AWL Agri Business Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Hedging losses wiped out two quarters: A one-time disalignment of hedges drove the majority of a ~₹350 crore profitability delta versus last year, compressing margins in Q1 and Q2. Management says the issue is behind them.
• Branded edible oil volumes surged 23%: Falling prices unleashed fierce consumption and out-of-home demand, an "unheard of" pace that caught the company's inventory and hedging out of sync.
• Portfolio derisking is accelerating: Edible oil's volume share fell from 65% to 58% over two years while food and FMCG rose from 11% to 18%, a shift management explicitly wants because it reduces exposure to commodity hedging and volatility.
• Steady-state margins are the H2 promise: With hedges settled and edible oil prices bottoming out, management expects a return to the ₹3,000–₹3,500 per ton EBITDA run rate delivered for the prior 10-plus quarters.
• What to watch next quarter: Whether the promised margin recovery actually materializes, whether basmati rice market share normalizes by March, and whether the hedging policy's contemplated shift from CBOT to OTC instruments introduces new execution risk.

The Hedging Hit

• Mechanism of the loss: Hedges were not in money and instead of protecting the base, the company lost money there. This is described as a one-time phenomenon confined to Q1 and Q2, with most CBOT positions now settled and rolled forward.
• Scale of the damage: The majority of the ~₹350 crore delta in profitability between last year and this year is due to hedging losses. The risk management policy restricted losses to only 15% to 20% of full year EBITDA.
• Why it happened: Branded packed edible oil grew at 23% in H1, a pace unseen in 8–10 quarters, driven by price corrections that unleashed fierce consumption. The company was worried to reduce inventory because consumption was high, but when it bought, hedges were not in tandem.
• Policy stance: Management sees no need to change the risk management policy, but one corrective action is being considered: distributing hedges between various mechanisms, e.g., reducing hedges on CBOT and taking them on OTC.

Shrikant Kanhere: "what happened was all our hedges were not in money instead of protecting our base, actually we lost money there and this is only a onetime phenomena which happened for Q1 and Q2, so it is something which I do not think should continue as we go forward"

Revenue & Volume Drivers

• Revenue decline explained: Revenues dropped 13%, majorly led by edible oil because edible oil prices corrected big time in Q1 and Q2. Volume growth in branded edible oil, food FMCG, and industry essentials partially offset the price-driven revenue fall.
• Food FMCG growth engine: Growth was majorly led by wheat flour, pulses and basin. Food and FMCG volume contribution rose from 11% to 18% over two years, with a stated target to reach 30% in coming years.
• Rural outperformance: Rural growth was slightly higher than urban, driven by edible oil prices reaching comfortable levels for consumers and branded wheat flour gaining as cheaper government-subsidised wheat became less available. Rural growth is expected to improve further in H2.
• Basmati rice market share dip: A 200 bps market share loss occurred because 50% of basmati rice business comes from modern trade and e-com. Last year's big scheme with Reliance for Fortune was shifted to Kohinoor this year. Management expects normalization by March 2024.
• Bangladesh drag: Consolidated results were slightly worse than standalone due to losses in Bangladesh, where operations have been curtailed to branded level only. Management is hopeful that after elections early next year, things should start falling in place.

Angshu Mallick: "branded packed edible oil growing at 23% is unheard of, so that we were worried to reduce the inventory then we lose it and if we had inventory so we had to buy, so when you buy obviously your hedges were not in tandem so that is one learning we have"

Portfolio Derisking

• Structural shift underway: Edible oil volume contribution fell from 65% to 58% over two years, while food and FMCG rose from 11% to 18%. This shift is explicitly good because it derisks the business model from edible oil's commodity hedging and volatility risks.
• Food growth trajectory: Food and FMCG is expected to keep growing at a CAGR of plus 30% year-on-year, while edible oil grows in single digits. Over time, food will significantly improve its share and edible oil will slowly come down.
• Niche product pipeline: New products launched last year include poha, khichdi, and chunkies. A Biryani kit is at a nascent stage. These NPD products are value and margin accretive, though volumes are still very small.
• Cold press oil entry: The company is introducing its own cold press oil, ready now, likely launching first with mustard oil where it is the number one brand.

Shrikant Kanhere: "edible oil suddenly has got its own risk profile due to the commodity hedging, commodity volatility"

Competitive Landscape

• Regional competition dynamics: Competition from regional players exists in both oil and food. In edible oil, non-refined oils (mustard, groundnut, cotton seed, rice bran oil) face stronger local competition than national brands. In atta, several small players exist within states.
• Structural advantage for nationals: Over time, regional competition is reducing in basic staples because the ability to buy and store is reducing, the ability to distribute cost effectively is declining, and consumers are becoming quality conscious.
• HoReCa push: A separate HoReCa division with a separate team, distributor, and mechanism was started around eight quarters back, targeting out-of-home consumption which management expects to be very big during the upcoming wedding season.

Export & Brand Initiatives

• Fortune brand expansion in exports: The company has started increasing presence and distribution of the Fortune brand for basmati rice exports, launched Jubilee as a second brand, and tied up with parties in Saudi and other countries, negotiating for big volumes from November onwards.
• New product launches: Launched Kohinoor brand brown rice in two variants (Kohinoor and Charminar), a Fortune Biryani kit for export markets with close to 20,000 kits already exported and another 35,000 on order, and a premium oil range specifically for the US market.
• Metro branding: Branded three metro trains in Delhi for three months as part of marketing spend.

Guidance & Commitments

Key Metrics