ADF Foods Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Bottom line more than doubled YoY: aided by operational efficiency, softer input costs and lower freight, though Q1 is seasonally the weakest quarter for demand and margins.
• 20% consolidated growth target reaffirmed: management is “fairly confident” it can maintain the pace, driven by robust demand, new listings and the Truly Indian frozen launch.
• Distribution business is a margin drag today, a margin lever tomorrow: fixed warehousing costs compress margins now, but as sales scale and cross-selling with ADF’s own brands grows, the margin profile should improve.
• Truly Indian carries outsized optionality: a single UK listing could match Ashoka’s annual revenue, but the outcome is unproven and depends entirely on secondary offtake.
• What to watch next quarter: whether the B2B inventory overhang clears on schedule, the pace of Truly Indian’s UK store rollout and secondary sales, and any acquisition announcement in international markets.

Top-Line Growth & Revenue Drivers

• Standalone leads, subsidiaries lag: standalone is targeted at 25% growth, subsidiaries at ~15%, yielding a consolidated 20%; the gap reflects the distribution business’s lower growth and ongoing losses at ADF Foods USA.
• All owned brands grew from FY21 to FY23; the consolidated top-line decline was driven entirely by the B2B segment, where customers over-traded in the prior year and are still sitting on inventory.
• B2B recovery expected next year: management characterized the decline as temporary destocking, not lost business, and expects a return to original levels from next year onward.
• Truly Indian UK launch underway: first shipment sent, trial orders received (8 containers for one retailer, 7 for another), with an initial rollout across 450 and 170 stores respectively, concentrated where ethnic clientele is present.
• Truly Indian frozen launch is being pitched to all retailers now and should be ready by Q3 of this fiscal year.
• Large US retail chain remains a work in progress, with presentations and interviews ongoing.

Sumer Thakkar: “demand continues to remain robust and we feel fairly confident we can maintain that 20% growth rate.”

Margin Profile & Cost Structure

• Q1 is the seasonal trough: historically, Q3 and Q4 deliver a better margin profile; on a consolidated level, management is confident of achieving high teens to early 20s in EBITDA margin.
• Other expenses rose on professional fees, advertising, sales promotion, freight and travel; the Truly Indian launch added market-testing and presentation costs, all treated as revenue expenditure with no one-offs.
• Distribution business margin is currently suppressed by high fixed costs from warehousing investments; management guided to a 9–10% EBITDA level for the year, with improvement expected as sales increase.
• B2B margins are in the same range as brand margins and are not being compromised.
• Freight rates are assumed to have bottomed out at ~7% and should remain at that level for the year.
• Sales mix shift away from high-margin Unilever and Patanjali products in the UK (now banned or transitioned) weighed on distribution margins; growth came from lower-margin items.

Shardul Doshi: “these are all kind of investments for us in a revenue expenditure manner.”

Distribution Business: The Ekaterra Transition & Cross-Selling

• Unilever-to-Ekaterra transition now streamlined: supply chain issues that disrupted deliveries are resolved, leading to timely deliveries and faster stocking; the improvement is expected to sustain under new management.
• Product basket shift: major Unilever products (teas) have moved to Ekaterra; the current Unilever basket is minimal, just a few items in the UK, though Knorr and a couple of other brands continue.
• Cross-selling economics: distributing third-party products alongside ADF’s own spreads fixed distribution costs over a larger base; complementary pairings like tea (Unilever’s) and samosa (ADF’s) are actively promoted.
• Contract tenure: agreements with Ekaterra and Patanjali are for five years with terms unchanged over the period.

Sumer Thakkar: “for example tea and samosa is something we promote very often, where the tea is Unilever's and the samosa is ours.”

New Products, Capacity & Capex

• Ashoka brand extensions: launched Frozen Curries for food service (Palak Paneer, Punjabi Choley, Dal Makhani) and Pure Butter Ghee.
• Cold storage in New Jersey: a new large-capacity facility is up and running as of last week; management expects it to run at full capacity based on current estimates.
• Nadiad expansion: adjoining plot acquired next to the existing factory; a state-of-the-art cold storage and freezer facility will be built, with Phase-1 capex of ₹50 cr spread across FY24 and FY25, and Phase-2 (₹30 cr) to follow after Phase-1 completion and product sales commencement.
• UK listings secured: three SKUs approved in a large discounter, and 15 SKUs across ambient and frozen with a supermarket chain.
• Soul brand domestic expansion: listings increased on Big Basket, Flipkart and Amazon.
• Camel hot sauces: a range of hot sauces under the Camel brand is being explored.

US Subsidiaries & Turnaround Efforts

• Nate’s and PJ’s: samples have been submitted to supermarkets and a vendor has been finalized; the business is now waiting on the supermarkets, with no timeline commitment from management.
• ADF Foods USA losses: fixed costs have been reduced, and the investment into the Indian brand has been slightly lower compared to the previous call.
• New distribution partner: legal formalities are nearly complete; everything has been more or less agreed.

Acquisitions & Capital Allocation

• Actively looking, but domestic expectations too high: management finds domestic target valuations unattractive and is instead finding “very attractive target companies” in international markets; no timeline commitment.
• Middle East opportunities have been evaluated in the past and the company remains open to them.
• Cuisine focus is flexible: the approach depends on the opportunity rather than a predetermined cuisine.
• Promoter pledge: no additional pledge recently; 10,50,000 shares (5% of total) were pledged last year for preferential warrants subscription, with a marginal 25,000 shares added last quarter; no plan to pledge more.

Shardul Doshi: “domestic market we have found that the expectations are too high at this point of time. But I think we being present largely in the international market, are finding very attractive target companies there.”

Guidance & Commitments

Key Metrics