ADF Foods Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Revenue grew 12.4% YoY, margins squeezed: Consolidated revenue reached INR 97.2 crore, but EBITDA margin compressed to 9.3% as freight costs surged to 16% of topline and raw material inflation persisted.
• Gross margin improved despite cost pressure: Gross margin rose to 49.2%, aided by a better product mix weighted toward higher-margin items, even as input costs climbed.
• Price hike taken, more relief expected: A June price increase and softening raw material and freight costs are expected to lift margins in coming quarters, though peak-season freight surcharges loom from late August.
• Strategic bets placed on U.S. QSR and India e-commerce: A \$1 million minority investment in NaanSense and the upcoming launch of Soul-branded products on Indian e-commerce signal a push beyond the core ethnic grocery channel.
• What to watch next quarter: Whether the full impact of the June price hike and softening input costs translate into the promised 15-18% EBITDA margin trajectory, and the pace of ramp-up in the new agency distribution and QSR supply relationships.

Margin Walk: Cost Pressure and Recovery Path

• Freight costs the dominant drag: Other expenses spiked because freight costs jumped between Q1 FY22 and Q1 FY23, reaching almost 16% of topline in the current quarter, up from around 14% flagged earlier.
• Raw material inflation absorbed selectively: The company could not pass on the full increase to consumers, absorbing some of it while taking price increases only on key products where it felt the market could bear it.
• Gross margin held up on mix shift: Gross margin stood at 49.2%, an improvement driven by selling more higher-margin products, which partially offset the raw material and freight headwinds.
• Recovery levers are in motion: A price increase was taken in June, raw material prices are now softening, and freight rates have begun to ease, though a peak-season surcharge expected from the third week of August means a major freight reduction may take a few more quarters.
• PLI income not yet booked: The Ministry of Food Processing pushed the PLI incentive timeline by one year, and the company has conservatively not booked any PLI income this quarter; booking will begin once further clarity is received.

Shardul Doshi: "So, the main impact in profitability was due to the -- if you see the other expenses have gone up, there was a huge freight cost increase which happened between these two products."

Demand Environment

• U.S. demand slowed seasonally, not structurally: The last two months were a little slow because of the holiday season and travel, not inflationary pressures; from the last week of July onwards, things are again getting back to normal.
• Channel inventory normalized: The panic stocking seen during the initial lockdown phase is gone; the situation is back to a pre-COVID normal.
• Diwali season optimism: Distributors and partners are very gung-ho ahead of the Diwali season, and demand seems to be coming back.
• Brand-level growth visible: Growth in absolute numbers was seen in most brands, including Ashoka, Camel, Aeroplane, and Truly Indian, though management declined to provide brand-wise growth figures.

Bimal Thakkar: "being in the food business, I mean, you know that is hopefully it doesn't impact us, I mean we are not seeing much of an impact."

Strategic Initiatives: QSR, India E-Commerce, and New Plants

• NaanSense investment opens a U.S. QSR window: The board gave in-principle approval for a \$1 million minority stake in NaanSense Operating LLC, a U.S.-based startup in ethnic Indian foods QSR and fast casual dining, secured at a lower valuation than their first fundraising round.
• The strategic rationale is intelligence, not just supply: The investment gives the company an edge as a supplier and provides insight into food habits and trends of mainstream American consumers, a demographic beyond its traditional ethnic Indian base.
• India e-commerce launch imminent: Products under the Soul brand in food accompaniments, including pickles, sauces, and chutneys, are ready to be available in the Indian market from Q2 FY23, with activity under the new backend entity and Telluric starting in August.
• QSR supply chain taking shape in India: The company has started supplying to one chain, is already on its second order, and is in active discussions with multiple players, exploring various opportunities to be a key ingredient or finished product supplier to the QSR and cloud kitchen space.
• Greenfield plant on a defined timeline: Land has been acquired and a grant application submitted to the Ministry of Food Processing; the company expects the grant in a couple of months and can then execute the plant within one and a half years, targeting H2 FY24 commissioning, with full-capacity revenue potential pegged at 2 to 3 times the CapEx.
• Brownfield capacity constraints resolved: Debottlenecking for some products has been completed, and the company now has enough capacity to grow at a higher pace going forward, with the new greenfield plant adding further headroom once commissioned.

Bimal Thakkar: "So, this gives us an edge in terms of being suppliers and also gives us insight in the food trends of mainstream American consumers"

Agency Distribution: Scaling with Guardrails

• New agency partnerships expanding the portfolio: The company signed up a new agency with a strong brand of frozen products from Malaysia, with a first-year revenue target of \$0.5 million, and continues to distribute for Unilever, targeting GBP 0.3 crore to 0.5 crore in revenue over the next two to three years for Patanjali by adding more products.
• Patanjali distribution off to a slow start: The first shipment arrived in May, generating only about GBP 35,000-38,000 in Q1 revenue; the full-year expectation is a minimum of GBP 0.05 crore.
• U.S. warehouse expansion to lift margins: Two warehouses were taken on lease in the U.S., and the company hopes to add more DCs over the next two years; as it does more of its own distribution, it will capture distributor margin in addition to super stockist margin, improving agency profitability.
• Own brands remain the anchor: Management was explicit that the agency business will probably stay under 30% of revenues, with 70% still coming from own brands, and margin profiles will remain in a similar band.

Bimal Thakkar: "our focus will always remain on our brands. And I think our agency business as we go along we'll probably look at under 30% of our revenues, 70% will still come from our own brands."

Guidance & Commitments

Key Metrics