Sarveshwar Foods Limited - IPO NOTE - Arihant Capital Markets

Sarveshwar Foods Limited primarily engaged in the business of processing and marketing of branded and un-branded basmati and non-basmati rice in the domestic and international markets. Company operations are based in the Jammu Region in the State of Jammu and Kashmir.

Sarveshwar Foods is one of the few Indian companies with a presence across the entire rice value chain, which includes procurement, storage, milling, sorting, packaging, branding and distribution. Product portfolio comprises of Basmati and non-Basmati rice of various kinds including white raw rice, steam rice, broken rice, brown rice and parboiled rice. Along with the varied variety of conventional Basmati and non-Basmati rice, product portfolio also includes organic Basmati and non-Basmati rice including range of other organic products.

"Organic" business also includes Organic Food Products such as Dry Fruits and Nuts, Pulses, Lentin, Flours, Porridge, Spices, Garam Masalas and super foods like Chia Seeds, Flax Seeds, Quinoa Seeds, etc.

Company markets and distributes these organic food products under its brand "Nimbark".

The company currently operates through two rice milling and processing facilities with cumulative processing capacity of 84,240 MTPA. It has three wholly owned subsidiaries, two in India, and one in Dubai.

The company has 132 procurement agents across 5 states for procuring basmati and non-basmati paddy from "mandi", except J&K, where they procure basmati and non-basmati paddy directly from farmers due to non-existence of the mandi system in J&K.

Investment rational:

1. Geographical Location:

The State of Jammu and Kashmir (J&K) has diverse physiographic features, agro-climatic variations and existence of cold arid temperature, inter-mediate and sub-tropical zones within a small geographical area in J&K. Company procures Basmati and non-Basmati paddy from Punjab, Haryana, and Himachal and primarily procures organic Basmati and non-Basmati paddy from the State of Jammu and Kashmir.

2. Integrated Operations:

Companies has a presence across the entire basmati rice value chain, which includes, procurement, storage, milling, sorting, packaging, branding and distribution. Such integration provides company with several competitive advantages and allows them to benefit from economies

Concerns:

- Business is working capital intensive and insufficient cash flows or inability to borrow funds to meet working capital requirements may materially adversely impact company's business and operations.

- Non-availability and higher cost of Basmati paddy could adversely affect growth plans and business

- Any decrease in the market price of Basmati rice between purchasing basmati paddy and selling Basmati rice may adversely affect company's financial condition.

- The Government of India may impose export duties or other export restrictions related to company's business, which could adversely impact business and financials.

Valuation:

Company has shown strong financial performance this year with improving organic product mix in the revenue. The issue has been offered at a price band of Rs 83-85 per equity share. At the upper price band of Rs 85, the stock is available at adjusted P/E of 15.9 x its FY17 EPS of Rs 5.33 (adjusted for equity shares outstanding after the issue). We have "3 star" rating for the issue.

Source : Equity Bulls

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