Hindustan Foods Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Record PAT despite demand headwinds: FMCG volume growth has been tepid for nearly three quarters, and commodity deflation is compressing reported sales, yet the company delivered its highest-ever quarterly and half-yearly PAT.
• New sites are the margin story: EBITDA improvement is driven by commercialization of recently built facilities; as these ramp up, management expects further gains in returns on equity.
• Warrant raise signals an opportunity-rich pipeline: A Rs. 400 crore warrant issue to existing and new investors was announced, with only Rs. 100 crores called initially, structured to avoid idle capital while keeping dry powder ready for deployment.
• Entry into sports shoes is a model pivot: The acquisition of KNS Shoetech marks a move into a private-label, design-led contract manufacturing model that is less capital intensive and promises higher asset turnover than the core FMCG business.
• What to watch next quarter: Whether the Mysuru site turnaround materializes as promised, clarity on the shoe business model and customer base, and any sign that FMCG volume growth is returning to unlock stalled customer CAPEX.

Demand & Volume Reality

• FMCG volume stagnation: Volume growth across the FMCG industry has been absent for nearly three quarters, and management is explicit that customer CAPEX decisions are on hold until it returns.
• Down trading adds pressure: There is some pressure from consumers trading down in FMCG categories, but the company's diversified product basket spanning premium, mass market, and private labels is helping mitigate the risk.
• Commodity deflation masks the top line: Raw material and packing material passthrough inflation had previously inflated sales by 20-25%; as those prices corrected, reported turnover deflated, eating up whatever volume growth existed. Management urges investors to look past percentage margins on sales because RMPM is a pure passthrough cost.
• Summer disappointment: An expected blowout summer season for beverages and ice cream did not materialize due to truncated summers and unseasonal rains, hurting utilization at the ice cream facility and slowing the ramp-up of a carbonated drink MNC contract.

Sameer Kothari: "It is tough Aakash and I think I have been saying this for the last couple of investor calls that unless volume growth comes back to the FMCG industry, we are going to keep fighting for each and every project, basically CAPEX investment is not happening at the pace at which we would like and that has been one of the pinpoints for, I think now nearly 3 quarters where unless volumes come back, volume growth comes back to the FMCG players, we don't see that changing."

New Business: Sports Shoes

• Acquisition of KNS Shoetech: The company executed a share purchase agreement to acquire 100% of KNS Shoetech Private Limited, a manufacturer of sports shoes, sneakers, and open sports footwear with a factory in Kundli, Haryana. The initial investment is small, approximately Rs. 5-10 crores, against a board authorization of up to Rs. 100 crores.
• A different operating model: Unlike the core business of dedicated or anchor-tenant manufacturing, the shoe industry operates on a private-label, business-development model where manufacturers design shoes and present them to brands for selection. Management asks for patience, promising greater clarity in the next one or two quarters.
• Return profile is attractive: Profitability is expected to be similar to or slightly higher than current levels, but ROEs and ROCEs should be much better because the business is less capital intensive and more manpower intensive, leading to higher asset turnover ratios.
• No own-brand ambition: Management reiterated in "no uncertain terms" that the company will not launch its own brands in any product category, including shoes.

Sameer Kothari: "The shoe industry does not work on the similar models that we do, which is the dedicated manufacturing, anchor tenant manufacturing, etc. It actually works in a very interesting model, which is mainly private label or it is mainly business development, design development led model. You would be surprised to know that a lot of these shoe manufacturers actually design shoes, presented to brands who then choose those shoes to be launched under their brand."

Site-Level Operations & Turnarounds

• Mysuru site nearing turnaround: Acquired as a shared manufacturing site, all lines are now dedicated to individual customers (juices, carbonated beverages, and a third packing format). After making losses for a couple of years, the site is expected to turn around starting from this season. Only 5-6 acres of available land are currently used, and a surface water connection provides optimism for capacity expansion.
• Ice cream facility underperformance: Phase one utilization was hurt by unfavorable weather last season, and phase two commercialization happened only toward the season's end. Full-blown commercialization is expected only in the upcoming season starting Q4 of this financial year.
• Baddi acquisition delay: The anchor-tenant model site, which is MHRA US FDA approved, has seen a delay in obtaining necessary approvals, hurting plans for this financial year. External capacity selling has not yet begun.
• Working capital is a ramp-up artifact: The increase in working capital is tied to new factories (the Bar factory and ice cream investment) that are capitalized but not yet at full utilization. Management says the trend is not permanent and will normalize as capacity utilization improves. The shoe business, with a different cash conversion cycle, will also alter the working capital profile as it scales.

Capital Allocation & Balance Sheet

• Warrant issue structured to protect ROE: The company initiated a Rs. 400 crore warrant issuance to existing investors (Convergent, Sixth Sense) and new investors (Malabar Capital, Bay Capital, Vanaja Sundar Iyer). Only 25%, or Rs. 100 crores, is being called initially. The warrant structure was chosen specifically to avoid raising money and parking it in fixed deposits, which would dilute ROE.
• No visibility on the remaining Rs. 175 crores: Management declined to specify when the balance would be called or which categories it is earmarked for, stating "obviously we can't."
• Debt will part-fund CAPEX: Of the Rs. 225 crore CAPEX plan, a portion will come from debt. Management asserts the business model allows taking on debt without increasing financial leverage or the overall risk profile.
• ROE target sustained: The company expects to sustain a 21% ROE.

Sameer Kothari: "Faisal, you have been a partner in our Company for a long time, our partner shareholder for a long time, you know that we are as sensitive about ROE as anybody else. That is one of the reasons why this pref allotment has been structured as a warrant."

Category Strategy & Boundaries

• Category-agnostic, model-specific: Management is agnostic to product categories as long as the engagement is pure B2B contract manufacturing. The mandate is defined by what risks the company does not take: no inventory obsolescence risk, no market risk, and no marketing or branding risk.
• Beverages are a conviction bet: Management is "very bullish" on beverages and expects to invest a substantial sum in the segment, driven by low per capita consumption, increasing e-commerce reach, and the resulting decentralization of manufacturing supply chains.
• Ice cream is a new growth vector: The company was not in ice cream until 2021; it now has one operational factory and has announced a Greenfield project with an investment of up to Rs. 75 crores.
• Bottling is a hard line: When asked about participating in carbonated drink expansion in North India, management clarified they will not look at the bottling end of the operation. Any divestment that involves B2B contract manufacturing is of interest; any sale of brands, master licenses, or B2C businesses is not.
• No divestments planned: All current categories are considered core because the common thread is B2B contract manufacturing.

Sameer Kothari: "So Abneesh, we have been quite agnostic as far as product categories is concerned as long as we are very clear that the mandate is to do contract manufacturing, which in our mind basically means that we do not take on any inventory obsolescence risk, we do not take on any risk as far as the market is concerned and we do not take on any risk as far as marketing branding is concerned."

Guidance & Commitments

Key Metrics