ADF Foods Limited (519183) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the ADF Foods Limited Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. Thank you. I now hand the conference over to Mr. [ Devang Daria ] from Orient Capital. Thank you, and over to you.

Thank you, Yashashri. Good evening, everyone. On behalf of ADF Foods Limited, I extend a very warm welcome to all participants on Q1 FY '24 Financial Results Discussion Call. Today on the call, we have Mr. Shardul Doshi, CFO; Mr. Devang Gandhi, COO; and Mr. Sumer Thakkar, who is on the promoter family as well as the Senior Manager, Business Development and Strategy. I hope everyone had an opportunity to go through our investor deck and press release that we have uploaded on the exchanges and on the company's website. I would like today...

I'm sorry to interrupt. We have lost the management connection. I'll just connect them again.

Yes.

We have the management team back online. Devang, please go ahead.

I hope everyone had an opportunity to go through our Investor deck and press release that we've uploaded on the exchanges and on the company's website. I would like to give a short disclaimer before we start this call. This call will contain some of the forward-looking statements, which are completely based upon our beliefs, opinion and expectation as of today. These statements are not a guarantee of our future performance and involve unforeseen risks and uncertainties. With that, I would like to hand over the call to Mr. Sumer Thakkar for his opening remarks.

Good evening, everyone. I'm pleased to welcome you all to our quarter 1 earnings conference call. We have been consistently improving our first quarter results since the past 2 financial years and this quarter was no different. Our top line improved on a yearly basis. But what's more interesting is that our bottom line more than doubled as compared to first quarter of last financial year. This was achieved by a substantial increase in our margins, aided by operational efficiency and a softening of input costs as well as freight costs. As ambassadors of Indian ethnic food globally, we constantly try to innovate and bring new products so that a larger audience can enjoy the richness of the Indian culture worldwide. This quarter, launch of 2 new product lines under the Ashoka brand name, frozen curry food service in restaurants, which includes some popular dishes such as palak paneer, Panjabi chole and [indiscernible]. The other product is Pure Butter Ghee, a staple in every Indian household. We've introduced this in 3 different packs, 500 grams, 1 kg and 2 kg. We also built a new large cold storage capacity in our warehouse in New Jersey. This will allow us to store products more effectively and enable us to achieve faster fulfillment of our products. It's also an essential capacity enhancement when we orient to expanding our frozen products and the offering in the future. Our flagship brand Ashoka continued to grow at a very high rate and that which we achieved this quarter 2. It had crossed INR 200 crores in revenues during the last financial year, going in an impressive CAGR of 33%. We received listing launches of 3 of our SKUs in a large discounter as well as 15 SKUs spread across both [indiscernible] and frozen with the supermarket share in the U.K. We're very excited about the revenue potential from these listings, further approval and testament to the fact that our products fulfill the cravings of our consumers at a high-quality standard. That's all on the operational part of the business. I will now hand over the phone to Mr. Shardul Doshi, who will share our financial highlights.

Hi, good evening. Stand-alone Q1 FY '24 revenues from operations stood at INR 84.6 crores which is an increase of 17.2% Y-on-Y. Gross margin for the quarter is 60.6%, an improvement of 573 bps on a yearly basis. Stand-alone EBITDA for the quarter was INR 21.1 crores, almost tripling from Q1 FY '23 EBITDA of INR 7.3 crores. EBITDA margin more than doubled on a Y-on-Y basis from 10.1% to 24.9% this quarter. PAT was INR 16.4 crores, a growth of 121% on a Y-on-Y basis, with PAT margin increasing by 908 bps Y-on-Y to reach 19.3%. In Q1 FY '24, consolidated revenue from operations grew by 15.7% on a yearly basis to INR 112.4 crores while EBITDA and PAT grew by INR 141.4 crores per percent Y-o-Y to INR 21.9 crores and 92.7% Y-on-Y to INR 14.7 crores respectively. Both EBITDA and PAT margins improved from 9.3% to 19.5% and from 7.9% to 13.1% when compared with Q1 FY '23. Our process and preserved food division not only saw revenue growth on a yearly basis, but healthy margin expansion from 14.5% to 26.7%. Distribution business grew significantly both sequentially as well as on a Y-o-Y basis at 28.6% and 40.4% respectively. This is all from my side. We can now open the floor for question-and-answer session. Thank you.

[Operator Instructions] We'll take the first question from the line of [ Navin Naredi ] (sic) [ Ravi Naredi ] from Naredi Investments.

My name is Ravi Naredi, not Navin Naredi. I would like to know how much percentage capacity utilization at U.S. warehouses? And second, margin-rise in quarter 1, it will be a regular phenomena or in quarter 2 or financial year '24, it will be a different story?

So Ravi, in terms of capacity utilization in New Jersey, the cold storage is -- I mean, it was up and running as of last week. But at maximum capacity, we can do about 10 containers, which is roughly 400 [indiscernible]. And on your second question, historically, in Q3 and Q4, we've had a better margin profile. But on a consol level, we are confident that we can achieve high teens, early 20%s in EBITDA margin.

Okay. And one more thing, how much CapEx plan for financial year '24 and '25 and how much top line we received if we do INR 1 CapEx?

So our CapEx plan includes the greenfield project in this year, we plan to spend our total planned expenditure is about INR 50 crores, out of which this -- and the second phase, you will spend INR 30 crores.

Okay. And are you telling for this financial year '24 or '25 also?

Both together. I'm talking about both together, this expansion will take place over the next 15 to 18 months.

15 to 18 months. Okay. And if we do INR 80 crore turnover to CapEx, how much top line we may grow?

We do about INR 250 crores from that. Almost 3x, yes.

I could not listen how much capacity utilization is U.S. warehouse?

So it's -- yes. 10 containers basically...

He's asking about utilization.

Utilization as soon as the material comes in, we just started like Mr. Thakkar said, it has just begun last -- of last week, it has gone into operation. So we expect it to be running at full capacity.

We have our next question from the line of Rishi Maheshwari from AKSA Capital.

This is the question related to understanding the nuance of sequential growth that you have shown as well as in the margin as alluded in the last question. You've been generally looking at 20%-plus kind of growth in all our conversations earlier also, you pointed that out. Whereas in this quarter, the growth has been marginally subdued at about 16%. So wish to understand whether is there something that you can share with us on the environment? How is the growth be -- industry growth? And so that -- and in light [indiscernible], how do you look at FY '24 in terms of growth for -- on the top line?

So Rishi, for us, I mean historically as well in the past, Q1 has always been low in terms of demand because a lot of people travel in the summer, so the months leading up to the summer, packaged food consumption reduces. In terms of our outlook for FY '24, demand continues to remain robust and we feel fairly confident we can maintain that 20% growth rate.

Fair enough. That's heartening to know. I also noticed that in one of the slides, Slide 19, your products are displayed in a showroom, in the background, there is Walmart. I'm curious to understand if we have made any breakthrough in any of the large names like Walmart, you mentioned that Costco, you have a relationship that you were trying to develop, but it's not fully convertible. So hence, if you can also help me understand if there is any relationship that has broken. And if specifically on Slide 19, the packet of boxes in yellow is in the Walmart behind. So have you been able to crack that?

Actually we've been selling in Walmart for over 3 to 4 years now. This is in Walmart Canada. In Canada, we're present in majority of the large-scale retailers. There's another one called Loblaws and [ Sobi ], we're present in both of them as well. In Walmart, we have a list of ambient products and frozen listed as well. I think there are about 12 different SKUs. And in terms of other developments, like I mentioned, we've done listings with 2 large retailers in the U.K. One has about -- I think they both have upwards of 350 stores. One is a discounter, one is a retailer. I see.

I see, so this is Walmart Canada. Is there any development in any of the large chain retail stores in the U.S.?

Still work-in-progress. Presentations are going on. All the range reviews are happening now. And Truly Indian we're launching in frozen now, which we're pitching to all these retailers. We should have that ready by Q3 of this year.

Okay. Great. Any -- can you also outline what is the benefit of PLI that we have received in this quarter?

So we have booked INR 1.5 crores in this quarter.

We have our next question from the line of Devanshu Sampat from Avendus Wealth.

So I have a few questions. Firstly, can you tell me what is the freight as a percent of sales this quarter consol number?

So in a stand-alone, it's around 7%.

Okay. And can you give the consol numbers?

So in the previous quarter, it was 8%. Now it's 7%. So it's in line with very similar to what we had in the last quarter.

Okay. Okay. So I'm just trying to get a sense of your other expenses ex of this freight rates, right? So if I'm assuming INR 8 crores as the number of your freight costs this year, your other expenses, excluding freight rates have gone up in the last 1, 2 quarters. So can you firstly just tell me what has happened there because the number that jumped up to be INR 21.5 crores from about INR 15 crores, INR 16 crores in the previous 3 quarters?

So other expenses includes our professional fees, advertisement, sales, promotional [indiscernible], travel and content. These are some of the major heads, which we have. Also, let's understand some of these costs are fixed cost in you said like rent and everything is fixed cost on a lower base than percentages looks higher. But in terms of absolute number also, I think as Sumer mentioned that there is a lot of focus on tooling then launch, which we are doing. So there is -- there are certain expenses, which we have incurred in the market for doing those testings and the presentations, which we have to do to them. So those are the -- these are all kind of investments for us in our revenue expenses [indiscernible].

So there's no one-off as such in this quarter, right?

No, no.

Okay. And would you say your freight rates which is 7% average for the quarter, was it -- will it be -- is that the bottoming out? Or can it be lower in terms of what your exit was for the month?

So this is like a bottoming out. I think we can keep -- I think we can assume that this should remain for the year.

7% is an assumption for the year? Okay.

Yes.

Okay. And can you also discuss what has led to lower margins in the distribution business despite a 28% growth?

So it's also about the sales mix generally. I think what happens is it's not really a function of the products which we sell also makes a lot of difference. So last year, we had these orders like atta and rice also as part of our kit when we sold it in U.K., we have -- some of these products were there from Unilever as well as Patanjali. But now in their bank now and these were high-margin products, they are not available, we cannot sell them in the current year. But of course, there is a growth which have happened on the other items, but margin may not be as high as what we would have seen in our products. So it's primarily because of the product mix.

So it will be safe to assume that this 10% -- between 9% to 10% is the number to work with at the EBIT level for the year?

Yes. In fact, in the earlier years also, we used to maintain -- we used to have -- I think this is a safe number we can assume on the distribution business.

Okay. Okay. And you haven't highlighted Unilever separately in this PPT. So anything to call out there?

So I didn't understand. Sorry, what is the question?

So the major products we used to distribute for Unilever was the TAs, which are now all moved to [ Acatera ]. And right now product basket from Unilever is hardly anything. It's just a few items in the U.K. Yes. That's why the whole business is now moved to Acatera.

If you see the brands are same. It's the same, Lipton, Brooke Bond tea products which have moved to Acatera and that's what we are selling there. So...

So ex of the tea, you're saying the -- I mean it's not like we've lost that account or something, right? We continue to...

We still sell the other items. We have no and a couple other that we handle in the U.K.

Okay. Okay. And I have a few more questions, if I may. If I subtract your consol numbers and the stand-alone numbers, like the numbers seem to have improved sequentially on an EBITDA level. So what has driven this? And can you give a sense of the outlook?

So when we look at sequentially, yes, what you say is right. See, what is the gap between your stand-alone and consol is essentially a distribution business and your investment in the Indian brand, which we are doing and the ADF Foods, USA losses, which we have to incur. So -- what we have done is the distribution business has done well in terms of top line increase and assets, there is a good contribution. We have reduced our fixed cost into the ADF Foods, USA, which is [indiscernible] business. While there is, of course, we have continued with our investment into the Indian brand, but right now even that has been slightly lower compared to the previous quarter. So this is what has -- that's the gap between your stand-alone and consol number.

Got it. Got it. And any update on Nate's, PJ's? Are we on track to making a comeback in the second half? Or will it be pushed forward to '25?

We've submitted samples. It all depends on the supermarkets now. So we finalized the vendor and [indiscernible] and pricing. So...

Sure. And just last question. We were obviously looking at a new distribution partner. So where are we on that right now?

So we're just waiting on a few legal formalities, but more or less everything is going to be...

[Operator Instructions] We'll take our next question from the line of [ Kane ] from [ Gort Advisors ].

Congratulations on a good set of numbers. So I just have one question. I mean, after looking at the -- at your investor presentation, I see that our processed food business has increased from INR 293 crores to INR 362 crores from FY '21 to FY '23, right? However, if I look -- if I look at your Ashoka brand contribution, right, the number, that has grown from INR 119 crores to INR 211 crores. So does that mean that our other brands like [ Soulful ], I think Soulful is -- and Truly Indian, they're not growing at all?

So within that business, we also have a private label and B2B business. On the brand side, we saw all our brand grow. Private label grew as well, but for us, B2B fell. That's where the decline was.

Okay. So you mean to say that I think that is -- sorry?

All our brand grew from FY '21 to FY '22.

Okay. Because if I look at the number, the INR 70 crores is the increase in the revenue for processed food. And I think for Ashoka, there has been an increase of some INR 90-odd crores. So we are seeing that this -- the institutional business that we have lost, it is more than, let's say, INR 35 crores, INR 40 crores?

Yes. Correct. But that's not business we've lost. A lot of our customers overtraded in the previous year, so they were just sitting on a lot of inventory. But hopefully, next year onwards, they'll go back to the original level.

We have our next question from the line of [ Abhay Mehta ], an individual investor.

I have 2 questions. One is regarding the distribution business, which you have told that we are going to expand. But if you see the capital deployment and the margins which we are earning, is it worthwhile continuing with that business or it will be a temporary thing or we will be expanding it on a much larger scale?

So one thing to keep in mind is distribution business has really helped grow our own brands. So -- and our brand business is a very high-margin business. So net-net, it is helping us a lot.

So do you mean to say that the distribution wherever you are penetrating, you are able to penetrate our brands also through that distribution?

Yes, that's correct. We offer a wider basket to the retailer. We are more [indiscernible] to the retailer and that helps us increase sales overall.

But then do you think the margins will always be like 10%?

So right now the business is in investment mode, fixed costs are very high because of the investments we've made into warehousing. Hopefully, our sales will increase, the margin profile should increase as well.

Okay. And another question was regarding the B2B business which you are having, where you mentioned that large ethnic foods brand has tied up with you for supply of their brand and the large market chain -- supermarket chain also has tied up for your -- some patient sources. So are those margins almost like what we are earning through our brands or it will be substantially less?

It is in the same range.

Okay. So margins are not being compromised when you are supplying through B2B and large supermarket chain, I suppose?

No.

We have our next question from the line of [ Sourabh Trivedi ], an individual investor.

I'm sorry if I'm asking this question again. Recently, promoter has placed their shareholding, I guess, more or less 30% to 40%. May I know the reason behind it?

Sorry, who has reduced the shareholder?

No, has led a certain shareholder from their own portfolio? Am I audible? Hello?

No, we couldn't hear that. Can you repeat yourself?

Okay. Promoter has placed '23 more or less 8% to 10% of shares of ADF Foods recently.

So this is Shalaka, I'm Company Secretary. And the promoters have not recently placed any additional shares. The shares were placed last year and those like 10% shares of the total shareholding what you are saying, so total like 50,000 shares are in place, which is 5% of the total shareholding. And that was done last year for raising the funds for subscription of the preferential warrant. And there has been no additional place thereafter. Only some marginal 25,000 shares were placed thereafter during last month.

Okay. So is there any plan to place more shares in future?

Not really.

No.

Okay. Next thing is the Indian plant sold is doing amazingly well. I'm living in Andover. So the neighbors that I am surrounding with, I recommend them to use Soul brand, and they are very happy with the product. So I would just give a suggestion to please market this product as much as you can because people are there who want to buy good quality products.

No, in fact, we've increased the number of listings and we've also launched on bigbasket, Flipkart, Amazon, yes, we are making the product more widely available.

We have our next question from the line of Richa from Equitymaster.

My question is regarding this CapEx of INR 80 crore odd. So my understanding is that it's going to happen in stages. So if you could share some time line as to how much time will it take for INR 250 crore kind of revenue potential to be reflected in the top line? That would help in what -- how are we funding it? What would be the peak debt and the mid funding [indiscernible]?

So there is -- as Devang just mentioned, there is a INR 50 crores in Phase 1, which will be spent in FY '24 and FY '25. And additional INR 30 crores will be in Phase 2. That will be done post Phase 1 is completed and we start selling the products out of the sales bank. So that we plan as of now. And there is a 3x multiple which we generally we look at. So top line expected out of this INR 50 crore plus INR 30 crores investment will be around INR 250 crores. And there is additional one more CapEx, which we are doing at Nadiad. We had -- there is -- we have bought the adjoining plot next to our factory and we are setting up the freezer capacity there, where -- yes, so they are...

Sorry, Shardul, just wanted to add that we are doing a state-of-the-art cold storage there. So this is to enhance our storage capacity for additional volumes.

Right. Sir, I just wanted, let's say, in FY '25, you are done with the placement kind of CapEx. So how much time does it typically take for the capacity to produce revenue, whatever potential is expected of it from that...

Depends whether we are doing greenfield or brownfield. Brownfield will be definitely faster, but greenfield will take you a long time because setting up everything takes time as you are aware. So that typically it would run between 12 to 18 months to set up a greenfield project.

Okay. And what would be the funding mix? How [indiscernible] kind of period?

I'm sorry, you're not clear, ma'am. Can you use your handset more, please?

Yes, yes. Sorry. So I just wanted to understand the funding mix and the peak debt that you expect for this?

So funding, we will be borrowing for this project because the grant which we have, we have to necessarily route it through the lender, but that will be very minimal. I think around 30-odd percent of the project cost will make it through the debt, 70% will come from equity and the grant.

Okay. And sir, my second question is on this Telluric Foods in which you're investing. Could you talk a little about it what -- exactly how exactly is it helping you? What is the ultimate offers of investing in it?

So Telluric Foods is a 100% subsidiary and that's the vehicle we're using for our domestic business. So the brand sold is being marketed by Telluric Foods.

[Operator Instructions] We'll take the next question from the line of [ Rahul Jain ], an individual investor.

Kudos to the management, sir, for a good set of numbers. I had a couple of questions regarding the distribution business. So my first question is that what has led to this revenue increase in your distribution business? And 2 follow-ups, sir. You have mentioned about the cross-selling in your presentation slide related to distribution. So my question is that what are we trying to imply, perhaps a better product basket?

Sorry. So on your first question, we mentioned last time that there were some supply chain issues during the transition from Unilever to Acatera. Those are now being streamlined a lot, which is why we got our deliveries in time, which is why stock moved out faster. Hopefully, this will continue now that the management is sales. And on your -- sorry, what was your second question?

Sir, my second question was that you mentioned about the cross-selling in the presentation slide. So sir, I just want to know that what we are trying to imply perhaps a better product basket?

Correct. Yes. We just provide an offering to all the retailer.

So just to give you one example, our distribution cost gets distributed over our products as well as these products. So that's how we save on the...

And because they are complementary products, we can also -- yes, cross-sell because -- I mean, for example, tea and samosa is something we promote very often, so the tea is Unilever's and the samosa is ours.

Also, sir, I had one more question, sir. What would be the tenure of the contracts like? And how does the renewable process -- renewal process generally works in your terms of the exclusive rights to the new products or in the new regions?

So our contracts with both Acatera and Patanjali is for 5 years. And the terms remain the same for 5 years.

We have a next question from the line of [ Samiad Jain ], an individual investor.

Yes. So my question is like, we have brought all the new products recently for the like 30, 35 new products launch we have done under the Ashoka brand last year. And also, I wanted to understand like what is the process you have been following, so like what research you do before bringing a new product launch?

So we have a sales team based in all our various markets and they actually go to the market on a daily basis. Then we also get to see -- we get feedback from a lot of our distributors. So they constantly monitor what's moving, what categories are trending and based on that, then we do the back-end accordingly.

Okay. So my next question, like what is the typical contribution of brands catering to the like Middle East in the last 2 to 3 financial years? Like need to understand their general trend.

Sorry, I didn't quite catch that.

Like what is the contribution of the brand catering in the Middle East, like for like 2 to 3 years for last financial years in the Camel and Aeroplane brand?

So Camel growth is -- we don't give the advice breakup, but Camel and Aeroplane has both been growing at about 20% year-on-year.

Okay. Okay. And so like were there any new launches for the same product for the same brand and any plans for this year?

No, we actually didn't launch anything on the Camel and Aeroplane, but we are looking at a range of outsources on the Camel.

Okay. Are you looking for any acquisitions and all for the catering to the Middle East markets?

We're actively looking at acquisitions and the Middle East is something we've evaluated in the past. Yes.

We have a next question from the line of Abhay Mehta, an individual investor.

This is the second time I'm coming on the call. But I was inquisitive about this inorganic acquisition which we are talking about, how far we are on this path and whether we can expect anything in '23, '24 or '24, '25?

So we evaluate a lot of proposals which comes to us. And as and when something happens, definitely, I think we'll come back and talk about it and then give more details about it.

And will it be in domestic market or in international market?

So domestic market, we have found that the expectations are too high at this point of time. But -- so -- but I think we being present largely in the international market, we are finding very attractive target companies there. So I think -- so this is what we have to say on the acquisition front. We will see -- as I said, we will come back as and when something happens.

Yes. But it will be -- some cuisine-wise, it will be Indian cuisine something we are looking at or it will be an international cuisine that we are looking at?

We're fairly open. It all depends on the opportunity that comes our way and what we can do with that business in the years to come.

[Operator Instructions] We'll take our next question from the line of Devanshu Sampat from Avendus Wealth.

Just a few more queries, sir. So just to clarify this, between your 2 segments, right, how do you expense the distribution costs?

No, it depends -- like it gets apportioned. See, generally, that's what happens.

Okay. So you're saying depending on the sales mix, how it is split as well?

Yes.

Okay. Okay. Okay. And a query on Truly Indian, right? So I mean, please correct me if I'm wrong, we're talking about a food service vertical, which is I believe you hired somebody as well to take a look at this business and the potential return mentioned is quite high. So that is -- and also, you mentioned about the developments that have happened in U.K. and the U.K. business. So sir, can you give a sense of what will be the possible revenue potential from both these? I'm just trying to gather a sense of the market size of what is the expectation that the company has on an annual run rate, even if it starts contributing say second half onwards, but -- and from a 2, 3-year perspective, do you think it can become as big as Ashoka was in FY '23?

So for Truly Indian, it's a 2-pronged approach. One is on the food service side. And the second is retail. So we've appointed someone for both these divisions. And in terms of revenue potential, even one listing can attribute to Ashoka annually. On the U.K. side, we've just entered our first shipment. So it's too early to gauge potential revenue. It all depends on secondary sales. But the trial order for one of the retailers was 8 containers and for another was about 7 containers. So it's promising initial volumes.

Okay. So you mentioned that both these entities in U.K. have about 700 stores combined, right?

No. I'm not showing the exact number. I think one is about 700 and the other will be upwards of 400.

Okay. So will we be available in all of them right away? Or will it be just in parts and then we scale up?

So for one, it's 450 stores, one is 170 stores. They all do it based on where the clientele is, where the ethnic clientele is and then if it picks up from there, then they move you into more stores.

Got it. Got it. And while you mentioned that the margin profile of this standard will remain similar to that of the processed food division, but how does the working capital requirements be? Will they be with you -- will they be at the company average? Or will it move higher?

I think it will be same like what we are maintaining for the company.

Okay. Okay. And in one of your earlier questions, one participant asked you about whether you maintain your 20% CAGR kind of a number, but the Mr. Bimal Thakkar has been very clear that we're looking at doubling revenues every 3 years, which essentially means a CAGR of 26%. So are you indicating that investors should tame their expectations or it was a 20%-plus number that you mentioned, which could be that?

So on stand-alone, we continue to say -- maintain 25% on your subsidiaries will be at around 15%. So at a consol level will be at 20%. So what Mr. Bimal Thakkar said was doubling our revenue in stand-alone every 3 years.

Correct, correct. Okay. So that is intact Okay, got it.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Sumer Thakkar for closing comments. Over to you, sir.

Thank you all for taking your time out and participating in our earnings conference call. You can contact us for any queries or reach out Investor Relations advisers, Orient Capital. We wish you all the best and hope to interact with you in the coming quarters.

Thank you. On behalf of ADF Foods Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.