Couple of reasons (Source: Management commentary) -
- 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.
- 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.
- 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%.
- 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 -
- Prior year includes service tax. This year the tax has been passed on. 1 cr gap on account of this.
- 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.