IPO: Sanstar

The IPO (initial public offering) of Sanstar Ltd, a plant-based specialty manufacturer of food and animal nutrition ingredients, will open for subscription on July 19, 2024 and close on July 23, 2024. Below is a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE were 30.5 and 24.2 per cent, respectively, between FY22 and FY24.
  
• Growth: Its revenue and net profit grew 45.5 and 104.6 per cent per annum, respectively, between FY22-FY24.
  
• Valuation: The stock will trade at a P/E and a P/B of 25.8 and 2.8 times, respectively.
  
• Overview: Growth in industries like pharmaceuticals, animal nutrition and food, especially the 'ready to eat' products should help Sanstar scale up. However, the industry's low entry barriers and the company's heavy reliance on maize may challenge its profitability.

About Sanstar

With an annual capacity of 363,000 tons per annum (TPA), Sanstar is India's fifth largest manufacturer of maize-based specialty products and ingredients. The company turns maize into products that are used as thickening agents, stabilisers, sweeteners, and additives in food products and as nutritional ingredients in animal nutrition products, among others. The food industry is its largest segment with a 58 per cent share in its revenue pie. Sanstar also has a large global presence with exports making up 36 per cent of its total revenue in FY24.

Strengths of Sanstar

• Solid brand recall: The company has a strong market position in India, especially in products made from maize. It offers a wide range of products, which helps it produce on a large scale. It also has a solid rapport with its customers. About 89 per cent of the company's orders in FY24 came from recurring clients. Its customer base is diversified, with the top 10 clients accounting for 41 per cent of its FY24 revenue.

Weaknesses of Sanstar

• Risks to margins: The company has single-digit EBIT margins and its profitability is highly dependent on how maize prices move. Just like in other commodity businesses, any increase in prices of maize, which is its key raw material, can severely dent its financials.
  
• Competitive heat: Due to low capital requirements and abundantly available raw material (maize), the entry barriers in the industry are low. As a result, the competition in the industry is intense and on a swift rise.

Risk report

Company and business

• Are Sanstar' earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its earnings before tax for FY24 was Rs 89.7 crore.
  
• Will Sanstar be able to scale up its business?
  Yes. Maize-based specialty products are being increasingly used due to rising demand for 'ready to eat' food products that use maize starch in large quantities. There is immense growth in other end user industries like animal nutrition and pharmaceuticals as well. These tailwinds will help the company scale up its business.
  
• Does Sanstar have recognisable brands with client stickiness?
  Yes. The company has established long-term relationships with its customers. In FY24, 89 per cent of its orders came from recurring customers.
  
• Does the company have a credible moat?
  No. The company operates in an industry with low entry barriers as the business is not capital intensive and the needed raw material is abundantly available. This is why the industry is experiencing stiff competition.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post the IPO, the promoters' stake will increase to 70.4 per cent.
  
• Do the top three managers have over 15 years of combined leadership at Sanstar?
  Yes. The company's chairman and MD, Gouthamchand Sohanlal Chowdhary, and joint MD Sambhav Gautam Chowdhary, have been with Sanstar since its incorporation in 2012.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Sanstar free of promoters pledging its shares?
  Yes. The company is free of promoters pledging its shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE were 30.5 and 24.2 per cent, respectively. In FY24, its ROE and ROCE were 30.9 and 25.4 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow from operations (CFO) in FY23.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio stood at 0.5 times as of FY24.
  
• Is Sanstar free from reliance on significant working capital for day-to-day affairs?
  Yes. As of FY24, it had a moderate cash conversion cycle of 51 days.
  
• Can the company operate its business without relying on external funding in the next three years?
  Yes. The company has limited debt on its balance sheet and the fresh proceeds from the IPO should be enough to cover its capex plans in the near future.
  
• Is Sanstar free from meaningful contingent liabilities?
  Yes. As of FY24, its contingent liabilities as a percentage of equity were around 1.8 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 4.6 per cent.
  
• Is the stock's price-to-earnings less than its peers' median level?
  No. It is valued at a price-to-earnings ratio of 25.8 times compared to its peers' median of 16.6 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  No. It is valued at a price-to-book ratio of 2.8 times compared to its peers' median of 1.9 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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