Unlearning and Embracing Change
Situations change faster than people realise | Investment Thesis Note for Agro Tech Foods
Greetings,
India is transitioning into a Global Superpower. These expectations have translated into amazing returns for us and the equity investment community.
As an aspiring value investor, these are not the times to be very active in the market generally but a study of all the market booms clearly shows that in every Market Boom, there is a certain sliver of companies that still don’t command sky-high valuations.
Our job as contrarians is to find value amidst sectors and companies that are ignored by the herd right now.
But first I would like to clarify what being a contrarian means :
Being a Contrarian doesn’t necessarily mean doing the opposite of what the herd is doing.
It means doing the Right Thing where the Herd is probably doing the Wrong Thing
and the odds are in our favour.
One of the patterns that has consistently performed for us has been to look at companies going through some fundamental shifts like changes in Management, Business Model, Product Mix, etc.
We as humans form perceptions about a business and refuse to change them until it’s too late. Getting over this bias helps discover some great ideas with risk-reward ratios in the right place. Below are some instances from our portfolio:
Example 1 : Usha Martin : Management change generating a return of 5x in 2 Years. (Our Investment Thesis can be found here)
Example 2 : MCX : Business Model Change by Transitioning from a third-party vendor to an in-house platform resulting in 3x in 1.5 Years.
Example 3 : Technocraft Industries: Product Mix Change, a 2x return in just a quarter. (This fast run-up was not expected. We are definitely lucky here!) Blog post here.
Why are we Investing in Agro Tech Foods ?
Agro Tech Foods operates the Act II brand of Popcorn & Nachos, and the Sundrop Brand making Peanut Butter, Oils, Spreads, etc.
The Parent Company is called ConAgra with $12 Bn+ in Revenues. Agro Tech Food’s INR 750 Cr ($8.9 Mn+) is sales is just a drop in the ocean for them. The Management lacked focus on the business and spread itself too thin by diversifying in numerous products. The Market hates such businesses and why shouldn’t it?
To put things into perspective,
The Company’s gross block grew from 110 Cr to 450 Cr without any increase in sales in the last 11 years.
But now, the company’s is being acquired by Samara Capital and Convergent Capital.
They will be transforming Agro Tech into a whole Packaged Foods Platform by Acquiring brands, and licensing global brands in India while leveraging the same 5 lac Urban Distribution Points
Undertaking Contract manufacturing for other large FMCG brands to sweat the under-utilised assets built up over the years.
Strengthening the Branding and Marketing Function within AgroTech Foods.
The Acquirer’s capabilities can be showcased through the following:
Samara has demonstrated an exquisite track record in scaling up platform foods businesses with Saphire Foods in India (through the master Franchisee of Pizza Hut and KFC).
Convergent Capital through their remarkable success in FMCG Contract Manufacturing exhibited from Hindustan Foods.
Agro Tech’s net-worth of INR 500 Cr with INR 750 Cr in Sales and only a Market Cap of INR 2000 Cr give us a lot of comfort in investing in the company at this stage. Even if we are wrong, the downside seems limited.
The Risk Reward seems to be in our favour.
With these thoughts, I’ll be Signing off. Happy Investing!
Warm Regards,
Darshit Jain