ADF Foods Limited (519183) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Rishav Das from Pareto Capital. We represent Investor Relations for ADF Foods. On behalf of ADF Foods, I welcome you all to our Q1 FY '22 earnings conference call. I have with me from the management, Mr. Bimal Thakkar, Chairman and Managing Director; Mr. Shardul Doshi, CFO; and Mr. Devang Gandhi, COO. We will have brief opening remarks on the management, followed by the Q&A session. Please note that certain statements made during this call may be forward-looking in nature. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results or projections to differ materially from these statements. ADF Foods Limited, will not be in any way responsible for any action taken based on such statements and undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances. I will now hand over the call to Mr. Thakkar for his opening remarks. Over to you, sir.

Thank you, Rishav. Good afternoon, everyone. I welcome you all to our Q1 FY '22 earnings call. I hope all of you and your families are keeping safe and healthy. I'm pleased with the performance of our team has achieved during the quarter despite the challenges of the second wave of COVID and the global container shortage, which has disrupted the trade. On a stand-alone basis, we have reported a year-on-year growth of 64%. And on a consolidated basis, growth stood at 20%. We have achieved this feat on the back of steady demand and volume offtake in our core business, where we export products under our brands, Ashoka, Truly Indian, Aeroplane and Camel. We continue to focus on sales and promotional activities to increase our brand visibility. We are investing in increasing our brand awareness and building our distribution network as a precursor to our increasing capacities. Last year, we added 66,000 square feet warehouse space on lease in the U.S. as a distribution center for the company to ensure uninterrupted product supply. I'm pleased to inform we've also made additions in our senior sales and marketing team. John Campbell has joined our U.S. company as an additional country manager for our retail brands. And Simon Roberts has joined our U.K. team as a sales agent for our U.K. mainstream business. In terms of capacities, our newly leased facility of Surat commenced commercial productions from this quarter and has helped contribute to our growth. We are also doing debottlenecking and modernization in our existing manufacturing units, which will give us additional capacities of around 10%. These two together will drive our near-term growth for the next 2 years, which is till 2023. By the start of FY '24, we expect our greenfield expansion to come on stream. We've already been allotted 7 acres of land in Surat. We plan to increase capacities for frozen food, ready-to-eat, condiments and -- with the potential to add around 10,000 metric tons of overall capacity. This first phase expansion is estimated at a CapEx of about INR 60 crores. Our agency distribution business this year saw some degrowth. We will continue to focus on this business as it helps strengthen our network and provide additional lever for growth. We have planned some major promotional schemes along with our principles to increase sales during the forthcoming festive season. We have a strong balance sheet today, and we will leverage this potential to continue investing in our products, our global distribution network and our manufacturing capacities, while optimizing profitability and margins. This is all from my side for the moment, and I'll hand over to Shardul to take you through the financial update. Thanks. Over to you, Shardul.

Thanks, Bimal. Let me brief you on the financial highlights for the quarter. In Q1 FY '22, our total revenue stood at INR 90 crores, a growth of 20% compared to the same quarter last year. Our stand-alone business, which comprises of exports in India business registered a revenue of INR 62 crores, up 64% Y-on-Y as we scaled up production post the initial COVID lockdown we faced in the previous financial year. Our U.S. business comprising PJs and Nate's brands reported revenue of INR 11 crores and agency distribution business revenue stood at around INR 17 crores. We have started the year on a good note despite various challenges and are confident of demand and volume expansions in the coming quarters. EBITDA for the quarter stood at INR 16 crores as compared to INR 13 crores in Q1 FY '21, a growth of 22% Y-on-Y with EBITDA margin of almost 18% and PAT for the quarter is around INR 11 crores, which is a margin of 12.5%. We continue to maintain a robust balance sheet with 0 total debt. That's it from my side. We can now open the floor for question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Ashish Singh, an investor.

My question is regarding the container services shortage. Is there any plan to overcome this bottleneck?

Well, we are dependent on the shipping companies. And there is just now it is challenging at the moment. But we are hoping in the next few months, things should normalize. However, we've -- because of being a large exporter, we are getting more priority from the shipping companies, and we've been able to manage shipments. But that condition that containers to remain problematic. And we hope in the next few months, it will get better.

[Operator Instructions] The next question is from the line of Ayush Modani, an investor.

So I just wanted to clarify, like if we remove the other income for this quarter, then we see a very quite flat profit year-on-year so and despite our sales have gone up. So how do we see the margins going ahead? Like will we see the contraction in margins because we are in fooding business? And I believe fooding won't stop because of some -- like we have supply chain issues, but demand side issues, I don't think there would be there. So what has led to the top line falling quarter-on-quarter. Can you please guide me on that?

Shardul, do you want to be that?

Yes. So other income mainly consists of the foreign currency gain during this quarter. So that's operating profit anyway. So exchange rate has increased. And so that's going to remain as a sustainable income going forward also. So the margin, I think we are very confident that this will remain in this range, which we are showing.

And then my second part of the question was like, as you said, as I mentioned that top line has fallen quarter-on-quarter, but fooding cannot stop, as I believe. So what has led to the fall in quarter-on-quarter top line. Can you please guide me on that?

So the top line...

Sorry, sorry.

No, go ahead. Go ahead, Shardul.

Yes. So when you are looking at quarter-on-quarter in the last -- in the fourth quarter of last financial year, we had a significant income from our export incentives, which was booked for the entire year in the Q4 when we could recognize that revenue of INR 5.5 crores. If you exclude that, you will see that we are in a similar range. Of course, there is a slight degrowth, and that's because of the container availability issues, which we are facing. However, as Bimal said, we have the solution for it, and we hope that our sales will sustain going forward.

So the sales have improved from the last couple of weeks from coming out of the June, is it that?

So in some markets, we have started seeing -- look, you need to understand what has happened in U.S., in U.K., in this first quarter, things have opened up out there, right? So people who had been stuck at home, consumers who had been stuck at home were venturing out, and so eating at home reduced a little bit during that time. So we saw a little bit of a lull in the first quarter. And from the last 2 weeks, we are seeing things improve in most of the markets. And we hope the second quarter will be -- will continue to see a good demand. And then you have the festive season of Diwali also coming in where we've [Technical Difficulty] so we hope to see a better second and third quarter.

The next question is from the line of Bheeshma, an investor.

My question basically revolves around this other income of INR 3.5 crores, of which I think INR 1.8 crores is foreign exchange. Can you -- what is the other part of it?

Actually, treasury income, that's the main part of this, so the investments which we have.

So export incentives, is that part of other income? Or is that counted from -- where does that reflect? Was there any export incentive in this current quarter?

So there is no export incentive in this quarter. But see, the MEIS income stopped as of 31st of December, and government has announced a replacement by way of RoDTEP, which will replace this MEIS, but we are still waiting for the proper rules and guidelines for it in terms of how that will be implemented. Hence, we have not booked any income right now.

[Operator Instructions] The next question is from the line of Abhijit Sinha from Pi Square Investments.

If you could just give more clarity on the container prices right now because you were talking about the exports and how the container prices have gone up. If you could throw some light over there, please?

There is a huge shortage of containers everyone knows. Our freight rates have gone up in the past 6 months or, in fact, a little over 6 months, the freight rates have been steadily going up. And for various countries, the increase has been depending on the availability. It goes up to as high as 3x or 4x more. We have been able to pass on some of the freight increase by increasing our prices. We hope this doesn't continue and because everyone is facing this problem. So I'm sure there will be some kind of intervention by some competition commission or some government and get things regularized. But we have been able to pass on some of the price increase to -- by increasing our prices for our products. At the moment, it still continues to be challenging. But we are still able to manage because, again, of our position as being a large exporter, we still manage to get our shipments.

So sir, when we're saying that we're passing it on. You just mentioned that it's gone up 3x, 4x. Obviously, we can't pass on that substantially to -- in our products. So about how much of a price hike would we have taken to a bit pass it on to our clients?

So we -- at an average, we've been able to increase our prices by about 10%.

Okay. And sir, this would be how much percent of our cost -- our total expenditures that we do? How much would this be particularly on a percentage, if you see?

So freight is around 10% of our top line, right now, the current cost -- at the current cost level.

Understood. Understood. The second question was regarding the previous question, someone asked about the demand quarter-on-quarter. And you mentioned that last year, like there was a lot of work from home -- last quarter, there was a lot of work from home and people were lodging in. Now things are -- if people are -- I hope that things get better and this situation opens up. So does that mean that those sales would not be expected on that level? Or like how do we go about it exactly?

No, we are not seeing -- look, this last quarter was a quarter where travel opened up in the U.S., people were [Technical Difficulty]. So it was more of people wanting to eat out and doing that. So we saw our food service, the catering business increase, right? We have a food service side of the business or the HORECA business, as you all know it. So that increased for us. The eating at home reduced a little bit because of the opening up of the country. As I mentioned, in the last 2 weeks, we are again starting to see the demand get strong on the packaged food side. And I don't think people will stop eating at home. I mean, yes, you will have people eating outside, but eating at home will still continue. So I don't really see the demand going down. And then we are adding on more products. We are doing promotions. So all this will continue to help us grow our sales.

Perfect. So sir, last quarter, we clocked about INR 100 crores in sales and about this quarter, it's about INR 96 crores. So can we assume that about INR 90 crores to INR 95 crores could be an average throughout like in the going quarter or do we think that it can go up till INR 100 crores again?

No, I'm hoping that we do cross INR 100 crores, at least our internal target is to be more than INR 100 crores from the second quarter onwards. So we will obviously try our best to push for over INR 100 crores every quarter.

Okay. And sir, is there any change in the future targets that we have set as an organization? Like further plans for FY '22 or '23 in the long run kind of a thing? Is there any targets that we have set for the company?

Yes, we have. We have done internal target setting, and we continue to maintain that. So we are not making any changes, what -- or to target what we have set aside for ourselves internally.

Okay. So you won't be able to be quantifiable, right?

No. In our last conference also, we mentioned, I mean by FY '24, we hope to cross around INR 600 crores. So we still continue to stand by that.

[Operator Instructions] The next question is from the line of Saurabh Trivedi from Keshav Labs.

Saurabh Trivedi here. Actually, I have one question about the pricing. Since the price of raw material has gone up drastically, especially oil and all the raw vegetables. How are we seeing this demand fluctuation in the prices and what are our plans in future?

So as I mentioned, we have been able to pass on some price increases. Some commodities have gone up, but it's not gone up across the board. I mean in some places, we've seen certain reductions also happening. So we have passed on the price increase and that's how we've been able to continue to maintain our margins. Despite the freight increase and -- yes. No, no. I said we've been able to maintain our margins even though with increase in some of the raw material prices and the freight price. We've still been able to maintain it. As I said, we've put a price increase since the last 3 months, and that's how we've been able to maintain our margin structure.

Okay. And sir, second question is our current capacity is 20,000 metric tons per annum, right, and we are -- we have invested for new facility in Surat. 7 acres land, right? So how long it will take to increase the capacity?

So Devang, do you want to get that?

Yes. So the new plant will add 10,000 tonnes extra capacity. But this should take the better part of 24 months.

So after 2 years, what will be our revenue target after adding 10,000 tonnes capacity?

So as Bimal just mentioned, we have kept a target of crossing INR 600 crores in FY '24. So that -- I think we will stick to that target at this point of time.

[Operator Instructions] The next question is from the line of Bheeshma, an Investor.

I have 2 questions, sir. One is on the agency distribution side revenue has come -- has seen a degrowth. So what could be the reasons for that?

As I've mentioned, we've seen a little bit of [Technical Difficulty] in the market in terms of offtake in the first quarter because people were going out, eating out. So we saw a slight reduction on that front. But now -- in the last 2 weeks, we've started again seeing the demand increase. So we hope that things -- and now we plan some aggressive promotions as well. So we expect the agency business to come back to normal in these next 3 quarters.

Okay. Okay. And the next question is that we have a top line growth of about 16%. So what is the breakup between the volume part of it and the price hike of it? Would that be -- could you quantify that?

Shardul?

So price hike has happened in the recent time. So it's -- you will see that effect in the next quarter. So whatever increase you are seeing that's mainly because of the volume growth.

Mainly because of the volume. And -- so what kind of products are you seeing that there is a structural growth in what if not a specific product, but is a specific brand or a specific type of a food product that you think is doing really well compared to the rest of the portfolio? Would you be able to give some idea about that?

So our flagship brand, Ashoka continues to get stronger and stronger. A lot of new products are being added in that Ashoka brand. We are seeing good growth coming out of the ready-to-eat segment and the frozen food segment, that's where we are seeing good traction.

Okay. And how would you -- could you give us some understanding of how you see this playing out? Is there -- how big is the market opportunity for you to really be -- really get aggressive in this particular fast-moving items or this fast-moving segment? Just an understanding of the competitive landscape would really help sort of to directionally at least?

Sure. So I mean, if you look at the size of the ethnic Indian food between U.S. and U.K. in the kind of categories we are in, it will be close to, I guess, would be about at least $1 billion in size. So there is a lot of opportunity to grow. And Indian food is only [Technical Difficulty] more popular, even with the non-Indians, right? So this continues to grow. And -- so there's a huge opportunity in this thing. And what we are doing now in the U.S. with the first step was to start with one of our own [Technical Difficulty] centers so that we are able to cater better in the market. And the plan is in the next 2 years, we will have at least 4 to 5 distribution centers in the United States, okay? So we'll be able to cater better and the supply chain will be much stronger for us. We then hope to do the same in U.K. as well. So there's a lot of -- the opportunity is huge.

Right, and the last question is that the rub-off of the agency distribution business on your core business, that is the processed food. How is that dynamic -- has that dynamic played out in the sense that you're able to cross-sell your products as well. So how do you -- how has that dynamic happen and how do you see that as a sustainable way of increasing revenue?

No, no, it has definitely helped us. It helped us -- I mean, and it's evident from the sales of our own brands, right? As I mentioned to you earlier, our core brand Ashoka continues to gain -- increase more market share, get more -- so this will definitely help us, and it helps us to reduce our selling costs. It gives us more leverage with the retailers. So as a strategy that has worked out well for us.

The next question is from the line of Miraj Shah from Dalal & Broacha Stock Broking Private Limited.

I just have a couple of questions. I think I missed some part of the start of the call. So sorry for that, I just like to research on that point. The question is regarding the container issues that we're having. Do we have any short-term issues in -- short-term solution that we have since we are expecting things. But for short term, do we have any solution? And the second part was that I think just a couple of questions ago, you said that there was a good volume growth that we have seen in this quarter. So can you just throw a number on that? What kind of volume growth have you seen this time?

Okay. So let me answer your first question. The second question, I'll leave it for Shardul to answer. So the container problem, I mean, there is no solution in the sense we have to make our shipments through -- by sea, okay? So we have to use these containers and get our goods. That's the only way we can basically send our products to these markets, right? Because we are a large exporter, we have some leverage with the shipping company. So we are getting priority compared to others. Yes, the freight rates have gone up. We tried to mitigate by passing on the price increase also in the marketplace. So we hope in the next few months, things will basically stabilize on this container supply problem because this is a worldwide problem at the moment. Every country is facing this problem. I'm sure there'll be some solution which will come out on this. So we hope in the next few months, things get better. As far as the second part -- second question, Shardul, do you want to just let them know in terms of tonnage growth?

So the volume growth, as I just mentioned, between 2 quarters, we have grown by almost 58% in terms of the top line, so from Q1 of last year to Q1 of this year. And largely, except the exchange rate difference, which will be around say, 10% of it, other is the volume growth, which we have seen between the -- and just remember that we have a base which is lower in first quarter of last financial year because of the COVID lockdown, hence the largely, almost 45-odd percent is the volume growth which you will see between 2 quarters.

[Operator Instructions] The next question is from the line of Ashish Rathi from Lucky Investments.

If you could help us understand what is the outlook for the year and the distribution business in particular, if at all this has been already discussed?

Yes. No. So no worries. So the first -- Shardul, do you want to just take them through the first quarter numbers?

Yes. So Ashish, as you know, our top line is almost 20% up and it's INR 90 crores in this quarter over the Q1 of last financial year, while on the standalone number, it's INR 62 crores, it is 62% up. And in terms of the value other than INR 62 crores from standalone, INR 11 crores came from our U.S. good business and INR 17 crores came from our agency distribution business. So that's in a nutshell. EBITDA is INR 16 crores versus INR 13 crores, a growth of 22% Y-on-Y and PAT is around INR 11 crores.

We've seen a little bit of degrowth in the agency business for the first quarter. And that's because the first quarter, there has been a little bit of a lull in the marketplace because everything opened up in the U.S., people were traveling, people were eating out. So the consumption at home went down a little bit. We saw our HORECA business increase during that quarter. But now from the last 2 weeks, we are again beginning to see demand pick up for the packaged foods as well. And now with the Diwali season coming in, we worked out some aggressive promotion plans for the agency business [Technical Difficulty] principles. So we hope to get that back on track in these next 3 quarters. We hope to grow that business well. The core business continues to grow, that's been growing well. And we are just having challenges on the containers, shipments, which we are doing our best to get. I mean, we being one of the largest exporters, we get priority from shipping companies. But -- so we are doing our best to get shipments out as much as possible.

Okay. So the distribution business, what is the outlook for the full year? And what is the guidance that you're giving for full year, Bimal, this year in terms of top line growth and bottom line?

So in terms of top line, we hope to be from second quarter [Technical Difficulty] so our goal is -- and our internal target is to do over INR 100 crores every quarter. And we continue to keep that guidance for ourselves and going to do our best. It all just depends on how things play out on -- with COVID, with supply chain, but our -- we've not yet changed any of our internal targets. So next 3 quarters, we hope to cross INR 100 crores every quarter. And we feel very confident of maintaining the same kind of margins that we had.

Okay. So INR 100 crores a quarter means around INR 390 crores odd number for the full year. So that will be like a 4%, 5% kind of a growth on the top line. So that given our sort of ambitious target of doubling the top line in 3 years. Are we kind of not running at the time? And in terms of bottom line also, will we be able to see the similar kind of growth this year?

So FY '24, I mean, we looked at around INR 600 crores, and we still remain optimistic to get to that number. And margins, again, as I mentioned, we continue to be fairly confident of maintaining the current margin levels. Shardul, do you want to add anything?

Yes. Ashish, so our interest targets -- we actually don't disclose any numbers as a guidance for the current year asset. We do not want to do that. What Bimal mentioned is INR 100 crores plus number. So there's no -- we do not want to really indicate our internal targets. We may not -- the point is, let's not add INR 90 crores plus INR 100 crores into 3 is what I'm trying to say. And on that to achieve INR 600 crores, we have added that distribution warehouse in U.S. to support our increased production, which we will do it here. We are doing the greenfield projects. We are doing the debottleneck. We have taken plants on the rent. So we have now increased capacities on both sides, on the production side as well as on the distribution side. We have added the country managers.

You've added 2 more -- 2 more sales people have been added.

Yes. So we are working [indiscernible].

And just an observation on the EBIT margin rate. So we have a 20 basis points kind of an increase, which is visible on a Y-o-Y basis, whereas we have the food business , which has grown 26% this year Y-o-Y, this quarter Y-o-Y, and the distribution business actually declined. I was hoping when the food business goes faster, there would be much more sort of EBIT margin improvement given that the distribution business is at a lower margin for the company level. Any color on that, please?

In the last financial year, we had export incentives, Ashish. In this year, we haven't booked any export incentive because the government has not come up with the guidelines for RoDTEP. So as soon as the guidelines come in and we are sure of getting the revenue from it, post that, we will be able to book those revenue. But till now -- I think that was a significant part of our EBITDA margin, almost 3% was that. So we have to wait and see how much -- what policies come from the government.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Das for his closing comments.

Yes, can we take the last question?

Yes. The next question is from the line of Sagarika Mukherjee, an Investor.

Sir, your gross margin in the first quarter has actually increased on a Y-o-Y basis. I am excluding the other income portion also from it. I'm just talking operationally, your gross margin has actually improved. So can you just help me understand, is it mostly because of any kind of price increases that we have taken? Or is it like the structural number that we can take going forward because it's much higher than your last year's gross margin also?

So it's primarily because of the -- when we look at it a structural number, actually, because the agency distribution share is lower in this particular quarter. So in Q1 of last financial year, agency distribution business was almost 30% of the top line, while it is right now in this year -- in this quarter, it is 17%. But when we look at the EBITDA, then it's -- yes.

Okay. So the mix will -- so once if the agency business actually picks a bit, it will actually again kind of normalize. So sir, in a steady-state scenario today at the costing and let's say, the FX also keeps improving as an operational number for you, FX gains, et cetera. As a steady-state gross margin number, what should we look at?

I think we maintain -- we will be able to maintain these ratios going forward. So on our standalone basis, our gross margin will remain at the level of around 54% to 55% of total income, which we are earning. While in agency distribution, it will be around 17%, 18%, and our -- in the food business in U.S., it will be around -- between 35% to 40%. So that's the gross margin which we maintain.

Okay. So at the consol level, sir, I was looking at your consol gross margin last year was 41.7%?

Right.

Would you say that is what you [indiscernible].

I just mentioned -- I just explained to you, the agency distribution gross margin is much lower compared to the other business. Hence the share of agency distribution is higher then the average will work out lower. But when we look at the EBITDAs generally, you will see that they are in line with -- because there is not significant difference in the EBITDA margin of all the 3 businesses. In terms of our main business, we earn around -- we are able to earn around 20-odd percent of EBITDA margin. Our food business in U.S. is around 16-odd percent, and our agency distribution will be around 12%. So when we -- there -- the average out it will work out to around 18% to 19% because the core business is higher share and when you add the other stuff, then we get around 20% EBITDA.

Got it. And sir, the other expenses item is the one which has increased dramatically for you in this quarter. So is this largely attributed to your increase in the container cost, et cetera? And would you expect that to come off?

Yes. So largely it's because of that. And I guess this is going to continue for a quarter or 2, if freight cost is going to remain high. But as Bimal just mentioned, we have taken some price hikes. So when we look at the percentage ratio -- because -- then it will not be significantly higher.

Got it. And sir, going by the competitive scenario in U.S., U.K. and all your markets there, once the container cost, et cetera, start coming off, whenever it does, would you need to pass on your -- pass on the benefits and take a price cut or something like that, depending -- I mean, depending on the history of your product?

So it's -- normally, we wouldn't do that because the price increase also, we haven't given a full increase to the effect of the input cost increase and the freight cost increase. So we would hope to continue maintaining those prices even if it comes down, even if the freight rates come down.

All right. Got it. And sir, this target of FY '24 of crossing INR 600 crores in revenue, et cetera, how much portion of it is from the agency business that we look at?

It will remain in the ratio of -- between 22% to 25%. So the current ratio is what we will maintain in agency distribution also because the growth is going to happen across all the segments in which we operate.

Our focus is always going to remain on our core business and on our own brands, right? But yes, the agency business also will grow. But you'll still continue to see major sales coming out of the core business.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Das for his closing comments.

Yes. Thank you all for joining the Q1 FY '22 earnings call of ADF Foods. For any further queries, please get in touch with us at Pareto Capital. Thank you.