The IPO of Adani Wilmar comes at a time when the market seems past its purple patch and is showing signs of nervousness. At a market capitalisation of about ₹29000 crore, this midcap stock is valued at around 40-42 times the annualised earnings for the half-year ended September 2021, on the post-issue equity. This valuation is only at a slight discount to Marico, its closest peer, which trades at 46.7 times its estimated FY22 earnings. But while Marico has made its mark in value added oils, food and personal care segments, Adani Wilmar is yet to. Adani Wilmar is in the low margin edible oil (65 per cent of revenues) and industry essentials (25 per cent of revenues) business. It’s more recent foods (wheat, rice, pulses, sugar) and FMCG (soaps, hand wash, sanitizers) business is margin neutral as of now. Its revenues grew by 13.5 per cent CAGR from FY19 -21 to ₹37090 crore and profits at, 39 per cent to ₹728 crore. Profits in FY21 got a leg-up from shifting to lower corporate tax rate of 25.1 per cent.

The entire offer for ₹3600 crore is a fresh issue, aimed at repaying a portion of long-term debt ( debt to equity at 0.39 times in FY21), capex spends and setting aside sums for acquisitions.

While edible oil can provide a steady state business for Adani Wilmar given its strengths in raw material sourcing and pricing power, what will bring the next level of growth is expansion in the FMCG business. But this is a long-term story. Given that the current valuation appears to capture the positives of the existing business, investors can wait and watch for better entry points in the secondary market.

Edible oil - a commodity business

Adani Wilmar’s business seems attractive in the light of the fact that the company is present in segments which constitute two-thirds of the kitchen spends of Indian consumers. The staple or the essential nature of the products means that the demand can be quite consistent. The low penetration of branded products in the categories the company is present in, and the expected shift from unbranded to branded products among Indian consumers is also a growth lever.

Adani Wilmar, known for its ‘Fortune’ brand, has 18.3 per cent market share in the branded edible oils segment in India and is the leader. That said, edible oils is essentially a commodity business with low margins. Raw material costs as a percentage of sales range from 85-90 per cent. Much depends on reliable supply of raw materials across all seasons, cost control, as well as the ability to pass on cost increases to consumers. India imports 60-70 per cent of the domestic edible oil requirements ( predominantly palm, soybean and sunflower oils) and strong relationships with suppliers is key for success. As of March 2021, Adani Wilmar was the largest importer of crude edible oil. The company sources raw materials predominantly from global suppliers such as Cargill International SA, Louis Dreyfus Company Suisse S.A, AAA Oils & Fats Pte. Ltd., Cofco International Limited and Viterra B.V.

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As per the offer document, Wilmar International (promoter group company), is the largest palm oil supplier in the world, benefitting the company directly in the form of zero dependence on third party suppliers, market intelligence on price movements and inventory management. Adani Wilmar also has a strong relationship with a large soybean crusher in Argentina, ensuring direct availability of crude soybean oil. Out of its 19 refineries, ten are port-based to facilitate further processing of imported crude edible oil without incurring much transportation costs. Speciality fats, derived from palm oil and catering to the institutional business are also manufactured at port –based refineries such as Kakinada, Mundra, Krishnapatnam and Haldia. This provides logistic advantages to cater to all regions of the country.

However, edible oil is also subject to vagaries of having to import either crude or refined palm oils from time to time, depending on the cost advantage provided by each or the government’s tweaking of the duty structure. For instance, to increase domestic supply, control price rise and reduce time-to-market of edible oils, the government, in December 2021 encouraged import of refined palm oil by slashing the basic customs duty on the same. Refined palm oil/palmolein was also allowed to be imported without requirement for permit until December 31, 2022. But the narrowing of the duty differential between crude and refined oil as well as the higher export duties on crude oil by countries such as Indonesia, is making domestic refining unviable currently. Utilisation of refining capacities of Adani Wilmar is at 48 per cent in the half year ended September 2021 and has been in the 50 to 60 per cent range over the last three fiscals. Thus, edible oil importers need to be able to wade through policy uncertainties from time to time.

International crude palm and soybean oil prices have shot up to $1300-1400 levels per metric tonne now, compared with the $400-500 levels at the start of the pandemic. Given its brand visibility and pricing power, Adani Wilmar has been able to pass on the costs to customers. In the year ended March 2021, for instance, volumes grew year-on-year by just 4 per cent but revenues grew by 25 per cent indicating the price increase. Despite this, EBITDA margins contracted to 3.8 per cent from 4.8 per cent in the previous fiscal. EBITDA per metric tonne also dropped marginally. For the half year ended September 2021 too volumes grew by only 1 per cent but revenues, by 54 per cent. EBITDA margins stood at 3.5 percent, lower by one percentage point year-on-year, but EBITDA per metric tonne grew by 18.7 per cent. Lag or gaps in passing on price increases, down trading within the edible oil segment and increase in other expenses such as advertising can also exert pressures on margins.

FMCG foray - easier said than done

Currently, at just 11 per cent of revenues, the food and FMCG business is EBITDA neutral. The company currently makes soaps, handwash and sanitizers under the ‘alife’ brand, apart from Ready-to-eat Kichdi under the ‘Fortune’ brand. It is eyeing entry into dishwash, floor cleaner, noodles /pasta, aside of functional oils and fortified staples which are higher margin segments. This is not new, given that other oil players like Marico (Parachute, Saffola) have adopted a similar route.

But an expansion into FMCG is easier said than done. For one, even as the company is striving to reduce costs - by setting up integrated manufacturing facilities for oils and packaged foods, by backward /forward integration into various inputs/products for homecare/personal care and by using common distribution network - the presence of well-entrenched players including MNCs is a big challenge. While it is true that FMCG can bring in higher margins than edible oils, requirement of high advertising spends and already high penetration levels in many categories implies that market share, pricing power and margin expansion is not a given.

Even after 20 years and several acquisitions, ITC, a latecomer to the FMCG business, makes around 5-6 per cent margins in this business. Agro Tech Foods which sells Sundrop oil and other ready-to-eat foods also has only 6-8 per cent margins. Marico does show 16-20 per cent margins. Any re-rating for Adani Wilmar will depend on how the FMCG business pans out.

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