Edible Oil Demand Will Fall Amid Rising Regulatory Risks

Key Takeaways

• Shifts toward sustainable food, increased regulation, and climate risks threaten AWL's core business model and growth prospects.
  
• Growing competition and reliance on edible oils expose AWL to price pressures and persistent volatility in revenue and profitability.
  
• Expanding branded portfolio, distribution reach, cost synergies from acquisitions, and focus on efficiency and ESG initiatives position the company for sustained profitability and long-term growth.

Catalysts

A fast-moving consumer goods food company, provides kitchen commodities in India and internationally.

• Intensifying consumer shifts towards plant-based, organic, and sustainably sourced foods are likely to erode demand for traditional edible oils and processed agri-products, placing AWL's core business at risk of long-term volume stagnation or decline and threatening future revenue growth.
  
• Increasing frequency of extreme climate events, including droughts and floods, is expected to disrupt AWL's raw material supply chains while driving up input costs for commodities like palm oil and grains, resulting in long-term margin compression and earnings volatility.
  
• Ongoing consolidation of the edible oil sector may not be enough to offset the threat from large multinational FMCG players and agile regional competitors, which could lead to price wars and persistent pressure on AWL's net margins and profitability.
  
• Heightened global regulatory scrutiny regarding deforestation, carbon emissions, and palm oil sourcing is likely to raise compliance costs and restrict export opportunities, directly impacting AWL's ability to grow its top line in both domestic and international markets.
  
• Overreliance on a narrow edible oil product portfolio combined with slowing per-capita edible oil consumption in core geographies is expected to intensify revenue volatility and limit the boost from diversification efforts, keeping both EBITDA growth and return on capital employed under sustained pressure.

AWL Agri Business Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on AWL Agri Business compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AWL Agri Business's revenue will grow by 6.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.7% today to 1.8% in 3 years time.
• The bearish analysts expect earnings to reach ₹14.3 billion (and earnings per share of ₹11.05) by about July 2028, up from ₹11.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.5x on those 2028 earnings, up from 29.6x today. This future PE is greater than the current PE for the IN Food industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 1.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.55%, as per the Simply Wall St company report.

AWL Agri Business Future Earnings Per Share Growth

Risks

• AWL Agri Business is consistently growing its branded food and FMCG portfolio, with double-digit revenue and volume growth over the last three years and a clear path to scale and margins improvement, which could support higher earnings and stronger net margins in the long-term.
  
• The company is aggressively expanding its distribution reach-especially in rural and alternate channels like quick commerce and e-commerce, with quick commerce growing over seventy percent year-on-year-driving both revenue growth and lower distribution costs that could lift bottom-line profitability.
  
• AWL's large capacities in edible oil refining and a robust supply chain, coupled with favorable regulatory shifts such as recent duty differentials and custom duty reductions, position the company to capitalize on future demand normalization and regain lost volumes, supporting a rebound or sustained growth in both revenue and EBITDA.
  
• Integration of recent acquisitions, such as GD Foods, is already resulting in cost synergies, improved operational efficiency, and margin expansion (with GD Foods delivering over eleven percent EBITDA margin), indicating that ongoing consolidation can further strengthen profitability and earnings growth.
  
• The company's ongoing investments in operational efficiency, technology adoption for sales and inventory management, and its focus on ESG-led initiatives are enhancing cost structures and brand reputation, supporting improvements in return on capital employed and long-term cash flow generation, which can translate into stable or rising share prices over time.

Valuation

• The assumed bearish price target for AWL Agri Business is ₹260.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of AWL Agri Business's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹397.0, and the most bearish reporting a price target of just ₹260.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹796.5 billion, earnings will come to ₹14.3 billion, and it would be trading on a PE ratio of 32.5x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹262.35, the bearish analyst price target of ₹260.0 is 0.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.