Hindustan Foods Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Transformation is loading, not yet delivering: Revenue grew YoY on new-facility contributions, but the shoe business has been loss-making for three quarters and a consumption slowdown is hitting all brands. Management is confident the business profile will look different in 2–3 years.
• Shoe business is the swing factor: Losses are decreasing as manufacturing inefficiencies are corrected, and management expects the division to turn positive starting this quarter or next. The disproportionate EBITDA effect from efficiency gains is the near-term profit story.
• The CAPEX cycle is peaking: Gross block is on a committed glide path from ₹1,250–1,300 cr toward ₹1,800 cr, with ice cream set to become one-third of gross block by FY27. Free cash flow management hinges on keeping CAPEX growth at 15–20%.
• Backward integration bets are being placed: Ice cream sticks manufacturing and the Nashik greenfield ice cream facility both target April 2025 starts, marking the company's first move up the ice cream value chain.
• What to watch next quarter: Whether the shoe business actually turns PAT-positive, the pace of Nashik and Karnataka ramp-ups, and any stabilization in consumption that would lift the base business.

The Shoe Business Turnaround

• Loss-making but improving: The shoe business has made losses for three consecutive quarters since acquisition in March, but losses have reduced each quarter. The division has always been EBITDA-positive; the problem was manufacturing inefficiency, not cash losses.
• Efficiency fix is the profit lever: Management says shoes were being manufactured inefficiently; now that efficient manufacturing is beginning, the effect on EBITDA will be disproportionate, then flow through to PBT.
• Path to profitability: Management expects the shoe business to start becoming positive from this quarter or next. The Karnataka facility, which started work in September 2024, is expected to ramp to full capacity by March, driven by training and hiring rather than additional CAPEX.
• Capacity build-out continues: A fresh ₹50 cr investment for new factories in Karnataka was announced, a longer-term project over the next couple of years. In the South, space allows setting up capacities at least double current manufacturing; the North will see debottlenecking only.
• Working capital drag: The shoe business has materially increased working capital requirements because receivable days are much higher and inventory needs 3–4 weeks to cut, plus raw material and packing material inventory. The company is funding this with debt and some equity, maintaining a 1:1 debt-equity ratio.
• Turnover ambition: Shoes are expected to contribute 15–20% of turnover by FY27. Per an analyst's math, capacity additions should take the sports shoe business close to ₹800–1,200 cr by FY27.

Kothari: "in spite of all the screw ups that we are doing, our customers continue to support us."

CAPEX, Returns & The Balance Sheet

• Committed CAPEX glide path: The bridge from ₹1,250–1,300 cr to ₹1,800 cr in gross block remains unchanged; contracts are signed and CAPEX is committed, so it will not change quarter-to-quarter.
• Ice cream dominates the gross block: The ice cream business is expected to account for as much as one-third of gross block by FY27. The Nashik greenfield facility is the major CAPEX this quarter, with commercial production expected from April 2025. A new ice cream facility in the larger NCR area is also planned, with land being shortlisted.
• Asset turns and ROE targets: Management is confident of around three asset turns once all CAPEX is fully ramped up. ROE is expected to return to 18% once CAPEX starts delivering through expected ramp-up, with FY27 as the hopeful timeline for all CAPEX to be done and factories ramping.
• Free cash flow condition: If CAPEX growth is 15–20%, the company will manage free cash flow going forward; if growth exceeds that, it will need outside money.
• Other income boost: Other income rose disproportionately because money raised is lying in fixed deposits, and acquiring an asset that was earlier on rent also contributed.

Samdani: "We are confident that we will be around three asset turns going forward when our all these CAPEX will start delivering and ramp up fully, right."

New Facilities & Integration Updates

• Baddi OTC turns positive: The Baddi facility contributed positively in Q3 after depressing performance for the prior two quarters. An additional customer has been secured, with production anticipated by Q1 FY26. The ₹20 cr investment for another dedicated customer at the same site should be commercialized in about six months.
• Baddi anchor tenant model: Reckitt committed a certain part of capacity; remaining capacity can be parceled out to other customers. Some lines have capacity available, others do not, so there is still scope for revenue expansion even after the ₹20 cr investment.
• Nashik ice cream facility: CAPEX is progressing; commercial production expected from April 2025. Once the merger of Avalon Cosmetics into HFL is complete, both the powder manufacturing facility and the ice cream facility will consolidate into HFL.
• Odisha bottled-water plant: The newly acquired plant has been integrated seamlessly. It operates on a job work/conversion cost model, so it may not make a large difference at the top line, but it has take-or-pay with the customer guaranteeing ROE.
• Color cosmetics facility: The facility announced last quarter has been finalized and acquired. The building that was on rent has now been bought, so ROEs will start accruing immediately because rent has stopped.
• DOY packs and Russia: Production of DOY packs for an existing beverage client has commenced. Dispatches to Russia are expected to resume within Q1 FY26.

Consumption Slowdown & Demand Environment

• Broad-based slowdown: Management confirmed a definite slowdown in consumption that has hit all brands, whether D2C or traditional, irrespective of distribution channel.
• Price environment stable: Prices have not deflated; they have remained elevated. The disproportionate change in EBITDA versus sales is due to shoe business manufacturing inefficiencies being corrected, not pricing pressure.
• Seasonal businesses: Subject to weather conditions, seasonal businesses are expected to perform well in the next few months.
• Counterparty risk acknowledged: Management conceded it would never be fair to say there is no exposure to any client where a small or mid-sized client could go under, given upfront investments made on behalf of customers. Contractual and practical mitigation steps exist, but risk remains.

Kothari: "No, that will be never fair to say that, right. I mean, we obviously are exposed to a bunch of customers... any kind of changes in business plans, any kind of changes in consumer behavior can affect."

Strategy & Business Model Evolution

• Shared manufacturing expanding: The shared manufacturing model is not restricted to shoes. The Mysuru beverage unit was acquired as a shared manufacturing facility and evolved to have anchor tenants with guaranteed volumes.
• Ice cream backward integration: Ice cream sticks are currently all imported (birch wood). A trial project for in-house manufacturing is underway to reduce high freight costs. If successful, factories will be set up across different locations. This is the first backward integration for ice cream.
• Pet foods on the radar: The team believes pet foods could be one category that could continue to grow, though no specifics are available and a public announcement will be made only when contracts are signed. No new product segments are expected in the next 12–15 months.
• Segmentation disclosure: Management will try to provide segmentation color as suggested by an analyst, though they currently do not look at these parameters and noted the only segment is contract manufacturing.

Kothari: "I do believe that in the next two to three years the business profile of the company will be different from what it was two to three years ago when we first saw the signs of the impending slowdown."

Guidance & Commitments

Key Metrics