ACT II is the undisputed king of the popcorn market in India with a staggering 90% market share in the home popcorn category.  They’ve been at this game for a while now, by first introducing microwave popcorn (which didn’t quite do anything because of the microwave penetration in India ) and then the cooker pop corn. They have been ahead of the time and have literally created the market for home popcorn. With things really changing due to to urbanisation, higher disposable income and the likes of Netflix and Amazon Prime this niche market seems to have everything going for it in terms of tail winds. 

But what seems surprising to me was why a company that has more than 5% share in the refined oil market, via Sundrop would get into such a small business. I am then reminded of this dialogue from Raees.

90% of Home Popcorn, 55% of Peanut Butter and 25% of the Tortilla chips. All very very niche markets.

When you look at other niche players in the foods segments like Paper Boat, Raw Pressary etc, they’ve created a great brand recall but have spent tons in capex and marketing, and I really wonder when they will really be able to generate free cash.

Agrotech on the other hand has painstakingly built its supply chain, a complete in house manufacturing capacity and is truly end to end, and has really really low operating costs. Unlike the examples mentioned, they didn’t have a private equity funding, but had to build the niche businesses of Popcorn, Peanut Butter and now Nachos on the free cash that the Sundrop Oil business. They have been extra conservative as the main business is in a very mature stage and they don’t expect margins to improve  too much or see a large volume growth.

In the oils business, a gross margin of 25% is considered premium, where’s in the snacks business a 25% gross is affordable. In a chocolates business even a 35% gross is considered affordable.

ATFL’s biggest strength seems to stem from their supply chain and cost of operations.With this advantage they’ve recently ventured into Choco Popz, a bite sized chocolate filled offering at 400 rupees a kilo. 400 rupees ! You don’t get 800 grams of mutton for 400 rupees in hyderabad.

At just 400 rupees a kilo !

ATFL has managed to hit a store count over various products of 4,00,000 today. Their target is 10,00,000. They expect to sell with increased velocity in the future as they now have a whole bunch of offering to distributors from Oils, Popcorn, Peanut Butter, Nachos, Choco Popz and some more offerings in the anvil. They are pretty strong in the South, East and North but a lot of works needs to be done in the West.

In the Nachos business too they’ve really proved their mettle. Not only is the  product top class but its also at just 30 rupees a bag. They’ve managed create yet another top grade product fro the mid/mid-premium segment.

They’ve smartly chosen to participate only in the bagged snacks format so that they don’t have to compete with Kellogs ( the cereal king ) or Mondelez ( the moulded chocolate king). Their closest competitor is at 600 rupees a kilo, a whole 50% more expensive.

Foods Target – Foods are now about 30% of their sales, and they really want to push that to 50% so that the foods division can operate as a separate company without depending on oils. From 240 cr sales they have to move towards 500 cr briskly. Prataap snacks has built a 1,000 cr market in bagged snacks at 5 Rs a bag. Yup Yellow Diamond.

Tinkering ! All great researchers are obsessed with this. Tinkering is like kaizen, its a process of continuous improvement and exploration. It’s almost impossible to involve in tinkering without having your own lab. ATFL understands this and instead of going the typical consuming company route of outsourcing production, they have decided to go end to end in manufacturing as well as packaging to keep their tinkering spirit alive.

Graph by Ichak Adizes

Flexibility and Control – When companies can balance this, they usually emerge as winners. More often that not, you find the main strength of old companies is control and that of new ones, it is flexibility. In the case of ATFL, it looks like they have mastered control and are capable to be flexible, but their policy and parent do not allow them to be flexible enough. They seem to be of the type that believe in not screwing up more than the one that are ok with screwing up in the process of achieving greatness. 

“A person who must win every game can never learn a new game” Ajay Piramal. While ATFL has succeeded in learning as well as winning new games, its been extremely slow. So slow that they are on the verge of the “save you ass” and “innovate something” line.

They seem to lack one of the qualities explained below.

Companies that hang around the start-up stage for too long, get boring very fast and head straight to the graveyard soon. ATFL, probably ran the risk of the same for a while before they got into Tortilla Chips and the new Choco Popz.  

My main issue is that I really find no ones neck on the line here. I am a biased as most of my investments have primarily been in promoter owned and driven companies, but ATFL is owned by Conagra, which in itself hasn’t really grown too aggressively.

The CEO in his last con call said that they are at a  16-18% CAGR today and want to hit 20 % soon before hitting their target of 30% CAGR. The products and production capacity definitely hold potential, but I wonder where the aggression to grow will come from. Never the less, I’m buying in and waiting for the 2nd ACT of ACT II.

3 replies on “The Second Act of ACT II !

  1. Good detailed analysis. I will add my bit here

    1) They had built the plants all over India through Internal accruals. But the capacity utilisations are still low and operating leverage is yet to play out.
    2) I agree with your assessment that they are not as aggressive as one would want to. But seems like this is typical of any MNC in my view
    3) The P&L does not have manoeuvrability for high A&P spends. They need more scale to afford higher advertisement expenditure. May be in the next two years or so this will improve
    4) Not sure what kind of support the local arm is receiving from Conagra. Reading through the parent annual report one gets a feeling that they are more focussed on Frozen foods now.

    It will be interesting to see how this will pan out.

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