AWL Agri Business Limited analyst Q&A

Thank you. We will now begin the question- and-answer session. T he first question comes from the line of Raghav Maheswari with Kamayakya Wealth Management.

I wanted to ask about the -- my question was about the margins actually. Like in the presentation, it was mentioned a couple of times that it was due to a higher base effect. Apart from that, when we are analyzing, let's say, on a COGS basis on your revenue. So last year's COGS was approximately 87% of your revenue. And this year, it was 88.5%. So where do we see these margins stabilizing? When do you see these margins stabilizing? Are we at the bottom right now? And I would want to know your opinion on that.

Yes, so what I'll -- in fact, what I will guide you is better in our scheme of the things, instead of looking at anything as a percentage of revenue, I think my suggestion to you is that you should look at a per tonne basis because in our scheme of the things, revenue goes haywire sometimes because of the commodity prices. So therefore, not necessarily the COGS may set in terms of the percentage or EBITDA may set in terms of the percentage. What you should be looking at is the gross margins and the EBITDA. So on an overall level, I think what the benchmark that we follow and has been guiding all the investing community is that the gross margin should be in the range of INR 11,000 a tonne and EBITDA of INR3,500 a tonne and we are there as far as this quarter is concerned. However, having said that, last year, it was a quite significantly higher number. And the reason for that we have been explaining is that last year, we had a couple of good commodity cycle gains and inventory gains, which were sitting in last year's number. And last year number is an exceptional number and not a representative number as such. So that's what you should keep in mind when you do the calculation, I think then you should be able to get a better understanding of this.

Understood, sir. And any future guidance that you can provide us?

The future guidance, I think, remains same. I think the run rate at which we are today running, which is close to INR11,000 a tonne of gross margins and INR3,500 tonne of EBITDA per tonne, we should continue to deliver that. I don't see any risk as such in delivering that in H2.

Next question comes from the line of Harit Kapoor with Investec.

I just had a couple of questions. One was on the industry essentials piece. So if you could just give a little bit more detail, the H1 has actually been quite good. And I think you mentioned that Oleo has kind of driven this growth. So how much of the share of Industry Essentials now is oleochemicals? And how different currently are the margins for o leo versus, say, castor and de -oiled cakes in your mix? The idea here is just to understand that what can be a sustainable kind of a per tonne number that we should look at? I know it is volatile, but oleo is relatively lesser volatility. So just if you could explain Q2 1H as well as the outlook.

Yes, Harit, I think on Industry Essentials, there are 3 subsegments to it. One is, of course, oleo as mentioned by you. Second is the castor oil and third is your de -oiled cakes and meals with improved rapeseed meal and of course, the soyabean. This quarter number, of course, is driven more from oleo. And as I said in my opening remarks that we had some good calls on -- particularly for the glycerin and the stearic acid. So those are the things which has actually given us an exceptionally good number. However, having said that, the reasonable number for the industry essential overall rather, I would put because many a time what happens is you also have a good run in the de-oiled cake also. But overall, what we look at is similar to what is our overall number, which is close to 11,000 tonnes of gross margin and close to 3,000 tonnes of EBITDA. So in this EBITDA is a little less, so you can configure that way if you really want to build a model on Industry Essentials per se.

The other thing was on edible oil. Now you very clearly mentioned how the pricing trend has worked for the different oils. And also that H1 from an industry volume perspective has been quite low. I was just trying to get your sense about how do you foresee H2? Do you see that because of these differences in pricing that palm oil will continue to be -- the palm oil piece will continue to be under pressure. And from your perspective, palm oil is a reasonable mix. So do you expect that there is a n improvement in the volume growth for H2 here or because of this palm oil prices still being pretty firm versus soya, there will be an impact. So just wanted to get your thoughts on that.

Okay. See, on -- in H1, you have seen our rupee value turnover has increased by almost 22% plus. That is mainly driven by the higher edible oil prices. And this has impacted consumption. So going forward, what changes we are seeing is that palm prices, which were higher in the beginning of the year has now come down, and it is at the lower level, which normally it should be. Soyabean is priced very close to palm, soya and palm will always be same level. Sunflower is a little high now. But after November, it is likely to come down after the harvest season and the new processing starts in Russia and Ukraine from October, November. Now with the GST cut, most of the namkeen, frying, bakery, these -- all these products, the taxes are now at 5%. We expect a jump in consumption of snack foods, particularly fried items, namkeens and bakery products. When this happens, obviously, edible oil is an integral part of these products. So edible oil consumption is likely to go up through this route. And we being one of the largest institutional suppliers to all the institutions in the country, obviously, we s ee higher consumption in the out-of-home consumption segment. Now as far as in -the-home consumption is concerned, marriage season, better agri production expected. Of course, rains has impacted in large part of the country. But still, overall, the agriculture production should be better. But more important is the rabi crop that will come up now, wheat, mustard seed and chana, 3 major crops, which will be harvested in February, March. If that crop comes up well, obviously, the rural consumption is likely to be more. H2 is always almost 60% of the consumption and H1 is 40%. So that is how we look at consumption. So I think H2 should be much more better.

Next question comes from the line of Pallavi with Sameeksha.

We cannot hear you. Your voice is breaking. Can you come in the range and talk?

Yes. Sir, I wanted to understand the difference for the Nepal issue, what's the difference in import duty for the loose and the pack form of oil? And how do we see this getting resolved in the second half for the industry?

Okay. As far as Nepal is concerned, they don't export any loose oil. As per the SAFTA agreement, they can export after only value addition. And they are exporting only in pack form, mostly in 600 or 700 gram pouches. And that also 90% is soyabean oil. Now they export at 0% duty. And there is a differential duty because we import and pay 16.5%, whereas Nepal brings at 0. So obviously, Nepal has a pricing advantage over domestic production, one. Two, all the bordering areas of Nepal, particularly UP, Bihar, Jharkhand, Bengal are all in the proximity of Nepal in terms of freight because our nearest port is Haldia. From Haldia, if I have to send to UP, our freights are higher than Nepal. So technically speaking, Nepal has a lot of advantage. And that is why almost 15% of Indian soyabean oil imports comes now from Nepal at 0% duty.

So sir, has this increased over last year and caused the disruption?

See, last year, it started with around 90,000 a month when the duty went up in India in September. But then in month of May, the duty was reduced by 10%. So some impact happened. But still today, 60,000, 65,000 tonnes is coming every month.

So this problem will continue into the second half also in terms of impacting our volumes?

It looks like it will continue because as per the SAFTA agreement, I don't think there is much the government can do, although we, as a trade body has been asking the government to put some channelizing agencies so that there is some restriction in terms of the quality and value addition, which once it was agreed, but nothing much has moved.

Sir, my second question was on the margins in the Q commerce. Are they similar to GT or they are lower given the discounting?

See, earlier, e- commerce margins were much higher than general trade. But slowly, what is happening in e -commerce also, there is a lot of pressure to promote and keep your brand on top of mind on the consumers. And as you know, there is a lot of competition in the e -comm also, not within the oil segment, I'm talking, between FMCG products, there is a competition. So the Atta brand may push Atta, oil may do oil, chocolates may do chocolates, but then the e-commerce generally promotes it through whoever gives them more money. So e-commerce is still better in margin, but it used to give us even better margin than general trade, which is now, I would say, at par or a little more than general trade.

And sir, my last question is what would be the share of institutional sales for our oil business percentage?

Today, overall oil, we sell to institutions almost 20% of our total volume, mainly to big institutions like Parle, Britannia, Nestlé, Mondelez, KFC, then you have Haldiram, Bikaji, Balaji, all these types of institutions for frying oil, for bakery products, for value-added sunflower oil and soyabean oil.

Right, sir. Sir, then it's difficult to understand the 2% decline, I mean, for volumes given institutional, I thought that would be larger and that's why the consumers are not.

No, institutions also were not doing so well in the first half of the year, and they had got impacted in September also because after the announcement of cut, their sales also were -- their productions were actually stopped for some time because they wanted to clear their old stocks. So the first half institutions were under pressure, particularly Q1. But going forward, with the GST rationalization and coming down to 5%, a lot of unbranded products will now get into the official fold, and we expect brands, good brands to do even better.

Last question is on the market share loss that you've seen around 100 bps, 17% in the oil. Is that -- will that reverse? And what would be the reason?

See, we are very strong in North India, particularly Delhi, Haryana, Punjab, UP, Bihar, Bengal, Jharkhand. These are our strength areas, and these are the areas where the Nepal low-cost soyabean oil has impacted. And we being the largest player. And let me tell you, we have over 50% market share in Bihar, over 55%, 60% in Delhi, 60% in Haryana, Punjab. So obviously, we being the largest shareholder, there, we got impacted because of the cheaper Nepalese brands.

Right. And Nepal share would be how much in the market share the Nepal oil.

I think Nepal oil put together is in the range of around 2%, 3% overall market.

Next question comes from the line of Kunal Shah with Jefferies.

So my first question was on this data point which you have provided, which is your stand-alone sales -- branded sales in foods grew 7%. So, I just wanted to understand, does this include regional rice as well? Because I presume there will be some branded component in that. And if yes, what would be the growth if you take out that factor as well? So just like-for-like growth.

These are all branded packed food that we are talking of, and the growth has mainly come from basmati rice, sugar and wheat flour in the Q2.

But would this number also have some impact due to regional rice consolidation, or this wouldn't be.

But regional rice, if you look at the packed regional rice, branded is always less. Mostly it is all exported or G2G, what was happening last year. This year, we have exported regional rice, but the volumes are not as high as last year.

So Kunal, to answer your question straight, yes, regional rice rationalization does have an impact on the food growth, including the G2G one-time business, which we had.

Understood. So for this number to improve, the key drivers will be, let's say, improvement in wheat flour and soya chunk, right, on a, let's say, on the next few quarters.

Yes, of course. Wheat flour, sugar, rice, all have to grow. I mean wheat flour and rice has got a significantly 60%, 65% weightage in our food basket. So these 2 has to grow. There is no doubt about it. Sugar has also has become quite a significant player in our overall scheme because we are selling 5,000 tonnes a month of sugar. So of course, all these 3 has to grow to deliver better numbers in H2.

Understood. And if you can give some guidance on -- do you think the H2 food growth should be back to your long-term guidance of that mid-teens sort of a number. Or that would be a bit aspirational?

I think so, yes, because second half, we did not have any G2G business. It was normal business and H2 should be as good or even better than last year's second half.

Understood. Okay. So that's clear. My second question is on oils. So when you say overall profitability will remain in that INR3,500, INR3,600 mark, would it be fair to assume that oils can see better number, which will get reinvested in foods or we can't look at it that way?

Yes. I think you -- that's how it will work because whatever the INR3,500 guidance we give, we give on a blended this thing. And I think in our presentation, we have shared the EBITDAs segment -wise. So yes, oil has to deliver better than INR 3,500 because food is not at that level. So that's how the scheme of the things should work in H2. In case you want anything specific, we will certainly provide you the segment - wise also.

Understood. And this question on Nepal. So I just want to understand, is oil a domestic crop in Nepal? Or I mean, do these players import it themselves and then we export it to India?

No, no, they don't have any domestic crop. What they do is that they import degummed soyabean oil from Argentina like the way we all do at Haldia port. And from Haldia port, they take it to the Birganj, where all the plants are located there, and then they refine and bring it back to India. And mostly the border states are impacted heavily because you know it's a very transparent border. And that border is also Raxaul border or any border that you take are part of the domestic consumption ma rket, and that is why it has impacted a lot.

Next question comes from the line of Dhiraj Mistry with ICICI Securities.

So yes, it's very interesting that you highlighted that there would be backed growth for the FMCG part of the portfolio. But if I remember correctly, a couple of years back, you stated that you would be achieving INR10,000 crores at least in FY '27 or so. So with all this G2G business rationalization and everything, do we still stand with INR10,000 crores in FY '27 or it can be pushed a bit?

If we look at our volume growth, we should grow at 20% food. First half has been a little low because of the G2G. If you remove that, we are still in the growth phase. Second half onwards looks like much better. And going ahead, we have another 18 months to touch INR10,000 crores. So we are working on it. We are aware of it that we had said mentioned INR10,000 crores, but we will be very close to it for sure. We are on it, and we know that we have to deliver. We are banking on Gohana plant now getting streamlined. Rice has just started in Gohana, both the lines. So we have around 500 tonne paddy processing daily. Our flour mill is not yet ready. It will be ready by end of November. That has a capacity of around 550 tonnes a day. So that flour will be added to the volume. So these 2 plants, plus we have taken a few more Atta plants, which are coming up in Odisha and Bihar, which we will add to our volume. Overall, overall, I think with the increase in capacity of the food, we should be able to reach very close to 10,000.

This you are talking about by FY '27?

Okay. Okay. And it's very heartening to see that you have improved your margin for the food business with all this rationalization. Would you like to give some guidance for your FMCG business margin going ahead? It should -- or is it safe to assume that the current margin what you have been clocking in the foods and FMCG business, it is safe to assume that we can assume that kind of margin going ahead as well.

No. So if I have to answer you this question very straight , I don't think -- see, as Mr. Mallick said, the aggression to grow top line will remain in the next couple of years. So therefore, not necessarily that we may be able to deliver what we have -- what we have delivered in H1, right? Don't assume safely that this will be the margin because in case we want to accelerate that growth, we may end up spending a little more on distribution and schemes and promotion. But I think we are now EBITDA positive. In the food, I think we will remain EBITDA positive. That's the only thing which I can surely comment upon.

Got it. Got it. And second is on edible oil. Sorry for very near -term outlook and all. But with a high base of palm oil prices have been coming in the base and everything, can we -- what kind of volume value mix we can expect for the oil business in second half?

See the oil business in second half will be driven more in the soft oil category because as winter sets in, the soft oil category grows, mainly sunflower oil, soyabean oil, cotton seed oil, rice bran oil and mustard oil. These are the 5 oils, which are sof t oil, where the consumption is higher in the winter. Palm will grow because, one, flying industry will go to palm as palm will be the cheapest oil, number one. Number two, bakery industry obviously takes palm. And hence, palm oil should do well in institution business. But in -home consumption, soft oil will do well. So overall, I feel the mix will be more or less same, but soft oil should be a little more.

I was asking from volume and value perspective that the first half value growth was somewhere around 26% and volume was more or less flattish kind of a thing. With that -- how that numbers will pan out for second half?

Okay. See, on value front, honestly, not much we can do duty increase or decrease by government or exchange rate. All this happens or commodity prices going up and down. So value, we don't generally track so meticulously as much as we do cost per tonne. Second is as volume is concerned, H2 volume is normally higher than H1, and we expect H2 volume to be better. Low single digit of 5%, 6% should be a good growth that we should get because the country is not consuming even more than 1%. Imports are down by 3%, but H2 should be still better.

Okay. And value would be more or less kind of a flattish kind of a thing with the high base of last year?

Yes, yes, yes. Unless anything drastic happens or any supply chain disruptions or government intervenes and increases the duty tomorrow by 10% or 15%, obviously, prices will go up.

Okay. Okay. Got it. And any outlook on margin for second half in oil business? Is it safe to assume? Or you would like to highlight something different?

No, I think our normal run rate of 3,500, we should continue on EBITDA. And similarly, the blended gross margins of 11,000 tonnes -- INR11,000 a tonne.

Next question comes from the line of Raghav Maheswari with Kamayakya Wealth Management.

So just to understand the thing which you highlighted earlier regarding the Nepal imports of edible oil. So like you mentioned, overall 12% of soya imports of India is getting accounted for by Nepal imports. So as far as the company is concerned, like what percentage of market share decline has AWL Agri Business seen due to this particular thing? If you can quantify that, if it's possible or a range?

Okay. See, Nepal, everything comes in pouch, 85%, 90% in pouch, and 10% in 15 kilo tins. So they directly compete with the Indian brands in mainly the states of UP, Bihar, Bengal, Jharkhand. Now we have over 50% market share in all these states. So what happens is that our 2 brands, King's and Fortune, both has to compete with these cheaper brands and cheaper means they are 0% duty. So obviously, they are much cheaper. Today, if you -- on cost to cost, it is around INR15 per liter cheaper than Indian brands. So obviously, the roadside stalls, hotels, dhabas, all these people have started consuming Nepalese oil. We are largest shareholders, obviously, we have got a hit and our soyabean market share has dropped by almost 2.5%, 3%. That is why at all India level in refined oil consumer pack, we have lost share of around 50 basis points.

Just one question from my end. So in the f ood and FMCG segment, we spoke about margin thing. So top line expansion would be there aggressively by spending more on distribution. So I wanted to understand when do we see this segment contributing meaningfully towards margin? And overall for the company, what steps are being taken to drive margin expansion?

See, I think what we have been saying for quite some time is that this segment will remain an EBITDA neutral for some time, though if you look at our past couple of quarters, we have been actually EBITDA positive on this segment. But having said that, we will remain aggressive on spending to grow. And therefore, our sense is that not before FY '28, we should start contributing really meaningful to the bottom line because by only by that time, FY '28 means what I'm saying is practically 3 years from now because right now, we are into FY '26, then you have a '27 and then '28. That's where it will start contributing meaningfully to the bottom line, and I think better than oil rather, I would say.

Ladies and gentlemen, that was the last question for today. We have reached the end of question-and-answer session. I would now like to hand the conference over to the management for closing comments.

Yes. From AWL team, we thank you, everyone, for attending the call , hearing us. Please do reach out to our Investor Relations team for anything specific you want to understand on the company and company model. Thank you.

Thank you, everyone, who have joined this call.

Thank you. On behalf of AWL Agri Business and ICICI Securities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.