Thanks Akshay for introducing this company. I think AA could be at a possible inflection point in its business life cycle. This is how I see the story; (Apologise for the bad formatting - don’t post often)
AA is the leader in the micronutrients space. One of the biggest priorities/challenges worldwide is to increase the yield per acre of arable land. Arable land is always in limited supply so governments of every country are trying to figure a way out to get more from the same space. This makes the business a very important one, giving me some confidence on the sustainability of it. As per my understanding of the business, it has a small but expanding moat. The distribution network has been painstakingly created. The management has, over the years, gone state by state, village by village to create awareness. It now has a very large distribution network, covering almost every state in India. Farmers did not know what they had been missing out on by not using micronutrients. This has been a very tedious job. There is no easy way for even a large established player to replicate this. Farmer education requires time, money and effort and AA clearly has the headstart here.
One of the biggest problems the company faced was that it has to customize its offerings for every state. So the number of SKU’s needed were extremely high. Also they received money at a later date, even though sales had been effected. These factors put together, made it a working capital heavy business. The success of ‘Flash sales’ could change the balance sheet of the company forever. For the first time in the history of AA, it has an order book to work with. As per the disclosures on the BSE website, they targeted a 100cr orderbook but ended up with more than 200cr. Being present at the event, I witnessed first hand how a Flash sale works. Apparently the event has been picked up by the Limca book of records as the largest order book by an agri company in half hour. The event was created to offer good deals to distributors of every state in return of advance bookings. Also they were given due recognition with their names being announced and awards being handed out to them. They were about 400 people from across the country. One could sense a closely bonded community of people in the room. I decided to speak to some of the distributors. Few of them said that people ask for a Aries product by name and that the products were indeed of great quality. Since micronutrients have a very favourable cost to benefit ratio, it would be easier for brands to sell over generic variants. The overall sense I got was that the distributors were happy to be associated with Aries and they have been treated well over the years. While the two main products are agromin and chelamin, a distributor mentioned another product called Nobomin (not entirely sure if this was the exact name), which he mentioned has great potential, given that i has applications across different fruits and vegetables.
I also sensed from the distributors that the internet and smartphones were being of great help in recent times. Apparently, farmers have created “WhatsApp” groups to share information in their local language, and DIY pictures…Apparently even orders are placed through the group. The main distributor is like a doctor who prescribes the ‘kit’ needed for individual plants/soil conditions etc. Lack of awareness of micronutrients has so far been the biggest issue. This sort of communication would help bridge the knowledge gap and help create the awareness. Add the help from the new direct benefit schemes, etc. Also I understood that since Urea has been subsidised by the government, farmers tend to overuse it. This spoils the soil and also plants do not end up getting the other nutrients they deserve…In case, the subsidy on Urea is ever lifted, it will greatly benefit AA…
The last two years has been bad for the entire Agro chemicals industry. Monsoons have been really poor and erratic. I feel not a lot needs to happen for the company to post better results. Combine Flash sales, better monsoons, SKU rationalisation, new products, government schemes, social media age etc. I expect one out of these factors to turn positive and/or reach a critical mass. Maybe some sort of lollapalooza outcome. We, as investors should get this answer pretty soon. IN this year itself, the 200cr. flash sale revenue will be recorded, though Im not quite sure about how it would exactly work. Maybe some orders are for the longer term and the company may amortise it over the quarters.
I have not yet spoken about the other things the company is doing. It has a white labelling subsidiary, does some B2b business abroad and sells some other type of nutrients. Will keep it for later since these activities might not be too important at this juncture (at least in my mind)
Coming to valuations, it becomes a little complicated since the track record, at least in terms of the balance sheet, is not too great. to give some perspective, most agri-related companies command a double digit multiple. We should not compare valuations to that of fertilizer companies, since none of the products come under price control/regulations of any sort. They are all brands bought at the farmer’s discretion. Currently it trades at 3-4 times last 2 years average OCF and 0.4 x sales. And my bet is on an improving balance sheet which should make the ROE’s look much better…There is some evidence of an improving balance sheet based on last 2-3 years, though that is primarily from SKU rationalisation only. Waiting for the impact of Flash sales
Views invited, especially highlighting the negatives of this company