ADF Foods Limited (519183) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '24 Earnings Conference Call for ADF Foods Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Udeshi from EY. Thank you, and over to you, sir.

Thank you, Manav, and good evening, everyone. We welcome you to the Q3 and Nine Months FY '24 Earnings Conference Call of ADF Foods Limited. To take us through the results and to answer your questions, we have with us the top management from ADF Foods represented by Mr. Sumer Thakkar, General Manager, Sales and Strategy, who is part of the promoter family; and Mr. Shardul Doshi, the Chief Financial Officer. We will start the call with an overview of the business and current business update by Mr. Sumer Thakkar, and then Mr. Shardul Doshi will give his comments on the financials. As usual, the standard safe harbor clause applies as we start the call. With that said, I now hand over the call to Sumer. Over to you, Sumer.

Good afternoon, everyone. Let me first give you an overview of the company followed by business update. ADF Foods is a leading consumer-focused company and a leader in prepared ethnic food. We manufacture, distribute and market South Asian food, both in India as well as globally in over 55 countries. We have 8 distinctive brands in our portfolio, each catering to a certain demographic and have a strong consumer following. These brands cater to the South Asian diaspora, global mainstream as well as domestic consumers. Our flagship brand, Ashoka, is growing at a CAGR of upwards of 30%. Our products are manufactured both in-house at our Nadiad and Nashik plants, which have a combined capacity of 28,000 metric tonnes. We also have a branded foods agency business for distribution of select FMCG products. These are renowned brands, including Lipton, Brooke Bond, Red Label, Taj Mahal and Knorr Soup. This substantially broadens the offering and enhances our store presence in overseas countries. This combination of our own brands as well as our agency-backed business backed by our manufacturing strength has contributed to healthy EBITDA margin in the range of 20% powered by a debt-free balance sheet. We continue to make investments in our brand and our manufacturing capabilities for long-term growth. Coming to the business update. We had a satisfactory growth as well as healthy margins over the past 9 months as we focused on brand building and investing in profitable products. We saw stable demand for both our processed foods as well as the agency distribution business. Our Q3 revenue growth could have been better. However, the Red Sea crisis impacted sales shipments towards the end of the quarter. We initiated several new plans to accelerate our long-term growth. The Board approval for investment in Telluric Foods will enable us to accelerate our India growth -- our India business growth. Further, the merger of our subsidiaries, ADF Foods and Telluric Foods will enable us to achieve substantial synergies, including efficient capital utilization, flexibility in business operations and cost rationalization. We continue to witness healthy demand for our products. And in order to support the same, we launched several new products under our flagship brand, Ashoka. These were across various categories, including frozen desserts, canned sweets and Indo-Chinese sauces. Overall, we expect all of the above initiatives to enhance our growth and increase our profitability as well over the long term. I now hand over to our CFO, Shardul Doshi, for his comments on the financials.

Thank you, Sumer. Good evening, everyone. I'll first share the standalone performance. For the 9 months that ended on December 31, 2023, we recorded revenues from operations worth INR 285.2 crore, an 11.8% increase from the same period last year. Our EBITDA was INR 70.2 crores, up 44.6% increase Y-on-Y. We managed to expand the EBITDA margin by 560 basis points, reaching 24.6%. We see this as a tangible outcome of our continuous focus on investing in our brands and innovation and innovating in our product portfolio. Our PAT was INR 54.3 crores, a 36.8% increase from the previous year, with a PAT margin of 19.1%, an improvement of 350 basis points from the last year. Now let us look at the quarterly figures. In Q3 of financial year 2024, we saw revenues from operations rise to INR 103.2 crores. This marks a 3.5% Y-on-Y growth and a 6% Q-on-Q increase. Our EBITDA for this quarter was INR 26.4 crores, a Y-on-Y increase of 2.7% and Q-on-Q increase of 16.6%, while our EBITDA margin was 25.6%. As Sumer mentioned, our Q3 revenues could have been better. However, as sales shipments were somehow -- somewhat impacted by the crisis in the Red Sea towards end of the quarter. This led to a marginal impact on the revenues as well as our EBITDA and both grew at a slower pace on a Y-on-Y basis. PAT for the quarter was INR 20.3 crores, a 5.4% increase Y-on-Y, and 14.4% increase Q-on-Q. Our PAT margin for this quarter stood at 19.6%, an improvement of 30 basis points on the previous year. Moving on to consol performance. For the 9 months ended 31st December 2023, revenue from operations was INR 366.7 crores, a 12.1% increase Y-on-Y. EBITDA was INR 70.6 crores, an increase of 30.4% Y-on-Y. EBITDA margin stood at 19.3%, expanding by 270 basis points Y-on-Y. Profit after tax was INR 48.8 crores, up 22.6% Y-on-Y with a PAT margin of 13.3%, an increase of 110 basis points on a yearly basis. Coming to the quarterly performance, our revenue from operations for Q3 FY '24 was INR 129.7 crores, an increase of 5.2% Y-on-Y and 4% increase from the last quarter. Our EBITDA for Q3 FY '24 was INR 27 crores, recording a small decrease of 0.4% Y-on-Y with an increase of 23.8% from the previous quarter. Our EBITDA margin stood at 20.8%. Our PAT for the quarter was INR 19.1 crores, marking a Y-on-Y increase of 3% and quarter-on-quarter increase of 27.9%. For Q3 FY '24, the PAT margin stood at 14.7%. Our CapEx for 9 months period ended December '23 was INR 3.5 crores in debottlenecking and another INR 3.5 crores in cold storage project. Our balance sheet continues to remain debt-free as of date. The Board has approved INR 13 crores in optionally convertible redeemable preference shares investment in our subsidiary, Telluric Foods (India) Limited. This will down-stream to Telluric Foods Limited, TFL, a stepdown wholly owned subsidiary of the company by TFIL. The paid monies will be used to support the brand building and working capital requirement of TFL. Also, the Board approved transfer of ADF's entire equity investment in its wholly owned subsidiary, ADF Foods (India) Limited, to its stepdown wholly owned subsidiary, which is Telluric Foods Limited at fair market value to be determined. Post this, a merger is proposed between the company's subsidiaries, ADF Foods (India) Limited, which is a transferor company and Telluric Foods Limited, the transferee company. This proposed merger is already approved in principle by the Board. As highlighted by Sumer, the merger is expected to generate substantial cost synergies as well as greater financial strength and flexibility. Overall, we continue to judiciously invest in our manufacturing capabilities as well as our brand-building exercise in order to focus on increasing our margin profile as well as deliver greater returns in the long term. With this, I now request Ravi to open the floor for the Q&A.

[Operator Instructions] We have our first question from the line of Faisal Hawa, an individual investor.

So sir, there is not much progress on the distribution business that we have because I think that Unilever sold some of their [indiscernible].

[indiscernible].

Hello?

Go ahead.

So Unilever sold off their business to another company and even Patanjali, we are not doing well. So are we giving up on this? Or are we in talks with more companies to really expand this because this is almost like an additional business, which goes directly almost to the bottom line for us.

So the distribution business, in fact, as we had pointed out in the last quarter, there were certain issues which we faced on the supply chain issues. When the handover happened from Unilever to Lipton, which is where the business has moved, the entire tea business they have moved. However saying this, a lot of these issues have been resolved in this quarter. There are still some issues which are -- which they are still facing in terms of supplying it to us. But our growth, there is a good growth which has happened over Q2 numbers in Q3 when you look at the distribution business. We are also looking at some additional -- we have talked to a couple of companies, and we will share some details as and when any transactions happen, and we will start selling those products.

And sir, second question is that -- hello, can you hear me?

Yes. Yes.

So second question is that how are we doing on our tie-ups with Costco and Walmart, which we are pursuing for a very long time?

So on the supermarket business, it's still a work in progress. So for Costco and Walmart, that's under Truly Indian, which we plan on launching next fiscal year. But supermarkets as a whole, we made some progress. In fact, just yesterday, we got listed in 700 outlets in the U.K. with one of the -- in fact the largest supermarket in the U.K.

So is it Tesco?

Yes, that's correct.

Okay. So 700 supermarkets at one go we will be now getting access to?

Yes, but it's just a few SKUs. It's only 3 SKUs.

But we'll be having access to all the 700 stores of Tesco?

That's correct. Yes.

Okay. So that itself could lead to a lot of quarter-on-quarter growth from here on?

Yes. So we're hoping at least $1 million in the upcoming financial year.

Okay. And sir, can you give some light on what has led to this huge EBITDA margin increase for us?

The main EBITDA growth which has happened, of course, the margin profile is better when you look at the product mix which we have. Our frozen share is increasing in overall sale. Second, when you look at the Y-on-Y EBITDA growth in 9 months, there is -- there was higher freight cost, which we are seeing in the last financial year and that was substantially impacting our bottom line. However, in the current year, first 9 months, the freight cost was lower. Towards end of, of course, Q3, the freight cost have also started going up. And we will see now how that will shape up in Q4.

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

This is to understand, you had earlier projected to grow between 15% to 20%. And at that point in time, this looked comfortable, given the kind of market size that we have, the penetration that we have, the product that we have and the expansion on the geographical side that we were approaching at. While I look at the 9 months numbers, today, they're at about 12%, 13% kind of growth. I believe that we may fall short of our target. What is your view on this in terms of revenue?

So towards the end of the last quarter, we faced that Red Sea issue. So the container availability where that wasn't really -- that became a question, and we lost some significant sales in last 15 days of December. However, now that those issues have been resolved, the freight costs of course have gone up, but containers are available and those orders have actually come into the fourth quarter. So hopefully, we will still be able to meet our targets, which we have mentioned. In terms of expected numbers, I think we still stand committed to the higher growth in our top line. We have done everything which is required to do that. Our manufacturing capacity, we have increased. We have installed our freezer in U.S. That's in the warehouse. There is investment in people which have happened. There is investment in our Indian business also, which we have done. So everything is in place now. And there is, of course, good order book also for the fourth quarter. So for the year as well as going forward, we expect to meet our numbers, which we have been saying in the past.

Sure. Will you be able to let me know what is the contribution of Ashoka within the third quarter numbers?

Ashoka will be in the range of 55% to 60% of our standalone revenue.

Sure, 55% to 60%. Sure. The other part was to understand Nate's and PJ's. Has that -- what -- is there any update over there?

No. So nothing as yet. I mean we did a identify facility last quarter but it didn't meet our quality requirement. And we still continue to leverage that relationship. I mean Nate's and PJ's, as you know, was mainly sold to supermarkets. So we hope to leverage that relationship and now introduce Truly Indian within those same supermarkets where the manufacturing is actually in our control.

I see. Sure, sure, sure. So as of now, we shouldn't build any -- yes, are there any expenses on -- with relation to Nate's and PJ's that we were incurring earlier?

We are still incurring, the company is still in existence, and there is a legal case which is going on. Our other fixed cost has significantly reduced. So last year, we had almost INR 5 crores of losses from that entity. That's down to half of what we are in the current year.

So while we will not have any revenue from there, will we continue to have these expenses onboard in the next year as well?

No. I think significant fixed cost is already reduced. It's just the legal cost, which is still we are incurring. And hopefully, we will get results of the -- I think we will finish with our legal case and that will also stop in the next financial year.

Your movement, your transition in U.K. supermarket, Tesco, I think is very appreciable. Congratulations on that. Is this 3 SKUs just a pilot product? And therefore, should we assume that gradually, we will have a lot of our SKUs if this pilot happens to be successful?

So it's actually a prominent listing. In pilots, they roll out to fewer stores because this is across the board. We're hoping it's a permanent listing and then, of course, they'll decide based on secondary sales.

And what is the potential that you see? I understand you're looking at $1 million perhaps next year. But what is the potential going in the next 3,4 years from, say, Tesco? This is a virgin contract, is that right?

Sorry, what was that?

This is a first time contract with Tesco, is that right?

So we used to sell in Tesco many years ago. But yes, we just got back in. And in terms of potential, it's hard to say, but we are estimating at least $1 million in the first year. I mean if you remember, a couple of quarters back, we got listed in Morrisons and B&M. And that next financial year should again move up with the full $1 million, but it's hard to say until we actually see secondary sales.

Sure. What is the expected CapEx for this year?

So there is -- on the cold storage, we have another commitment of INR 11 crores. So we will finish that project by April of the current year and the freezer cold storage will be up and running. So that's total INR 15 crores spending we would have done by then. And in terms of normal CapEx, there is nothing significant now till March. And the next financial year, again, I think will incur another INR 3 crores, INR 4 crores for the -- our normal CapEx.

INR 3 crores, INR 4 crores more than your normal CapEx?

No. INR 3 crores, INR 4 crores of normal CapEx I'm saying, in the next financial year.

In FY '25?

Yes.

So in FY '25, normal CapEx will only be about INR 4 crores.

No, I'm not talking about the greenfield. I'm just talking about our existing clients here.

And any greenfield CapEx that you've already envisaged?

So greenfield will be around INR 60 crores to be spent over 15 months starting from April. Yes.

15 months. All right.

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

So a few questions. Can you tell me what was the freight cost this year -- this quarter, sorry, as a percentage of sales?

It's around 7%.

7%. Okay. And sir, you also mentioned that you're seeing these rates go up now. So I mean, in terms of your expectation, do you see this as a percentage of sales going up to a double-digit figure anytime soon?

No. So what's going to happen, I think after last increase in the freight cost, which we had seen, a lot of contracts we have moved to the FOB. And what's going to happen is it will still impact us maybe and our profit impact can be around 200 bps here. But when we look at the overall sales increase, which we are expecting with the fixed cost apportionment overall, I think we should be in a position to maintain our EBITDA margin there.

Okay. And just to clarify, you're saying this percentage of sales is on a standalone, right, or consol number, 7%?

Standalone.

7%, okay. And so when it comes to Ashoka, do you think are we on track or as per expectation, do you think you can maintain this 30% run rate this year and next year as well? So I mean that would essentially translate to INR 350 crores plus kind of a number for FY '25. So are we on track to do that?

Hopefully, we should be in a position to maintain. Our Ashoka revenue this year is expected to be around INR 260 crores to INR 270 crores...

But it will still be a 30% growth expected this year.

Around 25%, yes.

[Operator Instructions] We have our next question from the line of [ Tushar Khurana ], an individual investor. As we are unable to connect with Mr. [ Tushar ], we will go on to the next question. We have our next question from the line of [ Saurabh Trivedi ], an individual investor.

[ Saurabh Trivedi ] here. I have been with the company since last 4 to 5 years. Sir, I have a question regarding freight charges. The sea issue is going on since last more or less 24 months. So what are we planning about that big cost?

So like Shardul said, we're trying to mitigate the freight impact as much as we can by moving all our contracts from CNF to FOB assuming the freight will be to the customer's account.

Okay. And sir, how are we planning with India market because we have very big plans for India, I suppose, because we are any which ways working on that thing. So what can we expect as an investor and as a customer of Soul brand?

So in India, we are hoping to achieve a revenue of about INR 100 crores in the next 3 years. So it's been about 8 months since we launched. We're just in the process of building our team. We have just appointed a India head. Right now, our product portfolio is mainly pickles and chutneys. And in terms of market, we only sell on e-commerce. So our own website as well as Amazon, Flipkart, BigBasket, and we have just got listed on quick commerce through Swiggy. And in the next 3 years, we hope to roll out modern trade and general trade both, but in a very phased manner and quarter-on-quarter expand our product portfolio as well.

Sir, what are our target audience for Soul brand? Are we targeting to the upper class, middle class or which type of audience?

So urban India, so I would say more upper middle class.

Upper middle class. Okay. And sir, what are our future plans, which are product listing for Soul brand because as an India-specific, this is my personal study, that people -- a whole country, I'm speaking about, the whole country, are going for higher quality and higher prices of product, right? So we are moving towards premium products. So what are we looking up to?

Right. So we hope to be in that premium space. In terms of product portfolio, I mean Ashoka and ADF has a wide extensive range of around 600 to 700 products, which we have access to because all the manufacturing is made in-house. So depending on the Indian market and depending on what's doing well and where we see not too much competition, we'll plan it out accordingly. But yes, we hope to be in the premium space.

[Operator Instructions] We have our next question from the line of [ Tushar Khurana ], an individual investor.

Am I audible now?

Yes, sir.

Okay. So sir, I have a question on ADF Soul again. So may I know what is the current turnover for ADF Soul right now? And how much cash are we burning?

So right now, the revenue run rate is at about INR 40 lakh, INR 45 lakh a month, approximately INR 5 crores annually. And in terms of burn, Shardul look at the cash flow.

So this year, as you are aware, we have committed INR 5 crores for brand building exercise, which we're doing. Also just on the number, monthly, we are almost doing at around 15-odd percent in last 2 months. So -- and that's how we are confident that the run rate going forward will keep increasing for our products and we will be launching some of the new product changes also in the next financial year. So that's something which we have planned for the Soul.

Okay. Okay. And sir, if I compare other Soul offerings that we have right now with say Ching's of Capital Foods. Could there be a like-to-like comparison in terms of the offering that Ching's has been offering and what we are foraying into? Am I getting it correctly?

So as it stands, the product range is only pickles and chutneys, which I believe Ching's doesn't do. But moving forward, I mean, Ashoka, we do have a wide range of Indo-Chinese sauces and we're also launching noodles, which is somewhat similar to Ching's product range. And I mean, depending on the market size, we will pick our categories accordingly.

Okay. And then sir, on the branding side of ADF Soul, what are the steps that we're taking?

So right now, I mean, our presence is only on e-commerce. So we do a lot of social media, a lot of performance marketing. But because it's mainly online, that's pretty much all we do in terms of marketing.