ADF Foods Ltd Q2 FY2023 Concall Summary

Key Takeaways

• US subsidiary drag masks ex-US strength: ADF Foods USA contributed zero sales and a ~Rs. 5 crore profit hit in H1, while the core ethnic foods and distribution businesses posted good growth and demand.
• Margins rebounded sharply QoQ: Standalone PAT margin improved 540 bps QoQ to 15.7%, helped by a 5%-of-topline freight cost reduction and cost controls, even as raw material inflation persists.
• ADF Soul launched in India with a Rs. 12 crore first-full-year target: The healthy-and-tasty brand went live online last month with encouraging initial traction; marketing campaigns begin this month and modern trade entry is planned after online establishment.
• Distribution business reset nearly complete: The Unilever tea brand transition that flattened sales is resolved and growth should resume from January, while Patanjali distribution commenced in the UK and is expanding into Europe.
• What to watch next quarter: Whether the US subsidiary supply chain disruption actually resolves, the pace of ADF Soul's online ramp-up as marketing spend kicks in, and any progress on the two new distribution engagements under discussion.

US Subsidiary Disruption

• Zero H1 sales: ADF Foods USA (Nate's & PJs business) had no sales in H1 FY23 due to supply chain disruption, compared to Rs. 25 crores topline and Rs. 3 crores profit in H1 last year; the business posted a loss of around Rs. 3 crores in H1 FY23, creating a profit impact of almost Rs. 5 crores.
• Supply chain still unresolved: The problem on supply of products to ADF Foods USA is still not resolved and the business will still have challenges, though management believes the worst is behind.
• Warehouse challenges in the past: Warehouses taken on lease were hit by COVID with disruptions in getting people and setting up; management states those challenges are now resolved.

Bimal Thakkar: "I cannot see it going anything worse than what we currently gone because the ADF Foods USA subsidiary has virtually given zero business and it has only gone negative for us. All the other businesses we are seeing good growth on them and so I think the worst is behind us now and we look forward to a good future now from the US subsidiaries."

ADF Soul India Launch

• Brand positioning: Launched through wholly owned subsidiary Telluric Foods Limited, ADF Soul is positioned as a healthy-and-tasty brand priced at a slight premium for millennials, currently offering pickles and chutneys made with olive oil.
• Initial traction: In the first month, the brand saw good traction and repeat orders from consumers via its own website soul-foods.in and platforms like Amazon; management is very pleased with the initial response.
• Marketing ramp-up: Social media ad campaigns were held back in October due to the Diwali high season and will start from November onwards; close to about Rs. 3 crores in marketing spend is planned over the remaining 5 months of FY23.
• Channel roadmap: After establishing the online presence, the plan is to enter modern trade; the first 1 to 1.5 years in India will be online and social media only.
• Sales target: For the current fiscal year (5 months remaining), management is not looking at anything over the top; the first full year (next financial year) targets a minimum of Rs. 1 crore per month online, at least about Rs. 12 crores topline minimum.
• Breakeven timeline: FY24 will be breakeven; this financial year it will not breakeven because investments are needed for the new brand.

Bimal Thakkar: "So, the whole Soul value proposition is healthy and tasty products. So, it is not priced on the economy, and it is priced for the millennials, and it is at a slight premium. ... it is a premium brand and in the first month we have had good traction on the products, we have had repeat orders..."

Distribution Business Reset

• Unilever tea transition resolved: One core agency brand (Unilever Teas) underwent a transition because Unilever globally sold those brands to a private equity firm; disruptions during the transition caused flattish sales, with Q2 billing at Rs. 16 crores vs. Rs. 18 crores same period last year.
• Growth resumption expected: Everything is now resolved and from January onwards, the business should start seeing a good growth trajectory again.
• Patanjali commenced: Patanjali distribution has started off and the quarter reflects Patanjali sales; launched in the UK and now being put into some other European countries; on track for a half-million-pound first-year target.
• New distribution engagements: One company from Malaysia has just started distribution; two more discussions are ongoing, with management hopeful to finalize one before the end of this calendar year or the last quarter.
• Operating leverage benefit: As more products are added through the pipeline, it helps reduce distribution cost because fixed cost gets reduced further, making the business more beneficial going forward.

Core Business Growth & Margins

• Ex-US demand strong: Excluding the US subsidiary, all other businesses (ethnic Indian food from India, agency businesses) saw good growth and strong demand; the ethnic food and Indian food brand is showing strong demand and good growth even in this fiscal year.
• H1 growth composition: 17% H1-over-H1 growth was driven roughly 60% by price and 30 to 40% by volume.
• Growth drivers: The combination of taking market share, increasing penetration (width and depth in stores), and adding new products is driving the core business.
• Margin improvement: Q2 standalone PAT margin improved 110 bps YoY and 540 bps QoQ to 15.7% because cost control, operational savings, and prudent price increases across select product categories mitigated inflationary pressure.
• Freight costs declining: Freight cost came down by almost 5% of topline QoQ (from 20% to 15%), helping margins, and the declining trend continued through September.
• Raw material inflation persists: The company continues to see inflationary pressures on the raw material side and is constantly working on improving cost efficiencies; management hopes it gets better next quarter.
• PLI income not booked: The company is continuing not to book any income on account of PLI incentive for the current year due to a change in policy with respect to the start year under the PLI policy.

Bimal Thakkar: "We can't take such price increases every year unless we are under like these kinds of extraordinary circumstances where everyone was getting hit by high cost on the raw materials, on the freight, all of that, but normally we do have price increases of about 4% to 5%, it all depends."

Strategic Initiatives & Capex

• Greenfield project: A Greenfield project of about Rs. 60 crores plus additional balancing equipment and capacity expansions of about Rs. 10 crores at Surat, Nasik, and Nadiad is planned over the next 2 years; primarily for frozen foods, it will replicate all lines from Nadiad and add some new product lines, with a second phase planned for other ambient products.
• Greenfield revenue potential: At 100% capacity, the project can deliver around Rs. 170 to 180 crores, plus a substantial figure from internal expansion.
• Funding: The project will be funded through internal accruals, will take some term loan, and management is hopeful of getting some government subsidy.
• Lease facility: The lease facility is for frozen products and will continue until the Greenfield project is complete, which is at least another 2 years.
• QSR investment on hold: The investment announced last quarter has been put on hold and not yet made; certain discussions are ongoing with that company, with a decision expected before the end of this fiscal year.
• Acquisitions: The company is constantly evaluating and always on the lookout for acquisition opportunities and definitely wants to look at something.
• Mainstream consumer push: The company has already started making inroads in distribution for the mainstream consumer; currently largely through the Indian diaspora, but the mainstream is where management sees a good run rate going forward.

Bimal Thakkar: "Because of COVID and certain disruptions, this financial year was a little bit of challenge, but otherwise had we not gone through those disruptions, I think we would be on track to do that, now that the worst is behind us, I think we hope to continue with that trajectory of doubling up every 3 years."

Guidance & Commitments

Key Metrics