Although it has faded as the day goes on, the Wattle Health Australia Ltd (ASX: WHA) share price was amongst the best performers on the market this morning with a 4% gain to $1.25.
Since then it has given back much of this gain and sits 1.5% higher at $1.22.
Why did Wattle Health’s shares surge higher this morning?
This morning Wattle Health announced the finalisation of a 12-month supply agreement with Vasudevan and Sons Exim Private Limited in India for supply of its natural baby food range.
The agreement follows on from an initial product order by Vasudevan and Sons in January and includes a minimum volume commitment which is expected to be worth $1.5 million over the 12-month period.
As the products will initially be distributed in just one Indian state, management believes an increase in supply requirements could occur if Vasudevan and Sons follows through on its plan to roll out to other states in the near future.
Further, management sees the agreement as a major step forward in allowing the company to compete in one of the world’s fastest growing economies and most populated countries. As almost half the population is under the age of 25 and the annual birth rate is much higher than in Australia, it is seen as a lucrative market for Wattle Health’s products.
Should you invest?
While the agreement sounds like a positive step forward for Wattle Health, I would approach it with caution at this stage.
Vasudevan and Sons Exim Private Limited is not an established company with a track record. In fact, the company was formed just over a year ago according to Indian government records. I think this makes it reasonably unlikely that it has longstanding relationships with retailers that will help get Wattle Health’s products onto the shelves of key retailers.
Because of this, I would suggest investors stick to the companies that have already successfully penetrated Asian markets such as A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL).
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.