Yves Potvin, a Canadian Entrepreneur saw potential in the plant-based meat category and launched his company Garden Protein International (Gardein) in 2009. It got sold to Pinnacle foods for USD 154 Mn (Sales of USD 65 Mn) in 2014, finally landing in Con Agra’s portfolio in 2019 (this was a part of USD 11 Bn acquisition of Pinnacle foods by Con Agra).
In the most recent Q1 con-call by ATFL, the MD, Sachin Gopal was quoted giving this instance stating that the categories ATFL is prioritizing their focus on are niche categories and will take time to reach a 2500-3000 cr. mark. The management is focused on shifting it’s focus from edible oils to making ATFL a total foods company. (The mix has improved from 22% to ~32% between FY15 and FY20).
The idea basically is, it is only in the recent years the world has come to terms with Beyond Meat and other meat alternative product companies to look at it as the next big leg of value creation. But for Gardein, it took almost 11 years to be recognized as a household name.
Is ATFL at an inflexion point? Let’s delve deeper.
The FMCG market in India has been a tough nut to crack.
India’s veteran fund manager Sunil Singhania, in a blog post dated 30th October, ’19 highlighted that the combined market capitalization of the top 40 core sector companies (across metals, cement etc.) is lower than the sum total of Nestle and HUL.
On the other hand, the rest of the FMCG pack keeps playing a catch-up game to the likes of HUL and Nestle. Recently, there has been a trend of growing in-house ‘indie’ brands that are serving niche spaces (think beard grooming, face masks, baby products etc.) heavily funded by consumer-focused VC funds.
The Direct – to – home model may have been growing in popularity but in a recent investor presentation by HUL talking about the merits of this channel, most of these business models were described as C.R.A.P. (Can’t Realize Any Profit).
ATFL – A tumultuous start
ATFL had started it’s operations in India in the year 1986 by entering into a technical and marketing consultancy agreement with ITC by Mr. CN Balu. The company undertook backward integration activities (solvent extraction, dewaxing facilities etc.) when it entered into a technical collaboration agreement with Pacific Seeds of Australia in 1990 for manufacturing of Hybrid seeds.
The company kept making losses due to poor capacity utilization and lower availability of seeds despite Sundrop being the largest selling sunflower oil in the branded retail segment upto 1995.
Between 1992 and 1996 the company developed the brands ITC Sundrop and ITC Crystal (which are now called Sundrop and Crystal respectively) when finally the business was sold to the US based foods company Con-Agra.
In 2000, the company got renamed to ATFL. Sachin Gopal, the current MD & CEO was appointed as the COO in 2007.
ATFL today does not sell only Sundrop and Crystal. The management has highlighted this as a key risk in their business – the fact that they drive the majority share of their business (~70%)
ATFL has been slowly transforming itself into a foods company.
While ACT – II is their flagship brand in the foods segment, they’ve also ventured into other range – spreads, extruded snacks, breakfast cereals and confectionery. As on FY20, the foods business makes up 31% of their overall revenue, a shift that looks promising and can go up further in the upcoming years.
Let’s start with ACT – II.
ACT – II is a global popcorn brand which is owned by Con Agra Inc., the global foods behemoth. ATFL uses that brand and has managed to have multiple extensions both in the ready to cook and ready to eat category.
In the initial days when popcorn was launched as a category in the country, ACT – II had launched the microwave version only to do a rollback since most of the consumers in the Indian market did not have a microwave oven to begin with. This technology was licensed by Con Agra to ATFL.
ATFL then launched a pressure cooker / pan version of the ready to cook popcorn (the technology was developed in-house for this) which was then an instant success in the Indian market.
Cut to 2020, amidst the pandemic of Covid -19 some clear trends have emerged. With movie halls shut and the rising consumption of Data and OTT platforms, the Indian consumer is increasingly bringing the movie experience home. While there are multiple choices for beverages, for popcorn there is only one i.e. ACT – II.
For Q4, they reported a 26% Volume (16% for Full Year) and 22% Value (17% for Full Year) growth. The company an interim update for Q1’s performance as on June which stood at 73% for May’20 (31% QTD) in terms of Volume and 64% (26% QTD) in terms of Value.
They had recently launched a new variant under the ACT – II brand, “Ready to Cook Corn” which contributed around 380 bps of value growth in QTD May ’20. Before ACT – II, the popcorn market was fragmented until ACT – II arrived to consolidate and create monopolistic brand share. With malls shut and consumers looking for instant snacking options, ATFL is ripe to create the same disruption in the instant corn space as a relevant brand extension to their existing portfolio.
Ready to Eat Category
In the RTE category, ATFL sells RTE popcorn, Nachos and other Extruded snacks. This category is heavily crowded by both national and regional players but the Indian market has shown us examples of winners coming out in Niche categories (Cornitos closed FY19 with 60 cr. in sales in an industry that is estimated to be 200 cr. in size making it the market leader with ~30% market share.)
ATFL has also been swiftly launching smaller packs to induce effective consumer trials. Sundrop Popz has been a differentiated offering in the space that is heavily dominated by Kellogs.
Spreads & Chocolates
ATFL had launched the peanut butter spread, a category which was again niche and unique in it’s own way (enjoying ~55% market share now). There were new variants launched swiftly, the latest addition being the chocolate spread. It is interesting to note that the management is always cognizant of the big players they are going up with (Hersheys and Nutella in this case).
They initially dominated the peanut butter category and after achieving the brand leadership space in that, they went ahead and expanded into chocolate spreads. In the chocolate market of India which is dominated by moulded chocolates, ATFL’s focus has been on nut-based chocolates (3-4% of the overall USD 2Bn market in India). This again is in-line with ATFL’s core competence in handling nuts and seeds (peanut butter).
ATFL publishes an annual investor presentation in the month of December whereby they disclose the details of media spends by major brands in a specific category.
The company has been historically very conservative w.r.t. ASP (Advertising and Sales Promotion) a key expense item for any FMCG company. There can be two ways of looking at it – the first way is to realize that ATFL has a strategy whereby they want their brands to grow organically and keep the ASP spends in check. The other way to see at it is they do not have enough sales to support an increase in spends.
Being cognizant of the above, the management has pressed the pedal on increasing spends and spend aggressively (compared to their own standards) in Q1 to get effective realizations through cost-effective media investments.
Trends emerging during Covid-19
In almost all questions asked to the management, most of the analysts ask around the current sustainability of growth. Here’s what Sachin Gopal has told us till date –
- There is a clear focus on improving overall margins by increasing revenue mix from foods.
- Since people are not working out enough, (gyms being closed etc.) the sale of peanut butter spreads has been sluggish. The demand has picked up in the later half of Q1.
- In terms of the shopping experience, the consumer is spending lesser time at Modern Trade outlets and is picking up brands that they can identify themselves with rather than trying new brands or exploring.
- ATFL has a pan-India presence in terms of production units which helped in delivering the required output in line with the surge in demand in certain niche pockets of the operating categories.
- The deleveraging cycle is over and the company is not content with the current run-rate. They wish to expand their topline and are mindful of the competitors they have gone up against.
- ATFL is not competing in their competitor’s turfs – in chocolates they’re not even trying to compete in the milk / dark category (dominated by Mondelez, Nestle and Amul), in Breakfast cereals they’re going after a niche space to be profitable (Honey Roasted Oats, Centre Filled Cereal etc.)
ATFL has had flat sales for almost 5 years. While operating profit margins have remained flat (~60% revenues coming in from edible oils), the net profit margin has improved on account of reducing debt that has led to a decline in interest costs.
We can expect this to improve over the period of next 5-10 years given the management’s renewed focus on improving their foods portfolio business. The strong parentage to Con Agra Inc. can also make us see introduction of newer categories. Maybe we can see a plant based meat in India soon?
Coming to the Balance Sheet, the company sits on a fairly comfortable position with adequate reserves and almost negligible debt.
ATFL has clearly underperformed compared to their FMCG peers. This has a lot to do with bulk of their business coming from edible oils which is essentially a commodity play and lacks pricing power. Over the recent years, ATFL has shifted it’s focus on niche categories in the Foods space where they expect significant upside in volumes and margins.
Will ATFL be the new darling of the FMCG pack or will it continue to underperform as before? We will have to wait to find out.
After reaching a low of 348 in March, ’20, the stock is now trading at 593 levels as on 31st July, 2020.
This post was originally published for Capitalmind Premium here.
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