Agro Tech Foods Ltd

NSE:ATFL

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and welcome to the Q2 FY '23 Earnings Conference Call of Agro Tech Foods hosted by Anand Rathi Share and Stock Brokers. [Operator Instructions]. I now hand the conference over to Mr. Ajay Thakur from Anand Rathi Share and Stock Brokers. Thank you, and over to you, sir.

[Unknown]

Thanks, Steven. Good afternoon, everyone. On behalf of Anand Rathi, I welcome you all to the Q2 FY '23 Results Conference Call of Agro Tech Foods Limited. From the management side, we have Mr. Sachin Gopal, Managing Director; and Mr. K. P. Srinivas, CFO of the company. We shall start with the opening remarks from the management and followed by the Q&A session. Now, I will request Mr. Sachin Gopal for his opening remarks. Over to you, sir.

[Sachin Gopal, executive]

Thank you. thank you, Ajay. Thank you, Steven. Yes. So good afternoon, everybody. Thank you for taking the time out to join us in today's conference call. We'll try and walk you through the highlights of the results, and then we can take the Q&A as you said. So I request you just to go through the presentation, which is already uploaded on our website, and go to Page 3 of the presentation. So company mission and vision to be the best of forming the most respected food company in India.

Phase 4, key performance aids for quarter 2. Food revenue grew by INR 124 crores. So this represents a growth of about 13% versus the prior year. But it's really the first time I have heard us drop close to about an annualized sales rate of INR 500 crores. So that's a very, very good milestone as we see it. When we started this business, we had a full business of INR 10 crores to INR 15 crores. And over the last 15 years, with CAGR of 19% to 20%, it's a nice billing to be able to get to close to INR 500 crores annualized running rate on a quarterly basis.

And it's time, therefore, also we will share with you now that we've got close to the INR 500 crore mark is what will be the building loss for us in the next few years so that we can get to perform INR 500 crores to INR 1,000 crores. But that is something that will take us in the analyst meet in the month of November.

Our non-RTC businesses really drove the total foot with a 33% revenue growth. This includes ready-to-eat snacks, it includes spreads, it improves chocolate and breakfast cereals. And it's a fairly complex piece to be able to get this growth on a diverse portfolio, because it's a large number of commodities, lots of packaging materials, multiple plants, but it came out well.

And the ready-to-cook business, as we will see later, was actually continued to be lower than prior year, which -- certainly, there is an impact of COVID-19 as far as this is concerned. But we always like to be a little careful. So we'll see what else we can do to be able to bring that into a positive volume space soon. Our food gross margin really improved from the quarter 1 low. As we told you when we entered quarter 1, there were a lot of headwinds, but they were all receiving. It was -- as I used the word, I think the tidal wave and we saw the way receding, and you can see the impact of that in quarter 2. We're not get back to where we need to be. We still have a long way to go, but it's a significant increase, and we will continue to work on improving the margin further. And really, this is a result of softening of commodity prices. Some amount of it is already in the P&L in quarter 2, some of our 8 is still to come in quarter 3. Impact of whatever pricing actions we have [ corten ] and volume growth in the non-RTC business. The edible oil GM of about INR 15 crores. I think it's about INR 15.6 crores was rein the broad desired range of INR 70 crores plus-minus. We will continue to balance volume and gross margin in a volatile business, but it's not that we are going to gross margin for the sake of volume. We are not going to do that.

We will balance both of them and margin will remain an important consideration for us, given the role of the portfolio in our business. The quarter 2 media was marginally below prior year. We also needed to be able to manage the P&L appropriately. So this needs some correction going forward, and we'll see how to do it. We've always said that we want to be in a 7% to 8% A&P spend. Obviously, there are many periods of time where we haven't been there because of the pressure on -- coming from the oil portfolio. But as that received in the share, the materiality of the oil business in our business comes out, that we'll have a little better room if you will, to be able to make the right level of [ testament ].

As opposed to the gross margin increased, but our quarter 2 was higher than prior [ INR 3 crores ] some amount here due to employee benefit cost, which you would have seen in the advertisement. But also the largest elements are really travel and secondary site. Travel because there's a lot more travel now. We are almost back to the pre-COVID levels, but not exactly. So we are -- I think, currently, our travel is talking at probably about INR 2.5 crores a quarter. [ Pre-COVID ] go a little more in the INR 2.6 crores to INR 2.7 crores.

So it's coming back, and this is an investment that we need to make because this is an investment that we need to be able to drive our business to make sure that we continue to get the growth rates that we want. But we see this as like in a sense a correction in the first year of COVID, the costs came down by about $1 million. Now in this year, they are going up. That correction will happen. And then meanwhile, of comes, our gross margin will continue to grow. And secondly, trade largely because a lot of the growth in this year has come because of ready-to-eat snacks, which are more trade intensive as compared to other categories. Again, some orders this is all balancing over time, it will correct because it's ready to start to grow, ready to eat is currently benefiting from the opening of the economy. Those benefits will not sustain on an ongoing basis. So there was some movement up and down and the travel and the secondary site are only one part of that which will hopefully settle down during the year.

And they go the profit before tax and the profit after tax was INR 43 crores, respectively. So let's go to Page 5, really, the 5 categories that we focus on are ready-to-cook, ready-to-eat, western snacks. We don't include India time on this. Spread, breakfast cereals and chocolate confectioneries. In total, that represents a total addressable market of about $8 billion. And so from our standpoint, that's large enough for us to get the growth that we want to at least in the near term. And we continue to focus on these 5 categories. Let's go to Page 6, ready to cook snacks. So the impact of the price increases that we've taken in popcorn and sweet corn particularly is very high. [ Visible ] value versus volume, value is moving into positive space. There is some impact in this mix also because part, these are also very, very good in terms of revenue per ton. So the non-RTE popcorn business is led right now, the growth is being led by faster, which shows steady progression. However, there is a volume gap versus prior year due to COVID-19 in the base. And this is more than we would have liked to see.

It's minus 4%. So this is something that we need to address and which we are working on as management because there could be an impact of COVID. I mean, certainly, there is an impact of COVID, but we don't want to be complacent about it. So we'll be putting more [ feed post-energy ] and other things in the back half of the year on this. This is a big part of the business and if this goes nicely, all pieces fall into place because it helps margin top-line growth, all of those.

We have mentioned to you some time ago that we'll be introducing a pizza and pasta as well. So the commercial production of this is underway. That is happening as we speak, and it's shipping good. And development of plant, we continue. The work is underway on texture for the right sensorial experience. So we are working on this. It's -- we have all the necessary to use in the machinery. I think it's just a question of, if you will, the time which will be taken for the development. There's a lot of action in this place. There are a lot of players, but we feel we have a strong competitive advantage because almost all the players who have introduced are not getting consumer demand, the category is still small.

Even in the U.S. is flat for, but it's a very important category because going forward, the role of [ propane ] is only going to increase. We are seeing that in [ other product ]. That will happen in plant mix also. The only thing is the winner in this category or in this subcategory, if you will, and depending on how it's marketed, is going to be the people who have the capability to create categories. A company that doesn't have the capability to create categories cannot go on this. And in our reading, actually, we are the only ones who have the capability to create categories.

We have the ability to create categories. We've done it with ready-to-cook popcorn. We've done it with [ senior ]. So we have that capability, particularly from a consumer contact perspective. So we'll just get it out during the course of the year, and we'll keep you posted. So whether we are able to complete the development in the current year and launch it in the current year or what is the status that we'll update you as the year goes by.

All right. Then the next category, which is Page 7, is ready-to-eat snacks, strong growth continues. Obviously, this is benefiting this is the mirror image of RTC, where this is benefiting. Plus there is a lot of strengthening in the popcorn business. So what is the consumer trend on this, it's difficult to call. But there is a very positive strong momentum in ready-to-pour and we are obviously the biggest beneficiaries of it since we are amongst the largest players. There's a clear improvement in margin driven by price increases, grammage reduction and packaging footprint changes. All of this happened last year with all the pressures that we had, and it's benefiting us today.

So overall, the margin on the category is improving. And sweet snacks are starting to gain momentum. So sweet snacks, as you -- as we probably mentioned to you, we haven't just clarified, where actually the [ ferry ] snacks are more sugar. So snacks will have more sugar. We will also have less packaging materials per ton of [ G ], and they will have less freight per kilo or per ton as compared to [ severe ]. So right now, we have caramel popcorn, which is a relatively small part of the portfolio.

We've launched the Dual Cruncheez, which is an excluded pan product, which is doing very well wherever we put it. And which is currently being supplied from one plant, but very soon starting this month, we'll start getting supplied from 2 plants, 1 in [ Kotura ] and one in [ Una ] and then subsequently also in more plants as we have progressed. Our work is underway also on value-added RT, including protein. We've talked about this earlier. And going forward, we will drive increasing share of sweet and value-added snacks to drive margin improvement for sustainable growth. So as we told you several times, the savory snacks or ready-to-eat is a very important portfolio because that's the career for the company.

That's what enables us to open more stores to get up to the coverage that we have today of about 400 or 500-odd thousand stores, but we need it to be profitable. It shouldn't be that we are losing money and are therefore, hesitating to grow. That should not be. And this incorporation of the sweet part within the RT snack portfolio is a very important, I would say, a strategic move for us because it will enable improvement in profitability as well. And then we'll never be hesitant to say, "Oh, we need to ship this product in 400 kilometers." It will ship because the freight is not going to be a killer for us. That's very important for us. Then next page, which is Page 8, spread and dips. You can see return to very strong growth. We have a volume growth of 30%, and we've certainly taken back share. So as we mentioned to you about a year ago, we thought we were losing share. We think whatever we had lost, we got it back and maybe a little more. And right now, we are absolutely working that is evident in the number. In fact, we are very close to capacity now or at capacity. So some capacity increase work is underway, and that will show up in the next couple of months. Our strategy to protect our share has really paid off. The big 10 competition has been really posed to replace the stock in trade.

They spend a lot of money. There are a lot of competitors there with multiple levers. But they spend money. [ PeAq ] for example, spent close to INR 80 crores on this which is probably more than what we spent on our plans for submitting advertising or at least equal to it. But they're having to replace stock in trade because across the date, it's not moving. And so impact of the ADF strategy is very visible in terms of freshness of stock. So that is something that is excellent. And you can go into the trade and have a look at it yourself, test the PKD dates of hours and competitors and you will now be answered to the question. We've also introduced a new high-protein variant peak. This was introduced now in Quarter 2, and the Roll Out is underway.

This is an important brand for us because over time, it will become our protein. It will become the lead as far as the protein plays concerned. Today, it's a need as far as peanut butter is concerned, tomorrow could see for protein bars, et cetera. And so this is being introduced now, and we will be rolling this out with the necessary modifications also in our field cost architecture. So that will include having a salespeople calling on gyms, getting the right endorsement from the people who are going to the gym, getting the tried and there, et cetera. It will be a long game. This whole protein piece, but it will ensure that we are in rock-solid position on this part of the room.

And we've also launched the Choco Peanut Spread launched in quarter 2 to complete the Nut-based Chocolate Spread range. So in the Nut-based Chocolate, we have a Hazelnut chocolate, Almond, Hazelnut, Almond-based and Peanut chocolate. This completes the Nut-based Chocolate Spread range that is also progressing well. And I would say it will be in line as -- and is one of the many samplings that we are planting as we go along, which at some point in time, we'll get to the INR 20 crores, INR 30 crore mark, and then we'll be ready for advertising support in the years to come. And we had also told that we'll be launching salsa. So commercial production of salsa is underway now, and you will see that also in the market soon in the next month or so depending on the Roll Out.

Coming to the next category, which is breakfast cereals, which is Page 9. We have steady growth, driven by distribution. But we are now at category to category is hedging the 100,000 mark in terms of distribution. As per our record, we are at about 95,000 stores. And that's a good place. It took a little bit of a backseat during COVID because our market working was not at the level that we would have liked to be. That is naturally it was visible in our travel expenses as well, and we were trying to stakeout the entire organization. But post the opening of COVID driving very fast.

And we -- I think we would be amongst the now lead players in terms of total breakfast cereal distribution. So as you know, we don't audit, but our management assessment is that the #1 player in restorals will be Kellogg, we think the distribution will be somewhere in the range of 400,000 to 450,000 stores. And if anybody has data at any point in time, please do share that with us, it’ll be useful for us. We think the next most widely distributed better schedule will be [ Saffola ], probably in the region of about 0.25 million stores. That's our judgment. This is our [ steel unit ]. And then we feel the other companies, which is quicker, quicker roads, which is a large player, but mostly only in big tax. So that will be a deterrent in terms of getting numeric distribution. Tata Soulfull would have been let, but with Tata, they have rolled out a lot. But I think also they are seeing a lot of challenges in terms of the offtake from the stores.

So let's see how they are able to sustain their distribution. We think that will also be in about 1 lakh stores now. Maybe it's more and maybe we'll give some information on their call, and then we can look at it and discount it for whatever is the incremental stock in the trade. And ours are about -- so we think 1 and 2 are Kellogg and [ Saffola ]. And 3, 4 and 5 is somewhere going to be between us, Tata Soulfull and Quaker, and we'll see what the outcome of that is. The other piece which is important to note is we're at a very strong position in cereal snacks.

Likely, we have the highest distribution of breakfast cereals. What our market booking tells us is that we are no doubt the most widely distributed centers cereals snacks. So in other words, Kellogg will have a lighter distribution than us. But in center snacks, we think we have a wider distribution than them. We feel that they have a bigger turnover than us. We think that center fill is about 3% of that turnover of about INR 13 million crores. So that's about give or take 34, 44 but a lot of that throughput will come in that case, some large crores, whereas in the small banks, when they come to it, we have a distinct competitive advantage. So this is important because a lot of the future of cereal snacks are going to lie in centers cereal.

Center cereals is a clearly different consumer experience. And it also caters to a slightly older rate group. So if you do meet [ Crave ] and do Kellogg U.K., you'll find that we've actually said that young people, 16 to 24 are more craving with the Kellogg equivalent of the center filled in the U.K. and the U.S. was our time users and actually because they say, "I don't want to buy shops [ donuts ]. I want something else." Or as you become older, you consume more cereal as a snack. So this is a great position for us to be in, and it's something that we will leverage. So this will be our key growth driver. The introduction, we've introduced center cost. It's been very, very well accepted. So that's doing well. And one more variant is scheduled for quarter 3. I'm not -- we're not telling you what it is right now, but we will see and then in the well we can do about it. We've also started commercial production of value-added or Masala. We told you that the regular [ or the pros ] we put and are staple because we don't think that they have a 30% to 40% gross margin potential at best, it will be 15% to 30%. So it fits in well with premium staple. And we'll work on this. Obviously, [ Masala ] is a small part of the business. So for the people who have Masala oats and regular oats, our estimate is that Masala oats is 25% of the business. This is, again, our estimate from whatever we get from our field and whatever information we get say from CSDs department. But we think it's a reasonable estimate. So we've been -- as far as this part of the presentation is concerned, we are focused on that 25%, which is the Masala oats and we'll see what other value add we'll do in the future.

So game plan really underway for development under development for a bigger and stronger position in the breakfast cereal. So if you go into any retail store and you look at Kellogg, it's like a wall. You look at breakfast cereal, it's a wall. It's a Kellogg wall. Now there may be other players on a regional basis. For example, if you go in North India, you see a little more barges. If you go in maybe Bombay and Bangalore, you might see a little bit more of [indiscernible] et cetera. But the wall is Kellogg. It's a Kellogg wall. There's nobody else really who comes close to them. So our task is how to break that wall.

And that is something that we are working on. And that is why we said there's a lot of work on our side will be how do we -- how do we execute our shelf presence in the category. So this is work underway. It will take us time, but that's it. And with that, we'll break -- we'll have a much bigger presence in the breakfast cereal in the category. And also finding and addressing unmet consumer need. We still think there are consumer needs in excluded breakfast cereal, which is where our strength and we are working on those. But at this point, we can't share those details with you, but we'll -- you'll see it when you see it in the market. Okay. In terms of chocolate, continuing strong growth in the business driven by distribution. Once again, this is nothing in the 100,000 mark with about 95,000 stores category distribution. You can see there's an increase in price realization, which is visible in value versus volume growth, consequent improvement in margin as well. First day of capacity enhancement has been completed. So we have said we'll put up a second line and which we've done. We will not talk so much about lines because we have been using more confidential information. So going forward, we'll share this information with you on a consolidated basis.

But what we do want to tell you is that work is currently underway for about INR 100 crore plus capacity for FY '24. This won't happen by March. It's also not required because April, May, June is summer months, and the business has come down. But it will happen by the time the new season and the next monsoon, et cetera, comes in. So we'll be looking at completing this, and this will complete in monsoon. Meaning once or meaning phase between now and June of next year.

And that is then we'll see, there's obviously in any category which we're building like this, there'll be a lot of ups and downs. Output will change depending on how much size you are producing on a day, what is the packaging work that we are doing, et cetera. But broadly, this is what we're looking at 100-plus crores capacity. This is in line with our thinking that in the next 3 to 5 years, a very large part of our growth is going to come from chocolate. Chocolate and ready-to-cook, we believe will be the 2 major increments that will come, helping us to take somewhere about INR 500 crores to 1,000 crore. So I would say we have done one advanced question from one of our investors. So this answers, I think that question as well.

All right. So coming now the staples, premium staples, which is basically premium oil and improve some amount of ore right now, but very small. It certainly reflects softness because we've had -- we have significantly higher consumer prices relative to prior year. As all a lot of commentary from more than one company saying that they are marking down inventory and they will take the loss on that to be able to protect volume. We are not going to do that. We will -- whatever is the pricing, we will move in Latin, but our focus will be on protecting margin because that is the role of the category for us to give a charge on a sustainable basis.

But execution of strategy is also underway to make premium staples more broader while providing procurement scale to food. So rollout of most have started and additional staple items that are under development. And I would say the rollout of that will also happen in due cost in the coming quarters, and we'll talk to you about it. And each one will explain to you what is the role as [ staples is concerned ]. And mass staples are largely reflects the exit from Crystal. October will be our last month, where we have Crystal in our base. After that, that will disappear. And for the comparison versus prior will become a bit of outfall comparison. But right now, that's the way it is.

All right. So that's the key point on the categories. I've got few questions. So I'm just going to try and answer those that came in the name. One of them was [ that ] and one of the [ banca ] you had mentioned we have achieved 10% dispatches through cool approach. I'm not sure when this was done, but it would be a while ago again.

So for the ready-to-eat snacks. We could ship about 90% of our -- 90% of our ready-to-eat snacks are shipped to throughput truckloads. So only 10% of ready-to-eat snacks go through the depots because that's why there's a lot of incremental cost in terms of loading, unloading, additional freight, more warehouse space, et cetera. We think this is a good number. Most commodity players will have almost 100%. But other companies earn the branded space, like the Frito-Lay or ITC will have mostly throughput depot. But we have this happy balance, I think, between the best of what the commodity players are doing and what the best of branded are on. So that answers that question.

And one question that we had from an investor was look, if you're will cyclicity improve in the time summer months, we'll give you the answer to that as time goes by. I don't want to give a straight answer, but I can't give you because for example, ready-to-cook popcorn is lower in summer. People tend to eat U.S. snacks. Similarly, shocks has environment, it increases in summer months. So it's more difficult.

Volumes always come down in the summer months. So with chocolate people, mostly the season start around [ Raki ] and then goes through till February. So you were talking about September, October, November, December about 6 months. And you see -- if you analyze the advertising spend by month, which is there in our presentation, you will know what the peak funds are. So let's see how our portfolio develops. Maybe we probably doesn't have that much security.

All right. And we also had a question on palm oil. So it has gone up in the last few days, Look, there's a lot of volatility in the market. And it all depends on what is happening in Ukraine, et cetera. But overall, I would say, from our edible oil perspective, we have -- and we've seen a softness in the palm oil prices and in some of the other oils as well. And I would say we are -- like we were in the last quarter, we told you we are positive as far as this -- our expectation of what will happen in the -- in quarter 3 and quarter 4.

All right. So coming then to Page 13 in the comparative update. Basically, you can see here that Frito-Lay snacks, on-service snack really dominated the spending. And the other highlight was DFM Foods, which is I think, I guess, in the process of being delisted now, has actually increased as spine significantly. So that is the other big thing. Other than that, we don't really see too much change in supplier.

The next slide is #14, which is spread. Here, I think the Kissan has continued to spend. So if you look at the row #2, which is Kissan PB, which is Kissan peanut butter, take the FY '21 spend, that's INR 20 crores, FY '22, that's INR 50 crores, INR 70 crores, INR 80 crores, there’s INR 10 crores to INR 90 crores so far. And you can make a judgment on how good or bad that is as we go into the market and see how the product is doing. We continue to spend in line with us. The other person who spent a lot of money this quarter is Veeb, they tend to do this. The business in FY '21 also putting front-page ads in Times of India and Bombay, Delhi, et cetera.

They can't spend a lot of money, but then you can see they did it in FY '21, then FY '22, they didn't spend any money. So let us see what happens now. And on the other, in the Honey, you can see there is, I would say, a reduced level of competitive intensity. We can see that, for example, Saffola Honey not really investing any money this year. Even Patanjali is spend money in 1 quarter, but not in the next and Dabur is fairly consistent just like us. And in chocolate spread, you can see Hershey starting to spend money and Nutralite actually started advertising sockets for the first time, which is good for us, and we'll be hopefully able to leverage all the spending in terms of expanding our distribution, particularly for our entry-level packs, which will come in this quarter. So yes, and our ad spends are broadly in their carrier.

The breakfast cereals, really here, the dominant summer scale of, which has been the case from the time we have to give them full credit for building this category. And Nestle actually discontinued support. So you can see here Nestle Koko Krunch. Last time the spend was FY '21. So you still see the product, but it's -- I would read this as not an exit, but not there for meriting support. And Saffola continue to spend as a peer. Tata Soulfull has spent some amount of money in last year, INR 13 crores, INR 9 crores in quarter 1. But after that, we see a little subdued. Let's see how this part goes and we'll have to work them as we go back. And Parle spent some money, Parle to do this become and spend money and then they'll go in for a while then come back again. All right. And chocolate really major normal remains modelers, but all others also spending money. And as I told you, we read the month, you can see that actually, quarter 2 is a big quarter for them. So if you look at this from a seasonality perspective, you can see in quarter 1, the total software category spending was INR 226 crores. In quarter 2, it has jumped to INR 563 crores. So that's a huge amount. And quarter 2 and quarter 3 really are the big quarters for the category.

Edible Oils, basically, it's a massive share of spending. If you look at the premium share, which is Sundrop Heart and Saffola, t it's becoming smaller and smaller by the day. As a percentage of the total. So it's really the nasal players now who have the dominant share of growth. So from a premium oil category perspective, that is not good news, but that is to be expected. I think we've always told you that that's going to be the case. And as you know, we've not spent any money and our focus will remain on rejecting our margin in a sustainable basis.

In terms of noodles, Nestle really dominating the spending with a lot of pricing. Other players seeking to leverage the price gap. So the price gap is becoming large now as Nestle moved up to the INR 14 price, and there's a lot more action there in terms of companies like ITC, Wai Wai moved so on and so forth, or [ spindle ] business.

Pasta, which is Page 19, not much activity. So almost nobody is spending. I guess everybody's energy is going behind the rooms category.

And Page 20 is soups cannot really remain the dominant spenders, excellent products that they have in their portfolio and really at this stage, leaving no room for anybody else. So we'll have to see how to track this piece as we go along. So overall, I would say 30 minutes at about INR 124 crores of food net. This quarter is really the close is the come to analyze revenues of about INR 500 crores.

So that's good. Margins have really improved from quarter 1 now, they still need to go up. We need to work on this and work is underway to drive further improvement through operating leverage. Many of the categories are really small for side. [ Breakfast cereals], So as we get scale in these, this will improve portfolio management. How do we manage the portfolio across categories and within these categories to manage pricing, so on and so forth, Grammand and so on. Last is pricing has approved by category. I think the mode to food revenue provides credibility and confidence. We said that we will be the most best performing most prospective foods company in India and the fact that we built up a business of that crores means that it is not huge. It is not INR 2,000 crores today. It will be, but it shows that we are capable of getting to our ambition of one day being a $1 billion business in India. And the great news is that the building of are very clear. So for example, the building blocks for the next INR 500 crores is very usable to us. We have multiple levers of growth based on innovation across several categories. And the great news is none of it is third-party source. It's all in-house. So we are able to transfer capabilities from one category to the next. We are only going to get better as far as operating leverage is concerned because in many cases, our capacity utilization is low. So these building blocks are very, very clear for us. And that's a great proposition for us as we think and say, "Okay, how will our INR 1,000 crores business look like in the near term and subsequently even bigger." So -- with that, I think we close the presentation. I'd just like to make a few points because yes, you can see the revenue growth and the revenue decline figure if you look at it, and that's largely done by mass spenders which is in the base that in quarter 3, we'll have 1 month of fiscal in the way after that it will distribute. And employee benefit is a little higher, but on a year-to-date basis is still flat versus prior year. Depreciation, not much changed.

And advertising and sales promotion expenses are a little lower. We won like this to be higher ideally with a full growth of close to 15%. We had a 15% growth in A&P. That way at least we're holding our 2%. But it's been a challenging quarter. Quarter 1 was very, very challenging. Quarter 2 also, obviously, the trajectory is great. But then you have to lift it July away, it was in September, the way it was. And therefore, the profit before tax was INR 4 crores. Now there's one other element here, which is under other comprehensive income. You see that for shares that there is a charge of INR 3.5 crores and then also a charge of -- sorry, of about 90-odd lakhs on account of tax on account of that.

Basically, we could restructure the entire pay scale structure of the company. And so in the new pay structure, we are now 100% compliant with whatever we anticipate could be the possible changes in the labor code at least as far as whatever we've seen from the draft label port or whatever information has been given to the public. So that part is taken into account. However, as a consequence of that, there is a one-time charge in other comprehensive income because actually, as you know, is a payout, which is based on years of service.

And on the salary at the time when the person leaves the company. This is not today. It is sometime in the future. So on the basis of actual valuation, we have -- and in consultation with our auditors, we have recorded a charge in other comprehensive income of about INR 3.5 crores. All right. And other than that, let me see, there's not a lot more. Obviously, the travel and secondary trade expenses that I talked about, you will see in the -- will be visible to you in the other expenses. So that's why right -- so going forward, we continue to see Ago Tech increases in margin, and we will hopefully navigate through the year well.

So again, I think that's it from our side, and we are open to questions to you as well.

[Operator]

[Operator Instructions]. The first question is from the line of Dhruvesh Sanghvi from Prospero Tree.

[Dhruvesh Sanghvi, analyst]

Am I audible, sir?

[Sachin Gopal, executive]

Yes, go ahead.

[Dhruvesh Sanghvi, analyst]

Yes. I have 3 questions, slightly qualitative ones. So today, as I see the companies turning, we have many products, more plants, more reach, more SKUs, and of course, more competition. And basically, things are getting very complex for us to evaluate who are not as savvy as a business manager. And when I ask myself that, "Okay, why am I invested in this company?"

The one big reason is certainly you, the way you explained the way you strategize, you are thinking very long term, having very big vision. And considering this the only problem of evaluation terms when promoters are completely different. And the bet for us in our mind is you. If you can talk a bit more on your thoughts, your incentives in the company, of course, on the qualitative side, have you think? And where do you find some satisfaction and your relationship with the promoters and how they think your -- so that is #1.

That will give us a little bit more comfort as the company structure becomes more complex because understanding market share gains a quarter, year-end here is very difficult for us. That is one. Second is considering the oil staple business, can we say that -- I mean, can I see INR 230 crores revenue, INR 125 million coming from food. So remaining is that all staples business.

Can we say that this broadly INR 400 crores yearly revenue is what you think can be maintained considering all the edible oil related noise so many new people entering and getting commoditized, but can we hold that INR 400 crores, INR 500 crores revenue base and get INR 40 crores, INR 50 crores cash flow out of that business. Is that broader understanding, correct? I'm not talking about quarterly, I'm talking about a couple of years. So that gives us fuel for marketing and building up the food business much faster. And the last is, can we say that the chocolate business in the next 2 to 3 years, I'm only talking 2 to 3 years can probably give us INR 200 crore revenue? Again, this is forward-looking, but just a guesswork on your side that how aggressive is this number in terms of assumption or more than INR 100 crores is very difficult over the 2-, 3-year period?

[Sachin Gopal, executive]

Okay. Thank you. So to your first question, yes, it's complex. And you want to know my thoughts, [ I’m slate ]. We are all slate. That's why it looks at it. There are not slates, no players in says. You remember that maybe this is 20 years of slates, I don’t know. But at the end of the day, we are paid to create shareholder value for the promoter and for all independent shareholders. And that is why our approach to the business is extremely transparent. You can see that. Today, actually, you don't really need to possibly ask a lot of questions in the call also. If it's good you're asking the questions, and we appreciate it because we need dialogue. We also learn from these calls.

And we get feedback also in which we have to pay positively. But there's a lot of information, which is available. You would actually have the entire P&L of the company visible to you. You have every element of it by the time we post that investor highlights page. So I would say the focus of the management team, which is all of us in the company and even all the management in the company is at the end of the day, to create a great company. People are not -- we think that people are motivated by money, and greed, that is not really the answer. People are motivated to do something great with their live. And not everybody is like that.

But over time, you create a team which is all motivated towards building something. So that is how we have and that is how we've gone from INR 10 crores, INR 15 crores of food, INR 500 crore. That is how will go from INR 500 to INR 100. That is why we'll go from INR 100 crore to INR 1,000 crores to INR 2,000 crores. And that is why we are not just me. The entire team is thinking right now, what are we going to do? Because to think about housing, what are we going to do at INR 1,000 crores, you'll need to start thinking today, see because a lot of saplings have to be planted right now.

They may a very small. But by the time we get to INR 1,000 crores, then we won't be -- we should not be looking for new growth opportunities. Otherwise, it be forced to make acquisitions. And acquisitions, as we know, are not necessarily the -- cumulatively, the -- if you look at the cumulative record acquisitions are not only the best return as far as the shareholder is concerned, especially going at India. And we're talking large sums of money. So for example, if you take a look, Tata Consumer just incorporated that smart food business of there, which is coming out of CCD.

Total assets incorporated were INR 395 crores. If you go into MCS filings for last year, the turnover of the company was INR 11 crores. Our sole book got sold. So I think INR 38 crore business sold to INR 150 crores. So -- and these are probably the right choices for those companies. I'm sure because they are all smart people running the company. But we don't want to be at that stage and we are that size. We want to be able to leverage products that we do today. So those saplings of today are all 20, 30 crores at that point in time and with in-house production so that all of those can be leveraged because otherwise, we will reach that point and then we see was going to come from.

And then we might -- we don't want to do silly things like overspend on advertising and other things. So our vision has to be long. Our vision has to be very long, and there's a huge potential for growth. Let's face it. There aren't too many companies today at the top of the pyramid. And honestly, we must be one of the very few 500 core companies which has the portfolio that we have. But these are not built for today. which are built for 5, 10, 15 years points. The other part is oil. I think revenue is very difficult to call on oil.

One of the reasons we exited [ Napole ] is that there's a revenue stream. I'll give you an example, when we sold up to Cargill many years ago, and today, the price has roughly been sold is 3x. But it would come down tomorrow also. So that's the same thing with a loss. So revenue is very difficult. From our perspective, what we focus is can we get a steady gross margin. So we've called out in our presentation, INR 70 crores plus, it could be 65%, 70%, it all depends. So we need the right gross margin, and we need to ensure that it's sustainable. It's not that it will come 1 year and it will not come the next. That is why we took the price reduction 2 years ago when we took the advantage of lower travel costs, we took it behind oil pricing because we said we wanted to be sustainable. -- iterate, obviously. But it will always -- the focus will be on margin though not so much revenue. Because the revenue exposure we want to get out... And the last is chocolate, yes, I think it's going to be a big business. It's visible if we are thinking of setting up a capacity of about INR 100 crores plus next year, we are certainly thinking of INR 250 crores, INR 300 crores business coming in the next 2 years. Exactly how much we can tell. I can't tell you that answer. But what we do know is a INR 15,000 crores to business -- sorry, category. What we do know actually is that we have a great product. We don't need to know it for me, go into the market and see where our stores are selling. And as the retailers, how is Agro Tech do, the outright -- we just have to figure out the business model for that, but there is enough scope in this category because it is -- so let me give you an example.

Historically, you would not have seen many gondola has been taken by us. But because gondola are the cells that you take at the end of the gondola and sometimes close to the checkout as well. So because the revenue from -- if you put the gondola at the end of top on, the revenue will not pay for the cost of the gondola. But in a category like software, it does -- to spend INR 5,000 on the end, you can get 30, INR 35,000, INR 40,000 of revenue. So these are great categories. They are very import space. They create to distribution strength. We have a great sales organization, which is the backbone of the company along with manufacturing. And we are, therefore -- yes, the answer is it's going to be a nice business, and that's why we are investing in it. Thank you, for the question. Next question.

[Operator]

The next question is from the line of Shirish Pardeshi from Centrum Broking.

[Shirish Pardeshi, analyst]

Congratulations for doing the good efforts to deliver a very strong growth. 3 questions. You have not mentioned anything about the international, and this is what, for quite some time, we were talking. So maybe if you can give some clarity. Second question is that on the investment of INR 100 crores, what we have spoken about chocolates. How are we going to fund? And the third question is on the intent to the high protein variant peak. The question here is that how big is this market? What are the growth rates and maybe some quantitative backup, if you can share with us?

[Sachin Gopal, executive]

Okay. Thank you, [ Shirish ] for all the questions. So Shirish, first part on international internationals are basically [ Sri Lanka, Bangladesh ]. Shirish, you would know as much as I -- I haven't been to Columbus for a while it is dealing with its own share of problems. I'm sure the country will come back. So right now, there's not much transaction happening on Sri Lanka. We have an entity there, and we continue to retain it. We'll work the circumstances. So it's -- and as it recovers, which one day, it will all complete, they go through their own turmoil, and we will be there. The thing is to be there at that point. Obviously, there is some good acquisition opportunity, we will evaluate it. But as of this point in time, it is just a hands.

In terms of Bangladesh, Bangladesh also having challenges, but the business is doing fine. And Bangladesh – look,, our focus is clearly India. Because India is -- India is going to be where the bigger size of prices, but one should always be in these markets so that we know what is going on. We have -- we see plants. We have a plant in Bangladesh. It is also a sourcing play for us. Even today, we sold some popcorn from Bangladesh. We import, we pack and we bring them to the country. And it is also, therefore, a supply chain alternative for us. And that's important. That's important for us from a strategic perspective.

So Bangladesh has a strategic role, both in terms of supply chain perspective and in terms of being a large market with good potential. Sri Lanka has an importance in terms of being a good neighbor and therefore, a part of it. However, it is a much smaller market and is going through turmoil. So at this point in time, we are not really engaging with too much energy or even investment in the market. As and when things turn, we change it. I apologize on -- maybe I was not clear on the chocolate slide.

So I just want to clarify that when we have said INR 100-plus crore capacity, it means capacity for INR 100 crores of revenues. So that was why you asked the question about INR 250 crores. We are looking at building a capacity next year only, we can generate about INR 100-plus crores of revenue. And yes, the answer to that is how is that capacity has it been funded, that has been funded through our cash flows. I mean it is funded right now through all internal approvals. As you know, our entire gross block over the last 15 years has been funded entirely through internal approvals. We've done -- we've got a gross log of what about INR 44 crores, correct?. And all that is due to the money that we earned from the company. We took some risks. We took some gambles as far as oil business [ is city ]. But today, we've built up a nice new business, right, which is talking at close to INR 30 crores of gross margin a quarter. So I hope that clarifies that part of the question. In terms of the high protein variance, I don't have a lot of data for you. But because the lag even the data that you get, let's say, from private equity, is very inflated because they don't mark down the discounts and et cetera.

So the gross merchandise value that are often quoted are not at all comparable with gross merchant, net sales of our companies because they might have a 30% or a 40% rate discount. So it is good from a valuation perspective but doesn't provide a good picture as far as products to concern. What I can tell you is that protein is very, very important. It is important in peanut butter. It is going to be important because of plant needs. It is important in bars. So if you do a Google search, you'll see Models just bought the cliff bar, Cliff is the -- one of the major players in the U.S. in this area in protein bars. And Moneta paid close to $1 billion for it. So I'm sure they're going to introduce Cliff in India as well. So the chip will be our competitor to peak. And we're both in the similar space. And since it will be important. How big it is? I must say I don't have the data, but we'll try and get that for you at some point.

[Operator]

The next question is from the line of Chirag from Keynote Capitals.

[Chirag Maroo;Keynote Capitals;Analyst, analyst]

First of all, congratulations on that we have reached the target of INR 500 crores in food businesses. I have 4 questions at this moment. First is related to gross margin, we see that on a Y-o-Y basis, that we have improved our gross margin from 72 --from COGS of 72% to 68%. But if I see on a quarterly basis, we are still in the range of 68%. Even if our food businesses as a percent of total sales have moved from 44% to 54% and it has started giving a higher contribution, plus our [ market ] business has reduced acuity. Yes, I'm not able to understand that why our gross margins not able to improve.

My first question is that, it would be very helpful if you can give us a financial highlight of how the gross margin is panning out in both the verticals like food and oil. It would be really helpful to understand and take the numbers in a better way. My second question is related to the distribution change. I see that we have reached the mark of INR 1 lakh in multiple verticals of our food business itself. But I just wanted to understand that what kind of difficulties are we seeing to increase our distribution range, like reaching from INR 1 lakh to INR 2 lakh, if [ packers are lakh ] that you have to pan out within an entire India. So it would be very helpful to understand but how are they panning out? And what other difficulties are we facing to increase it on a year-on-year basis? My third question is, I just wanted to understand the competition perspective. It is great to see that we are firing all the cylinders in food business and every business is growing well.

But just trying to understand that on ground, we are also starting to see more of competition taken in place may be organized and organized market. So what is our competitive edge within our categories, which is helping us to stand out in our competition. And my last question is related to understanding how our ad spends would move. Like as we are increasing our product portfolio and we are focusing more on multiple verticals, PRT, chocolate. And it would require some promotional activities. So as a percentage of gross profit, which we actually look at, it has been really stagnant, like 8% of gross profit we spend on added promotion. So should we expect that going forward, it is going to increase as we are panning out into new products like?

[Sachin Gopal, executive]

So I guess, then that will be certainly the last question for the day. All right. All very good questions. Thank you for asking them. So we don't look at it the way you do in terms of -- obviously, you're taking it from the ad in terms of net sales as possible. But let me try and give it -- tell you from the way we look at it in terms of gross margin.

See, our food gross margin used to be in the range of about 26% to 27%, something like that before COVID. As COVID happened, and we had a disproportionate increase in our ready-to-cook business that we can go back to those numbers for us, it actually crossed well ahead of 30%, went into to 32%, 33% rate. And then, of course, COVID out, and then there was a huge commodity on stop. And you can do the math in our investor highlights, you can see if you divide the gross margin that we mentioned in the bottom of the financial highlights, what we call it performance highlights, you derive that 28.7 by INR 124 and you get to a margin of about 23%.

In quarter 1, I think it had dropped down to under 20%, because this whole commodity on swap was there. And we had to navigate through it so that -- the important thing is that we are building this business quarter-on-quarter, so that we navigate it through and we have to convince our parent company also about it. And we navigate it through so that we exit the year well. And then we continue -- our journey continues at CAGR of 19% continues. Obviously, in 1 year, it can be a little more. In another it can be a little more less, but it must continue.

So I think right now, what has happened is from the 25% to 26%, 27%, we came down to sub 20% in quarter 1. We've already recovered to 23%. And as I said earlier, you can do the math, you're all smart. If you look at the trajectory in quarter 1 was an average of 20% and quarter 2 was an average of 23%. Clearly, the graft is upward. So it -- our first task is therefore we just get back to that 26%, 27% and then work out with operating leverage with the right mix, ready to cook we'll also start going, how do we get to that 30% gate that we've always called out as our minimum expectation. Less than that, we don't believe we can have a business because it's not going to be a profitable double-digit EBITDA business. In terms of distribution change difficulties, there are tons of difficulties. Okay. I mean, every day is a difficulty. And it's only going to become more challenging, but that's great because you know what, it's a more -- that is only going to become more valuable. Today, there are, as you've said, a lot of competitors because there's so much private equity money is coming. But most of them are in the Internet space. The moment they start coming in, the private equity money has to fund distribution expansion, particularly in the traditional trade, that as a reason block.

Now the good news and the bad news is that the only thing that you need is you need to be willing to slog. Okay. You get distribution in India by strongly. You've got to work at 9 in the morning, you work, you make to all INR 35 crores, INR 40 crores, INR 45 crores, report that to the distributor points to make sure that deliveries happen the next day, if it's an order booking and you slog and you slog and you keep doing that. One year doesn't make a difference. You do it 5 years, 10 years, 15 years, that promote that [ Hindustan Lever help ]. That's not... It's a different issue that because of their size, they are not able to handle something like [ tenant ]. So that's the mode that they've created. And that's the moat that we have today. How do you get distribution? You get it by slogging. I can remember a time I was in China 2 weeks ago, and I can't remember a time in China where we used to go and used to get an order for one line. One line means one is seen from the retail store. This the least number of line others that I got in any store in China in a small store was 11 lines. There were small stores ordering 11 lines on us, stores ordering 16 lines.

Stores ordering 50 lines. That is the power of the portfolio. You see the critical thing that distribution is, you have to think about the distributor. One of the reasons why we have this portfolio today is, of course, these categories are attractive and they're all growing. But the other reason is for our distributor, he is now targeting 5 categories in new geographies. And we were just selling instant popcorn EBIT target in 1 category or one part of one category.

So is the ability to get revenue or very ability to get revenue from a small area is much better than we are competing in a number of categories The answer is only strongly. You've got to keep doing it. We've obviously invested resources as well. But right now, we are not adding more people, because our expectation is within our 4.5 lakh stores that we've got coverage, we still have a long runway for growth at procedures we can take up to IPP level, the popcorn level, [ 80 ] store.

So I think the point will come in the next few years, our expectations, [ Vikash ], our sales director. Our expectation is that chocolates will cross popcorn because the size of prices so much, the category size is so much. So this is -- you need to be willing to work hard and you have to have the post. If you don't have both of these, then there’s nothing you can do. So if you want to -- you say, "You know what, Sachin, we're going to work really hard and we'll drive distribution."

But if you don't have the portfolio, you don't do it. And I was talking to somebody who set up a 30-ish plant in Kashipur. And he says the product merits is past the portfolio near distribution [indiscernible] because that fixed cost of the sales organization is huge. And that is where it comes to the third point that you raised, which is competition. Competition is there, and there obviously, it is useful. The current play of the Internet and giving some additional margin to the modern trade is useful. But it will only -- it takes to appoint to actually win in India with 1 billion people, you need widespread distribution.

The rest will come, you will create some business, you will sell it out to somebody else, et cetera, but it's very hard. So this distribution mode that we've now built or 0.5 million stores, is great. And I think we’d be happy if we had to build that distribution more today, it would be very, very expensive. It will be extremely expensive. And frankly, I think almost impossible to do because I don't know many other companies who even are showing signs that they will be able to do it. So that's one. And obviously, the other part is differentiated products. So either you have differentiated products through which you can gain share. So for example, we have our ARPU and is a very differentiated product. Now you can say over that is second, I think [ Agro ] a better product. And maybe there could be a valid customer view. But the fact is that [indiscernible] is not relevant in India. We are available and close to 1 [life store ] and [indiscernible] is available on I don't know on the stores maybe 5,000, 10,000 stores and very expensive.

Similarly, our [indiscernible] is a great product. It's great value and for the consumer. I was in China the other day, and as I said, I asked as a small sales per store. And I think it is the 20th of the month. And so we asked and we don't find off in the last 20 days, what is [ ticker sales ] and what is bigger sales because, as you know, spent a lot of money in the category. The ticker sale was 31 cases in that store, RG36, without spending a single dollar on advertising. So that's the power of great products, great packaging and a great sales force.

They have a great sales force. So where the products are not so differentiated, then you necessarily have to be price competitive. You have to bring value. And that's why it's important. I have a permit, maybe I'll touch on this in the November analyst real, which I hope will be important. We'll need the portfolio. We need the value products at the bottom, which sells for INR 250 to INR 300 a kilo.

And then you need those products at the top, which is INR 700, INR 800, INR 1,000 a kilo. But you can't do without ideas. You need all of this. And but if you have all of them, you will have control the category. And lastly, a spend, 100%, I would say our actions today are less than desirable, but there is a reason for it. We are at this cutter we are reducing the dependence of the [ staple ] l oil business. And we are transforming. It's visual to you. It's probably more visible to you than it is to me because for you, you can see it from a distance like when you see a child who's going up after a year or 2.

For us, we are needing in it, but it's transforming. Oil is becoming a smaller car of the business. And this is part of the pain of that. But that's okay, every transformation has it’s pain. Nothing comes for free. But as I think we all believe it's a great food business that we have today. Annualized of INR 500 crores, 5 categories. We don't need to think of what the growth is going to come from. There's no digit. At this point, the only degree is what will be the cost of that growth? That's all. That's a nice position to be in. So it's like -- we don't really notice next day at plans that we used to be a volatile world, but I don't think it can get better than that.

So thank you, Chirag, for the question. And Ajay, I guess, thank you very much. And Steven, over to you. We close the call. I apologize to those who have announced for questions, and we'll look forward to the next call.

[Operator]

Sir, any closing comments before we disconnect?

[Sachin Gopal, executive]

No. Thank you all for taking your valuable time out. We really appreciate you much. So thank you.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Anand Rathi Share and Stock Brokers, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.