ADF Foods Limited (519183) Earnings Call Transcript & Summary

Good evening, everyone. I'm Bhavin Soni from Orient Capital. We are Investor Relations advisers to ADF Foods Limited. I hope that all of you and your families are safe and well. On behalf of ADF Foods Limited, I extend a very warm welcome to all participants on this Q1 FY '23 financial results discussion call. Today on the call, I'm joined by Mr. Bimal Thakkar, Chairman and Managing Director; Mr. Shardul Doshi, CFO; Mr. Devang Gandhi, Chief Operating Officer. I hope everyone has had an opportunity to go through the investor deck and the press release that we have uploaded on the exchanges and company's website. Before we begin the call, I would like to give a short disclaimer. This call may contain some forward-looking statements, which are completely based upon our beliefs, opinions and expectations as of today. These statements are not a guarantee of future performance and involve unforeseen risks and uncertainties. With this, I hand over the call to Mr. Thakkar for his opening remarks. Over to you, sir.

Thank you, Bhavin. Good evening, everyone. I hope you and your families are healthy and safe, and I pray for their well-being. I'm pleased to welcome you all to our Q1 FY '23 earnings conference call. Before I provide an update on our business and performance, I would like to thank everyone for removing the time to join us today on this call and being a part of this growth journey. At the outset, I would like to thank the entire team for achieving a consistent performance this quarter despite multiple challenges, including geopolitical uncertainties, raw material inflation and supply chain disruptions. Current quarter, we recorded revenue of INR 97.2 crores in Q1 F '23, a growth of 12.5% from Q1 FY '22. Our EBITDA and PAT stood at INR 9.1 crores and INR 7.6 crores, respectively. On the cost front, our margins were impacted due to high raw material and freight costs. To mitigate this, ADF took a price hike in June, the full impact of which will be seen in the coming quarters. Further, we are also witnessing softening of both raw material and freight costs, which will also have a positive effect on margins going forward. High-quality product development and innovation is one of the most important aspect of our business. In this direction, we have strengthened our product portfolio by introducing new products under our flagship Ashoka brand. Product launch are in ready-to-eat, ready-to-cook and accompaniments category. Also to expand in India, we are ready to launch products through e-commerce under Soul in the food accompaniments category. Products like pickles, sauces and chutneys are ready to be available in the Indian market from Q2 of FY '23. QSR and Cloud Kitchen as a segment is at an inflection point and represents a very large opportunity. We at ADF are in active discussions with multiple players and are exploring various opportunities as we speak. We have taken a step towards this opportunity and are pleased to inform that the Board has given its in-principle approval for making a strategic investment of $1 million in a U.S.-based entity called NaanSense Operating LLC. It's a start-up engaged in the business of ethnic Indian food, quick service restaurants and fast casual dining restaurants. It will also give the company an insight into the food habits and trends of Indian food within the mainstream consumers in America. To conclude, we at ADF are really excited with the growth opportunities that lie ahead of us and are confident in executing our strategies. This is all from my side, and I'll hand over to Shardul for the financial update. Thank you. Over to you, Shardul.

Yes. Thank you, Bimal. Good evening, everyone. Thank you for joining us today. Let me brief you on the financial highlights for first quarter. In Q1 FY '23, our consol revenues increased by 12.4% to INR 97.2 crores compared to the same quarter last year. Also, our gross margin increased by 26.9% to INR 47.9 crores as compared to the same quarter last year. Gross margin stood at 49.2%. For Q1, our EBITDA stood at INR 9.1 crores and EBITDA margin stood at 9.3%. As Bimal said, our margins were affected this quarter due to inflationary pressure on raw material and freight as well as supply-chain disruption in our U.S.-based subsidiary. We are working closely on resolving the supply-chain issue and confident of finding an alternative in the next few quarters. [Technical Difficulty]

Sir, we are not able to hear you. Ladies and gentlemen, we seemed to have lost the audio for the current speaker. Please stay connected while the speaker reconnects. Ladies and gentlemen, this is the conference operator. Please note [Technical Difficulty]. Ladies and gentlemen, please stay connected while speakers reconnect. We now have the line for Mr. Doshi reconnected. Over to you, sir. You may please proceed.

I actually finished with my speech. Did I -- was I audible?

No, sir. Your line has dropped down.

Shardul, you are either gone on mute or your line has dropped off.

Mr. Doshi, your line had dropped off. You are reconnected.

So, I have to start completely all over?

Shardul, yes, I think it's best just start from the beginning.

Okay. Yes. So in Q1 FY '23, our consol revenues increased by 12.4% to INR 97.2 crores compared to the same quarter last year. Also, our gross margin increased by 26.9% to INR 47.9 crores as compared to the same quarter last year. Gross margin stood at 49.2%. For Q1, our EBITDA stood at INR 9.1 crores and EBITDA margin stood at 9.3%. As Bimal said, our margins were affected this quarter due to inflationary pressure on raw material and freight as well as supply chain disruption in our U.S.-based subsidiary. We are working closely on resolving the supply chain issues and confident of finding an alternative in the next few quarters. In addition, MOFPI has sent letters to all the beneficiaries whereby they have pushed the PLI incentive by 1 year and will now be applicable from FY '22-'23 till FY '26-'27. The company has made representation in this regard and as a conservative position, have not booked PLI incentive income in the current quarter. Once we get further clarity, we will start booking it in the coming quarters. Q1 PAT stood at INR 7.6 crores with PAT margin of 7.9%. For Q1 FY '23, processed and preserved food revenues increased by 12.8% to INR 78.6 crores and agency distribution business increased by 10.7% to INR 18.6 crores. This is all from my side. We can now open the floor for Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Abhishek Agarwal from Naredi investments.

My first question, how much revenue get from Patanjali products in this quarter and give some idea for full year FY '23 top line from Patanjali products? And second question...

So. Okay, yes, go ahead. No, no, go ahead.

Okay. Our EBITDA margin and PAT margin declined. So it is temporarily down or permanent? And what is the reason behind it? And also you say in your opening remarks, your raw material cost is high, but our gross profit margin are increased. So Give some idea?

Yes. So the first -- your first question about Patanjali, how much revenues were there in the first quarter. It was -- we have -- our first shipment actually just came in, in about -- in May this year, okay? So the first quarter has just got one shipment in, and that is just about GBP 30,000 to GBP 35,000 revenue. [Technical Difficulty] by the end of this year, we hope to at least get to GBP 0.5 million in revenue from Patanjali. That's what our expectation is. Your second question...

Sorry sir. I pardon. Your line breaks.

Okay. I said the first shipment only just got in, in May for us. So the first quarter doesn't have too much significant revenue. We expect to close the year with about GBP 0.5 million in revenue for Patanjali in this year.

Okay.

Your second question was -- can you please just repeat your second question?

Yes. Our EBITDA margin and PAT margin are declined. So it is a temporary down, or permanent? And what is the reason behind it? And also, you say in your opening remarks, raw material cost is high, but our gross margin increased. So what is the reason behind?

Correct. Yes.

Can I take this question?

Yes, yes, Shardul, please go ahead.

Yes. So this -- the comparison which we talked about was from Q1 of last financial year and Q1 of the current year. So the main impact in profitability was due to the -- if you see the other expenses have gone up, there was a huge freight cost increase, which happened between these 2 quarters. And as far as raw material is concerned, that comparison was from the previous quarter. And hence, the cost -- we mentioned that the cost of raw material has gone up during this quarter. And the prices are softening now. So going forward, hopefully, we should see some benefits coming out of it.

And also, we've taken a price increase in June. So you'll start seeing that benefit as well.

So our freight cost going in same thing or it will come down?

So the freight cost right now, it has softened, but we are given to understand there is going to be some peak season surcharge, which is going to be levied by the shipping companies from end of August -- I mean, from the third week of August. So we are not sure how that's going to impact. But the way it looks, it's going to be at least a few more quarters before we start seeing a major reduction on freight rates.

So in full year FY '23, give me some idea about EBITDA margin?

Well, our endeavor will be to try and maintain what we have done in the past. So we hope to be at anywhere between 15% to 18% EBITDA margins.

[Operator Instructions] The next question is from the line of [ Ninad Sabnis from Sabnis Financial ].

I have 2 questions. And first one of them, just following up from my question on last call. We have some good plans to foray -- we have already forayed and we had to -- we have plans to make better inroads in the QSR segment, which offers a great opportunity in a market like India also. So can we just know any progress on that front?

Yes. So in India, we have started supplying already to one of the chains, and we are on the second order with them. So it is progressing in the right direction, and we are trying to add more products as well.

Great. And if I may, I want to ask another question. Since a majority -- we have a substantial portion of our revenues coming in from exports and the dollar has been on a trajectory which is favorable for people -- for companies who export. So do we anticipate any positive impact of that on our P&L and balance sheet going ahead?

Shardul, do you want to answer that?

Yes. Definitely. In fact, this is going to help us in long term because this translates into the top line increase for us. But just a word of caution, we operate in 2 currencies, even we operate in GBP. So GBP has come down by almost 6%, 7% compared to the earlier levels and dollar has gone up to that extent. Of course, our USD exposure is more. So net-net, we will benefit more compared to what we'll lose on GBP.

The next question is from the line of Anupam Agarwal from Lucky Investments.

Sir, just on your opening remarks, you mentioned about price hikes being taken. Can you help us understand versus the quarter comparable that you allude to, how much raw material cost has increased? And in tandem, how much price increase are we taking?

So the price increase has been taken on selected products. And the overall impact, I think on some of the products we've taken is about 8% to 10%. So I think the overall impact, Shardul, would be around 3% to 5% for us on an overall basis?

Yes.

And the raw materials, again -- so if we look at our key raw materials, for example, this year, mangoes, wheat flour, oil, all these have increased tremendously. I mean some of them have gone up by as high as 30%, 35%. We obviously cannot pass on the full increase to the consumers. So we have been absorbing some of it. But on our key products where we feel we could take the increase, we've done that. So you can already see our gross margins have improved. Again, that is also because of better product mix. We are selling more higher-margin products. So we continue to do that and work through this better product mix. The price increase has already happened. Hopefully, the raw materials are now showing some relief in -- I mean, there is a softening on the increase on the raw materials. So all this should help, and we should be able to get back on track with our EBITDA margins, which we've been doing.

Okay. So can you help us understand what has been the frozen food mix in the overall revenue? And what sort of gross margin are we expecting for the entire FY '23?

Shardul, do you want to get that?

So we generally don't give the breakup of our revenue, but frozen is one of our main products which we supply. And our, in fact, share of frozen on month-to-month basis, it's increasing. And this is one of the main component of our overall sales mix. What was your second question?

Your...

Gross margin...

Yes.

The gross margin, in fact, we -- see, as Bimal said, that the raw material prices have softened compared to the previous quarter or previous few months, plus the dollar exchange rate is beneficial and the price hike also we have taken. So I think our gross margin will remain at that this year.

Understood. Sir, can you help us understand or give us some color on your CapEx updates? By when are we looking to commission the brownfield debottlenecking and the greenfield plant?

Yes, I'll let Devang answer that.

So as far as the brownfield is concerned, we are already -- as you know that last year, we spent a lot of -- we have put in a lot of CapEx there. But this quarter, we've been consolidating that and probably we have enough capacities and moreover, it is a streamline of processes. As far as the new plant is concerned, we have acquired the land already. And we have applied to the Ministry of Food Processing for the grant, which we are expecting to get in a couple of months. Having got that, we should be in a position to then execute the plant within 1, 1.5 years.

Okay. So H2 FY '24?

Yes.

Understood. What is the sort of CapEx we're looking at in this greenfield. And at peak potential, what is the kind of revenue we can do from that plant?

So in the greenfield, we look at a capital in the first phase of about INR 59 crores. And at full capacity, it would give us -- see, again, I'm saying full capacity. Normally, the thumb rule is about 2.5 to 3x. So you should take that as an indicator.

Okay. Sorry, I missed the number on CapEx.

The CapEx was INR 60 crores, including [ liabilities ] in the first phase -- in the first phase and we added something later.

So in first phase, what is the land parcel that we are looking to utilize? I mean what will be the Phase 2? Is it...

So what we do is normally when we set a plant like this, we put up infrastructure for both the phases together. So our CapEx on land and building would, of course, be a little bit higher in the first phase. So we're looking at approximately 15,000 square meters of land, which we've already acquired.

Understood. Understood. So this is in -- this is close to where our current plant is? Or...

Yes, it is in a mega food park, which is about 150 kilometers from our plant -- our flagship plant.

And it's in the same food park as -- where our current leased factory is, which we have taken on lease, the third unit. So it's in that same food park.

Understood. Sir, in your earlier call, you mentioned about freight costs being around 14% of top line. Is it similar currently -- in the current quarter as well?

Yes, it's maybe 1% here or there, but freight costs are still pretty high. Shardul, what was it this quarter?

It's almost 16%.

[Operator Instructions] The next question is from the line of [ Keshav from Raksan Investors ].

Sir, you had mentioned about an approval to invest in a U.S. based LLP. Sorry, I missed the name of the company and whether you're acquiring or investing. So could you clarify that and the amount to be invested?

So the company is called -- so it's a QSR. I mean they have a fast casual dining restaurant and QSR model. The brand is called NaanSense. So it basically specializes in Indian food targeting the mainstream Americans. The amount -- the in-principle approval we've got is for $1 million. We'll be taking a minority stake in there. And we would be the preferred suppliers to the chain of restaurants of all the ingredients. So this gives us an edge in terms of being suppliers and also gives us insight in the food trend of mainstream consumers.

Sure, sir. So is there a quantum if you can get to the business opportunity at hand with them?

See, it's -- they have just started with one outlet. They plan to scale it up to -- in the next 3 to 4 years, they plan to go up to close to 50 outlets. And so it's very difficult to quantify at this point. But if they get to that level, we should be looking at a decent amount of revenue coming from them.

Sure sir. And sir, what kind of business opportunities are you looking at in the cloud kitchen space, if you can give a qualitative idea on that?

So what we want to do is be a key -- be part of their supply chain. So be an ingredient supplier or finished product supplier to them because the whole QSR in cloud kitchen space is growing very fast and rapidly, and we have all the back end already in our facilities. So we want to be part of their supply chain. That's what we are looking at.

Okay. Sure, sir. And sir, pardon me, I'm fairly new to the company. So I just had just one observation, if I see the financials. If I look a year back, our capital employed in the agency distribution segment was probably half of what it is right now. So is it a matter of scale? Or is it some shift in business fundamentals because our revenues haven't moved in tandem?

So what we have done there is we have taken 2 warehouses on lease. So the way the accounting happens in U.S. is the leasehold assets you need to capitalize over the term of the lease and then you have to charge off the lease. So there is an equivalent asset and liability which gets created over there. So there are 2 warehouses, in fact, we took on lease in this business. And now we have a warehouse of almost 100,000 square feet there.

The next question is from the line of Aakash Javeri from Perpetual Investment Advisors.

My first question was, could you throw some light on the demand scenario right now in the U.S.?

Well, the last 2 months, things have been a little bit slow, but that's because it's basically everyone's been traveling, it's holiday season. So we are now expecting from August, things to come back to normal. So we don't see any kind of problem in terms of the demand. But last 2 months have been a little slow, which is because of the holidays and travel. And not just in the U.S., actually across the world, in all major markets, people have -- because of COVID, everyone was -- the travel was not there, and suddenly, people have just started traveling when they've got the opportunity.

Got it. Understood. My second question would be regarding like pricing scenario because of -- you spoke about volatility in raw material prices. How often do we get to revise our prices? You just said in June, we took a price hike. So how often generally do we get to revise prices and pass it down to consumers?

So normally, we do it once a year. And that too, it depends. It's not across the board for everything. If there is some bad crop or things like that, at that time, we will look at the price increase. Otherwise, we don't normally go for the price increase. But yes, if it is absolutely necessary, our brands are strong enough, so we are able to take the price increase. So -- yes, I mean now we've taken this in June. We don't hope to take any more increase unless the situation demands for us to increase, then we will.

Okay. And my last question would be that we heard about like destocking of inventory last year due to low demand post unlock. So how is that situation now?

I'm sorry, I didn't understand the question.

Last year, because of lower demand post unlock, once people started moving out of their houses, so because of that, there was some destocking of channel inventory. So how is that situation now?

No. So right now -- I mean, what happened during lockdown in the initial phase where people were just stocking up their kitchens and pantry stocking what we call, that's not happening. Everything is now normalized. There is no panic in that sense for stocking up goods. So it's come back to the normal situation pre-COVID.

Normalized levels.

[Operator Instructions] The next question is from the line of Abhishek Agarwal from Naredi Investments.

[Technical Difficulty]

Mr. Agarwal, we're not able to hear you. Your audio is breaking up.

Hello, now I'm audible?

Yes.

Sorry to interrupt. The line for the current participant has got disconnected. We'll move on to the next question. That is from the line of Nikhil Vora from Sixth Sense Ventures.

Bimal, just one question on distribution, where we've obviously done extremely well over the last couple of years with Unilever and Patanjali coming on board. How scalable is that business? And how do we see profitability in that business shaping up over the next couple of years? And what's the potential of other consumer brand businesses being part of this distribution platform that we have?

So Nikhil, we've -- for us, Patanjali has just started, as I mentioned, and we expect this to -- I mean, in the next 2 to 3 years, we at least hope to get it up to about GBP 3 million to GBP 5 million in revenue. The Unilever part of the business continues to grow. We are adding more products from their portfolio as well. And there are other agencies which we are actively in discussions with, and we've already signed up one which is a strong brand of frozen products from Malaysia. So that has just started. In fact, last month was the first shipment, which came in. And we hope that business will also -- I mean, the target for this year for that business is also about $0.5 million. So we will take on more brands through this pipeline, but our focus will always remain on our brands. And I think our agency business, as we go along, we'll probably look at under 30% of our revenues, 70% will still come from our own brands.

Okay. And does the agency business also enable us to go deeper into a lot of geographies, which maybe our brands were not able to go?

Yes, absolutely. It does help us. It gives us more power with the retailer. And the distribution business, we're setting up the warehouses, which we are setting up. All these products help us in bringing our operating costs down as well. So it's -- this whole business, this vertical for us has actually worked out very well, and we will continue to exploit it and grow it as much as possible.

And what's the potential leverage of a business like this over a period of time? Can the margin profiles increase meaningfully in this? Or we should be in the similar band for the next 2, 3 years?

No, I think the margin profiles will remain more or less in the similar band because we can't outprice ourselves also, and we work closely with the principals to ensure that the products are sold at the right price to the consumer as well. So we should -- but what will happen for us, how our margin improvement will happen is as and when we open more warehouses that there is a -- so we get a superstockist margin and then there is a distributor margin. So as we start doing more of our own distribution, we will get to enjoy that distributor margin as well. So that will help -- that is how our margin improvement will happen. Right now, we've got 2 outlets, 2 locations where we are distributing directly, and we hope to add on far more DCs over the next 2 years in the U.S. So that will help us further improve our margins.

The next question is from the line of Anupam Agarwal from Lucky Investments.

Sir, just trying to understand, I understand you don't give mix between the brands, but if you can help us understand how these brands have grown on a Y-o-Y basis, Ashoka and all our brands?

Shardul, do you want to take that?

Yes. So in fact, we have seen growth in absolute number in most of our brands, whether it's Ashoka, Camel and Aeroplane or Truly Indian. So these are -- so ADF Soul is a brand which we have kept for India. And so that -- when we are launching products in this quarter, it will come under that brand. But in terms of overall percentages, we have certain private label or B2B business also, which we do. In fact, that's coming down. Which used to be earlier 35%, it's down to now between 25% to 30%, which is anyway now compensated with higher growth in Ashoka. Ashoka, in fact, has been growing really fast. And Camel and Aeroplane, they are kind of on a steady state affair, but they have also grown in absolute terms. So that's how all the brands have done overall.

Understood. Understood. Sir, across the board, we've been talking to companies. We are seeing some sort of slowdown in Europe and U.S. given inflation rates where they are right now. What is your take and sense on this? Are we seeing some sort of slowdown or, let's say, some lower offtake from our customers given these issues?

So as I mentioned, the last 2 months, there has been a bit of a slowdown, but it's not because of the inflationary [Technical Difficulty]. We are already seeing, I mean, from the last week onwards, things are again getting back to normal. So hopefully, I mean, of course, the inflation pressure is there across the world. But being in the food business, I mean, that is -- hopefully, it doesn't impact us. I mean we are not seeing much of an impact. We have Diwali, which is coming up and people are -- all our distributors, all our partners are all very gung-ho about the Diwali season coming in. Demand seems to be coming back. I mean, the last 2 months was only because of the travel. Otherwise, I don't see much of an issue at all in terms of demand for our products at least.

Understood. Understood. Sir, we've incorporated a subsidiary in India for back-end solution and services. Can you give us your rationale behind that?

Yes. I think Shardul will -- Shardul, can you please?

Yes. So this entity will actually provide the back-end support for all our Indian operations, which will be conducted under this entity. So the way structure is now ADF India -- ADF will hold this back-end entity. And under that, there is Telluric, who is going to sell the -- who's actually going to buy products from ADF and sell it on e-commerce, and this all activity will start in the month of August.

In August. Got it. Got it. Sir, last question from my end. Just want to understand the valuation of INR 50 crores for NaanSense, for the 16% holding we bought. Just if you can help us understand something there? We've given INR 8 crores for 16% stake. That comes to about INR 50 crore valuation. So if you can help us understand something there?

Yes. So this is a capital which is required anyway for the company. And based on that, this valuation has been arrived. This is all in growth capital for the company.

They had already raised money 1 year ago at this kind of valuation. In fact, we were able to get a lower valuation compared to what they did in their first round of fundraising. And it's -- this is a start-up, but the team which is there who is executing this has got a proven track record. David, who is the managing partner of this whole entity, he has had past experience and success in growing a similar concept for Mediterranean foods and later on sold it off to a private equity after getting it up to 50, 60 outlets. So it's that premium you've paid for the team. And they already raised this kind of money earlier. So we've actually got a better valuation than their first round of raising because they look at us as a strategic partner because we [Technical Difficulty] vendors, suppliers for all the product as well.

Got it. Got it. So, sorry, last question. Is there some sort of capacity constraint we are facing in the foods business that we're not being able to grow north of 15%, 20%?

No. There is no capacity issue. I mean there is debottlenecking, which we had to do for some of our products, which has happened now. So we should be able to grow at a higher pace going forward. And then the greenfield will also help once that comes in. So there was some products we were facing issues, but that debottlenecking has been done. So now we won't have that issue as well.

The next question is from the line of Abhishek Agarwal from Naredi Investments.

Sir, in FY '23, what revenue generated from Patanjali product because due to line disturbance, I did not get the exact number. So it is GBP 1.5 million or 0.5 million?

No, GBP 0.5 million is what we will look at achieving this year because it was a little -- we started off only in May. So we expect at least a minimum of GBP 0.5 million.

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

Thank you, everyone, for your participation, and please stay safe, and we look forward to connecting with you in the next quarter. Thank you.

Thank you. Ladies and gentlemen, on behalf of ADF Foods, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.