Screening Four Companies in Agriculture Business

We all want to succeed in investments, but there are very few us who are willing to prepare for this success. Preparing and positioning yourself to take advantage of opportunities is something that is not learnt easily. It takes time and effort. I am not competing for allotment of IPOs and Bonds. Instead I am spending time and effort to continue expand my watch list and my buy list. I would like to be prepared for what I want to buy at next opportunity or when they fall in my fair value range. Following are four companies I screened recently in the agriculture sector.

In general, agricultural business is a low margin business and hence, there is no room for error. In our country, it still continues to be heavily dependent on monsoons. Having said that, I believe a company with good management, combined with buying at decent price, can provide good down side risk for individual investors.

Agro Tech Foods Ltd (ATFL): It is subsidiary of ConAgra Foods of USA. It is engaged in the business of marketing food and food ingredients to consumers and institutional customers. The company has a portfolio of branded edible oil, popcorn, cocoa mix, dried green peas, chocolate pudding and frozen potato products. The edible oil brands include Sundrop, Crystal, Rath and Sudham. The company sells popcorn under ACT II brand. Under healthy world brand the company sells dried green peas. It sources frozen potato products from Lamb Weston, another subsidiary of ConAgra Foods and sells them to institutions like hotel chains, quick service restaurants.

  • Operating Cash flow (positive for last 9 years)
  • Debt (no debt, I like such companies)
  • Dividends (yes, very low payout)
  • Reported Net Profit (positive, and slow increasing trends)
  • Margins (positive, improving trend)
  • Capital usage (positive, and slow improvement)
  • I like this company because of its debt free balance sheet, cash flow, and competitive market position. .
  • Liquidity is a concern; share trading volume is too low.
  • Lack of robust dividend is a concern. No room for error due to low margins.
  • This could be a good company to hold in long term portfolio depending upon at what price it is bought at. I will continue to read more about it.

ADF Foods Ltd (ADFFOODS): The company engages in manufacture, marketing, and distribution of food products in India and internationally. It’s products include Indian pickles, chutneys, canned foods, frozen foods, spices, ready to eat curries, snacks, parathas and naans, curry powders, and cooking pastes and sauces. These products are branded as Ashoka, Camel, Aeroplane, Khansaama, Truly Indian, and ADF Soul through distribution networks in Europe, the United States, the Middle East, and Canada.

  • Operating Cash flow (positive, overall increasing with nets profits)
  • Debt (negligible debt)
  • Dividends (yes, but low payout)
  • Reported Net Profit (positive, overall increasing trend)
  • Margins (net margins have improving trend, double digits)
  • Capital usage (stable and decent)
  • From the point of view of financial and business operations, this is good company to have in ones portfolio.
  • However, management is sketchy. The way management played games by issuing warrants to promoters, directors, friends and relatives, it makes me believe it operates more like a private company. The shareholding pattern is more like a private company. Banks or FIIs do not have any significant holdings, and hence management gets way with whatever they want.
  • Retail investors will keep getting squeezed in this process. The warrants issued in 2009 to promoter group, was basically, cashing out on market trend. The promoters issued themselves shares (under the disguise of warrants – i.e. capital investments) at low market price. These shares were then exercised in less than three months in markets at higher prices. Classic case of navigating loopholes in regulations! What about retail investors? Why didn’t they get warrants? Generally, warrants are issued with exercise options after few years of time – not immediately!
  • I am staying away from this company.

REI Agro (REIAGROLTD): This company is, primarily, a basmati rice producer. It also operates wind farm. The Company has three brands: premium, mid-range and economy. The Company offers a range of rice brands, including Kasauri, Real Magic, Mehrab, Mr. Miller, Hungama, Hansraj and Nausheen with choice at all the price points. The Company has a wind farms in the state of Rajasthan, Maharashtra, Tamilnadu and Gujarat, and its installed aggregate capacity is 46.1 megawatts (MW). During fiscal 2010, the company produced 5,56,039 million tons of processed rice and 46.10 megawatts of electricity.

  • Operating Cash flow (consistently negative)
  • Debt (extremely high debt)
  • Dividends (yes, but not of good quality)
  • Reported Net Profit (cyclical, volatile)
  • Margins (net margins in low single digits, gross margins in double digits)
  • Capital usage (reducing)
  • This company currently in a debt quagmire. On its expenditure list, the highest is allocated to interest outflow. To put a little perspective; REI Agro pays approximately Rs 340 crore as interest on its debt (net profit is Rs 157 crore). That is, REI is paying more in interest than it can make profits.
  • This essentially means, this business is continuously sucking in capital without generating any quality profits.
  • While I acknowledge that pure agricultural business is low margin business and have no moats, but it still does not mean negative margins and keep sucking capital.
  • Management is sketchy (putting is mildly). It went into retail business – couldn’t make a difference – so demerged. It then started Wind Farm – will it be demerged? Or will remain as a power hedge. Making/Selling rice is way off than wind farm!
  • I will follow this company like I do follow Suzlon – not for buying shares but to see how it evolves as a business and its debt situation. The recent rights issue from REI Agro will not solve the problem, it is just a band-aid.

Rallis India Ltd (RALLIS): The company’s product portfolio consists of three major segments, (1) Agricultural Inputs – typically pesticides for crop protection, for seed protection; (2) Fine chemicals – consists of plant growth formulations and plant nutrients. In this business unit, the company prepares its own formulations for selling in domestic market, selling raw molecules to other business like Bayer, Syngenta, Excel, UPL, and other agrochemical manufacturers ; and (3) Seeds – consists of BT cotton, hybrid paddy, and hybrid maize seeds. It has also started selling chemical products for household and/or building pest control.  In past, I have read news bits about Rallis, but never realized that it was a TATA enterprise.

  • Operating Cash flow (very good, higher than net profits)
  • Debt (low debt, near zero)
  • Dividends (yes, decent payout)
  • Reported Net Profit (overall increasing)
  • Margins (overall increasing, decent margins)
  • Capital usage (overall improving and high, but not likely sustainable)
  • In last few years, the company has evolved into business with good operating cash flow and low debt. This allows company to position for good shareholder returns, assuming it continues that way. Dividends will likely increase. Rallis has positioned itself as the top-tier company in Indian Agro-chemical business.
  • It is showing significant increase in operating cash flow, margins, and capital efficiency. At first pass, I believe majority of this improvement seems to come from internal improvement in areas of working capital and cost management.
  • The growth from revenue or by selling exists (probably less than half), but not as significant as the numbers will make you believe. For example, the recent quarterly results will make you believe the net profit growth of 28%. However, half of this growth is likely to be coming from reduced depreciation, reduced interest outflow, and high one-time expenses last year.
  • Overall, even with tempered expectations, Rallis appears to the good company which needs more work to determine what price to buy.

This screen is not my buy list, but it was time well spent on narrowing my list. I will stay away from REI Agro and ADF Foods. Shortly, I will have a separate post on issuing warrants to promoters in the context of ADF Foods.

I will read more about Rallis India and Agro Tech Foods. Assuming they are good, I hope to come up with by buy price and add to my buy list.

What are your thoughts? Do you agree? What are your observations?

Facebook User Comments:

19 Responses to “Screening Four Companies in Agriculture Business”

  1. Chirag says:

    I guess Rakesh Jhunjhunwala has a stake in ATFL !
    Nice pot 🙂

  2. Bhushan says:

    Hi Tipguy ,
    I have read about Rallis India.They have a strong position in agro-chemicals and are beginning to show signs of seeds sown in early part of decade when they upgraded their facilities.Their ROE clocks consistently above 22pct for last 3 years.Since Tatas are consolidating brands,mergining Rallis and Tata Chem which is largest producer of Potash.It also makes Tata Namak could be possible in future.

  3. ramesh says:

    Hi TIP Guy,

    why ATFL is slow ? their parent company has so strong brands globally. Why they have stuck to bad business of cooking oil. Only ACT-II have mindshare in India(I believe that is cyclic adue to input corn).They have good brands to become next nestle in India and but they are hugely defensive.

    Also, RJ doesn’t recommend Foreign companies(as he thinks that they don’t share wreath with retail Indian investors) but surprisingly he holds good amount of stake in ATFL.

    • TIP Guy says:

      Hello Ramesh,

      Did not understand what you are trying to say? Can you really compare ATFL vs. Nestle? Both are different markets!

      Again, regarding RJ’s recommendation… first you said one thing; and then gave example of opposite. What are you trying to say?

      Best Wishes,

      • Raja says:

        Hi TIP Guy,

        I have wondered about the same point(1) that Ramesh has made here. Let me elaborate – ConAgra has some really strong global brands/products which we are now seeing in Indian stores in recent years only but from other companies. That makes me think why they didn’t think of introducing those products in India yet ?

        A look into the Conagra site and listing the products which we see in Indian store shelfs from other companies gives me this list:
        1. french fries, tomato products, pasta
        2. frozen chicken products (ConAgra – banquet)
        3. trans-fat-free, premium frozen products (ConAgra – alexia)
        4. bread spreads. (conAgra – fleischmanns)
        5. wheat flour (conAgra – conagra mills)

        I think oil,dalda are not the kind of products where a premium can be charged unless highly advertised and branded.


        • ramesh says:

          let me add one more interesting thing

          Remeber that advertisement many u must have seen “one tibetian sitting with ice-cream kept(hidden) his pocket. one couple come and they share their ice cream with that Tibetan guru”

          1)that is not ice-cream that was PUDDING
          2)that was product of AgroTech food “Sundrop Snack Break”(globall Snack Pack)
          3)there is not branded pudding yet in India and so agrotech food had no competition and they could have achieved MINDSHARE FOR PUDDING SPACE category like “noodles”=>nestle, healthdrink=>gsk AND “Pudding” =>ATFL

          I used to see this adv one-two years before. Where is that adv. Have they taken back this product when there was no competition


  4. Bhaskar says:

    Good post.
    Did you study lakshmi energy and Foods.?

  5. Yogesh Tiwari says:

    2 questions come to my mind.

    1.I didnt understand capital usage. How do you determine if it growing..ROE, ROCE etc…?
    2.Rallis is already very expensive, Rs 1400+ a piece. I dont know, holding 10-20 could really make a huge difference in long run?

    Yogesh Tiwari

    • TIP Guy says:

      Hello Yogesh,

      My observation on capital usage is little subjective. I am looking for “historical trend of infusion of capital into business”. ROCE is one of them, but the only one. I am looking for changes in equity levels, warrants, rights issues, preferential shares, debt, etc.

      Again, I am not trying to calculate any pre-defined metrics because all of them miss something. ROE does not include debt portion or other forms of capital!

      On Rallis….. your questions has two parts. First, is on valuation. I agree it does seem to be expensive. But the point is, it is good business and good company, so what price would you pay to buy it shares? Without that you would not know when it falls in that range. Second, is about holding 10-20 shares. That’s is immaterial to me. Total capital remains the same whether you buy small qty of high value shares OR buy large qty of low value of shares. I do not think that should be the criteria.

      Best Wishes,

  6. Anonymous says:

    Hi TIP Guy,

    Was going through REI agro.. My observation:

    Net Current Assets – 4911 cr
    Current Mkt Cap @ 27 – 2600 cr
    Debt – 4500 cr
    Rights Issue – 1245 cr
    Share capital pre issue – 900 cr
    Share capital post issue – 2145 cr
    Expected Debt Equity – 1.1
    New Debt – 2500 cr
    Net net WC – 2400 cr (Net of Debt)
    Mkt cap / NNWC – approx 1
    The market is valuing the FA of the company at ZERO. Also, the mkt is not valuing Investment of REI in REI SIX TEN which is profitable for the company (mkt value of 270 crs)

    I strongly feel it is undervalued by the market.

    How do you see this?

  7. Anonymous says:

    I would also think REI Agro to be better risk reward opportunity. The future growth it expects is coming almost at no cost. so investor has much higher probablity that its stock price will be much more than current market price.

    Although I think REI six ten is negative. it has been a kind of failure or less than mediocre.

    What do you think?

    • TIP Guy says:

      Hello Anon,

      May be. But I am not looking for such opportunities. If you are confident about it, and looking for such scenarios, then go for it. Good luck!

      Best Wishes,

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