AWL Agri Business Limited analyst Q&A

Thank you very much sir. We will now begin the question and answer session. The first question is from the line of Abneesh Roy from Nuvama Institutional Equities. Please go ahead.

Congrats on very good set of numbers. My first question is on Edible Oil. If I see your quarterly run rate for the last 4 years, 3 years, it was almost stable. Hardly any movement in terms of the 1 million ton. This year, there is a spectacular movement. Is there any one -off? Is there any seasonality, festival-related impact or any modern trade or e -commerce activation? Or is it because of all this volatility? Whenever any pricing goes up in FMCG, generally, the market leader gains market share, and we have seen, obviously, sharp inflation in the last 3, 4 months. Is that driving that?

I think in Quarter 2, we had seen very steady prices barring that last 15 days when the duty hike was announced around 14th of September. But if you look at the entire quarter, the quarter was steady. So, whenever the commodity prices are steady, the brands always do well, and Fortune as a brand has been doing well. That is one. Two, over the last 2 years, we have made certain structural changes in our distribution factor. One of them has been to merge the food and oil distributors. Earlier, they were separate. So, from January '24, we started that exercise, and we merged all the distributors. That gave us strength because Edible Oil distribution was far stronger than Food. Second is that we had a separate sales team also. So, that also we started merging, and we could close that by March. So, we started gaining certain advantage of unified sales force and unified distributors. That is 2 things. Third is that rural markets, we have surely pushed for adding more towns, and we are at 37,600 almost. So, all this has inch by inch helped us to grow the distribution. And that is why we could reach 7.8 lakh retail outlets directly. And I think these are some of the reasons. Apart from this, we had good institutional sales, particularly from ITC, Parle and all that because there also sales picked up in July, August, September. And we are always a preferred supplier because we have pan-India production setup. So, it's very easy for them to buy from any of the location at any of that plant. So, that gives us an advantage over others, which we obviously have taken. So, all put together, the frying industry, baking industry, they have done well, and our retail distribution has done well.

And sir, ex of B2B, you said ITC, Parle, et cetera, have seen a good offtake, which I think if you could confirm, is it largely for biscuits? Second is B2C part would have seen what 12%, 13% growth?

So, next question is on Food and FMCG. So, here if I see, your pricing growth seems only 1%, which is surprising given there is a broad-based inflation everywhere. If you could tell us if there is some downtrading or adverse mix? Second is, why has branded rice not done well?

First part is that when you look at the total Food business, the growth on revenue has not grown only because the G2G business of rice is a lower priced rice. And that has contributed to topline, but value-wise, it has not given us that value because cheaper variety of rice is exported through the G2G route. That is one. Two, branded rice has not grown. Possibly, there are a couple of reasons. One of them has been that the basmati rice prices have come down drastically in the last 1 year by around 15% or so. So, retailers and wholesalers are trying to sell whatever stocks they have in their hand because they are expecting, and we know for sure, that this year's basmati crop is going to be bigger than last year, and the prices are already, the new crop that has arrived in the market from September end onwards, are almost 10% to 15% cheaper than last year. So, retail and wholesale, even institutions, I would say, those who buy regularly from us, wanted to consume their stock first and then buy. So, that is one of the reasons why we didn't do well. But we should be in a position to start picking up from October onwards.

Last quick question on Bangladesh. The pricing control, is it over? And second, in terms of the losses, which has risen, so when do you see profit coming because even in Q1, there was a loss? So, what is the issue? Q1, there was no big problem in terms of the law and order. And third, of course, is because of the way currently things are, any plans for a different strategy in Bangladesh, say, in terms of new product launches or, say, aggression or, say, localization? Anything you would need to change in Bangladesh?

See, Bangladesh is, of course, I think we all know what's happening in that country for the last 2 years. First, last year went bad because of the currency issue. And I think last 6 months were bad because of the government turbulence. I think now we have a new government in place. A lot of policy corrections, we can see in this particular country. We are only focusing on the branded sale in that country. And our expectation, of course, is that in the next 6 months, I think things should improve, but we are not very optimistic, at least for this financial year. From the next financial year, our expectation is that things should fall in place. We are losing basically money of not recovering the full fixed cost, actually, if you really ask me . On a contribution level, we have been able to cover all the variable costs, and that's how the situation as of now today in Bangladesh. I think the currency issue has more or less now been resolved. In a sense, the currency is now stable at 120, 122 level. It's not going up. The government is consistently trying to keep the inflation; of course, they have not yet been able to do that. I me an, day before yesterday, they raised the bank rate to 10%. It is the first time in the country that the bank rate is more than the inflation rate. So, those all steps are being taken. We are hopeful that we should be able to do better in the next 6 months. On your question, the new product launches and all that, I think that right now, this is not a time in that country to take such kind of initiative. We will wait and watch for another 3, 4 months, and then, we will take a call on whether we really want to do anything on the brand perspective.

The next question is from the line of Harit Kapoor from Investec. Please go ahead.

Congrats on a good set of results. So, my first question was really on the increase in duties. Just wanted to understand how this is going to play out in the market and how it is going to play out from an inventory perspective for you also going into Q3. I understand that there is a certain amount of inventory, probably 30, 40 days of inventory that you always have in-house. So, with this duty increase, just 2 or 3 factors, one is, is there a positive kind of mark -to-market benefit on inventory gains coming in, in Q3? Secondly, how has it landed in the market? Have all the prices now been adjusted upwards? And thirdly, do you expect any kind of demand impact on account of the price increase? Those are my questions on the duty.

Okay. First is that the duty hike was due for a long time, and there has been a lot of requests from the trade association, farmers' lobby, everybody that local oilseed prices were selling lower than MSP and that government should help increase the prices of edible oil, which were surely lower level. And the government did intervene on 14th of September. That is one. As per our risk management policy, we have certain policy guidelines under which we manage our inventory. So, we don't overdo or we don't play down. We have already seen how we were affected in Q1 and Q2 last year. So, there has been certain changes in our risk management policy, so which we have adhered to. In Edible Oil, historically, whenever there is an increase in price, whether because of duty or any other reason, that is normally passed on. And there is always a lag of 10, 15 days because inventory pipeline, inventory at distributor level, retail level, even at Company warehouses, are there to take care of 15, 20 days. So, that normally keeps the Edible Oil stable for some time, and then slowly, the market starts reacting towards the new price. And historically, that is how it has been always passed on by the manufacturer because our job is to buy at Rs. 100, make a margin and sell it. That is how everybody does, and we always do weighted average. So, when the duty hike was there, obviously, we had our incoming stocks at a higher duty, so averaging out and then pricing it and selling. That is how the entire industry does, and we have also done it like that.

And sir, just to follow up on that, has that process now been completed in the market because it's been about, say, 40 days since the import duty increase happened? So, has that now largely been passed through? And I know you have risk management processes in place, but given that you would have had some older stock at lower prices, would this result in some kind of a gain coming in into Q3, at least on the inventory side, while not structural, but could it be a onetime gain?

See, one is that the pass-on of the hike in duty has already been done, and that most of the Edible Oil manufacturers have been selling at the duty. What more has happened is that the international has gone up more, which we expected that it might come down. So, that has added to the pricing pressure. So, everybody has passed on whatever they had, and there can be some gain, but not something great windfall gain. Small gains can be there, only to the extent of the risk management policy, what it allows. So, we are not looking at that as a great anything. We are more optimistic on the next quarter's marriage season demand and how that spans out. So, hopefully, next quarter should be better.

Just on the Edible Oil piece again, obviously, the first half has been excellent. It seems like a significant amount of market share gain, which has continued to come through driven by your distribution expansion as well as merging of distribution as well as regionalization. I just wanted to get a sense of ex the B2B business, which has also done very well, on the B2C part, last 5 years, the Edible Oil volume growths is almost like 7% CAGR. And this year, obviously, things have been even better. Do you expect that this above-average kind of performance holds on for going forward for the next few quarters, given that your own initiatives have been kind of fast tracked over the last 12 months or so?

See, our initiative has always been to create more and more reach to the consumer. We are an essential commodity. Consumers don't wait for a brand. They just go and buy the brand, whatever is available. And top of the mind if it is Fortune, then Fortune must be available. So, the key to grow sales has always been distribution. That is one. Two, historically, we have been poor in South, and we have always said that South is somewhere we can do well. Let me tell you, 34% of branded edible oil is sold in South, which is the largest branded oil market, and our penetration is surely poor. So, we know that if we do well there, we will continue to grow for years to come, not one quarter. So, our focus is there, and we are putting our good team there, and we are working hard on it. So, going forward, I think distribution-led growth will continue. That is one. We are also looking at out-of-home consumption because out -of-home consumption is going to grow in days to come. And we have a team, HoReCa team, which is working on it. There also, we have some option of selling higher quantity, mainly 15 -kilo tins because the hotels buys 15 -kilo tins branded, of course. So, there, we are pushing. So, looking forward, if not 17% or like this, because these are not always a regular thing, but yes, double-digit growth is what we expect.

Great to hear. Sir, last question was on Food and FMCG. So, this year, you also had first half, there has been the government order -led growth, which I think would continue probably this year, but may not be a phenomenon going forward. And also, I think you've seen some inflation in prices. Also, competitive intensity in wheat flour would have been pretty high. I just wanted to get your sense on how do you see the margin kind of claw back starting again. And when do you see that kind of playing out? Because this first half of the year, the margins have been a little bit lower on this segment. So, when do you see that buildup kind of happening again, just wanted a timeline from your perspective?

You are right. There has been stress on the Food business, both rural and urban, because of the high inflation. And you can't pass on the way you can pass on the edible oil prices to the consumer. It is faster. But in case of wheat, rice, besan, sugar, very difficult to pass on the full hike immediately. It takes a little time. That is one. And second, consumers are relatively a little more conscious on these products. Edible Oil is still much more branded, 80% is branded. So, consumers either way buy branded. But when it comes to wheat flour, rice and all that, consumers always have the option to buy those where they get it cheap because 5% GST is not there, Rs. 3 or Rs. 4 packing cost is not there, retailer's margin is lower. So, all this gives a lot of support to the consumers. So, we can't increase the price so much. That pressure always remains in this type of product. But going forward, I think the inflation might be better off. Wheat production next year is going to be reasonably better because of the good monsoon this year. And dal, pulses, also, will be good. Rice, already it is 10% down. So, I think overall, food inflation will normalize, and we will see good growth in Food business as well as a little bit increased margin.

The next question is from the line of Megh Shah from Prospero Tree Financial Services. Please go ahead.

Congrats on a good set of numbers. I just have a one simple question. The Edible Oil segment has been making profit since the last 3 to 4 quarters. So, are these profits sustainable? And what are our sustainable margin range EBITDA or PBT, anything is fine, for this segment?

See, the Edible Oil business, of course, is a flagship business of the Company. We have been in this business for last more than now 24 years. And we have been number 1 market player in the country with a strong market share. I think this business will continue the way it is performing today. I think we get a little bit drawn by the last year's Quarter 1 and Quarter 2 numbers, but the numbers we have been able to focus on last 4 quarters for Edible Oil are the sustainable numbers. There might be plus/minus a little bit because, as I said in my commentary, I think last 2 quarters the demand, the brand equity, and of course, the stability in prices all work for us. And any one of it not going well sometimes have got an impact on the margins. But more or less, this is the range which we should be able to deliver on Edible Oil, which we have been delivering for last trailing 4 quarters.

The next question is from Utkarsh from DSP Broking.

Sir, I also belong from the edible oil industry. So, I would like to point out some issues which happened from Adani's side. Sir, for example, like when we sell mustard seeds like in mandis, even if we sell bad quality mustard seeds, it gets passed by Adani. It should be rejected. So, the managers who are there, they are corrupt, sir. They get some money and even bad quality seeds they pass it. So, sir, as a shareholder of AWL, I don't like these things. Sir, I would like you should monitor what's happening at the warehouse level.

No, sir, your point is well taken. We will certainly look into it. I think this call is more to discuss on the performance of the Company for the Q2 and H1. But having said that, you are trying to raise an operational issue, I think well noted, and we will certainly look into it.

Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Yes. So, thank you, everyone, for joining the call. And it's our pleasure to present before you one of the best set of numbers for Q1 and Q2 and for the H1. And we are quite hopeful that we will continue this stride as we go forward. Thank you very much, and keep tracking us and keep writing to us in case you have any queries. Thank you.

Thank you from my side also to everyone. I'm sorry for little delay in start. Thank you.

Thank you, members of the management. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.