Agro Tech Foods - A small cap MNC foods FMCG


#1

Disclosure: Have been investing since last 2 years and continue to add on dips.

Company: This was an subsidiary later acquired by Conagra Foods USA. They hold close to 51% in the company.

Products:
Crystal edible oil (Non strategic brand and company intends to phase out slowly)
Sundrop edible oil
Act 2 popcorn
Sundrop peanut butter
Act 2 snacks

  • Positive Triggers and opportunities:
    Premium edible oil is duopoly between Sundrop and Saffola
    Premiumization and shift away from local brand edible oils
    Health consciousness for better quality edible oil
    Opportunities in new products like snacks and peanut butter
    Huge brand portfolio with parent company

Risks:
Conagra not doing well and some restructuring going on
All conagra brands may not find favour with Indian taste

Financials: One can look at details on www.atfoods.com .
At current price it trades at PE of 38 and MCap of 1400 cr
Price to Sales : 2 times
Topline and bottomline have been erratic due to change in product profile, new product launches, Ad expenses, tax rate changes etc.

Opportunity:
Compare Unilever/P&G parent Mcap to Conagra: Approx 8-12 times
Compare Agrotech Mcap to HUL: 100 times

This is not for folks who are capable of chasing 25%+ opportunities every year.(I know there many on this forum) It is more for laid back investors who lack capability of analyzing Q financials threadbare( like me ) and who don't mind lower returns during the journey as long as they can hold it for a decade for decent returns. :smile:

Any thoughts


(Venkatesh) #2

I used to be a shareholder in this company and I sold out in frustration. Post FY12 there is hardly any growth. Edible oil (Sundrop) business is declining/ not growing due to competition from Saffola and Fortune.

Act II Popcorn and Peanut Butter are growing, but at a slower than expected pace. They launched a ready to eat product and dessert which never took off. Now they have launched Nachos which is another crowded category.

Conagra acquired Delmonte Foods globally but that is a seperate business and is not included in Agro Tech Foods.

Overall Conagra is a great global brand. Unfortunately has not delivered in India. I think even Rakesh Jhunjhunwala holds this stock hoping Conagra does some magic. So more of a thematic stock with poor delivery so far.


#3

I agree @vnktshb . But Sundrop has been holding on to 45% market share and seems to have grown better than Saffola in recent Q. But having said that building a food business needs lots of trials and is a real slow process. I read somewhere it took Nestle more than a decade to make Maggi profitable in India.

But it these concerns are captured in mcap @ 2 times sales.


(Rohan) #4

Having worked in the sector, the following need to be considered :
1. What sales % comes from the "branded" segment. Even Sundrop is hardly a brand - there are tons of Sunflower oil manufacturers with sub-10% shares and "leaders" in their own sub-sub-segment :smile: . If some people believe there is some pricing power in Sundrop - it is also a very small % of the edible oil sales for agro tech . My hunch is max 300 Cr including Sundrop.
2. Popcorn - Institutional sales are a big % for this category because of connection with entertainment. What stops a live pop corn seller from buying corn and popping it himself with the Act 2 banner for display? Checked with someone internally and that has been a huge problem for them as margin that a retailer can get from selling his "private label" ACT 2 pop corn is much higher

My view is that stock is still highly overvalued. Investors will sell out eventually when they realize that this is not really a great business.


#5

Thanks Rohan @rr1980 for sharing your perspective.

Even Marico had only two brands - Saffola and Parachute driving their majority of sales and profits.


(Hemant V Bhatia) #6

Key highlights of Conf Call by Capital Mkt
The standalone net sales for Q2 FY16 have increased by 1% to Rs 199.13 crore. The net profit declined by 36% to Rs 5.13 crore.The standalone net sales for H1 FY16 have increased by 1% to Rs 380.52 crore. The net profit declined by 27% to Rs 9.72 crore.For Q2, sundrop oil sales grew 5%, food business by 6% while Crystal oil was down by 17%.Sundrop oil sales grew by 4% for H1. Food business grew by 6%. Crystal oil sales declined by 13%.Food business sales was Rs 89 crore for H1 and the mgmt expects food business to do sales of Rs 180- 200 crore for FY16.Sundrop oil volume for H1 was 7%.ASP behind sundrop oil was Rs 2.8 crore and Food was Rs 16.9 crore for H1.Premium edible oil industry must has seen flat growth for H1.
The mgmt said that it has seen some increase commodity prices in last couple of month, resulting in pressure on gross margin in Sundrop oil.
Peanut butter sales was up by 28% to Rs 11 crore for H1. 7-8% volume came from small sachet packets. Big packs also doing well.ACT II performance was disappointing. Sales grew by 5% for H1. ASP spend was low vs H1 FY15. The mgmt expects with distribution expansion, sales will pick up.The mgmt said for instant popcorn it requires to invest in distribution along with ad spend. Ready to eat popcorn is a volume products for which the company need lots of factories. It will become strategic product but not now, as supply chain is not in place and so distribution, but will become next 18 months ahead.
In 1.25 lakh stores ACT II is distributed today. The company is investing in distribution and media for growth of ACT II.ACT II Nachoz is doing well.The company has started rolling out salty peanuts (different products from same raw material which is peanut, procure to make peanut butter) and it's doing well.Gross margin was under pressure in H1 as manufacturing overheads are significantly high. Hope to see gross margin improve in H2 on manufacturing stabilization.
Interest cost high due to working capital charge. The company is in process of importing corn, which has resulted in increase in borrowing by Rs 85-90 crore.The company's people on fleet are doing business of Rs 6000 per day, which the company expects to reach Rs 8000 by end of year.Tax rate – 31% expects for FY16.


(reacher) #7

Key Risk is poor sales growth .3 year Sales CAGR : 2.54 % : 5 Years 3.18% :10 years -2.31%
They will suck your money out in a v polished manner thro' opportunity loss of capital and when you exit in frustration the stock will go up based on some non earnings trigger


#8

Yes opportunity cost is key risk here. Will hold for 2 years and then take a call.


(ishandutta2007) #9

Ramesh Damani here feels it is under valued justifying as "ConAgra at a 1000 crore for FMCG company is fairly cheap"

Disclosure : Not invested(though in general I am bullish on packaged food)


#10

True. I like AgroTech due to long runway it has. If they execute diligently I don't have sale for at least a decade.

It is difficult to value it based on earnings as they are at peak of investment phase and small size makes earnings real volatile.

@reacher sales have not gone anywhere as they slowly did away with agro trading and have stopped investing in low value add product Crystal leading to sales decline.


(Harish Nagpal) #11

My take if Advertisement expenses are increased this should increase earning , Even If co stops advertising then also earning will increase being major expense . In theory if co stops advertisement for one year this stock will be 20 p/e stock.In future as brand becomes established the ratio of advertisement exp to sales will keep coming down which will be eps assertive.Dis :Small Exposure


#12

@nagpal, yes that is true. Also it has has started incurring higher depreciation from new factories where as full top and bottomline benefits are yet to accrue. Better valuation metrics would be to consider Price to Sales which makes it look cheap .


(Vinoth Kumar) #13

Hi all,

I was a summer intern with this organization in Finance and Supply chain department. I had to reject an offer from this org, as the culture is pretty laid back. Many internal systems are technologically not strong.

As you all have already mentioned, Sundrop and Popcorns are the major revenue drivers. Most sales of Sundrop comes from Military canteens. Sales promotions are carried out with other retailers to carry of the sales of oil products, throughout the year. Popcorn, the margin they get is very less though i would say i was impressed by the reach of it. They have captured most of the market.

Many other products they wish to sell, but not selling are olive oil, peanut butter etc., these products are introduced way back, yet, no improvement in sales are being seen.

From all this, I was not interested to buy this company, and at current valuation, this looks stretched


(Sandeep Patel) #14

Good read - Identifying Businesses exhibiting the "Capacity to Suffer" by Ashish Kila

http://www.moneycontrol.com/news/investing/have-you-investeda-company-that-has-%E2%80%9Ccapacity-to-suffer%E2%80%9D_4916341.html

  • Has capacity to reinvest.
  • Has a huge scope to grow.
  • Product line expansion e.g. Peanut Butter.
  • Short term pain (burden on margins); focus on advancing long term competitive advantage.

AgroTech’s vision is to become the “Best Performing, Most Respected Foods Company” in India.

Disc: No holding currently. Tracking.


#15

@IndianBuffet, sunsrop sells all over the place. Peanut butter can be found in most places in large cities.

We should not confess employment opportunities with stock opportunities. Most of us may not like to work for Kaveri seeds, avanti feeds etc but stock has done wonders for investors

@lustkills , completely agree. Mostly that has been my hypothesis.


(reacher) #16

stock has cracked below imp levels & trading at 52 week lows - why ?


#17

No idea about level stuff. I don't track price movements frequently. Will visit my hypothesis after 2-3 years. I will hold this till then.


(Vishnu Ch) #18

CONFERENCE CALL - from Capital Markets

Focus on the gross margin growth

The company held its conference call for discussing Q4 and FY16 results.

Key highlights

  • The net sales for quarter ended March 2016 grew by 7% to Rs 197.5 crore while net profit de-grew by 50% to Rs 7.2 crore. OPM declined by 263 bps to 8.4%.

  • The net sales for year ended March 2016 grew by 3% to Rs 780.3 crore while net profit de-grew by 37% to Rs 23.36 crore. OPM declined by 81 bps to 8%.

  • QoQ sales growth seen in FY16 on back of investment in distribution. The company has added 200 salesman.

  • Gross margin for FY16 stood at 24%. The mgmt said that it will now focus on the gross margin by driving faster growth in higher gross-margin products such as Ready to Cook popcorn, tortilla chips, and peanut butter.

  • Lower gross margin and higher A&P impacted Q4 OPM.

  • A&P FY16 – higher spend in Q4 seen.

  • Sundrop oil recorded 5% volume growth in Q4. For FY16, it posted 6% volume growth and 8% value growth.

  • Crystal reported 6% volume decline in Q4 and 14% decline for FY16

  • Foods business which contributes 22% of revenue reported healthy 18% value growth, excl. the institutional popcorn business in Q4

  • The company's bag snacks consisting of Act II RTE popcorn, Nachoz, Sundrop pnutz and extruded snacks clocked 87% increase in revenue in Q4 and 40% for FY16.

  • Bag snack grew 57% in volume in Q4 and 24% in FY16

  • Ready to eat pop corn volume grew by 3% in Q4 and 7% in FY16.

  • Vending corn business declined by 16% and consumer pack grew by 7%. FY16.

  • Ready to cook pop corn grew by 7% volume and 4% value FY16. The mgmt said that it will put lot of energy behind this category

  • A slew of launches in tortilla chips have led to keener competition. Parle's Mexitos and Fritolays Doritos are new players in the tortilla chips sub-segment. The mgmt is confident of its product and said that Act II Nachoz is very competitive, with competition priced at a 30-75% premium

  • Sundrop Peanut butter grew 31% in value term to Rs 24 crore. The smaller SKU now accounts for 60% of sales

  • In FY16, the company added 50000 outlets to its distribution reach. The distribution reach of Act II is 20000 outlets, while that of the newly launched Nachoz is 20000. Peanut butter had a reach of 40000 outlets.

  • Inflation in corn was 15% YoY in FY16. The company procures and holds corn inventory for 18-24 months. The recent drought in South Africa and rising commodity prices could drive higher corn prices.

  • The company would be paying the full tax rate in FY17.


(cool_raj) #19

Hi ,
So I was assessing the business growth for agrotech...
i was wondering there product mix does not seems to be used by common public
Like popcorn, Nachoz, Sundrop, pnutz ......Even i have never used these products nor i have seen that any of my freind using.

So Just want to understanf through Peter Lynch's way whether these products really has future prospects in terms of growth.Cos the product mix does not have any moat...


(Bhaskar Jain) #20

Which place do you live? Its pretty common to find all of these products in any kirana stores in any big city. Please don't judge a stock or company by whether you or your close friends are users of the company's products. I or my friends have not bought a Ferrari car -- does not mean there is no market out there for these cars.