Key Rating Drivers & Detailed Description

Strengths:

Established market position in branded edible oils, with continued growth in the food business: Agro Tech’s established market position and improving revenue diversity will continue to support the business risk profile. Its edible oil brand, Sundrop, has high recall and enjoys premium pricing. However, the company has been focused on increasing the revenue share of its food business over the past 2-3 fiscals driven by an expanding product portfolio. Operating income from the food business grew 9% on-year in fiscal 2023 backed by growth in the ACT II products (in the ready-to-eat snacks business) and other new businesses, such as chocolates confectionery and breakfast cereals. As a result, the revenue share of the food business increased to 52% in fiscal 2023 from 44% in fiscal 2022. The share of the foods business will increase further supported by new product launches and marginal decline in the Staples business.

Strong financial risk profile: The financial risk profile was healthy, supported by adjusted networth of Rs 471 crore as on March 31, 2023. While debt increased to Rs 52 crore as on March 31, 2023, from Rs. 39 crore debt as on March 31, 2022, owing to higher inventory holding amid rise in commodity prices, the debt is expected to reduce over the medium term. While cash accrual was subdued at ~Rs 30 crore during fiscal 2023, debt protection metrics were strong, as reflected in adjusted interest coverage ratio above 14 times in fiscal 2023. The financial risk profile will remain comfortable over the medium term in the absence of long-term debt or significant capital expenditure (capex).

Support from the parent: Access to Conagra’s branded foods portfolio, including ACT II (popcorn), has helped Agro Tech to steadily improve its branded foods portfolio in India. Continued focus on ACT II product portfolio and steady addition of food products under the Sundrop brand have resulted in higher revenue contribution from the food business.

Weaknesses:

Susceptibility to risks associated with agro-based business: The edible oil business remains susceptible to risks pertaining to availability of oil, regulatory changes and pricing. Availability of oil, both in the domestic and international markets, is linked to oilseed production, which in turn is vulnerable to factors such as monsoon, acreage under cultivation and yield. The edible oil and packaged food industries also face significant intervention from the government, given the commoditised nature of products. To ensure remunerative prices to farmers, the government fixes the minimum support price on oilseeds periodically. Moreover, recent geopolitical tensions have resulted in disruption in import of sunflower and palm oils, which may impact sourcing.

Modest operating profitability amid intense competition: Around 48% of the revenue came from the edible oil business in fiscal 2023. Though the company commands premium prices on edible oils by virtue of its strong brand, profit margin is lower than that of integrated branded oil manufacturers. Consolidated operating margin declined to 5.3% in fiscal 2023 from 5.9% in the previous fiscal owing to rise in input prices especially in the first half of the fiscal. Over the medium term, the operating margin will remain sensitive to movements in commodity prices, limited pricing flexibility amid intense competition, and level of sales promotion and advertising expenditure required to support the increasing scale of operations in the branded foods business.

Key Financial Indicators

Annexure – List of entities consolidated

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