Positives

Growth + Turnaround.

• Following triggers care making agro-tech attractive,

1.      Company’s financial status is improving and balance sheet is improving year by year.

2.      The operating margin is going improving year on year, so more bottom-line growth compared to topline growth.

3.      Focus on high margin business like Popcorn which will improve profit margin and provide growth in topline as well.

4.      The retail presence and brand image would help organised player to increase market share.

5.      Rising disposable income and economy would increase per capita oil consumption and lifestyle items like pop-corn and other similar food processing items.

6.      It is subsidiary of one of the largest food processing company ConAgra. Food processing is in nascent stage in India and hence with the help of parent Agro-tech should benefit from it.

• Company has paid 45 Cr. over 5 years from 2002-2006 to ITC and has charged this as extra-ordinary expense. So from 2007 onwards company should add at least 5 Cr. in bottom-line directly.
• Company has paid of all the debts 40-60 Cr over 5 years – this was resulting in interest charges on P/L of 3-5 Cr. a year. From 2007 onwards no such charges would be applied. So bottom-line should improve by such savings.
• Company has not diluted the equity which is good sign.
• Company has divested its stake in Advanta so that it can concentrate on core business.
• The debt-equity ratio has improved from 1.0 to 0.25 over 5 years as the debt has reduced. This is a very healthy sign.
• Current ratio is also improved from 1.28 to 1.5 over years. Such a ratio is good healthy sign.
• At current M.Cap of 236 Cr and Sales of 1100. M.Cap to Sales is 0.2 which is very low and is a sign of value.
• Looks like company is going to save around 10 Cr. only from interest and extra-ordinary cost savings.
• Profit margins have improved year on year and expect to keep on improving in coming years.
• Company is still carrying accumulated losses of 20 Cr this should reduce the tax outgo from future earnings. This is hidden element.
• Subsidiary of global food major ConAgra, bringing retail food processing business experience and export, outsourcing opportunities.
• Company is looking to save cost by sourcing corn locally, through contract farming, rather than importing it.
• The instant popcorn facility is established in Uttaranchal which is an excise exempt location and enjoys tax holidays.
• The ACT-II popcorn would bring growth to the company with the rise in Multiplexes in the country. Other types of entertainment locations and sport centres could also add in this growth.
• During 2005-06, ATFL's ACT II popcorn sales grew 45 per cent. Growth attributed to various factors including increased availability, riding on the growth of modern trade and sales promotion activities.
• Besides popcorn, the company's branded foods include Sundrop and Crystal edible oils, Rath vanaspati and Healthy World ready-to-eat snacks. The retail boom would provide required platform to market these products.
• Shift from vegetable oil to sunflower oil by the health conscious customer would add in the growth.
• Agro Tech has to pay 45 Cr to ITC in parts till 2007. Post 2007 Company would have handy cash to invest in new ventures.
• RJ has around 5% stake in the company and RD also recommend this company.
• With the help of another Congra group company,Lamb Weston, ATFL is venturing in potato and tomato products.
• Booming IT and ITeS sector, and the growing hospitality and tourism industry in the country had driven ATFL to enter the food service sector.
• Company is reducing its concentration from low margin products like Atta and Fries and going full bang on Popcorn venture.
• Majority of Indian, especially in rural market, still prefer non-branded loose oil. Shift to branded oil will help the ATFL growth.
• ATFL has sold its holding in Advanta India Limited, a seed company. “This sale will enable ATFL to capture value from this non-strategic asset and invest it in value-added brands in its foods business. The realization from the sale will also unlock cash, reduce borrowings and further strengthen ATFL’s balance sheet,” the company stated in a press release.
• Post 31^st 2006 – there would be no extraordinary cost to the company. there will be no more extraordinary cost in subsequent years on account of settlement cost in respect of Mantralayam and the results of the Company will reflect true operating performance.
• Topline growth is negative for FY05-06, as company has reduced low margin bulk commodity products business.
• Due to recent VAT implementation organised player has edge over non-organised players.
• After mantralayam factory settlement – company could carry on decentralised business and this will improve profit margins. There are no ports near this factory at this moment.
• Company could launch other oil variants like Butter, Margarine etc. as Retails could provide good platform for these products.
• In case of K S Oil – from 2005 to 2006 – topline grew by 50% but bottom line grew by 500%. In result stock price moved from 40 Rs to 160 Rs. It again doubled its profit in next year and stock price doubled to 360. So in 2 years stock price moved from 40 to 360.  Similar kind of change is expected for agro tech as well. This is evident that profit margin change at any point could result in eps growth and take the stock to new orbit.
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Of course it may take 3-5 years for company to accrue benefit of all above points and hence patience could be tested. As Peter Lynch always said, look for low margin businesses which are turning around in bull market as even change of 1% could double the profits and take the scrip to new level. Agro techs NPM are 1-2% but there are chances that company take it to 3-8% in due time.

Negatives

• The margin the oil business is very low and it is capital intensive business.
• The underline business is commodity price driven.
• Management hasn’t taken any radical steps till now. Margins of other companies like K.S. Oil are far better. May be till now company was concentrating on cleanup work.
• Tax free imports of Vanaspati’s from near by countries is always a threat. But after ITC Mantralayam settlement company could take it to its benefit and procure few oil variants from near by countries if find a price advantage.
• New trend of using oilseeds in bio-fuel adds pressure on raw material costs for edible oils.
• This is not a buffet stock – as he advocates not buying any business where the finished products price is highly dependent on raw material cost and the it just looks like commodity business which has no business barrier and no moat.

Excellent write up. Provides a very crisp and targetted view of what needs to be done.