Agro Tech Foods - A small cap MNC foods FMCG

Stock Opportunities Not-so-Hidden Gems
73

Hi Dhwanil,

Great questions on the Q2 conf calls and very clearly answered by the management. So going back to your earlier thesis, with 50-60k store additions every year, and larger contribution from the food business, add to that the new launches in the spread category management talked about, company does seem on the cusp of transitioning in to a decent size player in the FMCG space. Corp gov was never an issue here and the commitment from management to continue to launch new product in spread and RTE category should warrant for higher premium and hence may re-rate the stock.
Would like to know your thoughts and also if you are planning to attend the analyst meet in Nov ?

Disc - invested and is part of my core long term portfolio and even added recently when the stock was quoting at sub 500 levels.

PS- RJ has been adding to his positions ( although nothing significant compared to his overall pf ) for last two consecutive qtr.

3 Likes
74

@ramdhawad,

I continue to feel that the company is at an inflection point and it is demonstrated on different metrics. One of them is that in current quarter, GM from food business was 43% of total company while food contributed only 1/3rd. Similarly in the span of one year company will be launching 4 new products which has decent market potential and are not variants. If you look at the history of the company, In all they have launched and scaled up 4 products (Ready to cook popcorn, peanut butter, nachos and extruded snacks) in last 10 years. This to me is a good lead indicator too. In all I continue to track and I feel the thesis remains in place.

I intend to attend the analyst meet if it doesn’t clash with my calendar. Will put up the summary if I attend the same.

17 Likes
75

I wanted to check the quality and availability of their Ready to cook pop corn and can say it is really good and has different variants. My son who is five year old and like wise his friends liked the taste got thumsup from them as well. Tasted there nachos its good as well but high priced.

Disclosure - Invested for tracking and studying, No trade since last 6 months.

76

Hi Dhwanil,

Have you compared the scale up of Nachos and Peanut Butter of Agro tech with its peers. I think they have messed up big time. It cannot be called a scale up in anyways…They have been a late MeToo

3 Likes
77

Hi Ashwini,

Yes, I agree that the scale up in both the product categories is less than expected. However, at least in terms of peanut butter, we should also look at it from the acceptability perspective by people in general. Peanut butter as category is very new to India and is still largely restricted to afflent/mass affluent category. Having said that I would have liked to see them do more awreness campaign and goinf aggessive on ad spend to expand the category and take the most advantage of it. Also, in last few years there are many players who have entered and gained market share but Sundrop still commands 50%+ market share in that category.

Nachos is slightly different in my view. Here ACT II was never a category creator. Cornitos was the category creator and still remains market leader. Dorritos which is a world leader in Nachos was the second entrant.and is close second. ACT II is playing the mass market game here and is competing on price. Not sure dominating market share is possible to achieve here However the category itself is growing fast so the growth shall continue and they will remain the 3rd largest player for a while (Mexito and Salasito are distant fourth and fifth is what I feel).

Even on newer products except for redy to cook corn, in all categories they are entering ares where they are not category creators and they will have to compete on cost/prices to gain market share. Hence I do not expect them to gain big market share in a short while.

Having said that what I feel is that from business economics perspective, 3 things are happening

  • They are getting into categories where inherently GM are higher (Chocolate spread, chocolates,breakfast cereals). Moreover with food business size growing overall GM at company level will inch up too.
  • The fixed cost of distrribution and overhead will be better spread and hence operting leverage is bound to play out
  • Lastly, larger distributors will get ineterested as the company has a larger product basket and the ROI for distributor is much better as they can push multiple products down the channel. This generally is a good tipping point in FMCG business is what I have come to understand.

So I will monitor the scale up in new products and how it is playing out on the above 3 points going forward.

19 Likes
78

I attended the Investor day meet on 2nd and here are the notes from the meet

  • 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

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • ATFL’s cost structure on cocoa spread is very good due to inhouse chocolate manufacturing capability right from processing cocoa seed.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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).

  • 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.

  • 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.

  • 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

32 Likes
79

First of all thanks for the great in detail write up. Really appreciate your inputs. The above sentence seems small but has huge implications. Sometimes impatient investors, including me, want companies to expand, grow aggressively and want to see the products, new launches soon everywhere…but now above sentence clearly makes us understand how a company with real long term vision thinks and acts.

2 Likes
80

My notes from the ATFL Analyst meet. Dhwanil covered pretty much everything.

* Ready to Cook

	*

Until last year only Popcorn. From last quarter entered Sweet Corn
*
Supply chain for ready to eat would be very different from ready to cook snack
*
YTD -Volume - 9%, Value - 13%
*
Volume growh in quarter 2 20 was 12% and value was 14%. The entry level product of INR 10/pocket is doing very well
*
Ready to cook popcorn can grow 13-15% market has some momentum
*
Vending business is about 2% of the business- not big, don’t want it to be too big
*
Ready to cook pop-corn is around 140-150 Crores
*
Why sweet corn

		*

2 Major corn producing areas, - Gujarat, Pune
*
Currently no good product which has good shelf-life and is affordable
*
Existing brand - TADA
*
Real competitor - Frozen Sweet corn. - Price point is 200/Kg
*
Co feels - atleast 50% of the ready to cook popcorn in terms of size. (70-75 Crores)- can be even bigger
*
This category the co believes is similar to what honey is for Dabur. 15 years back Dabur did a major distribution excercise
*
Have supply chain advantages- freight costs is low
*
Getting good response in Punjab and Haryana
*
Current product is plan-vanila, but the real money is made in premiumisation, variants. The same thing was true in Popcorns.
*
ConAgra has an extensive portfolio in ready to cook segment. ConAgra acquired a company called Gardene Foods. Which is into plant based meat.
*
Ready to Eat snacks

	*

Ready to eat Popcorns - largest in terms of distribution. This product is around 20-25 Crores. The largest guy in this business is around 30-35 Crores- based out of Gurgaon. This segment will grow, and we have a very solid positioning. This segment has grown across the world, India shouldn’t be different. Caramel Bliss is the most premium product.- would be less than 10% of the ready
*
Extruded snacks -least competitive advantage in the company’s portfolio
*
Act II Nachoz - supply chain issues are there.
*
Bag snacks can become tough if we have to travel the product is ~ 800-1000 KMs
*
Order of priority - Ready to Eat Popcorn, Nachoz, Extruded Snacks
*
Read to eat Popcorn - 1,00,000 touch points.
*
Spreads

	*

Market share of 35%- more than 2x of the next closest competitor
*
Chocolate spread is 180 Crores category - entering that
*
Need to grow distribution and invest- the segment will grow
*
After chocolate butter - will do almond butter and cashew butter. Won’t get into jams and honey
*
Parent company has a lot of variety in dressing
*
Revenue per kilo is better in chocolate than peanut butter
*
Q4 onwards should have good contribution from chocolate butter
*
Breakfast Cereals

	*

INR 2500 Crore category
*
Visible competitive advantage - cost superiority - in-house manufacturing. Product quality is way better than peers
*
Will enter Granola and also other extruded breakfast products
*
Category is a very retailing oriented distribution category
*
25,000-30,000 stores presence
*
Chocolate Confectionary

	*

14,000 Crores category
*
Intend to be leader in nut and seed based confectionery
*
Low sugar category
*
Edible Oils

	*

Crystal is around 130 Crores
*
Sundrop is the rest- of this 35% is the contribution where profit margins are highest
*
Other Points

	*

Have been working on chocolate since 2014.
*
Current portfolio is good enough to take us to 500 Crores
*
Have spent 150 Crores of food machinery so far, very slow to ramp up
*
Our strategy is to build own and price it competitively and then slowly improve the margins by variants and premiumization
*
Spend 55-60 Crores on sales organization - this is a must for a company if it needs strong coverage. Most companies cant afford it.

15 Likes
81

Hi Rohit, In the earlier posts in this thread it is mentioned that their market share in peanut butter category is 50% and in your post you mention

Isn’t this bad that their market share has fallen drastically and rather than mentioning it as 2x of closest competitor they should talk about why their share in this category has fallen from 50% to 35%
Also,

Many companies have already entered cashew and almond butter spreads range and they have not yet started. Isn’t this lethargic on their part?

1 Like
82

[Agro Tech Foods Limited: Rating outlook revised to ‘Negative’; ratings reaffirmed]

https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Agro_Tech_Foods_Limited_March_02_2020_RR.html

83

This company has been in my watchlist since ages as I’ve been waiting for its margins to improve to a “FMCGesque” 2 digit percentage. With this below announcement regarding increase in royalty, the end isn’t in sight!

https://www.bseindia.com/xml-data/corpfiling/AttachLive/3e55b8ee-22f1-4546-b37f-fc30e46fffeb.pdf

Excerpt:

"Currently, the royalty is being paid at an average rate of 1.6% of Net Proceeds of Sales for all Products manufactured, marketed and sold with the brand name Act-II. This will now be revised to 2.5% of Net Proceeds of Sales for all Products manufactured, marketed and sold under the brand name Act-II with an additional 1.75% of Net Proceeds of Sales for all Microwave Popcorn Products with brand name Act II in respect of the use of the Licensed Know-How. "

For comparison, Nestle India pays a royalty of 4.5% of its net sales. As per CLSA estimates, every percentage change in royalty impacts earnings by 4-5% for companies such as Nestle India.

12 Likes
84

Interim quarterly update:

1 Like
85

Adjusted for roll differentials, Corn prices are the lowest in more than 50 years.

86

I am positively suprised by the Q1 results. Ready to cook segment has shown excellent value and volume growth in May and June. Ready to eat segment the company says is consciously down because of their priority in manufacturing…any one can throw more light on this statement from company?
Overall foods segment was very resilient and spreads also came back strong. Edible oils were not that great because they are not deep into premium options…
I was positively surprised by the ready to cook and spreads segment growth.
Not sure how further progress would take place as their product lines are little off beat for ordinary indian consumers…
I understand they have been working on distribution etc. And also most of conagra parent products are ready to eat (pls correct me if wrong) although in India they are focussing on local products as per local tastes and priorities so far…
Disc. Hold a small position in core portfolio. Views maybe biased and not a buy/sell recommendation.

87

Impressive growth indeed and if it was not for the subdued performance form the edible oil segment ( which has been the case for quite some time now because of the clear intent from the management ), the picture would have been completely different.
On RTE, yes it was company’s conscious decision to focus on high margin RTC segment for this quarter as they had limited resources ( labor and manufacturing capacity ) because of the locked-down and they wanted to channelize all of those resources on their RTC segment where they are clear leaders instead of the low margin ‘me-too’ category of RTE segment.
Please note the reason company is in the RTE segment is basically to compliment the RTC and spread business allowing them to have scale across supply chain in manufacturing, warehousing and final distribution resulting in easier acquisition of new distributors / consumers, providing volume growth which eventually will be margin additive over long run.
Another reason for this temporary shift in focus on RTC was because globally there is an increasing trend of RTC consumption.
overall company seems to be on the right track and walk-the-talk by shifting their focus on food business and moving towards their stated objective of foods contributing 50+% of revenue ( currently around 34%) thereby becoming self sustainable and reducing dependency on cash flow from edible oil business. We can see aggressive marketing and advt spend on foods business once they reach that inflection point. Today they are very conservative because of their BL size. Although they were among the very few to increase their advt spend in Q1 as the media rates were down because of less demand from other FMCG players. Smart move and the ROI was visible in the vol growth.
Food today is sub INR 300 Cr category for them, however with their focus and available capacity, not to mention the impressive growth in this quarter ( we will have to wait and see if it was because of panic stocking or sustainable ), it can easily be 500-800 Cr category in next 2-3 years IMHO.

Disc - Invested from sub 500 levels and is part of my core long term portfolio.

3 Likes
88

I understand clear intent of management is to focus on Foods business and increase its ratio, however, they have never mentioned that they will de-focus on their cash cow so far and not grow the edible oil or run it down? or have they?
In times when Saffolla is leading the race, Fortune is full-on on pushing their brand, Agro tech’s Sunflower - one of the oldest and one of the best brand at some point of time in past in edible oil - I would have expected management to use this opportunity to make full use of this golden brand at this stage. If they tried and it did not happen, then its fine but not making use of what they already have and what is in demand is a missed opportunity I feel.
Other than that, its indeed a very satisfactory result and performance! Thanks.

89

Allow me to correct myself. What I meant was, management have no intention to spend any additional resources on the edible oil business as they firmly believe that it’s a pure play commodity business with no entry barriers and brand have a little to no pull effect . Any new entrants can throw in money on promotions and get market share at the cost of low margins. Agro Tech is not going to do that. They won’t compromise on margins at the cost of increasing topline from this segment.
I feel they understand the cycle and will focus on this segment just for the right amount for it to self sustain and keep generating that free cash that it does today. Doesn’t mean they will defocus on this segment rather their intent is to have food to be such large portions of their business that contribution from edible oil should be insignificant. In other words they want to decouple their balance sheet from the volatility of commodity business such as oil and have more predictable business such as RTC and RTE contribute larger share to the topline and bottomline.

Cheers!
Ram

3 Likes
90

Management has indicated multiple times that they want to maintain Oils business at steady state levels on the gross profit levels. So they might forego some volumes here, but focus in on maintaining current level of profits if not more.

91

Forgoing some volumes is one thing and brand not able to generate comparable volumes with other leading players is another.
Disc. Invested and hence critical

92

Yes, the volume growth compared to say the competitors or the markets is poor. But given the tight cash budget for Agro Tech, either they push Foods or they maintain Oils business (something which will not add much value in long run).
So with such constraints, being able to maintain profitability is a good decision i’ll say.

3 Likes