11/5/2004 THE ECONOMIC TIMES - Branded oils player Agro Tech Foods hastied up with Parakh Foods to manufacture Sundrop and Rath vanaspati morecheaply.

The Indian arm of US major ConAgra is also trying to reduce its dependenceon commodity trading to acquire the image of a serious FMCG player.

But with more than half its turnover still coming from commodity trading,coupled with the declining market share of Sundrop and just a toehold yetin snack foods, AgroTech's new strategy may backfire on the bottomline.

Hyderabad-based AgroTech has entered into an agreement with Parakh forcontract manufacture of flagship brand Sundrop, Rath vanaspati and Crystalrefined oil. Manufacturing Sundrop at Parakh's Kandla refinery will allowATFL to improve supply to virtually the entire northern, western, andeastern markets (up to Bihar). For Parakh, the deal helps to improvecapacity utilisation.

Top company sources say, crude soya oil will be imported by Parakh itselfbecause its recent tie up with Cargill India gives an edge. Parakh Foodswill assist in the quality upgradation of Sundrop and any savings throughstreamlining costs and production may be split between the two companies.

As ATFL does not own refineries, it is wholly dependent on third partymanufacture to service its brands. But it is now paring down operationsfrom 29 locations across the country to just a dozen. It is now left withnine units for oils and three for snack foods.

But the decision to produce Sundrop in Parakh's unit may well stretchATFL's marketing skills. "When Gemini, Nature Fresh and Sundrop are allgoing to be produced at the same refinery, why should consumers pay apremium for Sundrop. Now there can be no claim to superior oil ortechnology that Sundrop can make,'' say industry watchers.

Moreover, with Parakh and Cargill ready to start co-marketing Nature Freshand Gemini brands soon, ATFL will also have to protect Sundrop against anyconflict of interest with its contract manufacturer.

ATFL is simultaneously aiming to reduce its dependence for profits on bulktrading of edible oils and grains. It is also shifting to trading morehigh-margin commodities. The company, which is publicly listed, derivesrevenue from two segments, branded foods, and bulk and processedcommodities.

"Though we will continue to do our own sourcing, we would like to rejigthe portfolio to include higher-margin products like spices, dehydratedonions, and potatoes. Instead of selling to third parties, we want tocater to the food service and restaurant sector. For instance, we coulddesign an oil for an industrial user to meet very specific needs,'' saidMr Utpal Sengupta, president ATFL.

However, ATFL, which has been a sizeable and well-known player on theIndian commodity markets, has yet to identify the big buyers and supplysources for these new products.

ATFL's mid-market brand, Crystal, hitherto a part of its commodityoperations and ranked five in terms of market share by Org-AC Neilson, isalso likely to be merged with the branded oils business.

But while this strategy may better align ATFL with ConAgra's focus onbranded foods, the reduction in commodity trading will wipe out its meagreprofits, at least in the medium term. Bulk commodity business has been oneof ATFL's strong profit earners.

On the other hand, snack foods like Act II are still at a nascent stage ofgrowth and face stiff competition from Pepsi's Frito Lays. Sundrop itselfhas been losing market share heavily to cheaper brands like Fortune,growing less than 5% annually in volume.

In the last six years, since ConAgra took over, ATFL has been oscillatingbetween net loss and meagre profits. It has yet to pay a dividend toshareholders. "When a company is dependent on a couple of profit centres,trying to tamper the formula without an alternative in place may provedetrimental to shareholder interests,'' say market analysts.

Meanwhile, CDC Group Plc, the investment arm of the Department forInternational Development (DFID) of the British government, has pared itsstake in ATFL by 16.74 lakh shares, while big bull Rakesh Jhunjhunwala islearnt to have built a 3.7% stake in the company.

CDC Group continues to own 2.75 lakh shares or about 1.13% of ATFL'sequity capital. The DFID arm owned 8% until September 2003, but has sincebeen reducing its stake. ITC continues to own 16.77% of ATFL's shares,through its investment arm Russell Credit.