I attended the Investor day meet on 2nd and here are the notes from the meet
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RTC category is witnessing health growth driven by higher consumption of content at home on OTT. This has been the trend worlwide and Indian market is no different. RTC has moved up from high single digit growth to double digits and it is expected to continue the same. One can pencil in 13-15% growth for RTC popcorn
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Introduced a new product in RTC category i.e. RTC sweet corn. We see this as potential product to take us deep in terms of hinterland and can expand our distribution reach significantly. We see a possibility of RTC sweet corn doing the same thing as Honey did it for Dabut i.e. increasing the distribution reach significantly due to the acceptance of the product across town/regions.
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RTC Sweet corn as a category can be at least 50% of the RTC popcorn category (around 120-150 Cr). This was the initial estimate that we started with based on our data from vending machine business (where corn was 50% the size of popcron). However as we launched product and talk to customer we see a possibility that the category can be as large as RTC popcorn and may even become larger.
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Primary competition for RTC corn will be from frozen corn. However positionig of RTC corn is different and so is package size and has higher convenience. It is a healthy snacks option for people. There was a question regarding about fresh corn available at street corners can be competition- management response was that two advantages that RTC corn has are - they are not perishable unlike fresh kernels and RTC corn can be made available in non corn growing states too.
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Currently RTC corn is rolled out in select locations. However, distribution reach will increase going forward. Company is keen to make the product available in as many stores as possible fast, however they want to be judicious in terms of roll out to ensure that later on they don’t face the problem of huge returns if there is any problem with the product. According to the management, in food business, new product is killed by overselling in early phase as it leaves little room for error/modifications and the writeoffs from product returns can be large. Hence ATFL will slowly and steadily increase the reach for sweet corn. Planned distribution reach for product is around 200000 stores (RTC popcorn is available in 300000 to 350000 stores) considering that it is 20 Rs pack.
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RTE Category growth in Q1 & Q2 was impacted due to packaging issues with the third party suppliers. However they are being sorted out and impact of that will be seen partially in Q3 and fully in Q4. After Unnao plant coming back (by end of FY 20), it will see further traction.
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Nachos market is seeing significant competition with recent launch of Balaji’s product of Rs.10. Both Dorritos and Cornitos have also reduced prices and realizations for them have come down. Category growth which was at 25-30% has slowed down to 10% range. One of the reason ofcourse is because the third largest player (ATFL) has slowed down due to supply chain issues. However that is only a partial explanation. ATFL has one of the lowest cost structure and well spread out plants to compete and give value for money to customers. Hence we expect good growth momentum as we resolve supply chain issues with third party packers and our own plant coming on stream.
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RTE popcorn - we are the largest national player (not by value but will soon reach there too) and we expect that we will continue to grow in this category at brisk pace. Even though there are many regional players who enter the market, they either remain local and pleateu out and then exit. One of the significant competitor PVR has taken a back seat in the market and spends have come down. As a category RTE popcron will continue to grow and given out brand, reach and cost structure, we will retain our market dominance at national level.
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Extruded snacks has been a weak link in out portfolio and we have not yet figured out a way to crack this segment so that we have a right to win. However, it is acting as nice suppliment product for distributors and helps them get good scale.
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Even though not in near future, over medium term we may introduce new products in RTE segment as the parent has very large portfolio of RTE products. We have to see which one fits for our market. These new products at times take a long time from conceptualization to market entry and hence if we start working on it now, the final product may be launched few years down the line.
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Spreads: Value growth has been lower than volume growth as proportion of 1 Kg pack is higher. We expect to grow peanut butter at decent clip despite competitive intesity increasing due to our product quality, cost structure and inhouse manufacturing. We will continue to add more nut butters and premium variants of peanut butter (one variant is peanut butter-chocolate spread). ATFL also will launch other nut butters (almond and cashew) soon.
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One of the major development in this category is we have entered chocolate spread category currently dominated by two multinationals Hersheys and Ferrero. However we think we have strong competitive advantage and more favourable cost structure to win in this space.
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Chocolate spread as category is much older than nut butters but is still 180 Cr category while nut butter is now 300 cr + category. ATFL believes the fundamental reason why chocolate spread as category has not expanded fast is because there is no sub 100 Rs product available and hence it has remained relevant for affluent class. ATFL intends to launch product at much competitive price and in 50 Rs and 100 Rs pack and it will expand the market. Another important thing ATFL is doing is that the chocolate spread is likely to have lower sugat content than existing products. There is clear trend world over for lower sugar consumption and same is catching up in India too. It is very difficult for existing players to change taste/recipe overnight and hence ATFL thinks it is an advantage for new players like them to play on lower sugar content.
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ATFL’s cost structure on cocoa spread is very good due to inhouse chocolate manufacturing capability right from processing cocoa seed.
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As a strategy, ATFL will not enter into Jams/Honey in spread category. However, over time they may introduce dressings as parent has large portfolio of dressings with them and that market has been growing in India.
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Breakfast cereal: Sudrop Popz has been relaunced since last quarter and it has received very good response. Management thinks that their product is far superior to that of other two competitors and is available at much better price point making it a clear winner. They seemed very confident of capturing good market share from Kellogs and Nestle in choco fills category.
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Last year Nestle spend 19 Cr on advertisement in breakfast cereal category while this year they haven’t spend any money. Thus it suggests they are vacating the space. Kellogs too has focused it’s energy on core products like corn flakes in recent times. Going froward niches will be dominated by players like ATFL. Breakfast cereal is a 2000 Cr + category and ATFL sees some opportunities to grow it’s portfolio due to it’s capability in extruded side, their ability to process nut/seeds and chocolate. However, ATFL is not interested in areas like corn flakes or plain vanilla oats where it does not have any competitive advantage.
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Chocolates: It is a very large market 14000 Cr+ dominated by Modalez. ATFL has no intention to compete with the market leader in milk/dark chocolates. ATFL decided to enter this category as they saw room for nut/seed based chocolates given their experitse in handling nut/seeds and their inhouse capability to make chocolates. This is an area where currently there is no large players. some exaples of such choloates are coconut chocolate, peanut butter based chocolate and all other permutation/combination of nut/seed based chocolates. Even if this market is 2-5% of overall chocolate market, it is large enough for specialized players like ATFL.
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ATFL started working on chocolate product in 2014-15 and it took 4-5 yeas for product to reach market. This demonstrates that for some products, the product development cycles can be quite long.
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Oil Business: ATFL’s appraoch remains same as to without spending too much money how to maintain current volumes/margins. Last couple of years have been tough for this business on margin side due to extraneous factors and competitive intensity. However, that is how oil business works. Key focus for ATFL in this business is to maintain it’s gross margins so the incremental margin from food business gets reflected in P&L.
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Not all oil business is low margin business. Out of 480 Cr sundrop business around 280 cr business has 25%+ gross margins. According to ATFL spending ad money over a commodity business with no entry barriers doesn’t make sense.
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In Q2, food business contributed to 43% of total GM for the company and very soon it will cross 50%. Once company reaches past this milestone, the volatitly in oil business will have lower and lower impact on the profitability of the company. We think we are reaching that stage very soon.
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10% EBIDTA margin: Our food business in last year delivered good margin growth however it was overshadowed by the margin challenges in the oil business. However as the oil business/margin challenges recede and contribution from food business keeps improving we see clear pathway to margin improvement over time. In next 5 years, our P&L will look very different as food business continues to scale up and profitbility improving with scale.
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Growth: Food business organically has been growing at 15% trajectory and that will continue to happen. On the new product side out initial goal is that we want each of the 4 new products to contribue around 1 Cr/month i.e. 48 Cr yearly. On current food business base of 240-250 Cr that is 20% growth. However, this will not happen overnight and we need to do work to ensure we reach these levels. However with current product introductions, we feel we are very well positioned to reach 500 Cr turnover and improve margins (As contribution from food business improves).
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As our margins expand due to food business GM being better thn oil and operating leverage playing out, we will have enough room to increase A&P and improve profitbility at the same time. We realize that we have spent lesser amount on A&P than we would have liked due to pressure on oil business’ gross margins.However as we get more room, we would spend more on A&P.
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Distribution: Currently, we have 1000-1100 distributors and we reach to 450000 retail outlets. Over few years we intend to reach 1.1-1.2 million outlets. This will require almost doubling our distributor count as well. However, with our current product portfolio, we see very good interest from distributors to get associated with ATFL. It was very difficult to get good distributors 3-4 years back.
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This year our focus is going to be on rolling out our new products across our network and execute our plans. Developing and launching new products was a much more difficult task, now marketing and selling products is going to be focus and we feel it is easier part compared to new product development.
Overall, I felt that they are waliking the talk on product development/portfolio expansion side. OIl business margins shrunk last year and hence their aspiration to reach double digit margins was not achieved and to get past that number, oil business margin will still play a key role at least for a year. 15-20% growth on food business looks quite doable. I personally feel that launching 4 new products in 2 quarters is no mean feat but it remains to be seen how many of them will scale up. I think we have to assume that only 2 out of 4 products can scale as the new product success ratio in food business is not very high.
Discl: Invested with small allocation