For a company that relies on three brands and clocks an annual revenue of less than ₹1,000 crore, Agro Tech Foods trades at 47 times its trailing 12 month earnings. That puts it in the same level with peers such as Marico, Godrej Consumer and Dabur India, all of which are several times its size and have posted better growth in the past several quarters as well.
Agro Tech is throwing its weight behind its snacks-and-spreads range in Act II Popcorn and Sundrop Peanut Butter. The foods segment provides higher margins than edible oils and will boost both margin and revenue profile over the long term. But Agro Tech is still heavily dependent on edible oils.
And this segment has been consistently slowing down for a year-and-a-half. Input prices are also on the decline, diminishing the potential of price hikes to spur growth.
Over the long term, the strong growth in peanut butter and popcorn variants, besides planned launches in snacks, can take sales higher, but the business needs to gain more scale to have an impact on the overall numbers.
Agro Tech’s stock has surged about 46 per cent in the past year, even as the company’s net profit fell 25 per cent for the nine months to December 2014 against flat revenues. Investors can use this rally to book profits in the stock.
Edible oils impact Edible oils is primarily a commodity-based business, with selling prices directly related to how raw materials move. Agro Tech mitigated this commodity effect through value-added premium oils, and marketing them on a ‘health’ platform by introducing olive oil and rice bran oil blends. Through the Sundrop portfolio, it holds around 45 per cent of the premium refined oils market, second to Marico’s Saffola.
The segment’s performance is important for two reasons. One, while the foods segment holds strong potential and will be the growth driver, it is yet to contribute significantly to profits. These brands need heavy advertising and promotions in the face of stiff competition from the likes of Pepsi and ITC. In order to have the firepower for this push, the company’s cash-cow oils business needs to do well.
Two, refined oils contribute 80 per cent of Agro Tech’s revenue and a poor performance here directly reflects in the overall numbers. The 2013-14 fiscal saw the segment’s sales drop approximately 4 per cent even as foods expanded 17 per cent. Agro Tech’s total revenue dipped 3 per cent for the year.
With the company choosing to scale back the oils business in favour of foods, performance faltered more. For the nine months to December 2014, value and volumes have dropped 5 per cent and 2 per cent for oils. Foods, on the other hand, showed strong growth of 20-30 per cent in the past three quarters.
Growth through price hikes is also set to get harder. Prices of oil seeds and oil are trending down with a global supply glut. Sunflower oil, Agro Tech’s major input, is down around 10 per cent over the past year. Soybean oil and rice bran oil are down by around 5 per cent.
Agro Tech is aiming to protect profit margins in this segment, which is commendable. But this also makes it harder for sales to grow well in a falling input price scenario. Competitors cutting product prices can result in shift in consumer preferences, especially with wary consumers hurt by inflation.
Margins lower Sales have grown 2 per cent annually over the past three years to ₹765 crore in 2013-14. Cheaper input costs aside, backward integration into manufacturing of peanut butter instead of direct imports, and tax benefits on manufacturing plants helped net profits grow 27 per cent in this period.
But over the past three quarters, operating profit margin has fallen, slipping below the 10 per cent mark as sales slowed and adspend inched higher.
In the recent December quarter, operating margin was at 8.1 per cent compared with the 10.6 per cent in the year ago period. Margins are also lower compared with peer Britannia Industries which has been clocking double-digit margins for several quarters now.