.

2) The company operates 90 percent stake in Future Farms LLP, Rajkot which has 600 acres under organic manufacturing. The transaction works in favor the company. Farms LLP have recently bagged order of supplying Aloevera pulp from its Kanpar, Gujarat unit to consumer product manufacturer Patanjali Ayurveda.

3)  Now the company has over 1030 acres of leased land under cultivation for organic farming (plus 513 farmers with 2800 acres of land, in total 3800 acres). By FY18 & FY19, company is looking forward for 2000 acres and 3000 acres land under cultivation respectively.

4) On execution side company is doing well with estimated PAT of 10-12Cr for FY17-18. Company is estimating a topline of 125Cr for FY18 and 200 Cr for FY19. With estimated PAT margin of 7-12%, net profit for FY18 turned out to be around 12-15Cr and for FY19 it will be around 18-20 Cr. Remember, these are just an estimate.

5) In the cultivation of aloe vera, the production are high in winter (after monsoon) compare to summer. So, the Q1 and Q2, the topline will not be as good as topline in Q3 & Q4. This year, monsoon was till Sept end hence Oct to Dec’17 quarter is going to be robust and topline will be higher. Since 80% of their own cultivation is aloe vera pulp and they finished 100% order of Patanjali in Oct’17 hence Q3 FY17 is likely to boost topline.

6) De-risking is done with land distributed across 6 different location almost 80-100Km away.

7) Letter of intent for 5 years was signed with Patanjali wherein whatever aloe vera pulp they will produce in their 1030 acres they need to supply to Patanjali. First purchase order for this year got completed in Oct 2017, soon they are expecting new purchase order.

8) On every Diwali or Holi, they add more acres, so during the coming Holi in March 2018, company will add more acres under lease or cultivation.

9) Promoters has issues 50 lacs warrants & contributed 15 Cr to the company which indicates that warrant issued  @ Rs 30/share and the current share price of close to 90-100rs.

10) Deal value to buy Future Farm LLP was around 12-15 Cr (calculated, not disclosed anywhere!) which seems to be in favour of White Organic which holds 90% stake in the company.

Reason why one should avoid this company?

1) Bad cash flow : The cash generated by operating activities is negative (4,142,458).  The company issued warrants of Rs 15 crore (and borrowings are also increased). So the net cash and cash equivalents of the company are increased due to cash flow from financing (borrowing).

2) The current ratio of the company is reduced significantly due to increase of liabilities such as trade payables and bank overdraft. Receivable is very high, although topline may seems to be growing, the company is actually going thru tough/tight cash flow.

3) There is a significant increase in other expenses when compared to last year. Company is routing funds to it’s Dubai subsidiary which raises a question mark?

4) They don’t have crop insurance in place hence in case of any diseases they are likely to suffer. Also natural calamity may disrupt their business.

5) Tax provisioning is not done till Q2 FY17, they have 30% topline from own cultivation business which is tax free while 70% topline contribution is from trading in agro commodity which is taxable. Hence tax outgo may be around 18-20% which they will provision in Q3 FY17.

6) Cost of acquisition of Future Farm LLP is not disclosed, it’s cash deal not an equity swap. A promoter with transparency will disclose the transaction value and also mention the source of funds.

7) Company does not have organic certification (IC-3) hence it is doing B2B, means supplying to certified organic firms. It seems it takes 3 years for a company to get the organic certification. This company started operation in Sept 2016 will complete 3 years in Sept 2019 to get organic certification for it’s 1030 acres of leased land. Management giving ambiguous statement that they will get organic certification by Sept 2018 itself, how come?

8) Company always promote that they are 1st and only listed organic firm company in Indian stock market which is not a good sign from quality promoter who focus on their business rather than promoting their company!

9) One of the investors visited their franchise store in Mumbai and found that the franchise store is selling products from different other firm too, also the foot fall was very low. When such queries are raised in front of mgmt in conf call, they got surprise and shocked to know this:-)

10) As of now, they are mainly focusing on Aloe Vera as well as Moringa, that is drumstick and both has got a 5 year of life cycle, that is a perennial crop. Dependency on only two crop may be a risk. 

Conclusion

Although the company showed a significance improvement in revenue and net profit (both on year over year and quarter over quarter basis), the cash component seems to be a problem. The cash from the operations is negative primarily due to the increase in trade receivables. Net cash generated by operating is decreased from 39,648,708 in 2016 to (4,870,640) in 2017 which is very significant. The current ratio of the company is also decreased from 5.6 in 2016 to 1.9 in 2017 due to increase in liabilities such as trade payables and short term borrowings. There is also an increase in other expenses and provisions of the company. The Company has borrowed certain funds from Directors to meet its short term liquidity requirements. So the cash position of the company is not encouraging. The company has to improve its liquidity position.

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