AVT Natural Products Ltd.

BSE Code – 519105 NSE Code - AVTNPL

Operational Segments : Quality Certifications Attained (These cetifications are a must because of
stringent global standards for supply of food, health & nutraceutical items) :

Marigold Oleoresin ( World Leader ) ISO 9001-2008

ISO 22000-2005
Kosher Certified
HACCP Certification by Major Global Clients
Spice Oils & Oleoresins ( India's 2nd Largest Exporter ) Halal Certified

Vendor Certified by :
Value Added Beverages ( One of Asia's only 3 Kemin (one of world's largest marigold consumer),
Companies providing Decaffeination Facilities ) McCormick (one of world's largest Spice Oils & Oleoresins consumer), &
Finlays (world's largest independent trader of Tea)

Major Clients :
Promoters' Holding :- 73.6 %
Kemin Industries Inc ( 69.6 % + 4 % Acquired via Open Market on 6th May 2011 @ Rs. 150 )
(one of world's largest marigold consumer – is bound to procure all its
requirement from AVT based on an agreement signed) Current Mcap :- Rs. 111.14 cr.

Chrysantis Inc FY11 Sales : Rs. 147.02 cr. (FY10 - 85.62 cr.)

(world's only provider of all-natural zeaxanthin – for which it has tie-up

with AVT) FY11 EBITDA : Rs. 25.11 cr. (FY10 – 16.61 cr.)

FY11 EPS : Rs. 14.4 (FY10 – 8.83)

Finlays
(world's largest independent trader of Tea -- has entered into an
agreement with AVT to outsource its Decaffeination requirement) FY12e Sales – Rs. 176.12 cr.

Harris Freeman FY12e EPS – Rs. 19.2

(is the largest Own Label tea supplier in USA)

FY13e Sales – Rs. 229.3 cr.

McCormick
FY13e EPS – Rs. 26.3
(one of world's largest Spice Oils & Oleoresins consumer)

Valuation Grading
Undervalued Till 195
(1.0xFY11.Sales, 13.5xFY11.EPS
0.84xFY12e.Sales, 10.15xFY12e.EPS
0.64xFY13e.Sales, 7.43xFY13e.EPS)

Reasonably Valued @ 195-235

(1.2xFY11.Sales, 16.2xFY11.EPS
1.0xFY12e.Sales, 12.2xFY12e.EPS
0.77xFY13e.Sales, 8.95xFY13e.EPS)

Fairly Valued @ 301.5

(1.56xFY11.Sales, 20.8xFY11.EPS
1.3xFY12e.Sales, 15.6xFY12e.EPS
1.0xFY13e.Sales, 11.4xFY13e.EPS)
 Why AVT Natural Ltd. demands a place in one's Core Portfolio ? :

(1) Two of the three operational segments of the company (Food-Grade Marigold Oleoresin and Spice Oils &
Oleoresins) have surpassed the immature stage which will see a multi-year demand boom starting from
2011. The third segment (Value Added Beverages) is still at a nascent stage but is bound to grow two years
hence, once the decaffeination plant (one of the only three in Asia) set-up by the company fully stabilises.
The new related segments in which company is entering now (Phytochemicals and Soluble Beverages) offer
tremendous potential for growth.

(2) Company has a World-Leadership status in supply of Food-Grade Marigold Oleoresin.

(3) Is the only company in the world which has a large production-base in two (India & China) of the only
three major countries (India, China & Peru) that supply marigold and so is the first preferred choice as a
reliable supplier of marigold which is evident from its exclusive tie-up with Kemin Industries Inc. (one of
the world's largest consumer of Marigold Oleoresin ) and Chrysantis Inc.

(4) Is world's only player in marigold industry which has own cultivation as well as processing facilities.

(5) Is a rare end-to-end player in marigold market with in-house development of high-yield hybrid-seeds,
firm contract farming arrangement (one of the largest in India) as well as own plantations for growing
marigold, certified extraction plants to extract food-grade and feed-grade oleoresin from marigold and
exclusive agreements (is the only supplier) with world's leading consumers Kemin and Chrysantis for the
offtake of entire produce of marigold oleoresin. Hence, the only risk left with the company is the
weather and therefore production risk which is very well mitigated by establishing large cultivation-base
(production-base) in two countries viz., India and China.

(5) Kemin, AVT's largest client, has last month (April 2011) launched an aggresive multi-million dollar
promotional campaign (second in its history and that too after a decade ) with renowned celebrities like Lolo
Jones, Emme, Aaron Scheidies and Jennifer Galardi to aggresively promote its FloraGlo Lutein brand for
eye-care ahead of the release of AREDS-2 Study in 2015, to enable the brand to reach the annual sale
figure of 100 mn. US$ by 2014 from current 50-55 mn. US$. In addition, Kemin has, in March 2011,
started a personal care division in which it plans to use its FloraGlo Lutein in the formulations meant for
skin and beauty care. These developments augur very well for AVT Natural as it has an exclusive
agreement with Kemin wherein Kemin has to procure all its requirement of food-grade marigold
oleoresin for production of FloraGlo Lutein from AVT only and so the business from Kemin is bound
to rise exponentialy for AVT in the years to come which is evident from the robust financials registered
by AVT in Q3FY11 & Q4FY11.

(6) AREDS-2 Study (a major clinical trial sponsered by US Federal Government's National Eye Institute ), which is
closely watched and is followed by almost all the leading Ophthalmologists around the world as well as
Pharma & Nutraceutical companies, is likely to release its findings on intake of lutein and zeaxanthin on
prevention of AMD (Age-related Macular Degeneration – which affects more than 30 mn. people worldwide and
accounts for more than 50 % of blindness in USA ) in the beginning of 2015. Based on the progess done and the
reports generated so far, it is almost certain that lutein and zeaxanthin will be given a prominent place in
AREDS-2 study as they are actually found in high concentrations in the macula of human eye. Once this
is done, the demand for these carotenoids (lutein and zeaxanthin) will rise exponentially which will
significantly benefit AVT Natural as Food-Grade Marigold Oleoresins are the richest source for
extraction of lutein and zeaxanthin and AVT is the world's largest supplier of the same .
(7) Spice Oils & Oleoresins, the other operational segment of AVT is also experiencing a demand boom
because of two reasons – first – Because of the steadily growing demand from the domestic as well
export markets due to their varied uses in confectionary, noodles, beverages, sauces, canned meat, soup
powders, curries and poultry products, and --- Second – Because of the increasing preference for
quality products in each of the user-industry, use of spices is rapidly getting replaced with oleoresins and
spice oils. Both these facts are validated by the recent Indian Spices Board report which states that “in
2010-11 fiscal, a significant feature of spices export was the rise in shipments of spice oils and
oleoresins. They made up over 15 % of the export basket.”. AVT, being a significant player in this segment
(almost second to India's largest exporter in the category – Synthite ) with a wide-spread customer-base
numbering more than 80, is bound to exploit the opportunity of demand-expansion in the segment fully.

(8) The third operational-area of the company, Value Added Beverages, for which it has set up a
Decaffeination Plant at Vazhakulam, Kerala (present processing capacity is 7 mn. kgs which is one of the largest
in the world), learning phase has already concluded and stabilisation started which will see a significant
rise in volumes going forward. This segment of AVT is again a niche one, because there are only 20 odd
companies in the world who provide Decaffeination facilities out of which only two are located in Asia,
Nine in Europe and Four in USA while others are located in Brazil, Mexico and Colombia. Major Beverage
companies like Kraft and Sara Lee have their own Decaffeination Plants but most of the other beverage
companies (including Unilever-Lipton) around the world outsource their Decaffeination requirement via
what is called as toll arrangement wherein they provide tea or coffe to Decaffeinators (like AVT) and pay
a fix processing fee. This is because, to set-up and maintain a Decaffeination plant, it requires a lot of
capital and skill and so not many companies venture into this business. However, beacuse of health
consiousness, the demand for decaffeinated beverages is, of late, robust, in both, developed and
developing countries, but price is the major constraint hampering thier demand. Asian continent,
especially China and India, are the obvious choices to outsource the Decaffeination requirement at the
most competitive cost and this is evident from the first Decaffeination plant in Asia becoming
operational in 2007 in Vietnam, only 2 years before the operationalisation of AVT's Decaffeination plant
in India.

(9) Finlays, the largest independent tea trader in the world trading more than 100 mn. kilos of tea each
year (also one of the largest producer of tea producing 45 mn. kilos of black tea each year ), has chosen AVT for
outsourcing its Decaffeination requirements w.r.t. Tea. It has entered into a toll arrangement with AVT till
2013. It is worthwhile to note here that Finlays already has an in-house Decaffeination plant in Hull, UK
where it decaffeinates almost 3 mn. kgs of tea each year at present, but the demand as well as the need
for offering Decaffeination at competitive rates is such that it has decided to outsource the
Decaffeination requirement to AVT and this itself is the vindication of positioning of AVT in the space.

(10) Alongwith Finlays, AVT counts amongst its clients Harris Freeman (which through its division Harris Tea is the
largest Own Label tea supplier in USA) in Decaffeinated Tea space.

(11) Company has a clean management being a group-entity of AV Thomas Group ( 69.6 % Promoter Holding +

4 % acquired on 6th May 2011 via Open Market Purchases at the rate of Rs. 150 so present promoter holding is 73.6
%) and is headed by a professional management under Mr. MSA Kumar (ex-vice president Shaw Wallace &
former Chairman of CII Kerala).

(12) The company has grown its topline at a CAGR of 20.6 % and EBITDA at a CAGR of 5.3 % over last 5
years. This growth was achieved inspite of the company being in a learning-cum-investment phase
(expanded capacity via addition of another extraction plant and added a capital intensive Decaffeination Plant )
 which depicts the bottomline-focussed approach of the company. If one analyses the balance sheet of
the company closely of last 3 years, then we will find that the company has expanded heavily on assets
front with no significant rise in topline as well debt-to-equity. The first part is quite easy to understand
as normally the plants like these take atleast 1.5-2 years for stabilisation and therefore any meaningful
contribution from them can be expected only after that. However, the second part of the observation is
really commendable as the expansion is done without burdening the balance sheet with debt as also
maintaining the profitability level and dividend payout level (35 % and 30 % in FY08, FY09 & FY10).

(13) With expansion already done and the stabilisation occured in all the three operational segments, going
forward we can see a healthy topline growth, a glimpse of which can be seen in recently declared
Q4FY11 results wherein company has attained a 101.5 % jump in topline YoY and a 105.6 % jump in PAT
YoY.

(14) Company has maintained an average dividend payout ratio w.r.t. PAT at healthy 32.15 % over last 10
years which speaks highly of the management's concern towards the return of its shareholders and
based on the expected FY11 dividend, the company is offering an attractive dividend yield of 3.5 % with
a significant growth opportunity for the capital invested.

At current market price of Rs. 145, AVT Natural is available at a p/e of just 10.03 on declared FY11 EPS of
Rs. 14.44 and at a market-cap-to-sales of just 0.75 on FY11 reported topline of 147.02 cr. If we look
ahead, then based on FY12e numbers, company is available at a p/e of just 7.45 and a mcap-to-sales of
just 0.62 and on FY13e numbers, company is available at a p/e of just 5.6 and a mcap-to-sales of just
0.48.

Past Financials of AVT Natural (alongwith key expenses as % of sales/ebitda/pat to assess quality)
FY11 FY10 FY09 FY08 FY07 FY06 FY05 FY04 FY03
(Fig. in ` cr.)

Revenue 147.02 85.65 87.13 89.65 72.37 71.72 57.29 52.03 32.6

EBITDA 25.11 16.61 17.26 16.97 18.64 17.09 10.72 6.27 2.6

PAT 10.99 6.72 7.12 9.15 8.71 7.5 4.83 2.16 (-) 1.7

Dividend To Be 30 % 30 % 35 % 30 % 50 % 40 % 10 % 0
Declared Declared

Div.Payout To Be 40.85 % 38.06 % 33.63 % 30.6 % 29.82 % 33.5 % 18.6 % 0

Declared
Ratio as %
of PAT

Taxes Paid 6.1 3.6 4.21 5.43 4.97 5.39 2.02 0 0

(24.29 %) (21.67 %) (24.29 %) (31.9 %) (26.66 %) (31.53 %) (18.84 %)
(% of
EBITDA)
Interest 4.81 3.51 3.46 2.53 2.95 2.17 1.86 2.12 2.31
(19.15 %) (21.13 %) (20.04 %) (14.9 %) (15.82 %) (12.69 %) (17.35 %) (33.81 %) (88.84 %)
Paid
(% of
EBITDA)