The Hindu Business Line : Agro Dutch Industries: Invest

INVESTORS can subscribe to the rights offer from Agro Dutch Industries at Rs 25. The pricing is reasonable and may leave scope for capital appreciation over the next one-to-two years.

The scaling up of capacities proposed in this project should boost the company' competitiveness in the global market and bolster prospects for earnings growth. The stock trades at Rs 37.

Agro Dutch accounts for over 80 per cent of the fresh mushroom exports from India. The company has steadily expanded its processing capacities over the past four years from about 3,000 tonnes a year to the present 36,000 tonnes a year, mainly using internal accruals. This rights offer will finance further expansion to 50,000 tonnes and help the company set up a canning facility and captive facilities for power.

These expansion projects, to be completed by June 2006, plans appear to have the potential to ramp up earnings.

A steady increase in the company's export volumes in the past, robust capacity utilisation of its facilities and relationships with large food companies such as Lipton Foods, are in its favour. Investments in captive power may help cut manufacturing costs as the business is energy-intensive.

Export prospects for processed horticultural products such as mushrooms appear bright, considering that the WTO is pushing for relaxations in tariff and non-tariff barriers on exports.

The EU and the US levy import and anti-dumping duties respectively on mushroom imports, which are also subject to quotas. Indian exporters such as Agro Dutch hold no quotas and compete in the general category, in the process shelling out high import duty.

A phase-out of the quotas may open up opportunities for players such as Agro Dutch, especially given its large, global scale of operations. This apart, there are also opportunities for stepping up mushroom exports to new markets such as West Asia.

The slide in the company's net profit in the first six months of 2005-06 can be attributed partly to a production shutdown taken to commission the captive power plant in March 2005.

Despite its good potential, the mushroom export business will continue to be subject to high risks. Given the sensitive nature of food exports, rejection rates on export consignments of mushrooms are quite high. Yields and production prospects are subject to climactic conditions and incidence of diseases.

External barriers on trade such as quotas, anti-dumping duties have the potential to substantially impact earnings.

However, even without factoring in the revenues from the expansion project, the company's per share earnings on post-offer equity would be about Rs 6.

The offer price discounts this by just about four times, translating into a reasonable asking price for the offer.

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