ADF Foods Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Record standalone year, U.S. losses drag consolidated: Standalone revenue hit an all-time high of INR353.3 crores, growing 17% YoY, but consolidated PAT fell because ADF Foods USA swung to a INR5 crores loss from a supply-chain disruption.
• Freight tailwind drove a margin spike that will partly reverse: Freight costs halved to ~8% of sales in Q4, lifting margins to an unsustainably high level; management says some benefit will be passed to customers and the annualized margin is the safer reference.
• The U.S. story is a recovery play with multiple moving parts: The loss-making co-packer litigation, a new distribution agreement at final stage, and a 5-year Ekaterra deal all need to land in FY24 to turn the subsidiary from a drag to a contributor.
• A greenfield Surat facility anchors the medium-term growth bet: Phase I breaks ground next month, with commercial production in 18 months; on full Phase II completion, management expects the business to contribute at least 3x the INR80 crores total investment.
• What to watch next quarter: Whether the co-packer litigation resolves by the September target, whether the new U.S. distribution agreement is signed, and whether the PJ’s & Nate brands begin the re-listing process with retailers.

Standalone Performance & Margin Dynamics

• Standalone revenue: Achieved the highest in company history at INR353.3 crores, growing 17% YoY, with the highest full-year standalone PAT and PAT margin.
• Freight costs: Softened materially over the year, particularly in the last two quarters, falling from 18–20% of sales to ~8% in Q4, which drove the exceptional Q4 margin spike.
• Raw material inflation: Some pressure on key raw materials in the last two quarters, being mitigated through cost optimization, better product mix and improved operational efficiency.
• Q4 margin spike: Management explicitly flagged that Q4 margins are not the new baseline; some freight benefit will be passed to customers via consumer offers, so the annualized gross margin number is the sustainable reference.
• Seasonality: No material seasonal margin variation; H2 top line is generally stronger than H1, and Q2 stronger than Q1, causing fixed-cost apportionment to show a slight Q1 dip then rise in later quarters.
• B2B mix shift: B2B (bulk plus private label) declined from ~32% of total revenue to 25% over a few years, while all branded businesses (Camel, Aeroplane, Truly Indian) have grown, improving the mix.
• Capacity: Debottlenecking at Nadiad and Nashik factories is complete, increasing capacity; a lease plant continues production.

Shardul Doshi: "Though there is no exceptional item here and the margin that the cost structure will remain like Q4, we will have to pass on some of the benefits to the customers. And hence, we are sticking to the annual number."

U.S. Business: The Recovery Equation

• ADF Foods USA loss: The subsidiary swung from a INR2.5 crores profit in FY22 to a INR5 crores loss in FY23, a ~INR7 crores swing at the profit level, because a local U.S. supplier failed to deliver and the company is now in litigation with that supplier.
• Litigation timeline: Management hopes for resolution before September, but timing is not in the company’s control; alternate suppliers are being evaluated, with a target to close on one option within FY24 itself.
• PJ’s & Nate brands: Have been off shelves for over 1.5 years due to the co-packer litigation; the INR32 crores of revenue they generated in FY22 was entirely absent in FY23.
• Re-listing challenge: Once a co-packer is tied up, the company must go back to retailers and re-list products that have been absent for over a year, a process that will take additional time.
• U.S. distribution growth: The distribution business (ADF Holdings / Vibrant Food) has grown significantly since taking over a distributor; the company now supplies directly to retailers with better control, driving Ashoka brand growth.
• Ekaterra agreement: Unilever sold its tea business to Ekaterra last year, causing supply disruptions and degrowth in the distribution business during FY23; Ekaterra has now signed a 5-year agreement with ADF, and the situation has normalized.
• New distribution agreement: In final-stage talks with one more company for U.S. distribution; agreement expected within the next month or two, pending FDA requirements, packaging changes and formulation changes.
• U.S. modern trade: The Truly Indian brand is intended to grow in mainstream modern trade, targeting supermarkets and club stores like Costco and Sam’s Club; current reach is negligible and management sees a "huge runway."
• U.S. food service: A new Head of Food Service has been appointed, joining from 15th May, to drive the college stores and campuses channel.
• FY24 expectation: Management expects ADF Foods USA to contribute positively in FY24 and not repeat the kind of loss seen in FY23; the endeavor is to generate profits in the U.S. business this year.

Bimal Thakkar: "So we're hoping before September, I mean, the matter is in litigation, it's in the courts. So we hope to have some resolution, but the timing is not really in our control, but we are looking for alternate for suppliers."

Growth Investments & Capacity Build-Out

• Surat greenfield facility: Breaking ground next month (June 2023); Phase I commercial production expected within 18 months of ground-breaking. Phase I investment is INR50 crores, Phase II is INR30 crores.
• Return expectation: On completion of Phase II, the business is expected to contribute at least 3x of the total INR80 crores investment.
• Expansion scope: The large land parcel allows for a Phase III expansion as and when required.
• Growth trajectory post-Surat: Management’s plan is for 20% YoY growth for the next 3–3.5 years once the Surat facility is on stream; investments are being made to align backend capacity with market readiness.
• Telluric Foods investment: Board approved up to INR5 crores via optionally convertible redeemable preference shares to develop the Soul brand with more D2C listings and urban-centric product offerings.
• Naansence: Decision made not to pursue the opportunity; intimation given to the stock exchange.
• Acquisitions: Actively and aggressively pursuing targets that move the company up the value chain for better distribution control, and evaluating complementary products with brand and distribution; one expensive opportunity was rejected, and a couple of proposals are currently being evaluated.

Bimal Thakkar: "That's why we are doing Phase I, Phase II, and then we can even do a Phase III there because we've got a large parcel of land there. So, we have scope to expand in that facility as and when required."

India & Europe: Emerging Bets

• ADF Soul (India): Plan to expand distribution on e-commerce with investments in brand building via digital media advertising; the brand contributed a INR2 crores loss in FY23 from marketing investments.
• Patanjali: Revenue was only ~GBP 0.1 crore as first shipments reached in May of last year; management expects at least 100% growth this year.
• Patanjali Europe: Working on labeling requirements with the company and EU regulators; hope to complete by September 2023 and start the Europe business in the second half of this year.
• PLI scheme: The government changed the 5-year PLI block from FY22–FY26 to FY23–FY27 after FY22 results were declared; the company had to reverse INR7.5 crores booked in FY22, resulting in net PLI income of only INR50 lakhs in FY23.
• PLI income FY24: Expected to be INR8 crores, booked as income from operations, with the amount increasing every year based on top-line growth; the final year could reach INR15–16 crores.

Guidance & Commitments

Key Metrics