AWL Agri Business Ltd Q2 FY2023 Concall Summary

Key Takeaways

• A one-time margin hit in an otherwise strong demand story: Gross margin was flat despite 9% volume growth because a ~50% crash in edible oil prices forced a ~Rs.150 Cr high-cost inventory write-down. Management calls it a one-time event and expects full recovery in H2.
• Market share gains accelerated across the portfolio: Edible oil share rose to 19.5%, Fortune basmati rice jumped from 5.1% to 8.5%, and combined with Kohinoor the rice share is near 10%, making the company a strong number three.
• The food business turned EBITDA-positive ahead of plan: Revenue grew 58% YoY in Q2 and the segment hit profitability a full year ahead of the FY2024 target, validating the diversification thesis.
• Demand snapped back sharply post-price correction: Edible oil volumes grew 17% QoQ as price pass-through revived rural consumption, and October was "fantastic" on the back of the first proper Diwali in two years.
• What to watch next quarter: Whether the promised Rs.150 Cr gross margin recovery actually materializes, the pace of Kohinoor's distribution rebuild, and if the 3.5%+ EBITDA margin floor holds as edible oil prices stabilize.

The Edible Oil Margin Shock

• Mechanics of the hit: Global edible oil prices fell ~50% in July-August, and the company passed the drop to consumers through multiple MRP reductions to protect market share. That left high-cost inventory on the books, creating a ~Rs.150 Cr one-time gross margin impact.
• Containment worked: The damage was limited to 10% of full-year EBITDA because of hedging and risk management policies, despite a 50% market price swing.
• Recovery path: Management expects to recover the Rs.150 Cr across Q3 and Q4 as lower-cost inventory cycles through and prices stabilize.
• The price pass-through logic: The company announced MRP cuts 3-4 times in newspapers during the quarter, and government intervention pressured weekly price reductions aligned with international falls. The strategy sacrificed near-term margin to defend and grow market share, which rose from 19.2 to 19.5.
• H1 cushion: H1 gross margin still grew 13% on 12% volume growth because Q1 was exceptionally strong, partially offsetting the Q2 underperformance. However, PAT fell 32% despite 16% revenue growth because of inflationary impacts below gross margin and the unrecovered Q2 costs.

Kanhere: "Actually, I have not seen such kind of quarter in my 10 years of experience at Adani Wilmar."

Demand Environment

• Price elasticity in action: Edible oil volumes grew 17% QoQ in Q2 because high Q1 prices had suppressed rural consumption, and the July-September price reductions brought demand back.
• Festival tailwind: October was "fantastic" because Diwali and Dussehra coincided, market prices had come down, and out-of-home consumption improved significantly, with airlines reporting more than 30% growth.
• Marriage season catalyst: More than 3 lakh marriages are calculated for the upcoming season, and Fortune is one of the most sought-after oils in marriages particularly in UP, Bihar, Madhya Pradesh, Chhattisgarh, Delhi, and Rajasthan.
• Rural recovery timing: H1 is always lower than H2 for rural demand because Q2 is sowing season when farmers focus on field work. Harvest started after October 15, and the basmati rice crop is 6-8% higher with farmers getting better prices than last year. Better money for soya bean and paddy overall supports H2 demand.
• Destocking normalization: Distribution-level inventory was almost bone dry (three days) when prices were falling. Once prices started rising and the festival season began, distributors stocked very well.
• ROPP market context: The overall market degrew 4% over 12 months due to lower out-of-home consumption, but record imports in September 2022 signal demand picking up.

Market Share & Brand Strength

• Edible oil share gain: Market share grew from 19.2 to 19.5 despite volatile conditions, achieved by passing on price drops to consumers rather than holding margin.
• Fortune basmati rice surge: Branded rice share improved sharply from 5.1% to 8.5%, driven by a combo scheme (Fortune oil 5kg + 5kg everyday Basmati rice + sugar) that sold more than half a million packs during Dussehra and Diwali. Flipkart performed remarkably well in Fortune Basmati rice.
• Kohinoor rebuild underway: The acquired brand historically did ~35,000 tonnes under McCormick (FY2020-21) but currently sits at 1.5% share. Supply chain was disrupted; the company is sourcing the same grain and quality. 45-50% of Kohinoor sales come from modern trade, which was reluctant to start the new category during heavy Diwali demands. Amazon has started; Flipkart and Reliance are going ahead; most chains expected to have Kohinoor within one month.
• Kohinoor timeline: Management needs one year to reach the historical 35,000-tonne level. The Bathi season (November start, Gujarat and parts of Maharashtra) should bring back Kohinoor glory; historically they sold more than 6,000-8,000 tonnes during the three months in Gujarat alone.
• Product basket synergy: The company now offers Basmati rice, Maida, Besan, and sugar along with oil, giving five products to trade and caterers.
• GST advantage: The 5% GST on pre-packaged branded staples provides a 5% advantage in commodity/food staples. Local small players who had an advantage are slowly getting weeded out, more visible in Atta than rice. The flour business is doing more than 25% branded Atta flour.
• Direct distribution push: Target to reach 6 lakh outlets direct coverage before March 31, with more market share gain expected as direct distribution increases and penetration in South and West (where the company is weak) improves.

Food Business & Diversification

• EBITDA-positive milestone: The food segment turned EBITDA-positive in Q2, ahead of the earlier expectation of EBITDA-neutral by FY2024. Revenue grew 58% YoY for the quarter and 61% for H1.
• Strategy intact: Management committed to continue nourishing the food business at 40-45%+ YoY growth, with both organic and inorganic growth in the food basket.
• Fortune Mart/App scaling: Three new outlets added in Q2, total now 37 across India. The Fortune Online App is present in 25 cities with 24-hour delivery, 3.4 lakh downloads, and 6,000+ average monthly orders. Plan to expand from 25 cities to 50 cities in a year's time, and the initiative should start giving more profitable business as it grows.
• International push: Clear-cut focus on international markets initiated: GCC, USA, Canada, Singapore as main markets. Wilmar distribution advantage in Africa, Europe, Australia, New Zealand to be leveraged. Product portfolio: edible oil, wheat flour, rice.
• IPO capex delivery: Wheat flour unit at Bundi, Rajasthan ready to be delivered in Q3, described as another best-in-class manufacturing facility.

Margin Outlook & Recovery

• The Rs.150 Cr recovery: Management is very optimistic for Q3 and H2 because demand has come back and prices have more or less stabilized. The one-time impact is expected to be recovered in Q3 and Q4.
• EBITDA floor: If current price levels continue, 3.5% EBITDA is "not going to be a challenge."
• Upside scenario: If price levels continue at current levels (\$800-\$1000/tonne range), there is a possibility of hitting more than 4% EBITDA margins, compared to 4.5-5% historically at those price levels.
• Gross margin per tonne target: Management aims to continue delivering in a range of Rs.10,500 to Rs.11,000 a tonne, culminating in gross margin of 11% to 12%.
• Hedging advantage: The company's ability to hedge at CBOT or Mdex internationally, backed by the credibility of both Adani and Wilmar, provides a stability advantage that not all Indian commodity players can access.

Kanhere: "I would not comment on the percentage term EBITDA, but if these prices level continue I think 3.5% EBITDA is not going to be a challenge."

Strategic Bets & Industry Dynamics

• Mustard oil opportunity: Mustard will be a new game in the next 3 to 5 years; the company is expanding capacity in mustard. Once GM mustard is introduced, there will be a lot of advantage.
• Consolidation thesis: Consolidation in the industry is expected going forward; there will be stress in the industry, which should benefit scaled, branded players.
• Spices optionality: Spices are an opportunity; the company is open to studying any good opportunity but is not close to anything currently.
• Geopolitical unpredictability: Management acknowledged the difficulty of predicting edible oil prices, citing the new Brazilian president's pro-biofuel stance as an example of how quickly supply-demand dynamics can shift. The company's stance is to avoid speculative mode and rely on brand strength.

Kanhere: "Brazilian president coming and he might favor bio diesel can be 10 minutes or 15 minutes advantage is good enough to win this game... stability of hedging risk and hedging is also very important as a commodity player not everybody can hedge at CBOT exchange or at Mdex and all that because India there is no hedging tool so internationally you can hedge provided you have a credibility so that is also helping us because we are both Adani and Wilmar so we get that advantage."

Guidance & Commitments

Key Metrics