Agro Tech Foods Ltd: Established Market Position and Product Launches Should Support Next Leg of Growth

Summary

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• Diversified foods portfolio due to continued innovation and tight cost control initiatives should continue to act as principal growth accelerators.
• Agro Tech Foods Ltd has strong innovation pipeline across its 5 Foods categories. Plans are there to leverage innovation to deliver Foods growth.
• Sectoral dynamics and strong market position should provide needed support.

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Agro Tech Foods Ltd is public limited company, which is in business of manufacturing, marketing and selling food and food ingredients to consumers and institutional customers. It is listed both on National Stock Exchange and Bombay Stock Exchange. The company is affiliated to Conagra Foods, Inc. of USA, categorised as one of world's largest food companies. The company creates strong sense of ownership along with defined goals and roles which supports employees to execute results with sense of urgency, without sacrificing quality.

Growth Enablers of Agro Tech Foods Ltd

• Increase in Foods Share of Business: Net sales for FY20 were 1% higher in comparison to prior year with Foods share of business rising 400 bps to 31% of total revenues. Foods business saw new high of INR259 crore, with 15% growth over prior year because of strong growth seen in Act II Ready to Cook Popcorn and Sundrop Peanut Butter supported by new product roll out including sweet corn, extruded breakfast cereals, granola cereals, choco spreads and chocolate confectionery. Steady growth of Foods business exhibits continued solid progress being made to be amongst India’s best performing and most respected food companies. Owing to lockdown to check spread of COVID-19, manufacturing operation and supply chain was impacted in second half of Mar 2020. Being in manufacture of food products, which was covered under essential supplies, Agro Tech Foods Ltd has since then seen steady improvement in supply chain, with better regulator support and labour availability.
• Focused on Building Media Presence: Net sales for 4Q21 were 5% higher than PY, exhibiting largely volume driven growth of 40% in Foods. In 4Q21, Foods business saw its gross margin grow by INR8 crore due to volume growth. This offset INR7 crore decline in Oils gross margin as a result of higher input costs and actions taken to make premium end more competitive. Investments in media more than doubled up to INR16 crore in FY21 and these investments were up by INR4 crore in 4Q21. In totality, advertisement and sales promotional expenses were up by INR5 crore+ for FY21 to ensure continued media presence. In 4Q21, ready to cook snacks saw value growth of 48%, principally driven by volume growth.

• Capitalising on Sectoral Dynamics: Rapid growth of food industry continues, principally in 5 categories which the company chose to compete in, which account for INR53,000 crore and have seen growth at 15% per annum over last 5 years. Challenge in capturing profitable share of growth of industry is to have balanced portfolio spanning across multiple price points and multiple segments, enabling the company to have scale across supply chain – manufacturing, transportation & warehousing and final distribution. The company believes that with multi-product multi-price point portfolio there is an opportunity for growth, enabling acquisition of consumers and then volumes which are margin additive. Continued growth of Indian foods market exhibits an enormous opportunity for steady growth in revenues and profits. Powerful foods portfolio of the company enables representation in 5 fast growing categories – ready to cook snacks, ready to eat snacks, spreads, breakfast cereals and chocolate confectionery. These categories should be sufficient to power Agro Tech Foods Ltd into strongest food companies in India.
• Foods Business Should Lend Some Support: The company is approaching an inflexion point where natural profitable growth in Foods business should be able to more than take care of risks in edible oils business creating P&L where strict control on costs should enable improved margin to flow through to profits. Category choices that the company has made and relentless pursuit of revenue and margin goals on Foods business should help it achieve market share in Indian Foods Industry. Agro Tech Foods Ltd made an acquisition of land near Kolkata for seventh plant in India and 100% subsidiary is operational in Bangladesh so that rapidly growing market with population of 165 million people can be taken care of.

Performance of Product Categories

• Revenues from ready to cook snacks business saw an increase of 17% in FY20 because of volume growth. Introduction of sweet corn supported total category growth by 160 basis points, with popcorn business growing by 15% in terms of revenues. Entry into sweet corn category was successful and it should be a significant contributor in future. This category saw 50%+ growth in FY21 and first category to cross INR200 crores in revenue. Enhanced media spends supported in protecting share and enhancing growth.
• Revenues from RTE snacks business saw an increase of 7%, with category impacted mostly by lockdown in Mar 2020 along with issues with supply side on tortilla chips. Ready to eat popcorn saw strong growth with more modest performance seen in extruded snacks.
• Revenues from spreads business saw an increase of 17% principally because of 14% growth in base peanut butter business supplemented by additional 243 bps growth because of launch of sundrop cocoa nut choco spread. In FY21, base peanut butter lent some support in seeing strong growth, that was supplemented by launch of chocolate spreads & nut butters.
• In FY20, the company made its entry in both extruded cereals and muesli/granola categories by launching sundrop popz and sundrop nutrify. These products saw an excellent response and are better than competitive offerings besides their availability at competitive prices.
• In FY20, the company made an entry in count line segment of chocolate confectionery by launching sundrop duo. Entry was made through coconut centered offering and product saw excellent response. The company is proceeding to scale up packaging capacities so that it can leverage successful launch of this product.
• In FY20, the company maintained its focus on restricting 3% decline in sundrop edible oils volumes that was seen in FY19. This was somehow achieved with 1% decline in volume making 2% decline in revenues. Plans are there to manage edible oils category with lowest investments, enabling to help strong growth of Foods business.

Revision in Rating Exhibits Confidence

In mid Aug 2020, CRISIL made a revision in its rating outlook on long-term bank facilities of Agro Tech Foods Limited to 'stable' from 'negative' and reaffirmed rating at 'CRISIL AA-'. Rating on short-term facilities and commercial paper was reaffirmed at 'CRISIL A1+'. The company has an established market position and better revenue diversity. Pricing premium can be enjoyed by the company’s edible oil brand, sundrop. The company is focused on expanding revenue share of food business over last couple fiscal years as it continues to expand product portfolio.

The company has support from its parent company, Conagra Brands Inc. It has access to Conagra’s branded foods portfolio that also includes ACT II (popcorn). This has helped Agro Tech Foods Ltd to better position branded foods portfolio in India. Strong growth has stemmed from focus on ACT II product portfolio and adding of food products under sundrop brand.

Successful Launches Should Lend Some Support

In FY20, Agro Tech Foods Ltd used technology to maintain and sustain competitive advantage and provide high quality food products. There was a launch of peanut butter with chocolate and chocolate almond spread, specifically designed to give consumers option of healthy and tasty spread. There was a launch of sundrop duo. This was a coconut filled chocolatey product. The company also launched nutrify, an oats-based breakfast cereal and it launched shelf stable sweet corn having seasoning under ready to cook format and roasted chickpeas with seasoning.

Conclusion

Agro Tech Foods Ltd has a total market cap of INR2,37,234.79 lakhs and free float market cap of INR1,07,950.97 lakhs. When Indian economy opened after a lockdown in Mar 2020, strong uplift in operations of several companies was seen. Stock of the company has seen a strong recovery between 25th March 2020 to 25th March 2021.

Growth was principally stemmed from support of Indian government and improvement in demand and economic activities. Investors would have seen their capital grow by ~103.0% between 25th March 2020 to 25th March 2021 if they would have invested in Agro Tech Foods Ltd. Since the company is having established market position, further growth in stock price is expected by investors. 

Though recovery was also seen in NIFTY50, it was up by only ~72.2%. If we dig deeper, INR1,00,000 invested in Agro Tech Foods Ltd on 25th March 2020 would have become INR2,02,969.57 on 25th March 2021.

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Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.