At best, Mishtaan Foods seems like a speculative buy.
The stock is popping because:
- The promoters have started buying it regularly since it was Rs 9, and
- The company is setting up a grain-based ethanol facility in Gujarat.
Also, here’s an FYI: The company had given a 1:1 bonus in FY 2022 which made its capital swell to Rs 100 crores (FV 1).
Also, until 2015, Mistaan Foods was known as HICs Cement. After getting into the food processing business in 2015, the company set up a processing plant. It currently sources wheat, rice, and grains from farmers, processes, and markets them under the Mishtann brand.
Here’s my analysis of whether Mishtaan Foods is worth buying:
Questions About Mishtaan Food’s Inventory
Typically, food processing and marketing companies buy grains and pulses from the market, process them in-house, and then package and market them. At the end of every reporting period, some inventory, either of raw food stock or packaged material is left over, which gets reflected as (opening closing stock less closing stock) in the Profit & Loss Account and the closing stock gets reflected in the balance sheet as inventory. In the Profit & Loss Account, the (opening-closing stock) item is posted as an expense if the opening stock exceeds the closing stock, and vice versa.
Now, here’s what Mishtaan Food’s Q2 2023 statements say:
As per Mishtaan Food’s Q2 2023 P/L Account, there is ZERO purchase of stock in trade and there’s ZERO change in inventories.
However, in the cash flow statement for the half year ended 30-9-22, the company has booked an excess of opening stock over closing stock worth Rs 5.75 crores.
What’s perplexing is that no inventory carryover costs were booked in Q1 2023 as well.
So the question is: Why wasn’t this 5.75 crore inventory carryover cost reflected in the income statement?
Another thing to note is that the company owned inventories worth Rs 40.29 crores as of 31-3-22 and Rs 34.54 crores as of 30-9-22. The difference is the Rs 5.75 crore inventory consumed out of opening stock.
Another question here is that if the company owned inventories worth Rs 40.29 crores as of 31-3-22, then why did it purchase materials worth Rs 140 crores in Q2 2023 (refer the first image above)? Why not use up the existing inventory first?
Well, I don’t have the answers and I sure hope that a company representative will read this post and post an answer.
Mishtaan’s Inventories and Debtors
For H1 2023, Mishtaan Foods has clocked sales worth Rs 318 crores. Its debtors and inventories together work out to about Rs 189 crores (see image above). This means that the company locks up its working capital for about 7 out of 12 months in a year. It seems high for a business that sells necessities (food).
Summing Up Mishtaan Food’s Prospects
Though Mishtaan Food’s inventory accounting processes and its inventory and debtors’ levels do raise concerns, 2 pros are loaded in the company’s favor:
- The promoter is buying stock
- The company is setting up a grain-based ethanol plant
These two advantages suggest that Mishtaan Foods can be a speculative buy.
PS: Would I buy it? No, I would look at something else….
