Freshtrop Fruits Ltd. Founded by an IIT graduate Mr. Ashok Motiani , is a food processing company and is engaged in the business of food processing and exports of fresh fruits to leading Supermarket chains in various parts of Europe, Russia & Far-east as well as in Domestic Market. The Company is producing Fruit Pulp & Concentrate for both the Domestic & International Customers. Freshtrop is today one of the largest Indian exporter of table grapes to the EU.
Details: Freshtrop fruits exports mainly Grapes, Pomegranates and Mango to Europe and the Middle East markets, CIS countries and Far-East The food processing division was started few years back as a part of diversification and de-risking strategy that also gave a natural backward integration to its existing seasonal fresh fruits business (and of course, because of the massive growth potential it provides). The food processing division is into non-alcoholic read-to-drink beverage vertical, which is one of the most lucrative area of food processing. The products include, Pomegranate Juice Concentrate,Various Fruits Pulp (eg. Mango Pulp, Guava Pulp etc), Tomato Paste etc. Freshtrop Fruits in line with its highly smart promoter is using technology and business strategy to its best. To de-risk their business from climate uncertainties they have set up multi location packing and post-harvest handling facilities for fresh fruit business. They already have 4 packaging warehouses but the management has decided to opt for asset light model moving forward (as it would dramatically improve the bottomline). So now, the expansion would come by outsourcing warehouse packaging and this will greatly improve the bottomline. They also increased the no. of fruits being processed for better capacity utilization and reduced dependence on vagaries of nature for processing business. Steadfast focus on quality and a systematic and thorough approach to food safety and traceability have been the directing forces for Freshtrop’s operations.
Excellent Business Acumen – Europe being one of the largest markets of grape exporters in India, shook the grape exporters in india with is ban of Indian grapes in 2010 (the ban was lifted last year). It wiped off nearly 2/3 rd of grape exporters in india, but not freshtrop. Interesting thing to note is that even during these years of export ban company was able to grow topline and did not post any loss. They did this by increasing the variety of fruit exports, exploring new markets, and also in the process realized the inherent risk of the business and took the plunge into the super lucrative non-alcholic beverage vertical, which not only de-risked its business but also gave it a backward integration. This remarkable agility and improvisation in adapting to changing business climate makes the management of Freshtrop a class apart. Normally such regulatory hurdles prove a death-knell of most companies (2/3rd of fresh fruit exporters were wiped off) but companies who come out strong out of it are the companies that create tremendous wealth in times to come.
Why to Buy – A food processing giant in making Freshtrop, is one of the biggest fresh fruits exporters of india, and a fast growing non – alcoholic food processing beverage maker, led by an IITian with “proven” excellent business acumen. The promoters have increased stake in the company from less than 44.99% in 2010 to 55.47% currently. Part of the promoter increase was done by warrants to promoters. The upfront payment helped in capex they had planned to start their food processing business. This was a smart move. They took the difficult decision of diluting a bit of equity to avoid raising too much of debt (which in any case was difficult to come by) in those difficult time. Remember that time was particularly difficult because not only the interest rates were high, India’s growth had started tanking and to top it all, the European ban had already put a huge pressure on bottomline. Rather than dropping the plan to open the food processing division, they took the warrants route as they knew de-risking of food exports business was essential and food beverage gave it a natural backward integration. This proves that the management of this company is not only agile and smart strategist but also a good capital allocator. With their recent decision to outsource packing warehouse to fuel expansion they have increased my belief in their capital allocation skills. They have 4 packaging warehouses but the management has decided to opt for asset light model moving forward (as it would dramatically improve the bottomline by avoiding any capex led expansion). Firstly, since the fresh fruits division is seasonal, they have the problem of utilizing their warehouses throughout the year (it can be kept professionally utilized only for a few months in a year). With things improving they have re-started paying dividends also, with a healthy payout ratio of more than 27%. The company would become debt-free (minus delivery credit) and without any capex in near future the company’s bottomline will improve significantly and that will in-turn boost the dividend payout. The company’s food processing division has also turned around and according to the management will now sustainably churn profits. They are so confident about their prospects that they have declared in their Annual Reports that this year they would be growing at 50% in their bottomline. In my interaction with the management, they even indicated that for next two years, growth of around 50% is amlost a given, so their bottomline will grow 50% for next two years atleast. This is really good. No wonder the company posted a first quarter profit that was more than the entire last year’s profit, infact 20% more than entire last year’s profit. The company has also started generating good cash flows now. The only sore point was the inconsistent bottomline in its food processing business and now in my interaction with company management they have indicated that the losses in food division is a thing of past and there should not be any losses in future. This could be a huge trigger. With other food processing companies saddled with Debt and trading at PE of 25-45, this company, that would be debt free this year, easily expected to grow more than 50% for next two years, having a payout of more than 27%, hereon growing in an asset light model, led by an IITs who is an excellent capital allocator and one of the biggest company in its area, is available at a PE of less than 8. The growth and PE is just going to expand from here on.
The management’s smart strategist acumen was tested very recently where there was a hail storm in maharashtra, but to investor’s delight, the management’s de-risking strategies played here and there was no effect of hail storm on the stock. Infact, the company posted best ever quarterly topline and bottomline numbers.
Technicals: The stock is looking very strong and is near its long term resistance of 65rs. But this time its looking all set to break this resistance and above this resistance the stock will become very strong and would quickly test its all time high of rs90. Beyond that it will fly once again.
1. Most of the material posted here is a result of my interaction with the management
2. Business is seasonal in nature, so 75% of earnings come in Q1 and Q4.
Remember, a smart first generation entrepreneur is the surest ticket to success.