ADF Foods Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Standalone margins surge, consolidated lag: Standalone EBITDA margin expanded 465 bps YoY to 23.3%, while consolidated margin reached 18.4% as investments in the US warehouse, freezer, and the Telluric brand weighed on the consolidated P&L.
• Agency business drags on top line: The distribution of Unilever tea brands declined because the new brand owner, ekaterra, is facing persistent supply chain issues, a headwind management hopes will ease in Q4.
• US mainstream push is a next-year story: The brand refresh for Truly Indian is being presented to supermarkets now, but management does not expect products to hit shelves until the next fiscal year, delaying a key growth catalyst.
• Special dividend marks a milestone: A special dividend of INR4 per share was declared to celebrate three decades of listing, returning cash to shareholders alongside ongoing operational investments.
• What to watch next quarter: Whether the ekaterra supply chain normalizes as hoped, any progress on the new beverage client deal, and the pace of investment spending into the US and the Soul brand.

Agency Business & the ekaterra Disruption

• The core problem: The agency business, which distributes tea brands like Red Label, Taj Mahal, and Lipton Yellow Label, declined because Unilever sold those brands to ekaterra and the transition was not smooth, creating supply chain issues that led to lower sales for ADF.
• Recovery timeline is a hope, not a guarantee: Management is optimistic the agency business will get better in the fourth quarter, with supplies fully back to normal next financial year, but the new owner is still struggling to fix the problem despite having invested billions in the brands.
• Strategic rationale remains intact: Management strongly believes the strategy of having complementary products in the distribution pipeline is the right one, as it helps ADF's own products business grow and achieve better market penetration.

Bimal Thakkar: "It's just a month that we are going through the - - company, which has bought these businesses also, is disappointed that the supply chain problem is there. They are also doing their best because they have invested billions of dollars in buying these brands."

US Market: Investment Phase Before the Growth

• Warehouse and freezer investments are live: ADF invested in warehousing space in the USA and has now installed a freezer within the warehouse for more effective distribution, investments made with a five-year horizon in mind because you cannot keep shifting warehouses every year.
• Truly Indian listings are a next-fiscal-year event: The brand refresh for Truly Indian, aimed at the mainstream non-Indian market, is in the presentation stage with supermarkets, but getting products onto shelves will happen only from the next fiscal year.
• US listing budget is set: ADF is looking at a budget of about \$0.5 million for next year, mostly towards listing fees, to support the Truly Indian push.
• Food service is a parallel workstream: The food service vertical is a work-in-progress, with management hoping to get listings from the next financial year, meaning sales from both retail and food service in the US should start coming in from that point.
• ADF Foods USA losses are narrowing: The subsidiary continues to have losses but at a considerably lower level than last year due to reduced fixed costs, though the brand-building exercise in Telluric and the warehouse investments are currently impacting the consolidated P&L.

Bimal Thakkar: "Indian food is at a stage where it's at this cusp where it's taking off."

India Domestic Business: Building for a 20% Contribution

• New leadership hired for the India push: Balark Banerjea was hired as President of the India domestic business, with a plan to reach INR50 crores top line for the Soul brand in three years, part of a broader ambition for India to contribute about 20% of revenues five to six years down the line.
• Soul brand budget is committed: The Board has committed INR5 crores for this financial year for the Soul business, and the company will start looking at introducing products beyond shelf-stable under the Soul brand in Q2 next year.
• Product pipeline is building: ADF is working on a range of Indian desserts in frozen format, more plant-based products, and street food products to be launched, while Knorr Soups distribution launched in Canada last month as a seasonal winter product.

Operational Moves & Cost Structure

• Surat lease transfer saves costs: The lease facility at Surat was transferred to the Nadiad facility, with the lease stopping on 30 September and savings starting from October onwards, enabled by brownfield and debottlenecking investments in Nadiad and Nashik.
• Greenfield expansion is back under review: The hiring of Arjuun Guuha as Director of Operations means certain aspects of the greenfield expansion at Surat are back on the drawing board, with the project expected to be up and running within the next 18 months.
• Employee costs will inch up: Employee costs will slightly go up in the next couple of quarters, and overseas hires will come as professional fees, meaning other expenses will also rise slightly as the company builds out its senior team.
• Corporate office lease extended: The lease for the corporate office in Mumbai was extended for the next five years, creating both an asset and a liability on the balance sheet.
• PAT margin pressure explained: The distribution business, which carries a lower contribution, and investments in the Telluric brand impacted PAT margins at the consolidated level.

Bimal Thakkar: "Mr. Arjuun will help us with our operations, planning and future expansions. And thus, certain aspects of our greenfield expansion at Surat are back on the drawing board."

Product & Brand Portfolio Strategy

• Ashoka is the flagship: The brand is present in nearly 55 countries catering to the ethnic Indian diaspora, and new products launched under the brand have seen an encouraging but premature response.
• Truly Indian and Soul are the future bets: Truly Indian is currently only in Germany and is being positioned aggressively for the US mainstream market, while Soul is the investment brand for the India domestic market.
• Khansaama is not a focus: The brand has a limited product range and is not a priority for the company.
• UK listings are ramping: Morrisons has listed ADF's frozen food and shelf-stable products, it is doing well, and the company continues to add more products, with at least GBP0.1 crore in revenue expected next year as the first full year.
• Patanjali business is flat: No growth is expected, and the products are not compliant in terms of labelling for Europe, so they are only available in the UK.

Guidance & Commitments

Key Metrics