Hindustan Foods Ltd Q2 FY2025 Concall Summary

Key Takeaways

• A quarter of moving parts, not a clean read: Revenue grew on shoes and Baddi ramp-up, but flat profitability reflected shoe integration costs. Management frames the quarter as a parable of the blind men and the elephant: each part tells a different story.
• Shoe business is the swing factor: The acquired shoe business carried a ~₹6-7 crores loss in H1, flowing straight to EBITDA and PBT, with profitability expected only in Q4 FY25 when the South factory is fully ramped.
• Capex cycle is accelerating: The board sanctioned a new North India ice cream plant (₹225 crores), a Mysuru beverage expansion, a Silvassa colour cosmetics facility, and an Orissa mineral water acquisition, pushing the gross block target to ₹1,800-2,000 crores by FY26.
• Cash flow turned a corner: Net operating cash flow for H1 FY25 was ₹74 crores, up sharply from ₹24 crores in H1 FY24, despite working capital needs from the shoe business and factory scale-up.
• What to watch next quarter: Whether the South shoe factory ramp-up stays on track for Q4 profitability, the pace of new client signings in ice cream and beverages, and any margin recovery as shoe integration costs fade.

The Shoe Business: Integration, Losses and the EMS Parallel

• Acquisition rationale: Management is banking on contract manufacturing of shoes evolving the same way the EMS space evolved, with import substitution driven by BIS norms and import duties creating sustained demand for domestic manufacturers.
• Demand is not the problem: All shoe factories are BIS certified and hold order books covering more than 100% of current capacities; the pressure is on HFL to ramp up and deliver the quantities and quality customers want.
• Integration costs are the drag: The shoe business contributed a loss of ~₹6-7 crores in H1 FY25, split roughly equally across Q1 and Q2, fully captured in depreciation and interest since facilities have ramped up and auditors will not allow capitalization. This loss flows directly to EBITDA and PBT.
• Profitability timeline: Management expects the shoe business to turn positive around Q4 FY25, when the South factory is fully ramped to capacity with 500 people being trained.
• Margin profile unknown: Management calls it "slightly premature" to give margin details after only six months in the business, and is hesitant to give definitive numbers in the first year, though the expectation is a profile similar to the contract manufacturing business.
• Capital-light ramp-up: Further capacity increases in shoes will not require major capex since the business is more people-intensive than capital-intensive.

Kothari: "You're absolutely right. I think we are banking on the contract manufacturing of the shoe being evolved in the same way that the EMS space is evolving."

Capex Pipeline and Capacity Build-Out

• Gross block trajectory: Expected to rise to ₹1,800-2,000 crores by FY26 end, funded with a 1:1 debt-to-equity mix, with ~₹250 crores in warrants money contributing to the equity portion.
• Ice cream expansion: A third ice cream plant, a greenfield in North India, was sanctioned with a phased investment of ₹225 crores, targeting commercial production for the 2026 ice cream season. The Nashik ice cream plant is expected to commercialize in April 2025, and the Lucknow plant expansion will be complete before February 2025 with three cone lines ready for the coming season.
• Beverage and cosmetics: A ₹15 crore capex for the Mysuru beverage plant will expand capacity by over 30%, while land acquisition for a colour cosmetics facility at Silvassa is complete with ₹40 crores in capex planned.
• Orissa mineral water acquisition: The board sanctioned up to ₹35 crores to acquire a company for bottling mineral water for a multinational, reinforcing confidence in the beverage segment.
• Hyderabad brownfield: Groundbreaking completed 2-3 weeks ago, with commercialization expected by May or June of CY25.
• Baddi facility: All approvals except Russian FDA have come through; production has started. Russian FDA approval is expected in Q4 FY25, after which exports to Russia should resume.

Revenue Visibility and the Dedicated Model

• 80-85% revenue visibility: Management states that 80-85% of turnover should repeat quarter after quarter, year after year, for the next 7 to 10 years, because it comes from dedicated manufacturing setups with clear customer commitments.
• Dedicated vs. shared ratio: The company will strive to maintain 80-85% of gross block as dedicated, though signing new customers and entering new categories makes this riskier.
• Anchor tenant model at work: Baddi is an anchor tenant model with a major part of capacity anchored by an existing customer. Nashik ice cream has a large portion dedicated to one customer and part to another, with the entire capacity spoken for. Lucknow is a pure-play dedicated site for one multinational customer.
• New client signings: The company signed a few new customers this quarter, and secured two new ice cream clients over the past six months, while the broader FMCG market continues to face pressure.

Kothari: "Given that maybe 80% to 85% of our business comes from a dedicated manufacturing setup, we have clear visibility of that."

Margins: Distortion, Mix and Inflation

• Commodity inflation distorts margin analysis: Commodity prices have risen 20-25% in the last year, and since gross margin is a pass-through, EBITDA margins mechanically fall when revenues grow disproportionately even though EBITDA from a factory remains constant.
• Gross margin is about product mix, not inflation: Most FMCG products fall within a similar gross margin bracket, but the shoe business has a different profile. If the inflationary environment persists, gross margin will decrease, though inflation will probably improve revenues more than credit given.
• No price deflation: The company is seeing inflation, not deflation, in its input costs.
• Shoe loss masks underlying profitability: Without the ₹6-7 crores shoe business loss, margins would have been higher, but management did not directly address whether capacity utilization is a problem.
• Operating leverage flows to the customer: At dedicated manufacturing sites like the Hyderabad soap bar facility, operating leverage benefits flow to the customer, not to HFL.

Kothari: "You have to appreciate that between last year and this year, commodity prices have started rising again. So some of our revenues have risen just on the back of the fact that commodity prices have gone up."

Disclosure Choices and What Remains Opaque

• No category-level granularity: Management declined to break out performance by verticals (Food, Beverages, Personal Care, Home Care, Wellness), repeating that the commercial model is the same across categories and granular disclosure would invite unwanted questions about individual customer performance.
• Shoes as the exception: Only the shoe business gets separate disclosure because of its inherent growth potential and because it was a large acquisition. More granular data on shoe top line and margins will be shared once a trend is established, with no date given.
• No formal guidance: Management gave the "politically correct" answer of no guidance, but offered a framework: 80-85% dedicated business provides clear visibility, and the only delta to the flat Q2 bottom line is the ₹6-7 crores shoe loss.
• Asset turnover clarification: Ice cream asset turnover is 2 to 2.5x on a full-year basis, not the 3x an analyst suggested.

Kothari: "Mayur, that's exactly the reason why we do not want to give granular details because unfortunately, then people will start asking us how much Ice Cream has Unilever sold and how much Ice Cream has Nick sold…"

Guidance & Commitments

Key Metrics