Food Gains

Written by Sarika Malhotra | Sarika Malhotra | Updated: Mar 27 2011, 07:56am hrs
Its unusuaL. Several food and agri companies are outperforming the Sensex. For example, while Sensex inched up by 10% from March 1, 2010 to February 28, 2011, Gokul Refoil shot up by 83% in the same period. Its almost a paradigm shift in the offing, as Indias economic mainstayagri-sectorgets a renewed thrust from the government and private sector like never before. And the situation is changing, albeit slowly, for this hitherto ignored and unorganised space.

Taking the overall Indian food story forward, performance of agri-related companies has had a good run over the last one year. Gokul was not alone. It had for company Jain Irrigation (up by 19%), Rallis (43%), Bayer (25%), United Phosphorus (15%), Coromandel International (88%), and Chambal (11%), according to the data by Angel Broking. Its a reflection of how the agri space is unfolding in India.

Also, the latest projections by just released Food & Beverages Report by Nomura substantiate this trend. As per the findings, in the consumer space, Nomura prefers food companies over the hygiene and personal care (HPC) names as food companies offer more attractive longer-term opportunities. This also partly gets reflected in valuations as food companies trade at a 15% P/E premium to the HPC names in India.

The report highlights how in the near to medium term, HPC names are likely to face intense margin pressure and thus earnings are at risk with downward bias. The Nomura report states that food companies offer an attractive long-term opportunity, which is unlikely to be held back due to issues like competition, commodity cycles and lack of pricing power. It points out how food names should trade at an even greater premium.

Jubilant Foodworks and GSK Consumer are its picks in the sector. Jubilant Foodworks is the exclusive franchisee for Dominos Pizza in India, and GSK Consumer is the market leader in health drinks).

Nomura pegs two-year earnings, CAGR forecasts 36% on average for food companies, putting them significantly ahead of the HPC average of 14%. While current valuations for the food sector are at a 15% premium, the Nomura report predicts that food should be higher, given the longer-term opportunity.

According to the report, high-profile hygiene and personal care (HPC) sub-sector is already beyond the penetration phase, and further growth will have to be squeezed out from increasingly stiff competition. Traditional and large HPC categories, such as soaps and detergents, have reached 90% or more penetration in both urban and rural markets. On the other hand, the organised food space continues to be under-penetrated at less than 25%, even in urban areas. This is where Nomura estimates that the next big investment opportunity lies, as rising incomes seek out consumption upgrades and create demand for packaged foods, health foods and non-traditional cuisine.

Sageraj Bariya, an agriculture anlayst at Angel Broking, says that companies with robust product portfolio and strong farmer relationship would benefit the most. Key agri-input sectors like fertiliser and agri-chemical (for example, United Phosphorus) would perform in line with market, while in terms of agri-output-based companies, which have strong brand and robust sourcing network, would continue to benefit from higher consumer spend.

Experts say this trend of agri-stocks doing well is here to stay as its fuelled by growing and sustainable demand / consumption of agri-products. Talking about the good performance of agri-stocks, Dinesh Somani, an independent agri analyst, says that 2010 was not that rosy due to broader economic conditions, however there has been an increase in market share of the branded processed food Moreover, with the government providing incentives to palm oil plantations in the current budget, the listed companies such as Ruchi Soya and KS oils would benefit the most. Similarly, food processing companies such as ITC will gain from the increasing market participation, mostly in processed food items such as wheat flour, he adds.

Experts spell that the growing interest in the agri-space in India is primarily due to growing food deficit, rising income level, and strong government support. Higher credit flow to agriculture and increasing allocation to agri-financing (through higher target for agri-financing to bank, or higher credit disbursal through NABARD and other agencies) leading to strong credit availability to farmers is making the sector attractive. Bariya cites how government support is changing the dynamics in the fertiliser space. India is one of the largest consumers of fertiliser. For a long time India remained dependent on urea for meeting its fertiliser requirement. Also for a long time India didnt see any new fertiliser plants. Seeing this, the government started promoting complex fertilisers and over a period loosened its control on it for the betterment of the sector. This deregulation of the sector not only promoted balanced usage, but also encouraged new capacity in fertiliser manufacturing, giving another option to farmers to enhance its yield.

Shakun Kohli, an associate director at KPMG, reasons that the demand and supply mismatch has led to inflationary pressures forcing the government to focus on agriculture sector as food security is one of the greatest challenges that India faces today. Kohli states that growing income levels have given rise to increased demand for agri-products and processed foods. There is also an increased export market for certain agri segments such as basmati rice and spices. Private sector focus has increased with large domestic corporates such as Reliance and the Birlas and international players such as Walmart and Carrefour showing increasing interest in contract farming for sourcing of agri-produce. Tapping into the large unorganised market with a focus on the agriculture inputs and logistics space presents an immense business opportunity. It will not be long before India creates its own Monsanto or Bayer! says Kohli. While the government continues to play a major role in shaping the agriculture sector in India, the current growing interest in the sector is mainly due to increasing private sector thrust.

The growing private sector interest is also evident with the kind of investment that agri and food space is attracting from PE/VC players. IL&FS, which invested $16.2 million in Karuturi Global Ltd in August 2010 through its Tara India Fund III, is tapping the sector closely for investments, especially in the food processing and logistics space. Archana Hingorani, CEO & executive director of IL&FS Investment Managers Limited, says the sector is of interest, given its potential size, broadening purchasing power in the country, and increasing strength of rural India.

The entire gamut of production, processing, logistics and transportation, marketing, and retail presents attractive opportunities. Hingorani adds, There will be greater investments in the mid market space ($10 $20 million) as large deals in areas outside retail seem difficult at this stage. But it is encouraging to begin with, given that the agricultural sector has been unorganised and hard to access from an investment perspective.

Hingorani elaborates that the recent budget has spelled out a real positive for the development of the agri-business. The allocation of R 2,200 crore to six different sectors to address demand-supply gaps within the agri-sector includes initiatives on vegetable clusters, promoting nutria cereals, launch of the National Mission for Protein Supplements, improving the supply chain and minimising wastage, introduction of 15 additional mega food parks, and allocation of more cold storage facilities. The government is also looking to focus on improving agri supply chain infrastructure such as storage and cold chains, which will be classified as infra sub sectors. This support will enhance investments and develop the sector.

Bariya estimates that sectors like irrigation systems (likely opportunity to the tune of $60 billion), food processing (growing at 25-30%), seeds (growing at a healthy pace of 12-13%) and commercial seed market accounting for only 25 share, will witness strong investment and entrepreneurial interest.

Taking a cue, Srikumar Misra, founder and CEO of Orissa-based Milk Mantra Dairy, which recently got VC funding from Aavishkaar Venture Management, is exploring newer ways to cash in on the growing opportunity in the Indian dairy space. Dairy sector is poised to boom as demand for quality products is growing in India. The organised dairy market in India is estimated at $ 5 billion and the overall dairy market is estimated at $ 30-40 billion, and we are innovating at all ends to make the most of the burgeoning opportunity. Innovation is happening at all ends, especially with newer investment models in the agri-space. For example, Milk Mantra struck a private treaty deal with Orissas leading news channel, OTV, last month. Way to go for Indias agri-biz!