Morarka Organic Foods Limited

MORARKA ORGANIC FOODS LIMITED

Company Report: India-Organic Food-Unlisted 17 NOVEMBER 2014

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COMPANY BACKGROUND

Beginning

Morarka Organic Foods Limited (MOFL) appears to claim to be more and social organization (NGO) rather than a business corporate.

It traces its origin to something called The Morarka Foundation which was set up by Kamal Morarka in 1993 in memory of his late father M.R. Morarka, and as a corporate social responsibility initiative by Gannon Dunkerley & Company Ltd.

The website of MOFL focuses more the Foundation, and its claimed philanthropy, rather than the public limited company. The one mention of MOFL states: The Morarka Organic Foods Ltd was created as a front-end business operation for providing marketing linkages to organic farmers.

MOFL was started in 2005, and is based in Jaipur, Rajasthan. The Foundation is also based there. Rajendra A Sharma, who runs the Foundation is a key director in MOFL. As can be seen, Kamal Morarka is not directly involved in MOFL.

MOFL has grown rapidly to reach a revenue size of Rs 746m by FY13 (~USD 25m). It has begun to declare consistent profits, though margins are tiny.

Board of Directors

Name Designation

Dinesh Chand Sharma Director

Rajendra Anand Sharma Director

Hiralal Pandey Director

Mukesh Gupta Director

Ravi Prakash Agarwal Director

Address

NEW EXCELSIOR BUILDING 3RD FLOOR,, A.K. NAYAK MARG, FORT, MUMBAI, Maharashtra , INDIA, 400001

Financial Summary

Year ending June 30 FY11 FY12 FY13

Net Sales (Rs mn) 350.2 593.9 746.5

EBITDA (Rs mn) 11.6 36.57 36.56

EBITDA Margin (%) 0.3 6.2% 4.9%

PAT (Rs mn) 5.0 6.7 7.0

Net worth (Rs mn) (1.2) 305.9 313.1

Debt (Rs mn) 438.4 611.5 1,114.6

Sales Growth (%) 239.2 69.6 25.7

PAT Growth (%) 1062.8 33.6 5.0

ROE (%) -136.8 4.4 2.3

ROCE (%) 3.2 4.6 3.3

D/E (x) -371.5 2.0 3.6

India-Organic Food-Unlisted Morarka Organic Foods 17 Nov’14

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Promoters

The company is owned by Morarka Family. The common equity is held by 3 companies. Of these, Ganon is clearly owned by Morarka Family, we presume the other two are investment firms of the family.

Name No of Shares (%)

Ganon Dunkerley Finance 9,996 20.0%

M.R. Holdings Ltd. 20,000 40.0%

Shakambhari Traders Ltd. 20,000 40.0%

Others 4 0.0%

Total 50,000.00 100.0%

In the overall capital structure, common equity is tiny. A much larger part is preference equity of Rs 300m held by Ganon Dunkerley & Co.

Preference Capital

Ganon Dunkerley & Co 3,00,00,000 100%

As of Sep’14

BUSINESS HIGHLIGHTS

From Procurement

This part is probably handled by the Morarka Foundation, however, it is not clear what is done by the Foundation and what by MOFL.

They initially focused on procurement of produce directly from farms and its delivery to organic trade players. Subsequently it expanded to year-round storage of farm produce, so that a greater share of organic produce available at the farm level could be procured and stored for delivery required by the organic trade players.

Very soon the demands started to flow in for processed organic food products, both from bulk buyers as well as from the retail trade getting into organic distribution.

To processing and cold storage

MOFL has now invested in processing and cold storage facilities in a significant way in FY12 and FY13. It has

also launched/ set up its own distribution and retail network in India.

Beginning with just a few cereals, pulses, oil seeds and seed spices, today Morarka Organic has a portfolio of over 170 different products.

Contract farming technology support

A strong technologic understanding of organic cultivation enabled Morarka Organic to successfully introduce organic production in almost every agro climatic zone in India. However increasing demands for processed products made it important to develop value chain management expertise for organic agri-businesses.

It has devised many processes for value addition of primary farm produce, through development of simple tools and equipments made available to the farmers as well as to the small entrepreneurs associated with it. Morarka Organic has also been able to develop in-house technology for CO2 fumigation, so that organic products can be stored longer.

The rising consumer demand and our objective to deliver certified organic produce at reasonable prices has now made us concentrate on packaging solutions.

Increasing Retail Presence

During FY13 MOFL started supplying to a few renowned retail chains:

- Reliance Fresh Limited;

- Heritage Food India Limited;

- Food World Supermarket Limited.

Brands

MOFL now retails products under the brand ‘Down to Earth’. Down to Earth provides large range of food products- cereals, pulses, spices, condiments, fruits, vegetables, oils, dairy products, Ready-To-Eat snacks and much more-amounting to almost 90 percent of the Indian kitchen grocery.

Down To Earth is certified by OneCert Asia Agri. Certification Pvt. Ltd. (a subsidiary of One Cert Inc. USA) as per NOP (USDA), NPOP (Government of India) and EU Standards for Organic Certification.

The brand has its own website www.downtoearthorganicfood.com.

http://www.downtoearthorganicfood.com/



The website claims that Down to Earth products are now available at major supermarkets, modern trade outlets, stand alone organic stores across the country.

Some product snaps:

There is atleast one own brand store called ‘Down to Earth’ at Mumbai listed on the website (see photo below). However, the brand is not quite well known, given that the company has not spent much on advertising.

Exports

Exports are tiny, low single digit portion of turnover of MOFL. However, their share in revenues increased from 5% in FY12 to 9% in FY13. Total exports more than doubled from Rs 30m in FY12 to Rs 64m in FY13.

The FY13 report says: Th number of containers exported during the year were 68 as compared to 30 of last year. MOFL started exporting to Germany, Hong Kong, Netherlands, Philippines, China, USA, New Zealand etc. in addition to Canada, Malaysia,Japan, Dubai, Singapore and Australia as done last year.

MANUFACTURING FACILITIES

According to the FY13 Directors’ Report:

To meet the growing demands for Company's products, the capacities are being increased by making large investments in infrastructure. Land of63,348 sq. mtrs was purchased in Ramchandrapura Industrial area , Sitapura Extension, Jaipur from RIICO wherein the production facilities are being enhanced. The warehousing and production area is being constructed.

The Cold storage building is also on the verge of completion. The machineries are in the process of ordering and shall be installed shortly.

FINANCIAL PERFORMANCE

MOFL has shown extremely rapid topline growth. However, margins are not too strong. EBITDA margin in FY13 was just around 5%.

While the company has reported positive net profit for 5 years in a row from FY09 (FY14 data not available at the time of writing this report), net profit margin has been miniscule.

It is possible the reported margins are not truly reflective of actual business potential

The company has invested in its own processing plant and storage facilities. Fixed assets had reached Rs 554m by March’13.

The capex it appears was supported by the issue of Rs 300m of preference capital to Ganon Dunkerley & Co.



However, despite that, the debt-equity mix of the company is quite strained. Debt-equity mix of the company was 3.6x as on 31 March’13.

FUNDING AND FUTURE PLANS

Given the strained balance sheet of the company, the company could be looking to raise capital. It does not seem to have raised capital in FY14 or in 2014 so far.



FINANCIAL DETAILS

P&L

(Rs mn) FY08 FY09 FY10 FY11 FY12 FY13

Net Sales 58.7 80.4 103.3 350.2 593.9 746.5 EBITDA

365.7 365.6

Margin (%)

61.6 49.0

Interest

212.0 345.7

Other Income 0.9 5.6 5.2 7.4 18.1 77.6 PBDT 0.0 0.7 1.0 12.3 17.2 9.7 Depreciation 0.0 0.3 0.6 2.7 6.1 0.1 Extraordinary Item

PBT 0.0 0.4 0.5 9.6 11.1 9.7 PAT -9.3 0.3 0.4 5.0 6.7 7.0 PAT Margin (%) -15.8 0.4 0.4 1.4 1.1 0.9

Balance Sheet (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13

Liabilities

Equity Capital 0.10 0.10 0.10 0.10 300.50 300.50 Reserves (9.26) (6.70) (6.23) (1.28) 5.42 12.57 Shareholder Funds (9.16) (6.60) (6.13) (1.18) 305.92 313.07 Debt 51.89 69.07 131.58 438.40 611.52 1,114.62 Deferred tax liability - - - 2.85 2.84 3.57 Total Liabilities 42.73 62.47 125.45 440.07 920.28 1,431.26

Assets

Fixed Assets (net) 0.39 2.17 5.30 52.51 377.44 554.91 Intangible Assets (net) - - - 72.50 166.43 249.95 Investments 0.04 0.04 0.15 0.18 0.25 63.91 Total Long Term Assets 0.43 2.21 5.45 125.19 547.73 870.56 Inventories 13.16 49.81 87.44 254.41 370.37 310.29 Debtors 13.55 2.80 14.43 93.96 114.45 154.40 Cash 7.61 0.78 2.89 15.07 9.97 147.79 Loans & Advances - - 6.50 29.68 22.95 58.63 Other CA 2.41 8.69 8.77 6.45 - 1.54 Total Current Assets, L&A 36.73 62.08 120.03 399.57 517.75 672.65

CL & Provisions 1.54 4.57 12.73 84.69 145.19 111.96 Net Current Assets 35.19 57.51 107.30 314.88 372.55 560.69



Misc Expenses 7.11 2.74 12.66 - - - Total Assets 42.73 62.46 125.41 440.07 920.28 1,431.26

Ratios

FY09 FY10 FY11 FY12 FY13

Growth (%) Sales 37.0 28.4 239.2 69.6 25.7

PBDIT -255.6 264.3 2166.7 216.3 0.0

PBT

11.6 1891.7 16.2 -12.8

PAT -103.7 26.5 1062.8 33.6 5.0

Margins (%) PBDIT 1.7 4.9 33.0 61.6 49.0

PAT 0.4 0.4 1.4 1.1 0.9

Balance Sheet Ratios ROE (%) -4.3 -6.8 -136.8 4.4 2.3

ROCE (%) -0.3 0.0 3.2 4.6 3.3

D/E (x) -10.5 -21.5 -371.5 2.0 3.6

Inventory t/o (days) 142.9 242.6 178.1 192.0 166.4

Debtors t/o (days) 37.1 30.5 56.5 64.0 65.7 WC Cycle (days) 167.1 245.2 196.1 195.8 177.9

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