AgroTech Foods - Q2FY14; Estimate operating performance to improve. Maintain BUY - PhillipCapital

AgroTech Foods (ATFL) revenue growth at 1% YoY was a major disappointment. Sundrop volume growth in the recent past has been volatile; being flat for 2 consecutive quarters. While we remain concerned of the sluggish revenue growth in the edible oil business as the company focuses on margin expansion, we are positively surprised by the robust volume offtake in the Rs. 90 recruiting price point. We estimate volume traction to sustain in the Rs. 90 SKU. We believe that going ahead an improvement in the demand environment should support volume recovery in the other SKU's for Sundrop also and translate into better realizations. We remain positive on the ability of the Snack Foods business delivering 30% revenue CAGR. New product launches in the near term in the Snack business are potential triggers. We expect operating performance to improve in the forthcoming quarters. We maintain our BUY recommendation on the stock.

Sundrop oil reports value degrowth of 1% YoY impacted by change in mix and flat volume growth: Sundrop brand growth was negatively impacted by lower realizations on account of change in mix. While the company has exercised a weighted average price hike of 6 - 7% YoY, the sharp volume offtake in the Rs. 90 SKU negated the pricing impact effectively translating to pricing degrowth of 1% YoY. Flat volume is also indicative of volume degrowth in the other SKU's of Sundrop. We expect demand improvement to contribute to revival in the volume growth for the higher priced SKU's. Hence along with sustenance of volume traction in the Rs. 90 SKU we expect Sundrop volume growth to improve to ~5% CAGR in the medium term with better realizations. Crystal brand reported degrowth of 6% YoY as volume was disrupted by strikes in the main market of coastal Andhra.

Act - II popcorn reported growth of 15% YoY: Act II brand growth decelerated to 15% YoY. Sundrop peanut butter reported growth of 30% YoY primarily led by pricing. Sundrop peanut Butter is to commence commercial productions from Jan 2014, with the launch of new SKU's. The brand is currently being test marketed in Gujarat to improve product taste to suit consumer preferences. The management has maintained revenue growth rate target of 40% for the Act - II popcorn brand. The management has guided for launch of two new products in the Snack Foods business in the near term. The resultant expansion in the scale of Snack business can drive ahead of expectations improvement in key operating metrics of volume and margins in the future. We view any new material product launch in the Snack business as a potential trigger.

Gross margins expand by 155 bps YoY to 32.6%: ATFL has exercised judicious price hikes to mitigate the negative impact of currency depreciation on the input basket. The 214 bps YoY sharp increase in Other operating expenses was on account of higher freight cost and spends on feet on street. ATFL is to calibrate its existing distribution network and focus on expanding product line in the medium term. ATFL is expected to increase its contracted period of corn from 12 to 18 months. Although the rupee has depreciation, the global corn prices have corrected sharply. Hence we estimate a probability of input cost savings in H1FY15.

PAT growth aided by lower effective tax rate: Lower effective Tax rate at 21% as against 34% in Q2FY13 was on account of tax benefits from the Kashipur plant which has turned profitable. The tax benefits are eligible till March 2015.

Revision of estimates and target price, maintain BUY recommendation: We have revised our revenue estimates downwards for FY14E and FY15E, however on account of tax benefits are earnings estimates remain unchanged. As per our DCF based valuation we have lowered our price objective to Rs. 570 (earlier Rs. 620). Considering the upside of 12% we maintain our BUY recommendation.

Source : Equity Bulls

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