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How Adani Wilmar Became India’s Second-largest FMCG Firm

How Adani Wilmar Became India’s Second-largest FMCG Firm

Adani Wilmar surprised everyone by emerging as India's second-largest FMCG company after it listed in February. But with edible oil forming the bulk of its revenue, will its planned expansion in foods help it de-risk its business, and also become numero uno in its industry?

Adani Wilmar: Gautam Adani's New Jewel in the Crown Adani Wilmar: Gautam Adani's New Jewel in the Crown

Ever since Pramod Kumar took charge of operations at Adani Wilmar’s (AWL) newly built manufacturing facility at Hazira, Gujarat in 2019, he has never been happier. The 45-year-old engineer has been devoted to the company’s edible oil derivatives operations for well over a decade, but the fully-automated edible oil manufacturing plant on the outskirts of Surat gives him an immense sense of satisfaction. With a refining capacity of 2,500 tonnes a day, the plant is already one of the largest for the edible oil giant. But what keeps a seasoned professional like Kumar expectant is its future prospects.

The plant’s half a dozen storage containers, standing side-by-side, 50-60-ft tall inside the campus, are being fed by dozens of oil tankers that relentlessly ferry raw edible oil from ships docked at the nearby Hazira sea port. While supply disruptions are not an issue, the quality of supply containers—which at times carry even fossil fuels—leaves Kumar concerned over the quality of third-party logistics support.

That, however, is a temporary glitch. A 14-km pipeline is being constructed that, once completed, will directly connect the plant’s storage containers with the shipping containers on-board vessels at the sea port. That would not only remove any chances of contamination from third-party oil tankers, it would also significantly cut down the cost of logistics and the time taken to empty a vessel after docking. “Much like fossil fuel, we are highly dependent on imports for crude edible oil. Thus, the more efficient the raw material supply chain is, the better it is for the refineries and the business,” explains Sanjay Sharma, Assistant General Manager-HR at the Hazira facility and, like Kumar, an AWL veteran for over two decades. For perspective, India imports nearly 65 per cent of its crude edible oil each year.

The expertise of people like Kumar and Sharma helps run the near human-less facility smoothly, but intricate planning at the group level is key to AWL’s success in the country’s vast edible oil market, in which it is the largest edible oil importer and refiner. AWL also nurtures the largest edible oil portfolio—spanning sunflower oil, soybean oil, mustard oil, palm oil, cotton-seed oil and rice bran oil, carried by its very popular Fortune brand. India’s overall edible oil market, worth `3 lakh crore, is dotted with unorganised players. The organised segment, worth `1.8 lakh crore, is in turn dominated by AWL, with a share of 18.9 per cent. Other big players include Ruchi Soya (8 per cent share), Emami (6 per cent share), and Cargill (4 per cent share).

AWL successfully listed on the Indian bourses on February 8, 2022. But the stock markets started buzzing even as it filed its DRHP with Sebi on August 2, 2021. Comparisons began to float with the leaders of the FMCG industry. And why not? AWL’s FY21 revenues of Rs 37,090 crore places it second in the FMCG sweepstakes after HUL (Rs 47,028 crore) and before ITC (Rs 34,752 crore of FMCG business only, minus hotels and other non-FMCG businesses).

In the first nine months of FY22, AWL with Rs 39,254 crore in revenues is ahead of even HUL (Rs 38,679 crore), creating a distinct possibility of a new market leader at the end of FY22 after decades of dominance by HUL. That said, their businesses are vastly different, even within the same industry. The bulk of AWL’s revenue (84 per cent) comes from branded edible oil. HUL’s business is dominated by soaps, branded tea, and personal care. And ITC’s FMCG business is dominated by cigarettes (59 per cent of revenues), and in non-cigarettes, it is mostly into categories like branded commodities, packaged foods and personal care. Still, the birth of the AWL behemoth is a compelling story.

Secret recipe to success

Unlike most of its competitors, AWL’s roots are deeply embedded in two of the largest businesses in their respective fields of expertise—Singapore-headquartered Wilmar International and Adani Group (post listing, both groups hold equal stakes of nearly 44 per cent each in AWL). Wilmar controls nearly 30 per cent of the world’s edible oil business, with its tentacles spread across continents—giving it a unique leverage when it comes to price negotiations and allocation of raw materials. And Gautam Adani-led Adani Group owns India’s largest private sea port operator—Adani Ports and Special Economic Zone (APSEZ). That plays an important role in ensuring seamless supply of raw materials at AWL’s facilities across the country.

Which brings us back to AWL’s core competence. The company currently owns and operates 18 refineries in India, out of which 10 are strategically located near sea ports, much like Hazira. According to Angshu Malik, CEO and MD of AWL, feeding the Hazira plant directly from shipping containers will cut down its cost of operations by Rs 19-28 lakh each day. Unloading through a pipeline speeds up the rate of moving crude to 450 tonnes an hour from 250 tonnes an hour. Impact? Today, it takes over 2,000 oil tankers (third party) and nearly a week to shift all the crude edible oil from a large vessel to the Hazira facility. The pipeline would bring the time to barely three days and completely remove third party interventions. Further, it would allow the company to invite larger vessels—up to 50,000 tonnes capacity instead of 15,000 tonnes at the port—resulting in better operational efficiency. This would also remove any unnecessary hourly waiting charges that vessel operators charge.

“Today, when a large vessel comes, we take our share of oil at Hazira and then it heads for our Mundra facility. But once we are able to unload faster, we will unload the larger vessels completely at one port, which will further cut down costs,” says Malik. In the long run, as the pipeline replaces container trucks, the cost of supply would come down by 40-50 per cent, he says. With crude edible oil prices hovering around $1,300-1,400 per tonne, broadly the pipelines help save AWL 1-1.5 per cent on its total input costs.

While the Hazira pipeline will become operational later this year, AWL has such infrastructure already in other plants, with the first such plant being built in 1999 in the Mundra port in Gujarat. Currently, it has seven such facilities directly connected with ports—two each at Haldia (West Bengal) and Krishnapatnam (Andhra Pradesh) and one each at Kakinada (Odisha) and Mangaluru (Karnataka), apart from Mundra. And there are three other port-based refineries, like in Paradeep (Odisha), that are yet to be linked.

Deven Choksey, MD of KRChoksey Shares & Securities, says it’s an advantage for AWL that APSEZ is a pan-India company. “Since the edible oil business is a low margin one, whatever they save on logistics and such related costs, reflects in the bottom line. And as the scale of operations grow, it catapults into higher profits,” he says, adding that AWL’s current net profit margin—around 2 per cent—has the potential to grow to 4.5 per cent in coming years.

It, however, is not immune to its due share of challenges, especially after its public listing. At 84 per cent, the contribution of the edible oil business in AWL’s total sales is enough to send alarm bells ringing. The segment also offers poor margins and, because of its heavy dependence on imports, is susceptible to a host of factors beyond its control. That would include the government’s stance on import duty, low yield of oil seed crops in India, and price volatilities in international markets, among others. For instance, the Ukraine conflict poses a threat to its supplies as 90 per cent of crude sunflower oil is imported from the region. With the crisis still on, AWL’s 45 days of oil reserves will be under stress and Malik says a supply crunch could be expected in April.

AWL’s Ebitda margin is currently at 3.57 per cent (FY21)—much lower than other leading FMCG players like ITC (32 per cent), HUL (24.7 per cent) or Nestlé India (24.5 per cent), whose businesses are not so dominated by edible oil. Analysts, though, don’t seem worried. “Operating margin at 3-4 per cent is not unusual [given its high exposure to the edible oil business],” says Deepak Jasani, Head of Retail Research at HDFC Securities. Cost optimisation through higher logistical efficiencies may improve margins marginally, but it is the newer initiatives (in branded foods) that have the potential to gradually improve AWL’s margins to over 5 per cent in 2-3 years. But he also points out that edible oil is a volumes game, plus there’s not much brand loyalty. So, if prices are hiked, branded players like AWL run the risk of losing customers.

And that brings us to the non-oil part of AWL’s business. While the company has been focussed on building its base of branded edible oil and industry essentials like oleo-chemicals during AWL’s initial years—1999-2013—it has since changed track. Over the past few years, the firm has aggressively forayed into branded, packaged kitchen commodities, such as branded rice, wheat flour, soya chunk, besan, maida, suji, dal and sugar.

Going beyond oil

“We have been concentrating on developing our foods basket. The aim is to be very strong in basic/essential staples that are consumed daily. After we champion this first stage, then comes the value-added portfolio,” says Malik. The plan is to make a mark in the hotels and restaurants supply business, where it already has a significant customer base due to its edible oil supremacy, apart from playing in the retail segment. Begun in 2014 with its foray into soya chunks, pulses and besan, the food and FMCG business has since been expanded into major categories such as branded rice, wheat flour and sugar.

In search of higher margins, AWL entered the fast growing ready-to-cook segment in 2020—under its flagship Fortune brand. According to Nielsen data, AWL cornered 11.7 per cent share and third position in the domestic branded rice market in the October-December, 2021 quarter. It also enjoys 5 per cent share—and second spot—in the wheat flour market. Overall, the foods business raked in Rs 1,865 crore or 4.8 per cent of its sales during the first nine months of FY22. But its volume offtake grew by a massive 35 per cent year-on-year, compared to 6 per cent in edible oil, and fall of 13 per cent in industry essentials such as oleo-chemicals, castor oil and lecithin.

Last year, AWL also forayed into the hand wash, sanitisers and soaps business to offset the poor performance of its industry essentials business. While sales from the personal care business is still low—about `200 crore a year—it helps AWL improve its margins by adding value to a large, market-leading derivates business. According to Malik, that’s a natural transition for AWL, which is already the largest maker of oleo-chemicals in the country with all leading personal-care majors as its clients.

An analysis by Ventura Securities says while the industry essentials business is expected to grow by 12.2 per cent, compared to 14.3 per cent in edible oils, it is the foods and FMCG segment that will be the key growth driver for AWL, at least till FY24. It estimates the segment to grow at over 31 per cent CAGR to touch Rs 4,340 crore yearly revenue for AWL in the next three years. “Due to rapid scale-up of the FMCG business and shift to value-added products, the company’s Ebitda margin is set to expand by 70 bps to 4.2 per cent. Ebitda is expected to grow at 23.4 per cent CAGR to Rs 2,491 crore (from Rs 1,325 crore in FY21). Net profit is expected to grow at a CAGR of 19.9 per cent to Rs 1,253 crore (from Rs 728 crore in FY21) with 20 bps margin expansion to 2.1 per cent,” it noted.

According to Choksey, AWL’s focus on packaged foods is aimed in the right direction: “Their foods business is growing very well, which is expected to improve their margins significantly. So, the market’s perception on AWL is quite strong as the higher margin segments have potential to deliver better growth.”

Muscling in overseas

AWL is also looking beyond the domestic market for growth. Its direct foray into Bangladesh’s edible oil market, for instance, is notable. Through a complex chain of acquisitions last June, the firm took over Bangladesh Edible Oil Ltd (BEOL), which is now marketing AWL’s flagship brands like Fortune (rice bran oil) and King’s (sunflower oil) in that country. BEOL refines crude, degummed soybean oil and crude palmolein, and distributes them in the local market. Additionally, it procures mustard, rice bran oil and rice for sale. AWL also owns another Dhaka-headquartered firm—Shun Shing Edible Oil—which is involved in crude oil transport and oil processing services. Industry estimates suggest the edible oil market in Bangladesh is currently at Rs 16,000 crore and growing at an impressive 9.5 per cent CAGR.

According to Malik, after the BEOL deal, AWL’s overseas business would touch Rs 7,000 crore by end-FY22. Apart from the Bangladesh business, it exports basmati rice, oleo-chemicals like soap noodles and castor oil (which are used in making personal-care items), soya derivatives and packaged edible oil to countries such as China, Japan and Australia, among others.

The road ahead

To keep the business future ready, AWL’s proceeds from the IPO—about Rs 3,500 crore—are being used primarily to repay debts worth Rs 1,059 crore. This, as per Ventura’s analysis, will make AWL a net debt-free company in FY22 itself. Additionally, Rs 1,900 crore is being allocated for capital expenditure as the firm is already into capacity expansion mode at multiple locations such as Nagpur (Maharashtra) for soya derivates, Haldia (oil refining), Paradeep (warehousing), Bundi in Rajasthan for oil mills and Kadi in Gujarat and Neemuch in MP for dal processing, apart from two greenfield projects in Kolkata and Gohana (Haryana). Further, Rs 450 crore has been set aside for mergers and acquisitions. Malik says AWL had been actively working on a select few brands and companies even before the IPO. “Our strategy is very clear: we want to expand our foods business. Second, whether the deal can help us expand nationally or even internationally. Third, will we get perpetual business from it? And fourth, whether we can expand that portfolio to meet our objective of making it big in processed foods. Hopefully, something should work out by April,” he says.

Additionally, the markets in the North and East are currently the strongest for AWL, while Malik plans to bring sales from South and West on a par with the other two. In spite of coming from one of western India’s leading business groups, AWL’s weakness in the high per capita oil consuming market in the West is ironic. But since its initial focus has been on capturing the North—from its refineries at the Mundra plant—the balance remains skewed. To bridge the gap, AWL is aiming to strengthen its portfolio with products like cotton-seed oil that sells well in markets such as Gujarat. Moreover, it is working on steadily growing its retail reach from the 1.6 million or 80 per cent of the grocery outlets in the country.

Amid concerns over the future rate of growth for its edible oil business, the management sounds less concerned. “The per capita consumption of edible oil in India is still half of what it is in many South Asian countries. Further, there are thousands of households that are not able to afford edible oil. It is the rich who are cutting down on consumption of oily products, not the ones who can’t afford it,” he claims. And like AWL’s winning formula of linking its ports with its plants, Malik has the backing of Wilmar’s expertise that, he believes, holds the key to even luring the premium consumers back into the fray with value-added offerings in the edible oil space.