It is in the business of manufacturing micro-nutrients and other nutritional products for plants and animals. Its largest business is that of adding mineral nutrients to plants. The technical term is called ‘metal chelates’. Two products, Agromin and Chelamin are the flagship brands of the company. Other products include fertilizers, sprayers and veterinary products
Barrier to entry is very high - The company has 6400+ distributors, 86000 retailers and reaches 1,99,000 villages in India
Macro trend - Increasing crop yield. Their products do to plants what vitamin pills do to humans
Company products are not under price control.
The product cost is miniscule in the overall scheme of things. So cost to benefit ratio is very high
Like any agro business, its fortunes are dependent on a good monsoon.
To counter this, company has introduced products in aquaculture, spray oils and is developing cash crops and horticulture for Rabi season (water availability here is known beforehand). Also increase in international sales will mitigate the risk to some extent
Very heavy on working capital requirements.
To counter this, company has reduced the number of SKU’s and discontinued some products that did not sell to a satisfactory level
Lack of awareness on part of the farmer on the benefits of the product.
To counter this, company has introduced an innovative marketing initiative ‘Flash sales’. As per the promoter this has been a game changer for the company
Market cap = 120cr, CFO = 30cr (2014) & 35cr (2015). Debt has slightly reduced over the last two years
Note: Vijay Kedia owns some 4-5% of the company
I have recently increased my position as I expect the company to benefit from the soil health cards scheme which are being issued by the government. The company had taken up this method themselves to spread education about soil conditions - check previous annual report- and now with the government running a very focused program to educate farmers about soil conditions - it is a big plus for the company. If monsoons are good - that will be a further boost to earnings in the near term.
Aries will benefit from trends such as micro-irrigation (water soluble fertilizers) and soil health cards ( balanced use of fertilizers and micronutrients)
Biggest issue with Aries was the high working capital requirement. This is set to improve through
Lower inventory (they have rationalized their stock keeping units)
Faster release of subsidies by the government ( where can i check concrete evidence of this? )
Last couple of years FCF from operations are 30 Cr + which is set to improve further. Market cap is 140 Cr + 120 odd crore of debt .
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
Contingent liabilities are small however if you read them, they stem from quality issue. Anyone going through the court process to settle that with the company has to be fairly certain or greatly affected by quality. They might not win but that’s not the point.
Accounts receivable days are quite high around 5 months (I dont understand distributor model so perhaps they are alright after all)
Interest cover is quite low - I wouldnt worry too much in normal circumstances however with banks coming under fire lately I imagine they would be more diligent. My worry is if the company would easily be able to refinance. If not then the company will really struggle to maintain long debtor terms
I re-checked on the contingent liabilities - What quality issue are you referring to?
Quoting from the annual report on Contingent Liabilities “Letters of credit / guarantees given / Bills discounting Rs. 5,392.48 Lacs”. This accounts for most of their liabilities
Also, the not so good situation of accounts receivable and high interest cover is explained quite well by Rishit in the post above…Please refer to it. As per my understanding, the balance sheet has been weak so far due to the high number of SKU’s needed and the absence of an order book
I am referring to the below in the financials:
F Y 2007-08 - City Civil Court, Jalgaon/ Quality issue
There are 2 more similiar items
Even with higher SKU why does AR have to be high ?
If SKUs were reduced will that mean some inventory will have to be written off or those will be eventually sold. If inventory has to be written off, then profits this year wont be great.
I do not usually touch anything with that high interest coverage. In the bull market it does not matter but when there is a banking crises, which we might have, it will matter if the company survives or not.
Account receivable issue is being addressed slowly. Point is that even though interest costs are high - they have decent cash flow from operations . After paying the interest cost - they have more than 20 Cr cash released every year for past 2 years. So Im thinking such customers will be valued by banks rather than lose funding.
In the medium term - Interest burden likely to come down as - demand increases and the balance of power slowly starts shifting from distributors to Aries.
I confirmed with someone in their company that they will benefit from the soil health card scheme and that they have collected approx 3% of the order book of 200 Cr as upfront payment. Rest will be paid as stocks are picked up. So looks like company is looking at better days ahead.