Rydak Syndicate Financial Analysis 2023

05 March 2024

The company has achieved ~11% growth in revenue in last 4 years from FY19 to FY23. Alongside the net income has increased by ~108% during the same time period. The sudden spikes in sales observed in FY20 and FY21, were primarily attributed to increases in the realization price of tea. For instance, in FY20, the average realization price of the company's tea rose from Rs. 185.5 to Rs. 199, and similarly, in FY22, there was a significant jump in prices from Rs. 199 to Rs. 256, leading to revenue growth.

Despite these increases, the company's tea production remained relatively consistent, ranging between 50 to 55 lakh kilograms. Moreover, there has been a notable 15% hike in labour costs, which has significantly impacted the company's margins. The labour cost is expected to rise further in the future, and currently, this matter is under consideration at the Calcutta High Court.

In FY23, the company experienced a decrease in revenue by Rs. 6 cr., primarily due to a 7.1% loss in production. Additionally, the operating profit declined by 54% in FY23 compared to FY22. This drop was attributed to a 17% increase in cost of goods sold expenses and a 16% rise in power and fuel expenses. The combination of higher operating costs and lower revenue resulted in a significant 50% decrease in net profit for FY23 compared to FY22.

While performing the relative valuation, we have realized that the company's stock appears undervalued, as its price-to-earnings (P/E) ratio is lower than the industry median. Currently trading at Rs.605/share, the stock's intrinsic value, determined through relative valuation, stands at Rs.1,017, indicating substantial potential for growth.

However, we've maintained a neutral recommendation due to certain factors. Despite being in the tea industry for over a century, the company has shown relatively modest revenue growth, with a 5-year compound annual growth rate (CAGR) of only 4.7%, compared to the industry's 5-year CAGR growth of 6%. Being in the business for last 100 years, the company is not able to make its presence and achieve operational efficiency. However, in 2019 the company appointed a new Director who has an experience of 25+ years, which might be beneficial for the company. Hence, we kept the rating as Neutral for the company.