ADF Foods Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Red Sea crisis clipped the quarter: Revenue and EBITDA growth slowed YoY as shipments were disrupted late in Q3, but management frames this as a supply-side issue, not a demand one.
• Margin expansion story intact: Nine-month EBITDA margins rose from 16.6% to 19.3%, driven by a better product mix and lower freight costs, though freight began rising again at quarter-end.
• Soul brand scaling fast in India: Monthly growth of ~15% over the last two months supports a stated ambition of ₹100 crores in revenue within three years, with a dedicated India head now appointed.
• Greenfield capex cycle begins: The board has laid out ~₹60 crores of spending over 15 months starting April for a new facility, while existing capacity is sufficient for the next 1.5 years.
• What to watch next quarter: Whether the Tesco listing converts into the hoped-for $1 million run rate, the pace of the FOB contract shift to offset rising freight, and any concrete progress on the long-pursued Costco and Walmart tie-ups.

Red Sea Disruption & Freight Strategy

• Late-quarter hit: Sales shipments were impacted by the Red Sea crisis towards the end of Q3, causing a marginal drag on both revenue and EBITDA growth for the quarter.
• Freight costs turning up: Freight costs, which had been a tailwind for margins earlier in the year, started rising again towards the end of Q3.
• FOB shift as the hedge: Management is moving contracts from CNF to FOB, shifting freight cost to the customer's account, a structural change that reduces exposure to shipping rate volatility.
• Margin math on the shift: The freight impact is expected to be around 200 bps, but management expects overall sales growth and fixed cost absorption to offset that drag and keep EBITDA margins steady.

Shardul Doshi: "No. So what's going to happen, I think after last increase in the freight cost, which we had seen, a lot of contracts we have moved to the FOB. And what's going to happen is it will still impact us maybe and our profit impact can be around 200 bps. But when we look at the overall sales increase, which we are expecting with the fixed cost apportionment overall, I think we should be in a position to maintain our EBITDA margin."

Brand Portfolio & Retail Expansion

• Ashoka driving the mix shift: The Ashoka brand grew faster than B2B and private label, reducing the latter's share of processed food from 30-35% to 20-22%, though all businesses grew in absolute value.
• Tesco listing secured: A permanent listing across 700 UK outlets with 3 SKUs, with management hoping for at least $1 million in revenue in the upcoming financial year, though secondary sales will determine the outcome.
• Morrisons and B&M still unproven: Management expects these to move up to a full $1 million run rate next financial year but says it is hard to call until secondary sales data comes in.
• Truly Indian launch timeline: Plans to launch under the Truly Indian brand for Costco and Walmart next fiscal year remain on track, though discussions are still ongoing and the Tesco listing itself took 8-10 months of discussions.
• U.S. distribution business rationale: The Unilever partnership provides cost synergies on last-mile delivery and gives more influence with retailers through a wider product offering, with Ashoka growing in tandem after the deal was signed.

Sumer Thakkar: "It's actually a permanent listing. In pilots, they roll out to fewer stores. But because this is across the board, we're hoping it's a permanent listing and then, of course, they'll decide based on secondary sales."

Soul Brand: India Consumer Play

• Rapid monthly ramp: The brand has grown at about 15% month-on-month over the last two months, a pace management calls a fairly fast ramp-up.
• Three-year ambition: Management is targeting ₹100 crores in revenue within three years, a milestone it notes many brands have not achieved in India's complex landscape.
• Positioning and team: The brand targets premium, urban, upper-middle-class consumers, and the company has just appointed a dedicated India head to drive the effort.
• Product pipeline: New product changes are planned for the next financial year, with categories to be picked from ADF's existing 600-700 product range depending on market and competitive dynamics.

Sumer Thakkar: "So if you look at our past 3 to 4 months, we've been growing at about 15% month-on-month, which is a fairly fast ramp-up in our opinion. And in terms of targets, we're looking at INR 100 crores in 3 years. There's a lot of brands haven't been able to do, especially in a complex landscape like India."

Capacity & Capex Cycle

• Existing capacity sufficient near-term: Current plants are running at 60-80% utilization after debottlenecking, enough to cover demand for the next 1.5 years until the greenfield facility comes online.
• Greenfield spend starting April: Phase 1 capex of ~₹60 crores will be spent over 15 months, with the site having room to eventually become as large as the Nadiad facility through further phases.
• Funding mix: The company will borrow some money to access a central government grant, but otherwise has no debt requirement given ~₹140 crores of cash on hand.
• Cold storage going live: A cold storage facility will be commissioned by April of the current year, and freezer capacity in the largest U.S. market was already commissioned in November/December.

Distribution Business & Subsidiary Moves

• Supply chain recovery underway: The distribution business faced issues after the handover from Unilever to Lipton, but most were resolved in Q3, with good sequential growth from Q2 to Q3, though some supply issues remain.
• ₹100 crore ambition contingent on resolution: Management is confident the supply chain will be streamlined next financial year, and once that happens and more principals are signed, the distribution business should reach ₹100 crores.
• Telluric Foods investment: The board approved a ₹13 crore investment in optionally convertible redeemable preference shares of Telluric Foods India Limited to support brand building and working capital.
• Subsidiary merger approved in principle: The board approved transferring ADF's entire equity investment in ADF Foods India Limited to Telluric Foods Limited at fair market value, with a merger proposed between the two entities.
• Nates and PJ's wind-down: A facility identified last quarter did not meet quality requirements, but significant fixed costs have already been reduced, with only legal costs remaining, expected to finish in the next financial year.

Guidance & Commitments

Key Metrics