It was the worst of years and it was the best of years.
The Indian economy experienced one of the most challenging slowdowns in a decadereporting a sub-5 per cent GDP growth for the second year running in 2013-14. In such anenvironment it would have been reasonable to report flat revenues and profits and blame iton the economy.
I am happy that JVL Agro reported revenues of RS. 4405.31 crore in 2013-14 comparedwith RS. 3837.38 crore in 2012-13 a growth of 14.80 per cent over the previous financialyear. The fact that the Company reported only a marginal increase in net profit during theyear to RS. 61.26 crore compared with RS. 60.37 crore in 2012-13 must be viewed favourablyconsidering the rupee reported its sharpest two-way movement in years weakening to anabysmal low of RS. 68 per dollar in August 2013.
Quality of earnings
One of the things that I must impress upon our shareholders is the quality of ourearnings.
Over the years the Company selected to trade raw materials in the normal course of itsbusiness. This trading was considered essential to capitalise on short-term opportunitieshedge positions and provide the Company with adequate raw material inventory to sustainuninterrupted operations. The trading exposure is generally conducted for a modest returnon the one hand and raw material security on the other. However given the volatilebusiness environment and with the aim to focus largely on the core business the Companyresolved to moderate its exposure to traded revenues. The Company drew down the tradedcomponent of its turnover from 39.19 per cent in 2012-13 to 21.85 per cent in 2013-14. Theresult is the branded proportion of our revenues have increased from RS. 2307.32 crore in2012-13 to RS. 3387.89 crore in 2013-14 validating the investments that we have made inplants products and promotions.
Performance drivers 2013-14
The Company registered an improved performance during the year under review on the backof a full-year operation at the Companys Haldia unit which was commissioned inOctober 2012. The Company launched the Royal brand of mustard oil directed at the premiumsegment one of the many instances of the Company moving from the low-mid consumer segmentto the premium segment. The Company launched a bakery product in preparation of itsevolution from edible oil to a food products company. The Company launched cotton seedoil which helped widen the product mix and enabled the Company to enter a niche category.The Company took on lease a plant (15000 TPM) belonging to KS Oils to supplement theexisting capacity of the Haldia facility validating the success of the said facility andits asset-light business model.
The next big leap
During the year under review the Company embarked on a project that promises totransform the Companys identity.
The Company promoted JVL Mega Food Park Pvt. Ltd. to commission an 80-acre Mega FoodPark in Bihar which received in-approval from the Ministry of Food Processing Governmentof India. The Mega Food Park will deepen the Companys presence in the countrysagri-infrastructure space and serve as a foundation for its extension to the fast-growingFMCG sector.
The Bihar Mega Food Park will be the first-of-its-kind in Eastern India. The locationis appropriate; the facility will convert the states abundant throughput of ricewheat maize and mustard into processed products and address a growing consumer pool notonly within the state but also across a 40 million-strong population in six contiguousstates. Over time one is optimistic that the Mega Food Park will emerge as a hub forfarmers processors and downstream users coupled with adequate financing warehousing andother support functions. I must assure shareholders that this RS. 117.43 crore project(first phase) will be funded by a judicious mix of net worth debt and government support.
One of the challenging realities affecting the countrys edible oil refiningsector was an anomaly in the import duty structure related to raw materials and endproducts. During the year under review the edible oil processing industry suffered areduction in the delta between customs duty on the raw material and import duty on thefinished product the difference declining from 10 per cent to 5 per cent. Following areduction in the incentive to refine raw materials a number of companies were compelledto close down while all expansions were put on hold. Thereafter the governmentreconsidered the reality and increased the differential to 7.50 per cent following whichthe industry stabilised.
At JVL Agro we are convinced that the future of Indias food security hinges onthe health of its food processing sector. In turn the health of its food processingsector lies among other things in the duty differential which serves as an incentive tosustain and expand the business. In view of the need for long-term sustainability a 10per cent duty differential will serve the interests of processors and consumers both.
To manage forex volatility in our business given the large import exposure theCompany established a dedicated treasury desk comprising ex-bankers and professionalswhich we expect will translate into informed decision-making on the one hand and aninstitutionalised hedging approach on the other.
At JVL Agro our aim lies in raising margins from the current level to 5 per cent overthe next three to five years. For this purpose your management is following a dualapproach of expansion into the premium segment with value-added products on one side andleveraging government subsidy schemes by making investments in greenfield projects on theother. While the value-added products help Company earn more margins the investments ingreenfield projects add to the subsidy inflow which in turn improve margins further.
The projects that will enable the Company to more than double its subsidy inflowcomprise the proposed Mega Food Park and a unit in NorthEast India. Going ahead theCompany expects to increase the number of owned depots from 35 to 50 creating afoundation for enhanced throughput to be distributed across the markets of theCompanys presence.
Besides the Company expects to start manufacturing its products from an internationallocation (Africa) during the year under review establishing its brand and then setting upa unit there.
During the last quarter of the financial year under review the Company reported anattractive convergence of a number of positive realities increased outsourcing fromthe leased KS Oils facility a stronger rupee robust offtake and a matured presence inWest Bengal. The result is that the Company reported a 2.75 per cent increase in toplineover the immediately preceding quarter but a 109.24 per cent increase in its EBIDTA and a92.46 per cent growth in its post-tax bottomline. This was reinforced by margins (EBIDTA)expansion from 1.98 per cent to 4.03 per cent which provides shareholders with a peekinto the intrinsic profitability of our business.
At JVL Agro we expect to sustain the growth that we reported in the last quarter into2014-15 through the following developments: commissioning of the rice processing andbranding business starting from the first quarter of current year; the expansion of theAlwar facility which will generate incremental revenues for three quarters of the yearand marketing branded pulses by the second half of the year.
In view of these initiatives the Company expects to report a topline of RS. 5000crore in 2014-15 with a proportionate increase in profits.
With warm regards
S. N. Jhunjhunwala