Hindustan Foods Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Record year, subdued quarter: Full-year revenue rose 27% to ₹2,602 crores and PAT crossed ₹100 crores for the first time, but Q4 top line was subdued as falling commodity prices passed through to revenue.
• Margin profile is structurally improving: EBITDA grew 56% in Q4 and PAT 66%, driven by ramp-up of ice cream and beverages factories and the end of losses in the beverages business that had been a drag on margins.
• The acquisition and project pipeline is dense: A Baddi acquisition underwritten by Reckitt, a new juice factory in Guwahati for Dabur, and a Mysuru beverage partnership with two of India's largest players all point to a materially larger revenue base ahead.
• Management is pulling forward its revenue target: The ₹4,000 crores figure set for FY25 is now expected to be reached earlier and exceeded, with revised capex and top-line numbers promised next quarter.
• What to watch next quarter: Whether the Baddi acquisition closes in Q2 as now guided, the revised capex and revenue numbers, and any greenfield beverage announcements that management has telegraphed.

Revenue Growth & the Commodity Pass-Through

• Full-year strength, Q4 softness: Annual revenue grew 27% to ₹2,602 crores, but the Q4 quarter-on-quarter top line was subdued because raw material and packing material prices are directly passed through to customers, so falling commodity prices mechanically compress revenue.
• Profitability decoupled from revenue: Despite the Q4 revenue softness, EBITDA grew 56% and PAT 66% in the same quarter, as underutilized factories ramped up and operating leverage kicked in.
• Cash flow turned the corner: Cash flow from operations improved nearly 3x to approximately ₹100 crores, a sign that the ramp-up is converting to cash.
• The beverages turnaround is complete: The beverages business had been a loss-making "millstone around our neck" until last quarter; those losses have now stopped, changing the margin profile of the company.
• Ice cream season was a mixed bag: The season started strong in February with an early summer, but unseasonal rains in March tapered demand; management had hoped for a much better season than what actually materialized.

Kothari: "I thought I ought to brag a little bit about the fact that leverages is finally taking off for us."

New Facilities, Partnerships & the Acquisition Pipeline

• Baddi acquisition is the near-term catalyst: The acquisition, with a large part of capacity already underwritten by Reckitt, is expected to close by Q2 or Q3 of this financial year; debt funding is already in place. Management initially said Q3, then corrected to "definitely Q2."
• Guwahati juice factory breaks ground: Work has started on a dedicated juice facility for Dabur, a first-time customer for Hindustan Foods; production is expected by Q4 of next year.
• Mysuru beverage partnership is a scale play: The company signed a dedicated, take-or-pay contract with two of India's largest beverage companies to manufacture two types of carbonated beverages at the existing Mysuru facility; it is a long-term contract.
• Soaps and Bars facility now live: The Hyderabad facility started commercial production in May, adding a new category to the portfolio.
• Ice cream Phase 2 is commercialized: The second phase of the ice cream facility is complete and commercialization has already started.
• Scholl is underutilized with a long runway: Total capacity utilization at the Scholl site is quite low, and management is bullish on ramping it up much more than current levels; Scholl also carries slightly better margins than regular FMCG products.

Kothari: "So, Akhil, Mayank is kicking me underneath the table for having named out the customer. But yes, this is the first time that we signed up with this customer."

Margins, Tax & Capital Structure

• Tax rate is set to fall substantially: MAT credit has been utilized, so the company can now shift to the lower tax regime; from FY24, the tax rate will come down to 25% plus surcharge, with one greenfield subsidiary enjoying a 15% rate as it ramps up.
• ATC tax losses are exhausted: Tax losses accumulated at the ATC subsidiary have been utilized, removing a drag on consolidated earnings.
• Debt-equity guardrails are explicit: At the project level, the company targets debt-to-equity of nearly 2:1; at the corporate level, with Board guardrails, it looks at around 1 to 1.25.
• ATC is expected to earn back its COVID losses: After losing money in ATC for two years due to COVID, management is confident that ROE and ROCE for ATC will be much better than Hindustan Foods as a whole and will make up the money lost.
• Capex is half-spent on the bar plant: The first phase of the bar plant is half spent, with the remainder yet to be deployed; the Baddi acquisition payment is due by Q2/Q3.

Kothari: "We acquired the facility in 2019, and then unfortunately, COVID happened for 2 years and we ended up losing money in ATC. However, in this year and the coming couple of years, we are confident that our ROE, ROCE as far as the ATC acquisition is concerned, will be much better than what HFL posts as a company as a whole, and we will make up the money that we've lost in those 2 years."

Competitive Position & the Contract Manufacturing Opportunity

• Scale is the moat: Management believes most competitors are not as organized and may not have the scale that Hindustan Foods has built; this competitive advantage is expected to be leveraged for the next few years.
• Execution is the existential risk: The single biggest thing that could go wrong is execution; customers bank on right quality, right quantity, and right time, and any failure can affect the company in a very large way.
• D2C brands are a rounding error: The D2C segment is going through a period of mean reversion in favor of traditional FMCG brands; D2C will continue to be a rounding error for Hindustan Foods in the near term.
• Contract manufacturing potential is large: With first-mover advantage in organized contract manufacturing, management believes the potential is quite high and the company should be able to leverage it.

Kothari: "I wish Naveen it was a straight sell wherever we enter into. Unfortunately, while you don't hear about the competition, the competition does keep us awake every day."

Guidance & Commitments

Key Metrics