Agro Tech Foods - well oiled to make ACT stronger; visit note: Edelweiss

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key takeaways of our recent meeting with Mr. Sachin Gopal, CEO, Agro Tech Foods (Agro Tech).

·          Margin improvement the key focus area

Agro Tech’s revenues declined at 14% CAGR, while PAT grew at 16% CAGR, in the past three years, a testimony to the management’s efforts at improving the company’s margin profile. As part of its long-term margin improvement strategy, the company also sold its Rath brand to Cargill. Currently, Agro Tech’s gross and PAT margins, at 23% and 3.8%, respectively, are far lower against its peers, as the company is highly dependent on the low-margin refined oil business. However, going forward, the company intends to expand its packaged food business, and launch new products with gross margins greater than 30%. Overall, the company intends to expand gross margin to 40% over the long term. Also, it is increasing product prices in its cooking oil segment more than raw material cost inflation. The company has zero debt on its balance sheet and INR 890 mn in cash.

·          Packaged foods to drive growth in future

The company has been primarily in thin margin cooking oil business. However, it is, of late, diversifying into high margin convenience/packaged foods. Revenue share from foods has swollen from 2% in FY07 to 15% in FY10, and is likely to further rise to 50% of sales over the long term. Its packaged food products like ACT II popcorn, peanut butter, chocolate pudding, etc have gross margins exceeding 35%. Act II launched many India-centric tastes for popcorns and currently comes in six flavors. The company is, however, cautious of MNC competition, and is clear on its strategy of not going for “me too” products.

·          Parent provides product technology and R&D support

Agro Tech is an affiliate of ConAgra, a Fortune 500 company with net sales totaling USD 12 bn in FY10. ConAgra provides Agro Tech technology and R&D support, using which the latter plans to introduce/test market 1-2 new value-added processed food products every year. ConAgra, with its wide range of products in frozen and convenience meals, could provide Agro Tech significant leverage. Agro Tech’s business strategy will be to customize ConAgra’s international products to suit Indian needs, and then launch it in the domestic market.