Reiterate long-term bull thesis on packaged food industry - Edelweiss

Edelweiss Research recently attended FICCI conference 2011 'FOODWORLD India 2011', during which they met several listed and unlisted companies as well as government stakeholders in the food processing industry. The key message was—processed food is a multi-year theme (to grow ~4.5x by 2020) and to cash in on the same will require streamlining the value chain, tackling competition and regulatory decisiveness. Our interactions reiterate our long-term bull thesis on the packaged food industry; we expect Nestle, ITC, GSK, Britannia, Marico, HUL and Agro Tech to be the biggest beneficiaries.

Food processing to jump ~4.5x by 2020, outperform non-food

According to Mr. Antonio Helio Waszyk, MD, Nestle India, Indians spend ~35% on food, which translates into ~USD330bn per year (of which only USD40bn is currently processed). Processed food, as per a FICCI-BCG report, is likely to reach 20% of total food consumption, which is expected to grow to ~USD900bn by 2020. Urbanisation, rise in working women, low penetration, higher disposable incomes and evolving consumer habits will ensure that packaged foods will grow at a sustainable superior clip compared to other consumer categories. The packaged F&B segment has zoomed up in the past five years, posting a CAGR of ~18%, and we expect the growth trajectory to accelerate to 20% CAGR over the following five years. Also, the food segment's profitability profile has turned superior than non-food as the competitive intensity is lesser in the former since penetration level and per capita consumption is low.

Streamlining supply chain and regulations key

The agri-supply chain in India faces several constrains. It involves multiple players such as farmer, aggregator, commission agent, wholesaler and retailer, which results in price rise. Inadequate storage facilities lead to significant wastages (wastage is ~35% for tomatoes, ~30% for mangoes and ~25% for potatoes). High capex for setting up cold storages, warehouses and shortage of power are major hindrances to ramping up of supply chains. Therefore, FDI in modern retail will be the most important trigger, feeding investments in back-end operations. Supply chain efficiencies will help offset inflation and deliver packaged food as a value proposition to consumers.

Outlook: Ample food for thought

Edelweiss Research believes the food processing industry has reached an inflection point, evident from the number of new entrants in the past few years (Conagra via Agrotech, Kraft via Cadburys, Danone, McCain, ITC, etc.) and large scale capacity/product expansion (Nestle, Pepsico, HUL). These investments, though at a nascent stage, will eventually set the base for the next leg of growth. Most leading players are adopting a more localised business model, including India specific products and a well-spread out distribution network. Right strategy in processed food is more about baking a new cake, rather than launching me-too products to get a small market share.

Source : Equity Bulls

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