Is the rally in small-cap solvent extraction stocks sustainable?

Synopsis

Small-cap solvent extraction companies have seen significant gains due to high edible oil demand, ethanol blending, and supportive policies. However, analysts now advise caution, noting that valuations may be exceeding fundamentals. Risks like raw material price volatility and supply challenges could lead to corrections, suggesting investors consider booking profits or waiting for better entry points.

Mumbai: Shares of small-cap solvent extraction companies have posted sharp gains in recent months, boosted by strong demand for edible oils, ethanol blending prospects and policy support. But now analysts are recommending caution after the run-up, as the rally may not sustain.

CIAN Agro Industries & Infrastructure has been the biggest gainer, surging 261% in six months and 853% over one year. BN Holdings jumped 195% in six months and 133% in a year. Ambar Protein Industries gained 106% in six months and 130% over one year, while Modi Naturals rose 30% in six months and 34% in a year. In comparison, the S&P BSE SmallCap index is down 5.2% in one year, while it rose 24% in the last six months.

"Rising demand for healthier edible oils, growing ethanol blending opportunities, and government efforts to reduce edible oil imports are strong tailwinds for solvent extraction companies," said Saurav Chaube, research analyst at Samco Securities. "A good monsoon and higher realisations from by-products like de-oiled bran should further support earnings."

While most stocks have surged thanks to favourable business conditions, the time may be right to be choosy within the sector.

"When you see rallies of this scale in the agri-processing sector, it indicates structural factors are at work, but it also means valuations are running well ahead of fundamentals," said Trivesh D, COO at Tradejini, an online trading platform. He said raw material price swings, supply-side challenges, and compliance costs could hurt performance and trigger stock price corrections.

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Chaube flagged risks of a share price reversal in CIAN Agro - the top performer.

"The stock's meteoric rise has stretched valuations and revenues are heavily dependent on subsidiaries, prompting partial profit booking for existing holders," he said. He prefers Modi Naturals and Ambar Protein Industries, citing ethanol expansion and healthier oil positioning.

"A staggered accumulation approach in these counters may be a better long-term strategy," he advised.

Trivesh suggests existing investors may consider booking some profits, while new investors should wait for better entry levels. "At the end of the day, wealth is built through discipline, not by chasing short-term spikes."

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