`A level-playing field will benefit this market' -- Mr Utpal Sengupta, President, Agro Tech Foods

Prashant C. Reddy

WITH its sunflower oil brand, Sundrop, leading the branded edible oil market, Agro Tech Foods (formerly ITC Agro Tech) commands a 16.4 per cent share of the domestic market.

After chalking up large trading losses in the last two years, the company engineered a turnaround in the first half of this fiscal. Business Line discussed prospects for the sector with Mr Utpal Sengupta, President of Agro Tech Foods.

Excerpts from the interview:

The monsoons have been quite erratic in the current year. What is your expectation of oilseeds availability this year?

The monsoons have been erratic this year and this has impacted the kharif crop. The kharif crop (2000-01) is now estimated at 110.9 lakh tonnes, 15 lakh tonnes lower than last year. Also remember that last year's crop was poor. The total oil seed production for 2000-01 is now estimated to be 190-200 lakh tonnes (57.7 lakh tonnes in oil terms) against 211.8 lakh tonnes last year (62.7 lakh tonnes in oil terms). The situation in the rabi season appears bleak with large parts of Madhya Pradesh, Rajasthan and Gujarat suffering drought conditions. Mustard cultivation has already been pegged at 50 per cent of last year, and early estimates see a 25-lakh-tonne decrease in rabi production.

What strategies has Agro Tech Foods put in place to avoid more trading losses?

Agro Tech Foods has implemented a completely new business model to avoid a repeat of the trading losses over the past couple of years. This business model is now working successfully. An aspect of the business model is the use of hedging techniques to substantially reduce associated price risks. In addition, there is strict monitoring of positions, and the adoption of a variety of risk-management systems.

Despite a steady growth in your edible oil business, the inadequate availability of oilseeds at your Mantralayam unit has been the key constraint. What are you doing about this?

Our research shows that the farmer has not been getting remunerative prices for sunflower seeds, which is pushing him to produce other crops such as pulses and minor millets. At the same time, imported oils are cheaper and worsening an already complex issue.

Our short-term solutions are to run the plant in short bursts, wherever parities exist, and sometimes even at marginal losses; and, with the capacity utilisation at Mantralayam declining, we have initiated widespread measures to reduce both variable and fixed costs at the unit. Productivity has actually increased through multi-skilling.

For the medium- to long-term, the Government will have to join hands with corporates and play a major role in enthusing farmers to grow sunflower seed. The solution is higher productivity and guaranteed income to the farmer and simultaneously making the project viable for corporates competing against the low prices of imported oil. One possible way is to have higher duties in season and lower duties off season for the different varieties. This differential import tariff system has seen success in other parts of the world.

Have oilseed imports been a viable option after they were placed on the OGL last year?

Importing oilseeds is not a viable option. Quarantine issues are a major obstacle, and logistical costs are a barrier because our crushing plants are not near ports. Furthermore, India does not have a large feed industry. Consequently, the meal generated from crushing seed would probably have to be exported. Therefore, it makes more economic sense for India to import crude vegetable oil for refining.

Last year, import duties on crude vegetable oils were lower than those on refined oils. Has this helped improve the utilisation levels in your refining facility?

Due to the lower prices, imports have become major raw material sources for the refining units. As logistics forms a key element of competitive costing, new capacities have mushroomed near the ports. This has driven down the capacity utilisation of inland units. Mantralayam is no exception to this. Despite selling more, Mantralayam's capacity utilisation levels have declined.

After the import duty hikes and a fairly sharp rupee depreciation, the landed cost of edible oil imports has risen. Has this curtailed the imports of edible oils and helped domestic players?

The import of edible oil in fact went up from 4.3 million tonnes last year to 4.5 million tonnes this year.

The primary reason is that international markets have continued to decline over the past two years due to the over-supply in international markets, and India has emerged as a major destination market. Consequently, despite the duty increase in India, the effective price of the imported oil has been low.

Domestic players like us have not been impacted much by the changes in duty per se. However, we will benefit when there is a level-playing field in the market in terms of consumers getting what they are paying for (purity and correct quantity) and everyone paying the same rates of taxes. This will happen only when there is a significant shift from loose oil consumption to packaged oil consumption.

Edible oils is a volatile market. Regional players and unorganised players are quick to drop prices when the edible oil prices fall at the wholesale levels. Since you cater to price-sensitive consumers, do you feel that regional and unorganised players could have an advantage over you in this respect?

There are price-sensitive and brand-sensitive consumers. For the price-sensitive consumer we offer Crystal, a competitively-priced product whose price we frequently change. For the premium consumer we offer Sundrop, a premium product whose price remains fairly constant.

Your company has managed to retain its market share despite the adverse competitive environment. How have you managed this?

We have consistently invested in the Sundrop brand, apart from maintaining the impeccable quality. Our national distribution system gives consumers the best service and also maintains excellent relationship with the trade.

What were the volume growth rates in this business over the past year and what kind of growth rates do you expect in the next three years?

The refined oil consumer pack (ROCP) market has been growing at a compounded average rate of eight per cent over the past five years. Growth in the last year was higher at 14 per cent. We expect the ROCP market to grow at compounded annual rate of over 10 per cent in the next 3 years.

What is your outlook for the international sunflower oil prices over the next year?

The fundamentals of the international sunflower crop for next year are not promising. Argentina, a major player, has reported a 20 per cent drop in seed plantings. Sunflower prices are firm. However, what must be kept in mind is that sunflower is only a small part of the overall oil complex and the two majors -- palm and soybean oil -- continue to be bearish. These two oils will dictate the price trends for sunflower as well.

Agro Tech Foods has forayed into other branded foods such as atta and microwave popcorn. Is this part of a strategy to consciously reduce focus on the edible oils business in the coming years?

With ConAgra Foods assuming management control of Agro Tech Foods, our stated objective for the past three years has been to progressively move towards operating across the food chain. The launch of the food brands Healthy World and Act II are manifestations of this strategy. This in no way signifies a reduction of focus on the edible oils business. For example, our first acquisition of a consumer brand, Rath Vanaspati, operates in the edible oils and fats market.