Agro Tech Foods - A small cap MNC foods FMCG

(Sandeep Patel) #42
  • Flat sales in Q2Fy18. Operating Profit up 19.5% YoY. Net Profit up 23.4% YoY.
  • Improvement in OPM and NPM (best in last 10 quarters).


(Yogesh Sane) #43

Isn’t flat sales a bit concerning? after all the capex it is doing for so many years, top line is not moving, not just this Q but for last several years. Why all this capex not generating sales?

Growth in Operating Profit also due to cut in advertising which means future sales are likely to be flat as well.

(Sandeep Patel) #44

Couple of reasons (Source: Management commentary) -

  1. ATFL clocked growth in traditional trade and in modern trade. However, alternate channel trade was down by 500 bps in Q2Fy18. What is alternate channel? The channel that service government employees or ex-govt employee and receive benefit prior to GST which they don’t receive today. Or they receive today but are in process to figuring out how they are going to walk the whole system. In short, this channel is working through their own transitional pains. Will return to normalcy shortly.
  2. GST: ‘Accounting’ impact on sales growth. Around 150 bps impact. Comparable sales growth > Reported sales growth. This applies to all FMCG companies. Can look at HUL/Nestle slides to understand better. In Q2Fy18 companies are reporting revenue net of GST while Q2Fy17 it was gross.
  3. Softer oils prices in H1. Sundrop oil volume was down 1% but revenue was down 5% YoY. Crystal oil volume was down 2% but revenue was down 7%.
  4. Edible oil is a commodity business. Has low entry barriers. Any new entrant can spend money on advertising and gain market share. Couple years back Adani did it (Fortune Oil). Then Emami. And now Patanjali doing it. Also absolute amount of space edible oil command today in modern trade is significantly lower than 5 to 10 years ago. Number of shelf devoted to edible oil has halved. It is only going to reduce further. There is growth but at bottom. Migration from loose oil to packaged oil. Can’t smell money there. You can make money through scale. But can’t make money too much. Also consumption pattern is changing. With increase prosperity, cooking is coming down. People consume lot of ready to eat snacks today, but consume less packaged oil. In short, can’t smell much money in edible oil.

I think ATFL should be judged on how they perform in foods business. Peanut butter revenue up 70% and Act II Ready-to-Eat revenue up 46% YoY in Q2Fy18. Foods business reported growth of 20% this quarter. Foods share of the business rise up to 27% this quarter. More Indian snacks coming under Sundrop brand in next 6 to 12 months. ATFL has increased distributors by 20% in last six months. If they are able to do the same in next 6 months means 35-40% increase in a year. That is a biggie. Basically, as product portfolio increases, distributor traction increases. More distributor, means more city/town coverage. Ultimately wider coverage will result in sales growth in days to come.

Advertising and Promotion expense is lower by 3 cr this qtr YoY. 10.8cr v/s 13.8 cr. This reflect two things -

  1. Prior year includes service tax. This year the tax has been passed on. 1 cr gap on account of this.
  2. The balance is media spending reduction as a consequence of the lower sales in the alternate channel. Basically moderated it because this is certainly the business that is not going to come this quarter. As and when alternate channel business recovers, ATFL will reinstate this money. We can expect to see that the gap will start to close as we go forward.

(s) #47

Only thing they can vouch for so far is their RTE popcorn a far cry from what it could have done in past 6 to 7 years. Stock languishing as the management is bz with Conagra losing marketshare in US. It did create good infrastructure but ITC after selling this business has moved up the ladder chain much faster than Agro tech. It has potential will it create the magic only time will tell.

(Vivek) #48



Hi, Is there any concrete news for move for more of 40% in recent months?

Or it is just discovery of the stock having a huge potential in packaged food segment. Next frontier of FMGC

Still below <2000 cr market cap and subsidiary of one of largest American food companies.

(s) #50

Company has been indicating stabilization of existing launches and has indicated new launches but that has been food for thought for over a year. Aggressive building of plants across India , expansion into neighboring countries is a indication of company trying to dig deeper for a long haul. Apart form this there is no publicly available information

(Vivek) #52

Equity Intelligence has entered the stock today [email protected] Rs 650/-


Interesting. Let us see how this plays out. Still an undiscovered story.

Something like a local Prataap snacks has Mcap which more than twice of an innovation led food company AgroTech which has national footprint.



(Susindar) #55

It’s interesting to note that RJ got tired of this theme playing out and actually reduced stake in the recent quarter. While the expectation and price have always been high in this stock, the execution was very poor over the last 10 years and will be interesting to see how it will pan out over the next 10 years.

(Dhwanil Desai) #56

From activity levels, ATFL looks like a deserted story in the market :grinning:

I have been following this company for some time and recently attended their analyst meet held in Mumbai. Here are my notes

Agro tech foods Investor day meet notes:

Gross margins:

In last few quarters the gross margins have been impacted due to combination of GST + hike in import duty in oil business and company’s philosophy of playing safe in terms of anit-profiteering clause (they did not increase prices even though they could have taken price hike due to import duty hike as it would have been out of anti-profiteering perview). Total impact of this is around 1.5%. However, in oil business the worst seems to be behind us and things should look up from here on

Ready to Cook popcorn:

Ready to cook has grown at lower rate- one because of much larger base and second we did not support it with enough ad spend due to profitability pressure. However, going forward, we will see some ad support coming in for this category that will help us do better growth going forward. We are also planning to launch one more ready to cook product (apart from popcorn) that will help in growth too. Growth in this category also needs to be accompanied by distribution expansion as this category has the highest retail store coverage among all categories.

It is very difficult to do innovation in Ready to Cook popcorns. However, we have continuously added new products/flavours and some more innovations are lined up in next few months too. This puts us in pole position as we contunue to bring new/innovative products and dominate the category. We have more than 90% market share in ready to eat popcorn. With our launch of DieT popcorn, we have also expanded our offering to health conscious consumers. It is important for us to continue to innovate and fill the need-gaps in the category to ensure no new player enters the market and takes away market share piggy backing on the new product introduction.

On the Spreads: It is a very large and diverse category and we do not intend to compete with most of the large players head on in their well established market. Rather, we want to carve out niches where we are very strong and create right to win. Peanut butter is one such category. However, peanut butter is just an entry into a category of nut based spreads. In fact, in near future, we will launch more nut based butters (almond may be Cashew) to expand our product base.

Today, Chocolate spread + nut based butter combined as category is equal in size to that of Jam as category. This was unthinkable 5 years ago. Jam has been part of our life for last 25-30 years and chocolate/nut based butter has only come in last 5-6 years and still have gained this king of scale. This clearly indicates rapid and perceptible change in taste/preferences. We want to dominate the nut based butter category and peanut butter was a part of design. Even though there are new players who have entered in category, we reamain the most profitable and largest players in the category. According to our internal judgement, our market share is more than 50% in this category. In fact, today all other players are looking at us so we increase our pricing as they are losing money on peanut butter. However, we are not raising prices as we are making enough money even at this prices so why give benefit to competitor when we are making decent money?

Entry into chocolate spread: We may consider entering this category in future but again we will not taken on a well established large player in this category head on by competing in me-too product. Hence, do not expect us to launch chocolate spread to compete with Nutella. However, what we will definitely look out for is considering our expertise in nut based butter and chocolates (that we are going to launch soon), can we create products like dual spreads where we can combine chocolate with some other nut based spread and enter the category. Such product will give us distinct competitive edge as the pure chocolate player will not have ability/efficient cost structure for nut based spreads and hence we will be able to capture the market to large extent.

Ready to eat snacks:

Total category for ATFL has reached 50 Cr sale today however it is not yet profitable. What we have done in last 3-4 years is we have built the distribution network, the product portfolio and manufacturing capability. It is very important in this category that we have a large base of mass products (Rs 5/10 price point) and then build premium product on top of the base of the large base. Even though the base products do not earn company enough money, it earns money to the distributor and hence it is critical for success of this business. As we have now decent base for 5/10 rs product in place, we have started building out premium products on this which will help us earn margins.

Today we have 950+ distributors and 400000 retail touch points which are serviced. It took us many years to build this base. In fact, according to our knowlege, In last 10 years, ATFL and Ferrero are the only two new companies who have built such reach of 400000 touch points. This sets up very well for future. In fact the cost of reaching to touch points has been increasing significantly. For every incremental 100000 touch points, one has to spend 7-8 crores and this cost is increasing by the day.

In Nachos: We have end to end capability to manufacture nachos right from sourcing of corn to making our own packaging. Same thing goes for peanut butter. This sets us apart from competition as all others are not as efficient as us on cost side. Thus, our cost structure has become our advantage. Most of the other players continues to do this through contract manufacturing and hence their cost structure is much higher. We think this gives us “Right to win” in the category. Moreover this category itself has tailwinds and has been growing and expanding its we are benefitting from that as well.

In RTE : it is important to recognize whether one follows a pure retailing model or a distributor led model where typical supply chain is bypassed. Companies like Pratapp, DFM are not pure play retailing model. Direct model works for products upto ticket size of Rs 5/10. However, in order to sell premium product, one has to do old style retailing which is takes time to build and grow. ATFL as a company, want to be present across categories and make products that are appealing to mass as well as affluent and typical ticket size is much larger than possible in direct model. Thus, we have chosen to follow retailing model. In direct model: it is very easy to grow as response times are much lower and hence many of these companies have grown very fast. In retailing, one has to arduously build network over a period of time and hence growth may not be spectacular as such in the early years.

We have also strated experimenting with direct model for our products with ticket size of 5/10 to accelrate growth in that segment. However, it is limited to that only and for rest we continue to rely on pure retailing model.

Chocos: In bagged snacks, we recently introduced “Chocos” which are chocolate cereals but as bagged snacks. These are the kind of premium products in RTE category we want to introduce to get our desired margins. Our thought process here again is : Do we have right to win in this category? IF you look at this category: we compete with Kellogs and Nestle in this category. Kellogs is a dominant breakfast cereals brand. However, in last few years, they gave realized that the market for breakfast cereals is degrowing or not expanding. Thus, they have been trying to offer products that is all day snacks. We think “Chocolate/flavoured cereals” as all day snacks is a good opportunity that we can capitalize on. We have few advantage over large players like Kellogs

  • Kellogs has much lesser direct retail touch points than us as breakfast cereals is still largely a modern retail driven product and hence smaller Kirana stores don’t have it. Their coverage is around 150000 while we have coverage of 400000.
  • Secondly, the way bagged snacks and boxed snacks works is completely different. Right from packaging to cost structure to distribution. We know bagged snacks game inside out and are much better positioned the competition.
  • Lastly, we have good understanding of the “chocolate” part and also we have strong supply chain capability on “corn” side due to our exposure to Nachos. Thus, combing these two expertise, we think we can make a superior or at least equivalent product to that of competition at much lower cost. This puts us in pole position.

New Products:

Company is likely to expand spreads category by launching new nut based butters stregthening product portfolio of peanut butter. (Rationale covered earlier)

Recently launched “Chocos” in ready to eat segment (Rationale covered earlier)

Likely to enter “Chocolate” segment. In this case too, company doesn’t intend to take on Nestle/Cadbury head on as such. It wants to carve out niches “on the sides” in bagged chocolates segment. Bagged chocolate market is around 1000 cr and is mostly dominated by unorganized players. All the advantages of “bagged snacks” will come into play for company. In addition to that, we have developed good competencies in supply chain and handling of “nuts” due to our presence in nut based butters. We would like to leverage this to compete. Look at the Risleys and how they dominate nut based chocolates. We would like to focus on such differentiated niches.

Unlike many other categories, chocolate as category will require some ad support. Logistics also will need to be though through as cold storage may be required too. All these aspects we are evaluating and addressing.

Both cereals and chocolates are world over high margin categories. If you look at companies like Mars/Kellogs, they are immensely profitable. They make 40-50% gross margins and hence these products as they scale up will help us gain margins.

Few other interesting points

  • Current manufacturing capacity is sufficient to reach upto 450-500 Crore turnover and we may not need to put in any additional capacity. Typically, the asset turn for manufacturing is 3

  • Recent fire in one of the plants: It was manufacturing Nachos and Chocos. It will take 5-6 months to restore everything to normal. There won’t be impact on sale of Nachos as company already has a contract manufacturer who used to manufacture Nachos for them. There the production has been increased. Chocos- we have just launched so not much of disruption of supply but the scale up will be postponed by 5-6 months.

  • We wil continue to remain in “Indian snacks” slelectively. Though these categories may not provide margin, they are important from distributor’s profit perspective.We will again focus on making where our stregths lie.

  • As we reach 500 crore for food business, P&L will look very different and better.

  • Oil business is tough- still it provides valuable cash flow to the company. We will continue to do it prudently without investing much in it.

  • Sundrop brand has lot of value and we would not like to dispose it. IT takes years to build brand and tinkering with brands in general not a good idea. We have two separate brands that gives us more flexibility/resilience as business.

  • Parent is quite supportive on our endevours however all decision making is done by Indian management and BoD. Parents have not been pushing products from their basket to us. We evaluate the attractive opportunities from that and if we find a good fit, we go ahead and launch it in market

  • Royalty: It is a very small amount as of now. However, if there is any change in that structure, rest assured, we will inform the stakeholders well in advance

  • Open to look at inorganic opportunities, however it has to offer something niche/unique which we don’t have and should have some scale. Anything less than 100 Cr doesn’t attract us as we are organically adding 50 odd crores every year to our food business. We are not averse to paying value for someone’s effort in building product/brand/distribution network. At the same time, we do not see such opportunities on the horizon.

  • We continue to believe that the growth through “channel partner incentive” is one way route to hell and we will not engage in it. On the Ad spend too we will be judicious. We do not want to spend 13-15% of topline on ad to grow. At the same time, we do acknowledge that current level of ad spend is less than what is required and hence the proportion should go up. We will do so as our P&L allows more. We are not PE funded guys where we can burn money and buy growth, we will spend based on what our P&L allows.

  • As the food business grows from 200 crore to 500 crore, the pace of introduction of new categories/products shall go up.

My Views:

  • Across the listed companies in the foods business (barring well established large FMCGs), there are almost no listed companies other than ATFL that has an ability to create new category/sub category and grow it from scratch. All others in my opinion, are competing in “me too” products that has limited entry barriers and ability to capture large market share. What makes ATFL unique is that unlike most of the listed players (Prataap, DFM) , they are not costrained to one category. In the early years they are already into spreads/ready to cook/ bagged snacks and will soon enter chocolates.

  • I have met lot of people who are utterly disappointed with the rate of growth of the company in last 7-8 years and probably rightly so. However, on the other hand, these 8 years have been spent to build the base for the next 10 years. They have established 6 manufacturing plants, 400000 touch points and created two categories. It is not appropriate to extrapolate the growth in last 7-8 years with next few years. My sense is the growth trajectory is likey to change soon and they are nearing inflection points.

  • There exist significant room for GM expansion as they move up value chain and launch premium products. This combined with operating leverage that exist in manufacturing and existing distribution network, mean significant margin expansion opportunity is available. In last one year, all new products they launched are high gross margin products (Diet popcorn, Caramel blissp popcorn, Peanut butter with jelly, Chocos and potentially chocolates) clearly indicates that base has been made in terms of product portfolio and now company will develop products that sits on top of the base.

  • One must not look at the company from headline numbers and focus on “food only” numbers. That becomes key monitorable.

  • The business architecture that has been built is resilient enough and has been built with long term aspirations in mind. Company has take hit on P&L and growth both for building this architecture. However, it is a very robust architecture and can sustain itself over next 10-20 years. I personally, liked the approach as my impression is that the “long term” view was always considered in most of the cases truming over shorter term gains by alternative choices.

  • For the first time (as far as I remember), company is intending to change growth trajectory from 20% to 30% by giving tangible actions for it (Refer to presentation). I think that is a clear signal that accelaration is likely to be there in business.

  • Current view of management (right or wrong only time will tell) is that they do not want to burn significant money to grow a category either by ad spend or incentives. Hence it will spend as much as it is allowed by their P&L. However, as the current categories mature and large, they will bring cash flows that will allow more flexibility to management on spending money to grow. Till now they were only relying on oil business’s cash flow to grow food business. Once the food business brings positive cash flow, their ability to introduce new categories and support categories grow incrementally.

  • ATFL will enter niche areas where they have ability to capture and dominate market. Thus, they may not target 10000 crore category that is already domnated by large players or is intensely competitive. I think this is a very smart strategy to create entry barriers for business and good for longevity and stability. They also seem to be thinking that they will cross leverage capabilities to create combinations/skill set that is unique (Chocolate + Nuts+ bagged snacks; Chocolate + corn + bagged snacks) and hence gives them right to win in market.

Overall, I think ATFL seems near to inflection point. It is very difficult to get FMCG company at sub 5000 Crore market cap which has global pedigree, innovation capability and strong margin expansion possibility.

Disclosure: I recently added ATFL during correction. It is a reasonably sized position in my portfolio and hence my views are obviously biased.

I am not an investment advisor and hence this is neither recommendation and/or investment advise. Request all to do their own due diligence and/or consult investment advisor before taking investment decision.

(Bhaskar Jain) #57

Many thanks for the detailed note.
Link to the company presentation -

I have been holding ATFL from few years and added some recently but very illiquid script. I like the fact that they created and grew the popcorn category. They can surely replicate the same in the food business even though there is lot of competition. But I feel they are not aggressive at all and tend to play very safe. So one should expect only slow growth. It’s a poor man’s Nestle.


Agree. It has been long wait for me. But if you shut out noise of stock price, you definitely want to own such a business which is in early phase of growth.

(Bheeshma Sanghani, PhD) #59

Thanks @desaidhwanil for the detailed note and additional insights.

As I understand from your note, AR and various reports - ATFL is creating a base for the existing and new categories at lower price points. Its focus currently is the general trade channel. Would you be able to comment on the margins given to this trade channel. In addition, freight charges are heavy to supply to this channel at a pan national level and going forward are likely to be a meaningful % of the costs. So while gross margins may increase, the ebit % could take some time to move. Would these be valid concerns?

Also chocolate is a difficult category to operate so I am not able to fully understand the rationale behind it. If you could throw some light it would be great. Thanks again for the insights.

Some additional points (most of them covered by author in his note though)


(Bheeshma Sanghani, PhD) #60

Flattish results