ADF Foods Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Record revenue, margin surge: Consolidated revenue grew 5.2% YoY to an all-time high, while standalone EBITDA margin jumped 930 bps YoY to 25.8%, driven by softening freight costs.
• Divested business drags profitability: Nates & PJ's swung from a INR 3 cr profit to a INR 4 cr loss in 9M, creating a INR 7 cr net negative impact; management targets a restart in 3–6 months.
• Demand remains resilient: Management sees no reduction in food demand, with strong Q3 growth and a solid start to January; no channel destocking is occurring.
• New brand bets on India e-commerce: ADF Soul launched on e-commerce with an internal ambition of INR 70–75 cr in three years; the business targets INR 1 cr/month in sales and EBITDA break-even around April.
• What to watch next quarter: Whether Nates & PJ's co-packer discussions convert to a firm restart timeline, the pace of ADF Soul's e-commerce ramp, and if freight cost relief can continue to offset raw material inflation.

Quarterly Performance & Margin Drivers

• Revenue composition: Consolidated revenue hit its highest-ever quarterly level, with like-to-like growth (excluding Nates & PJ's divested business) reaching almost 17%, far outpacing the reported 5.2% YoY figure.
• Freight tailwind: Softening freight costs were the primary driver of the 930 bps standalone EBITDA margin expansion, partially offset by inflationary pressures on raw and packing materials.
• Efficiency offsets: Better operational efficiencies and an improved product mix helped sustain margins in Q3 even as commodity and packing costs rose.
• Distribution stabilization: The distribution business, which suffered losses earlier from supply-chain disruption during Unilever's tea business transition, stabilized in the last two months and is expected to improve from Q4 onward.
• Agency growth path: The agency business is adding complementary lines and is expected to continue growing next year; discussions with new companies are in final stages, with at least one agency signing hoped for by Q1 next FY.

Thakkar: "Right now, we're juggling too many balls. I mean freight has helped us, but commodity costs, packing costs, all of those things have gone up. ... It's just certain external factors which are not within our control. If those go out of track, then we will see margin pressures."

Nates & PJ's: Restart Plan & Financial Drag

• Profitability hit: The Nates & PJ's business swung from a INR 3 cr profit in 9M last FY to nearly a INR 4 cr loss in 9M current FY, creating a net negative impact of INR 7 cr on consolidated profitability.
• Restart timeline: Management is in discussions with three co-packers and is hopeful of starting something within the next three to six months, with an endeavor to resolve this before September in the next financial year.
• Operational hurdles remain: The factory requires customer approval, product formulation must be completed, and supply-chain and raw-material challenges from current vendors persist.
• Ramp-up expectation: Once resumed, management expects a gradual ramp-up, with a fair assumption that at least 50–60% of prior business will return, though not all at once.

Thakkar: "I'm hopeful that within the next three to six months, we should be able to start something. The thing out there is the factory needs to get approved by the customers, product formulation has to be done. So there are still some challenges on the supply chain, on the raw materials, getting the raw materials from the current vendors."

ADF Soul: India E-Commerce Launch

• Early traction: Launched three months ago on the company's own website and Amazon, ADF Soul's initial response has been encouraging; more products were launched in January and additional e-commerce channels are being explored.
• Revenue target: Management is targeting sales of about INR 1 cr per month in the next few months, with EBITDA break-even expected around April at that run-rate.
• Three-year ambition: The internal ambition is for the ADF Soul brand to reach at least INR 70–75 cr in revenue within the next three years.
• Channel roadmap: The current plan is to first build the business on e-commerce, then begin exploring modern trade in FY24–25, not FY23–24.

Thakkar: "In the next three years, I would hope for the brand to be at least in the range of INR 70 crores, INR 75 crores is what the internal ambition is."

Core Market Expansion & Mainstream Push

• US mainstream focus: Management's effort is to continue increasing its consumer base with a focus on mainstream retail, citing growing popularity of Indian food among non-Indians; the company has been in and out of Costco in some divisions.
• UK retail presence: The company is already present in quite a lot of mainstream supermarkets in the UK.
• Core geography growth: Expansion will continue in core markets including North America, Europe, and the GCC, through adding distribution, expanding width in stores, adding new stores, and increasing mainstream penetration.
• Patanjali Europe: The Patanjali tie-up is performing well, with a UK launch completed and first shipments to Holland expected in the next two months, expanding the footprint into Europe.

Thakkar: "In the US, we have been in and out of Costco in some of their divisions and our effort is to continue increasing our consumer base, which is -- the focus is on the mainstream, because there's a huge runway out there for us and Indian food is getting very popular with non-Indian as well."

Product & Brand Investment

• New product launches: A range of international gourmet products launched under ADF Soul includes dips, Italian sauces, and Thai curries; new ready-to-eat and ready-to-cook products were added under Ashoka and Khansaama, along with plant-based meat items under Ashoka.
• Brand visibility spend: The company is spending more aggressively on listing fees, visibility and sampling in the UK, social media, and TV advertising, adopting a full 360-degree approach; the PLI scheme is helping increase these spends.
• Capacity debottlenecking: Debottlenecking efforts are underway at the existing Nadiad facility to improve capacity utilization and mitigate costs.
• Greenfield project grant: The company received approval for a INR 10 cr grant from the Ministry of Food Processing Industries toward a proposed Greenfield project at Surat, Gujarat, netting the capex to approximately INR 50 cr.

Guidance & Commitments

Key Metrics