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Prospect Commodities

• Prospect Commodities is coming out with an initial public offering (IPO) of 12,26,000 equity shares of face value of Rs 10 each for cash at a fixed price of Rs 61 per equity share.

• The issue will open for subscription on March 8, 2023 and will close on March 10, 2023.

• The shares will be listed on SME Platform of BSE.

• The share is priced 6.10 times higher to its face value of Rs 10.

• Book running lead manager to the issue is Interactive Financial Services.

• Compliance Officer for the issue is Bhargavi Pandya.

Profile of the company

The company is in the business of trading of cashew in to B2B Market. The company is selling the Cashew to the wholesalers in the state of Gujarat only. Currently, the company is not able to cater the demand of Gujarat State, hence it has not ventured to supply or develop market out of Gujarat. The cashews are packed in tin of 10 KG. The Company had instead of importing the RCN (Raw Cashew Nut) from other countries, which require to import in larger quantity and blocking of the Working Capital Fund, started buying the RCN from Gujarat who are importing from other countries and also from Kolam, Tuticorin and Manglore.

The company’s product includes Cashews of different grades and packed in 10 KG tin pack. The Grade of the cashew nuts are on the basis of size of the cashew nuts and colour of the cashew nuts. The company has following premium grades such as W400, W320, W240, W210 and W180, DW and SW. During the Production the company also get the Broken cashew nuts, split cashew nuts which are also sold in the market. The products are processed under hygienic condition following the specific food grade standards recommended by the industry.

Proceed is being used for:

• Repayment of unsecured loans

• Long-term working capital requirement

• General corporate purpose

• Meeting public issue expenses

Industry overview

India is among the largest cashew-producing countries in the world. The cashew industry has large economic significance as it employs more than 10 lakh people on farms and factories in rural areas. The cultivation of cashew in India covers a total of 0.7 million hectares of land, and the country produces over 0.8 million tonnes (MT) annually. Between 2019-20 and 2021-22, India's cashew nut production grew from 0.70 million tonnes (MT) to 0.77 million tonnes (MT). In India, cashew cultivation spread along the coastal regions of the peninsula. Cashew is mainly grown in states like Maharashtra, Kerala, Karnataka, Tamil Nadu, Andhra Pradesh, Goa, Odessa, West Bengal, and some parts of the North-Eastern region. According to data published by the National Horticulture Board (NHB), Maharashtra stands first in annual cashew nut production during 2021-22 at 0.20 million tonnes (MT), growing from 0.19 million tonnes cashew nut produced in 2020-21.

Besides the vast scale of cashew production, India is also known for pioneering cashew processing and exporting cashew kernels across the globe. The cashew processing industry was earlier concentrated in Kollam (Kerala), Mangalore (Karnataka), Goa, and Vettapalam (Andhra Pradesh), but now it is spread across many states of India. Over the years, India has emerged as the global processing hub for the cashew industry. India is the largest cashew exporter, with more than 15% of the world's export share. India primarily exports Cashew Kernels and very small quantities of Cashewnut shell liquid. During 2021-22, the cashew exports by value grew from $420 million in 2020-21 to $452 million in 2021-22, witnessing a growth of 7%. Between April-August 2022, cashew exports stood at $134.38 million.

India exports cashews to over 60 countries spread across different parts of the world. The key export destinations for India are UAE, Japan, Netherland, Saudi Arabia, the USA, the UK, Canada, France, Israel, and Italy. As per the APEDA statistics on the exports of cashew kernels and Cashewnut shell liquid, UAE is the largest importer of Indian cashews, valued at $131.5 million, accounting for 29% of overall exports during 2021-22 as compared to $98.5 million in the previous year. In volume terms, India's cashew exports to UAE stood at 16.6 million kg, growing by 29% from 12.8 million kg of exports recorded in the previous year.

Pros and strengths

Strategically located manufacturing facilities with modern machines: The company’s factory is in the Ahmedabad city which is well connected with India and outside by Road, Rail and Air. The company can get the experienced labour and the logistic facility for transportation of raw material as well as finished goods is easily available and at competitive rates. It is strategically located in terms of access to raw materials and proximity to clients. Its manufacturing facility will easily help it in catering to its customers and help is in sending its products to the Customers.

Existing client relationship: The company is constantly addressing the customer needs for its products. The company has made continuous efforts to ensure customer satisfaction by taking steps for meeting customer specific requirements, timely delivery of orders to its customers as well as maintaining consistency in quality and this has yielded results in the form of repeat orders from its customers. Repetitive business and large client relationships reflect confidence reposed in it by its customers. The company is providing after sale Service and assured its customers that if they have any issue with the quality of the product, it will take back the product but not allow customers to ask for any discount. Due to quality of product and the company’s after-sale service, it is able to sell its entire proceeds Cashew nuts in Gujarat Only.

Quality service: The company provides quality and timely service to its customers. It has set very high standards for itself when it comes to timelines and quality of service it provides to its customers. The stringent systems ensure that all the products reach its customers on stipulated time and there are minimum errors to ensure reduced product rejection. Its quality service has earned it a goodwill from its customers, which has resulted in customer retention and order repetition. It has also helped it to add to its existing customer base. It has developed internal procedure of checking the client orders at each stage from customer order to delivery. The company focuses on maintaining the level of consistently in its service, thereby building customer loyalty for its Brand.

Risks and concerns

Dependency on top ten buyers and top ten suppliers: The company had taken running business of M/s Fortune Exports and in the partnership firm, it has relied upon top ten buyers of its product and top ten suppliers for raw material for its revenue and source of raw material. In the FY 2022-23 (upto November 30, 2022) the revenue from top Five customers was 97.13% of the total turnover (including tax). The loss of any customer or a decrease in the volume of orders may severely affect its revenues and profitability, if the company is unable to develop and maintain a continuing relationship with its key customer or develop and maintain relationships with other new customers. The loss of a significant customer or a number of significant customers due to any reason whether internal or external related to their business may have a material adverse effect on its business and results of operations.

Limited geographical presence: The company is supplying its products to the wholesale customers spread over with the state of Gujarat. Looking to the good quality of its products, it is able to sale its entire production within Gujarat. It is supplying its products to the wholesalers only. The company is not able to cater the demand of Gujarat State; hence it has not ventured to supply or develop market out of Gujarat. Recently the company had started supplying the cashew directly to the customers who are leading chain restaurant in the North India. In the event of any natural or manmade calamity in the state of Gujarat, the company’s entire business operation comes to stand still. Under the circumstances its business, revenue and its profitability will be adversely affected.

High working capital requirements: The company is engaged in processing and trading of Cashew Nuts. For the current year FY 2022-23, the company’s net working capital requirement is Rs 730.92 lakh as against the Rs 520.92 lakh as on November 30, 2022. The company’s net working capital requirement for the FY 2023-24 is estimated at Rs 910.92 lakh. If the company is not able to manage the working capital requirement properly then the growth, profitability and business will be adversely affected.

Outlook

Prospect Commodities is majorly into the international trade of Agro Products. The entity was recently incorporated as a company, earlier the operations were managed and controlled through the partnership firm under the name M/s Fortune Exports. Cashew Nuts themselves are premium dry fruit and require multiple processing stages to be sold as a finished product. Before reaching the doorstep of the end customer, the nuts undergo a series of processes. On the concern side, the top ten buyers of its product and top ten suppliers for raw material contribute its total revenue and source of raw material. It does not have long term agreement with the customer or supplier. The loss of any Customer or a decrease in the volume of order by any customer or any disruption in supply of raw material by any supplier may adversely affect its revenues and profitability. Moreofvert, the company has limited geographical presence in the market and its operations are limited to the state of Gujarat only.

The company is coming out with a IPO of 12,26,000 equity shares of Rs 10 each at a fixed price of Rs 61 per share to mobilize Rs 7.48 crore. Minimum application is to be made for 2000 shares and in multiples thereon, thereafter. On performance front, the total income from the operation for the stub period ended on November 30, 2022 was Rs 839.98 lakh consist of Rs 300.07 lakh from processing of nuts which is 35.72% of the total income and Rs 539.91 lakh from trading of nuts which is 64.28% of total income. The profit after Tax for the stub period was Rs 52.85 lakh representing to 6.29% of the total revenue.

Going forward, the company intends to improve efficiencies to achieve cost reductions so that it can be competitive. This can be done through domestic presence and economies of scale. Increasing its penetration in existing regions with new range of products, will enable the company to penetrate into new catchment areas within these regions and optimize its infrastructure. As a result of these measures, the company will be able to increase its market share and profitability.