AWL Agri Business Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Turnaround quarter, driven by edible oil: After losses in Q1 and Q2, the company returned to normal profitability, with the entire Q3 profit driven by a turnaround in the edible oil segment.
• Food business margins under pressure: Segment profit in the food FMCG business declined due to aggressive pricing, even as wheat flour volumes grew 45% YoY.
• Supply chain risks are live and specific: The Red Sea conflict has spiked container freight rates, while the Argentinian election and Russia-Ukraine war continue to pose risks to soya and sunflower supply chains.
• Distribution is the core growth engine: Direct retail coverage expanded from ~500,000 to 660,000 outlets, with a target to reach 0.1 crore outlets in another year or so, and rural town coverage is set to increase from 27,500 to 30,000 by year-end.
• What to watch next quarter: Whether the promised Q4 volume improvement materializes, the trajectory of food segment margins after aggressive pricing, and any stabilization in Red Sea freight costs.

The Turnaround: Edible Oil Leads, Food Lags

• Profit recovery: After losses in the first two quarters, the company returned to a normal phase of top-line and bottom-line performance, with the entire Q3 profitability driven by the edible oil segment, where segment profit rose 15% YoY.
• Revenue decline is a pass-through story: Consolidated revenue fell 17% YoY, which management attributed to lower raw material costs being passed through to consumers, not a demand collapse.
• Food business margin hit: Food FMCG segment profit declined because the company was very aggressive on pricing in some markets, a move that was reflected in a 45% YoY growth in the wheat flour business but compressed margins.
• Gross profit squeeze: Gross profit was down ~12% YoY, driven by a strong base quarter in the oil business and the aggressive pricing posture in the food business.
• Edible oil volumes were flat: Packed oil grew 5% in Q3, but institutional supply to the frying industry (chips, wafers, snack foods, biscuit manufacturers) declined, leaving overall edible oil volumes flattish.

Mallick: "Heartening to start with that after Q1 and Q2 losses we have turned around and we are back in the normal phase of top line and bottom line which is good."

Supply Chain: Geopolitical Risks and Sourcing Outlook

• Red Sea freight spike: The Israel-Hamas war and Red Sea conflict have pushed container freight rates up very high for routes to Europe, the US, and even Jeddah, posing a direct supply chain threat to the food business.
• Argentina supply recovery expected: Last year's drought produced a crop of less than 2.5 crore tons, but sowing this year is good and the crop is expected at least 4.5 crore tons; a new president is bringing stability and the currency gap is narrowing, so no disruption is expected.
• Brazil harvest underway: Brazil has a strong 125-million-ton crop, with harvest started and processing beginning in February, which management expects will improve the supply chain from February onward.
• Russia-Ukraine risk persists: The ongoing conflict continues to pose a risk to the sunflower supply chain.
• Wheat procurement strategy: Wheat prices follow a cycle of lows at harvest (March/April) and steady rises through November/December; the company's policy of procuring at harvest pays off on both price and quality.

Distribution & Reach: The Core Growth Lever

• Direct coverage expansion: Direct retail coverage increased from approximately 475,000-500,000 outlets to 660,000, with a stated ambition to reach 0.1 crore outlets in another year or so.
• Indirect reach: Overall indirect coverage stands at 2.1 crore outlets, supported by 93 depots across the country, including Srinagar and Leh, and 10,000 distributors.
• Rural penetration target: Rural coverage currently spans 27,500+ towns, with a target to reach 30,000 towns by the end of this fiscal year.
• Market share consolidation: Edible oil market share consolidated from 19.5% to 19.8%, while wheat flour market share rose 50 bps from 4.7% to 5.4%.
• Channel momentum: Branded exports grew more than 80% in the first nine months, the HoReCa segment is growing well, and e-commerce and modern trade are growing very fast.

Kanhere: "It is not that how much of market share you have been able to grow. I think a leader, if he is able to maintain his market share, itself is a very big achievement and so we have been growing on market share."

Rice Business: Footprint Expansion and Brand Building

• Geographic expansion: The rice business has grown from operating 4-5 units last year to 13 units now (2 owned, 11 managed), with a footprint extending into Bihar, UP, Karnataka, Tamil Nadu, Bengal, Punjab, and Haryana, and new operations starting near Nagpur in Maharashtra and in Andhra Pradesh.
• Export ban impact: The drop in food revenue growth (26% in FY24 vs 55% in FY23) was due to India's ban on non-basmati rice exports; basmati rice exports continue unaffected.
• Seasonal strength: Kohinoor basmati rice hit its highest monthly volume of 6,500 tons in December, and the OND quarter was very good because the basmati rice season starts in October; the trend is continuing through January-February-March.
• Biryani kit export push: The biryani kit is now being pushed more into export markets, with exports accounting for more than 44% of biryani kit sales in Q3 FY24.
• Ambition: Management intends to go to every state where rice is available, convert Rabi to rice, and build the business closer to the market.

Commodity Prices, Hedging & Import Duty

• Lower prices benefit brands: Management stated that if oil prices remain at current levels or reduce gradually, brands do well because lower commodity prices mean less volatility and more attractive consumer prices, which drives consumption.
• Hedging in tandem: The edible oil business is now safer because hedges are in tandem with physical positions, reducing the risk from sharp price declines that historically left little time to cover.
• Import duty debate: Management's stance is that lower duties mean lower commodity prices, manageable volatility, and higher consumption, but acknowledged that farmers are worried because soyabean rates in MP have fallen below MSP, and discussions are ongoing.
• December consumption dip: There was a slight slump in edible oil consumption in December, but demand returned to October/November levels in January.

Mallick: "Edible oil industry what we always fear is sharp decline or sharp increase... when it comes to sharp decline we are all afraid because you don't get much time to cover yourself, but the edible oil prices have... Now the hedges are in tandem and it's a little much more safer business I would say."

New Products & Segment Monitoring

• Premium launches: The company launched Fortune Sharbati Atta (premium wheat flour) and a biryani kit during the quarter.
• Glycerin leadership: The company supplies almost 25% of the country's glycerin, and the oleochemical business performed very well in Q3.
• Branded segment monitoring: Supply chain is the key focus area; the company operates the largest number of manufacturing points, 93 depots, and 10,000 distributors, with direct coverage growing to 660,000 outlets.
• Southern market push: The company is slowly getting stronger in southern markets, which management noted are more remunerative.
• Food volume ambition: The plan is to take food's contribution from 17-18% of overall volumes to close to 25% by the end of FY25.

Guidance & Commitments

Key Metrics