Incorporated on February 26, 1982, the Sanstar Group comprisedtwo entities: Sanstar and Sanstar Bio Polymers. The group manufactures maize-based specialty products and ingredients solutions and its co-products such as gluten, germ and bran. Sanstar and Sanstar Biopolymers were merged on November 23, 2023.

Sanstar’s products include liquid glucose, dried glucose solids, maltodextrin powder, dextrose monohydrate, native maize starches, modified maize starches and co-products like germs, gluten, fiber and enriched protein. These speciality products and ingredients solutions add taste, texture, nutrients and increased functionality to (a) foods as ingredients, thickening agents, stabilizers, sweeteners, emulsifiers and additives (in bakery products, confectionery, pastas, soups, ketchups, sauces, creams, deserts, amongst others), (b) animal nutrition products as nutritional ingredients, and (c) other industrial products as disintegrants, excipients, supplements, coating agents, binders, smoothing and flattering agents, finishing agents, among others.

The promoters of Sanstar are GouthamchandSohanlal Chowdhary, Sambhav Gautam Chowdhary & Shreyans Gautam Chowdhary.

The fifth largest manufacturer of maize based speciality products and ingredient solutions in India has an installed capacity of 3,63,000 tonne per annum (tpa) (1,100 tonnes per day or tpd).The company is recognised as a two-star export house by the Director General of Foreign Trade, Government of India, while SBL, now merged with Sanstar following the order of NCLT, Ahmedabad, dated November 23, 2023, was recognised as a three-star export house. Export revenue was Rs 3,94.438 crore, representing 35.53 % of gross revenue from operations, in FY 2024. Products were exported to 49 countries across Asia, Africa, Middle East, Americas, Europe and Oceania, in FY2024. Additionally, there are footprints across India, with products being sold in 22 states.

Sanstarhas two manufacturing facilities spread across a cumulative area of 10.68 million square feet(245 acres) at Dhule in Maharashtra and Kutch in Gujarat, with a total installed capacity of 363,000 tpa (1,100 tpd). The Dhule facility is the latest and largest manufacturing facility, having commenced operations in 2017. It on an aggregate land area of 7.90 million square feet. Of this, 2.46 million square feetare available for future expansion. The facility had an aggregate installed capacity of 247,500 tpaor 750 tpdas on March 31, 2024. There are more than 50,000 tonnes of maize storage silos and finished goods storage at the Dhule facility. The Kutch facility was registered with the USFDA in August 2023. The registration is valid upto December 2024. The manufacturing facility at Kutch, Gujarat, had commenced operations in 2006. It is on an aggregate land area of 2.77 million square feet. Of this, 1.84 million square feet are available for future expansion. The facility had an aggregate installed capacity of 350 tpd as on March 31, 2024. The capacity utilization of the Dhule facility was 89%, while the Kutch facility’s capacity utilization was 81% in FY2024.

The food segment formed 58.12%,animal nutrition 10.45%, and other industrial applications formed 31.43% of total revenue in FY 2024.

The in-house R&D team comprised 10 personnel as on March 31, 2024. The employees of the in-house R&D team have an overall collective experience of atleast 40 years. The R&D facility is spread across 2,200 square feet and is equipped for research and testing.

The principal raw material required for manufacturing is maize. Sanstar is dependent on a few raw material suppliers. They are local farmers located near manufacturing facilities and suppliers in mandis,the unorganized marketplaces. In addition to maize, certain other consumables and chemicals are also used during the manufacturing process.

The Offer and the Objects

The offer comprises fresh issue of up to 41800000 equity shares, aggregating Rs 397 crore at the upper price band of Rs 95 and Rs 376 crore at the lower price band of Rs 90, and OFS of up to 11900000 equity shares, aggregating Rs 113 crore at the upper price band of Rs 95 and Rs 107 crore at the lower price band of Rs 90.

The net proceeds will be used from the fresh issue to fund capital expenditure of Rs 181.56 crore for expansion of the Dhule facility, repayment and pre-payment, in part or in full, of borrowings of Rs 100 crore, and the balance towards general corporate purposes.

The manufacturing capabilities at the Dhule facility are to be expanded to 1,00 tpdby installing additional machinery and equipment. The Dhule facility’s capacity is eventually to be expanded to 1,750 tpd. The cost of the proposed expansion is estimated to be Rs 201.56 crore. Commercial production from increased capacities is set to commence from July 2025. Post expansion, the total installed capacity will be 2100 tpd, from the current 1100 tpd. The aggregated outstanding borrowings amounted to Rs 164.23 crore end of May 2024.

Promoter group selling shareholder Gouthamchand Sohanlal Chowdhary’s stake post-issue will decrease to 8.1% from 10.89% pre-issue shareholding, Rani Gouthamchand Chowdhary’s to 3.9% from 7.77%, Sambhav Gautam Chowdhary’s to 17.6% from 23.21%, Shreyans Gautam Chowdhary’s to 17.5% from 23.12%, Richa Sambhav Chowdhary’s to 4.2% from 7.74%, and Samiksha Shreyans Chowdhary’s to 4.2% from 7.83%.

Strengths

One of the oldest players in the starch industry initially engaged in trading oftapioca starch and later venturing into manufacturing maize-based starch and its derivatives. Has nearly 19 years of track record in manufacturing operations.

Leading position in the industry, technical knowledge to bring specific functionality and nutrition to end products, more than five decades of presence, state-of-the-art manufacturing facilities, and a diverse product portfolio and clientele in domestic and global markets, provide competitive advantage.

The manufacturing facilities are strategically located in terms of proximity to raw material sources, i.e., maize harvesting belts, as well as seaports of Mundra, Kandla, Hazira and Nhava Sheva, for exports of finished products. The Dhule facility is in the maize production belt of Maharashtra and Madhya Pradesh, accounting for around 25% of India’s total maize production

The Dhule unit has been duly certified in accordance with FSSAI, FSSC 22000:2018, Kosher, HALAL, International Standards for Quality Management Systems as per ISO 9001:2015, and SGS’s Certificate for India’s National Programme for Organic Production Standards, among others. Similarly, the Kutch unit is registered with the United States Food and Drug Administration (USFDA) and holds certifications like FSSAI, HACCP, HALAL, ISO 9001:2015.

The increasing demand of maize-based speciality products and ingredient solutions in food and beverages, animal nutrition, pharmaceuticals, adhesives, paper, and textiles from developing economies like India is likely to increase the consumption of these ingredients.

There is diverse clientele. The top 10 customers formed 23% of total revenue in FY2024 as against 30% in FY2023. These customers are from diverse industries, textiles, paper, pharmaceutical, food, adhesives, animal nutrition and others, ensuring insulation from the risk associated with cyclicality in respective industries.

The clientele included AB Mauri, ITC, Capital Foods, Hindustan Unilever, Godrej Agrovet and Zydus Wellness in the domesticmarket. There is strong presence in Maharashtra, Gujarat, and Andhra Pradesh.

The global native maize starch industry is expected to be valued at US$ 29,631 million in 2023, with an estimated CAGR of 3.78 % from 2023 -2029. Increasing demand from food and beverages, textiles, and paper industries clubbed with governments focus to increase productivity of maize is driving the growth of the native maize starch market. The use of native maize starch in cosmetics, adhesives and pharmaceutical industry is fuelling the growth of market. The Indian native maize starch industry is expected to be valued at US$ 1,897 million in 2023, with volume of 4.87 million tonnes. The market has recorded CAGR 3.27% since 2019 and is further expected to grow at CAGR 4.56% till 2029

Weaknesses

Maize is used as a key raw material, accounted for 75-80% of total cost of sales since three to four years. As maize is an agriculture input, operations are vulnerable to inherent risks associated with agri-based inputs prices. Raw material prices are linked to agricultural output, exposing to factors such as vagaries of monsoon, acreage, crop yield level, and global demand-supply mismatches.

The price of primary raw material maize is subject to fluctuation due to global volatility in supply and demand. Any major price fluctuations can adversely affect the business.

The maize processing industry is highly competitive, with a presence of few large players such as Roquette India Private Limited, Gujarat Ambuja Exports Limited, and The Sukhjit Starch and Chemicals Limited, and medium-sized players such as Gulshan Polyols Limited, Bluecraft Agro Private Limited, SAL, Sayaji Industries Limited, Sahayadri Starch & Industries Private Limited and several other unorganised players. The commoditised nature of product limits pricing flexibility and bargaining power with customers. Large players have a significant presence in value-added products of maize and command a wide product basket. Significant capacity addition by major players, coming online in one-two years, may further increase competition in the industry.

Products are exported to various geographies across the globe. Products may be subject to import duties or restrictions of the relevant geographies. Additionally, any adverse fluctuation in foreign exchange rate, unavailability of any fiscal benefits or the inability to comply with related requirements may have an adverse effect on business and results of operations.

Cash flow from operations was negative in FY2023.

Profitability, business and commercial success are significantly dependent on the performance of the food industry. Economic cyclicality coupled with reduced demand in the food industry, in India or globally, could adversely affect the business.

Any restrictive change in the regulatory provisions governing the use of modified starches in India, American and European countries may have an adverse impact on the financial condition.

Maize starch is seldom replicable. However, researchers and innovators are trying to replace it with starches from other crops such as rice, tapioca, and arrowroot. In the event any or all products of the company are to be replaced by substitute products of same or low cost, the business, financials, profitability and demand for products may be affected.

A number of approvals, NOCs, licences, registrations and permits are required in the ordinary course of business and any failure to obtain, maintain or renew them may have adverse effect on business, financial condition, and results of operations.

Valuation

Consolidated sales were down by 11% to Rs 1067.27 crore in FY 2024, led by a decline in raw material prices of maize. Consequently,lower sales realization of maize starch resulted in decrease in sales volume of primary product starch by 7.20% in FY2024 over FY2023. The OPM rose 320 bps to 9%, leading to 35% increase in OP to Rs 98.14 crore on the back of better realization in the processed food segment alongwith reduction in power and fuel cost after the completion of the solar plant and biofuel plant, and low coal prices. Other income rose 213% to Rs 14.41 crore, while interest cost increased 10% to Rs 10.74 crore and depreciation went up2% to Rs 12.09 crore. PBT jumped62% to Rs 89.72 crore. Tax expenses were 69% higher at Rs 22.96 crore. Net profit spurted60% to Rs 66.77 crore.

The FY2024 EPS on post-issue equity works out to Rs 3.7. At the upper price band of Rs 95, P/E works out to be 25.9.

Sanstar will be repaying 61% of its debt from the issue proceeds. This will bring down its interest costs substantially and boost profit. The FY2024 EPS works out to Rs 4.0 if 61% of its interest cost is removed, keeping all other items, including the tax rate same. The re-worked P/E, at the upper price band, moderates to 24.

As of 16July 2024, listed peers such as Gujarat Ambuja Exports traded at TTM P/E of 18.2, Gulshan Polyolsat70.4,and Sukhjit Starch and Chemicalsat15.1.

For FY2024, Sanstar’s Ebitda margin and ROE stood at 9.2% and 28% ascompared to 9% and 13.6% forGujarat Ambuja Exports,4.2% and 6% for Gulshan Polyols, and 9.3% and 13.6% for Sukhjit Starch and Chemicals, respectively.