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Agro Tech Foods – Recommendation

April 28, 2007

ConAgra Foods Inc of USA, the world’s third largest foods company, holds a majority stake of 48.3% in Agro Tech Foods, through CAG Tech Holdings, Mauritius.

Agro Tech Foods operates in two business segments: branded foods, and bulk and processed commodities. The company has two very successful foods brands: Sundrop edible oil and ACT II, the No 1 popcorn brand in the world. Some other brands include Crystal and Rath vanaspati oil. The company has stopped its non-profitable brands of chips and atta, and has developed a strategy of focusing only on products with a gross margin above 20%.

Bulk and processed commodities include oils and grains procured, processed and distributed; and seed buying operation. This segment is not the focus of the company.

Earlier, Agro Tech Foods was a group company of ITC and had its manufacturing plant at Mantralayam in Andhra Pradesh. Subsequently, the plant was sold to ITC and was leased back for 99 years to the company for Rs 16 crore. Subsequent to ConAgra taking a majority stake, the parent found this arrangement totally unviable as reflected in the poor margin and losses.After a long conflict between the company and ITC, a London court passed an order of settlement: the company had to pay Rs 43 crore to ITC in phases (as reflected in extraordinary items over the past few years).

Presently, Agro Tech Foods has no manufacturing plant. Manufacturing is outsourced to unorganised players under its quality control. Hence, there is no need for any capex or any other significant investment to increase volume.

Sundrop normally contributes nearly one-third of the total turnover of Agro Tech Foods. The brand continues to grow at 10%. The company is operating this brand at a gross profit margin of around 15%, which it intends to increase to 20% with deeper penetration and promotion. With growing consumption and income level, the shift towards premium quality will sustain the profitable growth of this brand.

Currently, ACT II brand is available at over 120 locations across the country, where hot, fresh and tasty popcorn is served. The target market for vending popcorn is cinema theatres, amusement parks, shopping malls, coffee parlors, college canteens or even railway stations and bus stands. Over the next 12 months, Agro Tech Foods plans to increase the availability of ACT 11 vending operations in more than 400 locations across the top 14 towns. The company’s ACT II ready-to-eat brand, launched six months ago, has also received a very positive response.

The ACT II brand contributes nearly Rs 25 crore to the top line, with a gross margin of around 30%. Going forward, this brand has scope for almost doubling sales every year from both the vending popcorn as well as from the ready-to-eat segments, considering the huge untapped rural and urban markets with hardly any competition.

Agro Tech Foods is expected to register EPS of Rs 5.3 in FY 2007 and Rs 6.6 in FY 2008. At the current market price of Rs 75, the scrip trades at 14.2 times its FY 2007 earning and 11.4 times its estimated FY 2008 earning. This discounting is very low compared to Nestle and other MNC Dairy companies in India.

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