Hindustan Foods Ltd Q4 FY2022 Concall Summary

Key Takeaways

• ₹2,000 crores target met despite headwinds: Commodity inflation, slowing demand and rural stress did not stop the company hitting its FY22 turnover goal, a milestone management calls proof of the business model's resilience.
• ATC Beverages turns the corner: The former "millstone" has been converted to an anchor-tenant facility with two committed customers, and management "certainly hopes" to see profits from Q1 FY23.
• Margin profile normalizing as planned: As dedicated manufacturing share rises, EBITDA margins are settling at 5.5–6.5% and PAT at 2–3%, exactly where management guided, with inflation pass-through protecting those levels.
• The next leg is already funded: All announced CAPEX to reach the ₹4,000 crores FY25 target will be funded through debt and internal accruals, with no equity dilution required for what has been disclosed.
• What to watch next quarter: Whether ATC actually delivers profits, the pace of the ice cream plant ramp-up in Lucknow, and closure of the Scholl acquisition, which management expects by June.

The ₹2,000 Crore Milestone

• Target achieved in a tough year: The company hit its FY22 turnover target despite commodity inflation, slowing demand and rural stress, a result management attributes to the business model's ability to shield from short-term demand and inflationary vagaries.
• Category diversification paid off: While some categories faced volume headwinds and down-trading, others like ice creams, beverages and color cosmetics saw a major spike from pent-up demand accumulated over the last couple of years.
• Color cosmetics integration complete: The acquired factory achieved its highest ever turnover in March 2022 and again in April 2022 after full integration, validating the M&A thesis.
• All existing units performed as expected: Operational stability across the portfolio meant no negative surprises from any factory during the quarter.

Kothari: "What gives me confidence is that in spite of all the headwinds, including commodity inflation, slowing demand, stress in rural demand, etc. we've been able to achieve the target that we have set for ourselves, which was that of achieving a turnover of 2000 crores."

ATC Beverages: The Turnaround Story

• From millstone to anchor-tenant facility: ATC was a shared manufacturing facility with no customer commitments when acquired and made losses for two years. It has now been converted to a dedicated manufacturing model with two anchor tenants, Hector Beverages and Tata Consumer Products, both holding full-year FY23 off-take commitments.
• Demand tailwind arrived: Beverage consumption and out-of-home consumption increased tremendously during the year, with ATC turnover hitting its highest levels in March and April.
• Seasonality risk is mitigated: The Mysuru location in South India means the off-season is less severe than in Northern territories, and anchor-tenant commitments for the entire year remove variability. Q4 and Q1 are generally the best quarters for beverages.
• Capacity expansion sanctioned: The board has approved additional investment to double capacity at the Mysore site, signaling confidence in sustained demand from the two anchor customers.
• Profitability expected from Q1 FY23: Management "certainly hope[s] so" to start seeing profits from the next quarter, with the anchor-tenant model providing full-year visibility that the previous shared-facility structure lacked.

Kothari: "ATC was the millstone around our neck for the last couple of years, as I've talked in a bunch of investor calls as well. I'm happy to say that and it's not just my information, but you reading it in all the pink dailies that beverage consumption and out-of-home consumption for beverages has increased tremendously in this year. So, I am happy to confirm that as a theme,"

Margin Structure & Inflation Protection

• Normalization is by design, not accident: As the share of dedicated manufacturing increases, EBITDA margins are settling at 5.5–6.5% and PAT at 2–3%, in line with management's long-standing guidance. The business is "high CAPEX intensive with no margin" by design, but those margins are guaranteed by the contractual structure.
• Inflation pass-through is automatic: In dedicated manufacturing, which accounts for 80–85% of turnover, all inflationary costs including power, fuel, commodity prices and minimum wage increases are passed on to customers. Any lag is an accounting phenomenon, not a commercial one, and money is recovered, possibly with a quarter's delay.
• ROCE dip is temporary: Q4 ROCE fell to approximately 15–16% annualized because a large part of CAPEX in the ice cream subsidiary was in capital work in progress. Trial production started in March and commercial dispatches only in April, so the asset will begin generating revenue and profit from Q1 FY23, with capitalization to follow in the same quarter.
• Steady-state ROCE remains elusive: Management is explicit that at any given point, ROCE will not be at desired levels because substantial money is always invested as capital work in progress. Given aggressive growth plans, steady-state CAPEX is not expected for the next few years.

Kothari: "We do not foresee any situation where our margins should get affected because of inflationary pressure."

The Path to ₹4,000 Crores by FY25

• All announced projects contribute to the target: The bar project, ₹75 crores ice cream CAPEX increase, Coimbatore CAPEX, ATC capacity doubling and shoe factory CAPEX are together expected to take the company to ₹4,000 crores by FY25 given current visibility. If the pipeline brings the target earlier, timelines will change.
• Funding is secured without equity: All announced projects will be funded through debt and internal accruals. Management will only return to investors for equity if pipeline opportunities that are not yet announced require it.
• The bar project is delayed but starting soon: Legal formalities have been delayed from the client's side, so FY23 contribution will be for only nine months rather than the full year. Management is cautiously optimistic about starting project work in June.
• Ice cream ramp-up underway: The Lucknow plant commenced trial production in March and made its first commercial dispatch in mid-April. Production is expected to ramp to approximately 15,000 litons by end of 2023, with an additional ₹75 crores CAPEX to increase output from Q4 2023.
• Scholl acquisition closing soon: The share purchase agreement was signed in January and legal formalities and government approvals are in process. Management expects closure by June, with payment only after approvals. The MHRA-approved facility in Sriperumbudur manufactures medical bandages and footcare products, supplying approximately 20 countries in Europe.

Business Development & the Pipeline

• Four-vertical structure with clear targets: The business development team is organized into key accounts (increasing wallet share with existing large MNCs), new accounts and private label in home and personal care, food-related new accounts and new product development, and a health and pharma initiative.
• Market stress is creating opportunity: Management believes FMCG companies grappling with growth and inflation will look more to contract manufacturing, principals will consider divesting physical assets, and smaller contract manufacturers may not cope with volatility, driving consolidation. The pipeline is robust, though the gestation period for such discussions is nearly a year.
• Private label will grow in absolute terms: While private label will continue to be a small percentage of turnover, management expects it to become far more meaningful in absolute terms. The company is confident that private label, D2C and retail companies will not invest in manufacturing assets and will continue to come to contract manufacturers like HFL.
• Pet food is in discussion, nothing tangible yet: The company is in touch with established players and working with B2C companies launching pet food, but there is nothing concrete to report.
• Exports are a 3–4 year story: A lot of inquiries are coming in and the potential is huge, but for exports to become significant, it will still take some time. Management sees exports becoming part of the portfolio in the next three to four years.

Kothari: "I think the B2C boom is definitely there in terms of funding. I think the B2C boom is definitely there in terms of the media coverage. I think we are yet to see the B2C boom actually reflect on the retail shelf. It's early days."

Capital Allocation & Cash Flow

• Operational free cash flow is quick, but company-level FCF is reinvested: From an operational perspective, free cash flows are achieved within 3–4 months of a factory ramping up. From a company perspective, management will continue to invest free cash flow into productive assets at 18–22% ROE rather than return money to shareholders, as long as investment opportunities and growth exist.
• Cash flow from operations optically depressed: Approximately ₹45–50 crores of investments in subsidiaries (HFL Consumer Product and Aero Care LLP) were classified as current investments or loans rather than financing activity, making them appear as negative in operational cash flow.
• MAT credit remains a near-term drag: MAT will continue to be a problem as long as substantial investments continue, creating a chicken-and-egg situation. Some MAT utilization is expected to start in the holding company sooner rather than later, since new investment is largely happening in the step-down subsidiary HFL Consumer.
• Paper profits on land are real but unrealized: Land prices have gone up substantially across all factories and the replacement value of buildings is much higher due to inflation in steel and cement. However, no actual conversion into free cash or profits has occurred because no customer has yet walked away from or shut down a factory.

Kothari: "Yes, we are a high CAPEX intensive business with no margin, but I have to point out that's by design and not by default. Given the nature of our business, we are guaranteed of those margins, we are guaranteed of that profit or EBITDA and as a result, we invest into CAPEX."

Guidance & Commitments

Key Metrics