Hindustan Foods Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Consolidation drives the top line, not like-for-like growth: Newly integrated Colour Cosmetics and Reckitt Benckiser Scholl divisions began contributing, while existing dedicated factories delivered steady volumes subject only to inflation pass-through.
• Ice cream capacity nearly doubling ahead of peak season: The Lucknow plant is commercialized and expansion to 20,000 tons is expected online by Q4 FY23, positioning the company for a material contribution in the January quarter.
• Margin uplift is a mix story, not an efficiency story: Better margins from healthcare (RB Scholl) and ice cream lifted profitability; in dedicated units, the entire COGS is passed through, so bottom lines are protected against inflation.
• China Plus One for FMCG exports is a multi-year story: Management sees high probability but warns India's plastic moulding and injection moulding ecosystem is underdeveloped, with a large percentage of pumps imported from China, delaying the opportunity by a couple of years.
• What to watch next quarter: Whether the ice cream capacity ramp-up hits its Q4 timeline, the pace of the Soap Bar project (now pushed to Q1 FY24 with expanded scope), and any update on the INR 300 crores capital raising that remains unresolved.

Revenue Drivers & Business Model

• Acquisitions consolidate, factories stabilize: Dedicated factories reach peak capacity within 3–6 months and then deliver similar volume and value throughout contracts lasting up to 10–12 years; like-to-like revenue from existing factories stays the same subject to inflation pass-through.
• Inflation is a top-line story only: The business model is pass-through, so inflation affects sales numbers but does not affect the bottom line; margins are protected.
• Beverage capacity expanded for seasonal demand: Mysuru shared facility capacity increased more than 40% because the last beverage season was excellent and the next season, starting Q4, is expected to see substantial growth.
• Private label is strategic but financially immaterial: Work began with DMart and Reliance in the last quarter, but private label remains a rounding error on the balance sheet and will stay very small for the next few years.
• Exports are real but contained: The Reckitt Benckiser Scholl facility (100% EOU) caters to nearly 20 affiliates in Europe, Japan, and Australia; coils are exported from Jammu to Bangladesh and South Asia; the shoe business is completely exports. Exports will remain a very small part of financial numbers for the next couple of years.

Kothari: "We are very clear that our strength lies in manufacturing. We are very clear that we are a B2B company. We have very little experience in dealing with B2C."

Segment & Project Updates

• Exports ecosystem bottleneck: India's FMCG export ecosystem is not well developed, particularly plastic moulding and injection moulding capacity; a large percentage of pumps in India are imported from China, which constrained hand-sanitizer manufacturing during COVID.

Kothari: "You'll be surprised to know that a large percentage of pumps in India are actually imported from China. So in a situation like this for us to be able to position ourselves as an exporter in place of China would require that the plastic manufacturing capacity and the plastic injection moulding capacity has to be much better developed."

Margins & Tax

• Margin improvement is mix-driven: Healthcare (RB Scholl) carries better margins, and ice cream also has better margins; in dedicated units, the entire COGS is passed through, insulating bottom lines.
• Tax rate reduction is sustainable: The effective tax rate dropped to 25%; new factories in subsidiaries (e.g., ice cream) are already at a lower rate. Management expects to reduce tax liability from next year when all MAT credits and previous losses in one entity are exhausted.

Samdani: "So believe me this question is giving me sleepless night from the management and the Board also."

Strategy & Competitive Positioning

• B2B manufacturing is the identity: Management does not see itself moving away from B2B manufacturing; FMCG companies view distribution as a strong competitive moat and are unlikely to give it up. Enough growth potential exists in the current field for the next three to four years.
• China Plus One for FMCG is probable but distant: Probability is very high for FMCG, and expected sooner rather than later for pharma, OTC, and health and wellness. For FMCG products requiring a robust plastic ecosystem, it may take a couple of years as the packaging industry consolidates and allocates capital.
• Demand slowdown may accelerate outsourcing: Management believes FMCG demand slowdown and inflationary pressures will lead customers to rethink manufacturing strategies and outsource more, leading to better growth prospects in the medium and long term.

Kothari: "FMCG companies do strongly believe that distribution is a very, very strong component of their competitive mode. And as a result, I really doubt that companies like ITC or HUL or Reckitt Benckiser will give up their competitive advantage in terms of distribution to people like us."

Organization & Governance

• Leadership hire: Mr. Sunil Plakkat recruited as President in Excellence; chemical engineer with experience at Asian Paints and Atul Limited; appointed as resident manufacturing excellence, looking after operations for all non-health and wellness factories, adding senior management bandwidth at the operating level.
• Board rotation: Mr. Dempo stepped down as Chairman; Mr. Shashi (independent director, FMCG professional, director for ~5 years) took over as Chairman; Mr. Dempo continues as promoter. Described as rotation of chairmanship to professionalize the Board.
• Disclosure discipline: Management declined to provide specific revenue guidance for the ice cream dedicated factory (attributable to one customer), declined to discuss the FMCG deal pipeline in specifics, and declined to give updates on each new customer signed.

Guidance & Commitments

Key Metrics