ANSWER FOR THE QUESTION IS .....

It is happy to say that the response for my request to find out a company with the given specifications in last weeks posting was overwhelming.Out of the received responses 26 readers send the correct answer.Answer for the question is SIMRAN FARMS LTD.I believe none of  other companies listed in BSE satisfying all the mentioned conditions .

Congratulations for all who spend time to find out  the answer.

 All those who send correct answer  accepting  that the valuation of SIMRAN FARMS is very cheap and at the same time expressed their  opinion about the reasons for such a low  valuation.So let us look into its details.

For my old posting on this same company click HERE

THE INDUSTRY

The Indian meat consumption statistics as follows -   Buffalo meat about 23.33 percent, cattle 17.34 percent, sheep 4.61 percent, goat 9.36 percent, pig 5.31 percent, poultry 36.68 percent and other species 3.37 percent.The Indian poultry industry is estimated at USD 3.6 billion and it is growing at a CAGR of 10%. Currently India is the third largest egg producer and one among the six largest producers of broilers in the world.chicken meat production grew from 939 thousand tons in 1999-2000 to 3 million tons in 2011-12 and going forward  it is expected to increase sharply  due to shift from consumption of other meats to chicken on account of health concerns.

LISTED COMPANIES FROM THIS SPACE

On a standalone basis three listed companies are operating in this sector viz,Venky’s India , Srinivasa Hatcheries and Simran Farms.On the basis of turnover Simran ranks the second next to Venkey’s India .Due to the sheer size and fully integrated operations no meaning in comparing Venky’s and Simran.So only a comparison between Simran and Srinivasa make some sense.The second largest company Simran is valued at just Rs.10 Cr market cap but the next player trading with a market cap of  Rs.64 Cr !.

 WHY LOW VALUATION ?

IMPACT OF INSUFFICIENT MONSOON

Even the company posted an EPS of Rs.5/- in first quarter alone, its share price didn’t move anywhere.The major reason for this (in my and many of the readers’ opinion ) is the expectation of a sharp rise in feed prices in the coming quarters .The two major components of broiler feed is Maize and Soya and its farming area may shrink due to insufficeient  rain  in this season.On account of this reasons prices of this commodities already shot up and this will surely impact the profitability of Simar in coming few quarters.

LOWER PROMOTER HOLDING ?

Some investors shared their concern over the low promoter holding of 35%

WHAT WE CAN EXPECT AHEAD

The first reason is a reality and there is every chance for a lower profit or even a loss in next few quarters .But on the other side this fact is known to all market participants and to a great extent it is  already discounted in the current market price. I am not sure  how much the recent revival in monsoon will help , if it is significant one can even expect some positive surprise.As I mentioned in last posting ,this company have already seen these type of up and downs and one of the few listed companies  surviving and growing over 22 years in this industry which is not a small thing.Regarding the stake of promoters – 35%  promoter stake in a company is neither bad nor aggressive.Before we thinking about why they are not hiking their stake even it is available at a cheap valuation we must look at the recent change in their attitude too.Even this company is existing for the past 22 years it never paid dividend for 20 years.But in last year it paid a 10 % and surprisingly even on a lower profit it decided to pay 8% in this year too.This clearly indicating their changing attitude and I believe in near future they will merge their privately owned companies one by one into the listed entity.In such a case they can easily hike their stake and need not buy it from open market.Also.a  higher price due to open market purchase will not help them to ensure a favorable merger ratio even if it is not decided only on the basis of stock price.If such a move happens that will be a game changer  for Simran .Company will become an integrated entity with   feed production and production of medicines and vaccines for chicks along with core activities .Value added products from chicken may also a possibility at a later stage which will surely increase profit margins going forward..

At present market is ignoring many positive factors and projecting only the near term hiccups and valuing the  company at a throw away price of less than Rs.10 Cr for the entire company . I am looking this price rise of feed and occurrence of some bird flue cases  in the past as a natural entry barrier and this will help to weed out small players from the business .Such cases will ensure survival of only the fittest.It is a fact that ,only very few companies surviving even in organized sector mainly because of such uncertainties and it is one of them which is here for last 22 years and increasing their business at a rapid pace .If any sharp fall happens from here due to any knee jerk reaction to the next quarterly result ,true value investors  can look into it. It is one of the very few stocks from small cap space giving comfort even at current price level  based on minimum downward risk and decent dividend yield .Remember , contra decisions and sufficient patience is the father and mother of multi baggers.

LINK TO THE RECENTLY LAUNCHED WEBSITE OF THE COMPANY HERE

Notes :

 This same stock   once recommended in June 2010 @ Rs.30 and thereafter hits a high of Rs.86 in November 2010 and now back to the previously recommended level.

 I have vested interest in this stock , hence my views may be biased ,do own due diligence before investing.