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Decent quarter with good growth in Foods.

AWL had a decent quarter with volume growth of 6% YoY and 53% YoY in edible oils and Food and FMCG segments, respectively. This is despite inflation-led consumer slowdown in most staples categories. In terms of prices, while there was some cool-off in edible oil prices (partly driven by government measures as well) the trajectory still continues to be volatile. In terms of demand outlook, festive season and some expected improvement in rural demand (good monsoonled) should aid improvement. Strong competitive advantages (price-laddering, oil segments, scale, market intelligence (courtesy Wilmar)) in edible oil provide AWL with an edge over competition. Further, AWL enjoys multiple synergies across all three business segments which augur well for scale up of packaged foods business – a) scale in procurement & logistics, b) brand recall of ‘Fortune’ and c) readily available distribution and mix-load supply chain benefit from edible oil. We like the potential in the HoReca segment given AWL’s key focus in that segment. We like the business and have a constructive view. We increase our TP to Rs595, downgrade to REDUCE (from HOLD) given the sharp run-up (+20% in last 1m).

* Decent performance despite macro headwinds: Overall volumes were up 15% YoY with 6% YoY and 53% YoY growth in edible oils and foods, respectively. Industry essentials reported volume growth of 22% YoY. On an overall basis, revenue was up 30% YoY with pricing-led growth in the edible oil segment. AWL is driving penetration growth in the semi-urban and rural markets. In terms of key foods segments, wheat flour and rice reported volume growths of 33% YoY and 73% YoY, respectively while soya nuggets and besan grew 21-24% YoY. The company continues to gain traction in new channels of MT and e-com, up 21-23% YoY - AWL’s share is over indexed in these two channels with better brand mix (vs GT).

* Margins profile still weak; sufficient levers to drive expansion in medium-term: Margins for edible oil business saw some contraction in 1Q. Unit EBIT (EBIT / kg) were down 13.8% YoY to Rs2.9/kg. We note that this was largely due to inflation in operating costs including power and fuel – other expenses related to plant operations also saw some increase. We believe some of this inflationary pressure should ease going forward. The Foods and FMCG business reported EBIT margin of 1.3% compared to marginal loss in the base. That said, strong continued volume-led growth potential and some respite in inflation should help margin improvement. On an overall basis, PBT was up 16% YoY while PAT grew 10% YoY to Rs1.94bn.

* Valuation and risks: Our earnings estimates are unchanged; modelling revenue / EBITDA / PAT CAGR of 9% / 24% / 35% over FY22-24E. We increased the multiple for Foods business from 4x EV/Sales to 5x EV/Sales. Downgrade to REDUCE from Hold with an SoTP-based revised target price of Rs595 (was Rs550). Key risks: 1) Higher volatility in RM prices, and 2) failure in scaling up foods business. On the upside: Sharper-than-expected scale-up in operating margins

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