Hindustan Foods Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Record quarter, margin improved: Consolidated turnover and profitability hit all-time highs, with EBITDA margin expanding to 6.4% from 5.9% YoY, helped by product mix and conversion-cost billing.
• New facilities are ramping, not yet contributing: The ice cream plant started production in May and the RB Scholl acquisition closed 1 July, but both are in early integration and will only contribute meaningfully after the monsoon lean season.
• Slowdown is real but the pipeline is long: The deal pipeline has "definitely slowed down" as FMCG customers cut consumption, yet the company's pipeline stretches 1.5–2 years and the Hyderabad Bar project finally broke ground, signalling customer confidence.
• Dedicated manufacturing protects the bottom line: In dedicated factories with fixed EBITDA guarantees, absolute EBITDA is locked in regardless of top-line swings, insulating PAT from volume shocks even as margin percentages move around.
• What to watch next quarter: Whether the ice cream plant ramps to its 15,000-ton capacity post-monsoon, the pace of RB Scholl integration, and any sign that FMCG demand returns by Diwali as management expects.

New Facility Ramp-Up & Integration

• Ice cream plant commercialized, lean season ahead: The Uttar Pradesh facility started production in May across all formats (sticks, spoons, cups, party packs) but the next 3–4 monsoon months will see no significant turnover because ice cream is a summer product and the plant sits in the north where the seasonal swing is sharper.
• Post-monsoon ramp target: After the lean season, the plant is supposed to deliver 15,000 tons per annum going into peak season, with an expansion project expected online by Q4 FY23.
• RB Scholl acquisition closed: The agreement was signed 1 July 2022 and integration work has begun; the facility carries EOU status and pharmaceutical compliance requirements, which management flagged as a challenge. The entire RB Scholl team, including senior people from Reckitt Benckiser, has joined and is being integrated.
• Mysuru beverage plant turning around: The plant recorded its highest ever turnover this quarter, reducing its burn rate, and is expected to be profitable in this financial year after two years of pandemic losses; the order book is higher than capacity and expansion work is underway.
• Coimbatore beverage merger complete: The board sanctioned an additional ₹10 Cr investment at the site, with work expected to finish by September.
• Aero Care unit at full stride: The color cosmetics execution is fully integrated; the factory achieved its highest ever turnover this quarter and has started manufacturing a host of new products.

Sameer Kothari: "I think we are very cautiously optimistic that we should be able to integrate that facility well into our system and also look at any other opportunities that can come our way in that sector."

Demand Slowdown & Pipeline

• Pipeline slowed but not stalled: Management acknowledged the deal pipeline has "definitely slowed down" because customers are reducing consumption, affecting future growth. However, the pipeline is nearly 1.5–2 years long, providing a cushion.
• Hyderabad Bar project finally moving: After being discussed for nearly three quarters as a "casualty of the slowdown," work started this quarter with phase 1 investment close to ₹60 Cr. Civil infrastructure is being built for the entire capacity, and commercial production is expected by Q4 FY23.
• Phase 2 on the horizon: Management hopes to sign off on phase 2 between now and Q1 of next financial year; if that happens, phase 2 will complete in a shorter time because the civil infrastructure is already being built for the full capacity.
• Green shoots signal: The greenlighting of the Bar project is read as a signal that customers are beginning to see "green shoots," with management expecting FMCG demand to return by the Diwali quarter.
• Inflation hits volumes, not margins: Reduced per capita consumption affects future growth more than current facilities; dedicated factories have long-term contracts with minimum guarantees that provide clear turnover visibility. Raw material costs are passed through to customers monthly, so commodity price increases do not expand the margin profile.
• Down-trading is hedged: In an inflationary environment, customers down-trade (e.g., sachet instead of bottle), but the company's diversification across brands and product categories means down-trading does not end up affecting them.
• Customer destocking unknown: Management declined to answer whether customers are destocking, stating they are "not privy" to that information and could only confirm they shipped the maximum product they could.

Sameer Kothari: "Any kind of reduction in the FMCG consumption definitely affects expansion plans of our principles and in turn it affects growth plan for us. Hopefully, India being, such a huge population and the demographic we don't see this temporary blip of reduction in the volume will last more than a quarter or so."

Dedicated Manufacturing Model & Margin Mechanics

• Fixed EBITDA guarantees protect the bottom line: In dedicated factories, the company earns a guaranteed absolute EBITDA; if sales volume or prices go up, costs rise correspondingly but EBITDA in rupees stays the same, so the margin percentage falls. The bottom line from EBITDA down to PBT and PAT is "pretty much guaranteed irrespective of what happens to the top line."
• Margin percentage outlook stable: For dedicated manufacturing, EBITDA percentage is believed to "definitely remain around the same level."
• Q1 margin improvement drivers: EBITDA margin improved to 6.4% from 5.9% YoY, driven by product mix change (ice cream carries better margin) and some products shifting to a conversion-cost model where there is no raw material cost, only conversion billing.
• Seasonal margin variability ahead: The next 4–5 months will be lean quarters for beverages and ice cream, so some amount of margin variability quarter-to-quarter is expected going ahead.

Sameer Kothari: "Mathematically, when you look at a fixed EBIDTA that we get, which is guaranteed in case of our dedicated factories, if the sales volume goes up, our margin profile, defined as a percentage of sales will actually go down. Because our sales will increase, correspondingly our cost will increase, but our EBIDTA in absolute terms will remain the same."

Customer Concentration & Revenue Visibility

• Top-three concentration: Nearly 80–85% of business comes from the top three customers, the largest being Unilever and Reckitt Benckiser. Management declined to provide a specific top-one-customer figure, calling a reported 85% number in the annual report "a screw up from our side."
• Revenue guidance maintained: Management is confident of reaching ₹4,000 Cr turnover by FY25. For FY23, the Q1 annual run rate is ~₹2,400 Cr, and management said "your guess is as good as ours about where we will land up between 2400 and a higher number."
• Equity dilution not needed for current plan: To achieve ₹4,000 Cr turnover with what has already been announced, no dilution of equity capital will be required. However, if acquisitions or new projects beyond those announced materialize, the company will probably look at raising funds, in which case revenue guidance will also probably change.
• Consolidated-standalone convergence expected: In the next couple of quarters, as new companies and foreign projects ramp up, consolidated figures are expected to converge with standalone figures. The Aero Care unit contributed ₹24 Cr of the consolidated-standalone difference this quarter.

M&A, New Segments & Consolidation

• Slowdown as consolidation opportunity: Management called the slowdown "an interesting time for consolidation" because stress in the market creates more opportunities to buy competition or do mergers and takeovers.
• Health & wellness push: The company is currently looking at health and wellness as a sector, with a new executive given P&L responsibility for the entire segment as an experiment. Pet foods within the FMCG space is also being explored.
• Leather and shoe sector potential: Management sees potential for this to become a very large business and has recently been in discussion with government officials about incentives for the leather sector.
• M&A strategy agnostic on categories: The company continues to look aggressively for assets to consolidate the contract manufacturing industry, including assets where a customer is divesting or has lower capacity utilization.
• Organizational build-out underway: The company is actively recruiting a Chief Operating Officer, upgrading its ERP system, and working on processes across factories.

Sameer Kothari: "This is also incidentally an interesting time for consolidation, because when there's stress in the market overall, we also get more opportunities to consolidate the industry in terms of buying our competition or doing some kind of a merger or take over there."

Guidance & Commitments

Key Metrics