ADF Foods Limited (519183) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the ADS Foods Limited Q2 FY '26 Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Udeshi from E&Y. Thank you, and over to you, Mr. Ravi.

Thank you, Shlok, and good afternoon, everyone. We welcome you to the Q2 and H1 FY '26 Earnings Conference Call of ADS Food Limited. To take us through the results and to answer your questions, we have with us the top management of ADF Foods Limited represented by Mr. Sumer Thakkar, the Promoter and also Vice President, Sales and Strategy; and Mr. Shardul Doshi, the Chief Financial Officer. We will start the call with an overview of the business and the recent business updates by Mr. Sumer Thakkar and then Mr. Shardul Doshi will give his comments on the financials. As usual, the standard safe harbor clause applies while we start the call. With that said, I will now hand over the call to Sumer. Over to you, Sumer.

Thank you, Ravi. Good evening, everyone. In Q2 FY '26, our stand-alone revenues increased by approximately 12% year-on-year to INR 140 crores despite continued uncertainty around U.S. tariffs. The quarter witnessed steady progress in market penetration for the Ashoka and Truly Indian brands alongside the addition of new product listings in key retail outlets such as Costco. Stand-alone and consolidated PAT increased by 39.1% and 34.2% to INR 29.7 crores and INR 26.4 crores, respectively, supported by a better product mix, prudent cost optimization and foreign exchange gains. These results reflect healthy net margins of 21.2% and 16.2%, respectively, indicating improved operational efficiency. Our flagship brand, Ashoka, underwent a vibrant brand refresh that reflects its bold flavors and proud desi identity. Meanwhile, our Truly Indian brand adopted a fresh new identity inspired by the rich colors and lively street style spirit of India. The expansion of the Surat greenfield facility is nearing completion and remains on schedule to commence operations in the second half of FY '26. We're seeing continued traction for our brands, led by increased store penetration and geographic expansion. Our continued focus on disciplined execution and operational excellence makes us confident of sustaining the current growth rate in the long term. I will now hand over to Shardul, our CFO, who will comment on the financials.

Thank you. Thank you, Sumer, and good evening to all. I'll first share the stand-alone performance. For quarter 2 FY '26, the company's stand-alone revenues reached INR 140.1 crores, marking 11.5% increase year-on-year and 39.6% increase quarter-on-quarter. Stand-alone EBITDA for the quarter was INR 37.7 crores, which is a 36.1% increase from the previous year. And EBITDA margin was 26.9%, which has increased by 490 bps year-on-year and 450 bps quarter-on-quarter. The stand-alone PAT for the quarter was INR 29.7 crores. This represents a 39.1% increase year-on-year and a 75% increase quarter-on-quarter. The resulting PAT margin was 21.2%. Coming to the H1 performance. Our revenues from operations were INR 240.4 crores, up 8% Y-o-Y. EBITDA was INR 60.2 crores, registering an increase of 19.2% Y-o-Y. EBITDA margin was 25%, an increase of 230 bps on Y-on-Y basis. PAT was INR 46.7 crores, up 21.4% with a PAT margin of 19.4%. In the second quarter of fiscal year 2026, consolidated revenues were INR 162.6 crores, reflecting 0.8% year-on-year growth and 22.4% quarter-on-quarter increase. The company's EBITDA for the quarter was INR 35.8 crores, which is a 29.1% increase year-on-year and 52% increase from the previous quarter. The EBITDA margin was 22%, an increase of 480 bps year-on-year and an increase of 430 bps quarter-on-quarter. PAT for the quarter was INR 26.4 crores with a PAT margin of 16.2%. As highlighted by Sumer, the margins increased due to improved product mix, balancing in cost structure and favorable foreign exchange. As mentioned in the past, we continue to invest in our brand and management resources as an investment for -- towards future growth. This is already bearing results. Our flagship brand, Ashoka, continues to drive growth across core and emerging markets through focused market engagement. New product introduction and deeper market penetration supported by strengthened teams. Our global mainstream brand, Truly Indian is also available now in 2,000-plus stores, including Costco in U.S. and Australia. For the half year ended September 30, 2025, consolidated revenues from operations were INR 295 crores, up 4.4% Y-o-Y. EBITDA was INR 69.3 crores, a growth of 25.3%. EBITDA margin stood at 20.1%, an increase of 340 bps and PAT was INR 41.6 crores, up 22.3% with PAT margin of 14.1%. The company's capital expenditure program is on track. The Surat greenfield plant is nearing completion and expected to commence operations in H2 FY '26. The company's financial position also remains strong with a net debt-free balance sheet and robust net cash balance of INR 89 crores. With this, I now return to Ravi Udeshi to open the floor for question and answer. Thank you.

[Operator Instructions] The first question comes from the line of Rishi Maheshwari rishi from AKSA Capital Advisors.

One of the comments in the presentation indicated that this quarter's growth was due to deeper penetration and enhanced entry in one of the retail chains. On Slide 21, I can see 2 new logos, one of which is Costco Wholesale. So congratulations on that. What is the arrangement here? Is this relationship for Truly Indian or any other brand? How many SKUs or shelf space have you got here? And if you can also highlight what is the number of Costco stores you have presence in right now? And what is the escalation clauses over there?

So this is across -- well, 2 countries. So this is Costco Australia as well as Costco U.S. In -- for Costco U.S., it's Texas and Chicago. So Texas is actually one of the biggest divisions, which is approximately 52 stores. We're present across all 52 stores. This is with Truly Indian. So it's -- so some of the buyers, especially Australia, prefer the Ashoka brand. So in Australia, it's under Ashoka, but in the U.S., it's mostly Truly Indian. There's 1 SKU under Ashoka. Costco works on an in-and-out basis. So this was the trial order and then they assess rate of sales for the first shipment and then basis that they give you a permanent listing. And currently, so in our high -- in the more SKUs we have listed, it's about 4 SKUs in terms of shelf space with Costco Texas.

Given the first order, what is the experience? And what about permanent listing?

So it's still a bit too soon, but we're in talks with the buyers. And I mean, based on the initial rate of sales, we're fairly confident we'll get a permanent listing. And we're also pushing for some new items in shelf stable. So far, all the SKUs are frozen.

Okay. So I also noticed that from last quarter to this quarter, the retail outlets have moved from about 1,600 to 2,000. That's about 35% growth. Can you help us understand, clearly, this is just what have happened over the period of quarter, but it seems fairly large. So is it because of the recent Costco inclusion? Or is there anything else also that you'd like to highlight? Most of this, I would tend to believe, apart from Costco, as you mentioned, would be permanent in nature?

That's correct. Only Costco works on in-and-out. The rest of them are normally permanent listings. So the jump from 1,600 to 2,000, as you know, most of these guys are pan-U.S. Costco was a large part of it. Costco was about 70 stores. But when you get listings, I think the major jump happened with Safeway, Albertsons, which I think was about 200-odd stores. And then there were a few smaller regional chains, but all again, in the range of 70, 80 stores.

Sure. So while Sumer, this is heartening to understand what was -- what is obviously -- Yes. This is just an associated question of the same. So while this is happening to appreciate, I was just trying to understand that I could not reconcile the kind of growth that you have delivered in this quarter. I presume that some of it is marked by tariff issues. And as a result, you wouldn't have got the choices growth that you would have targeted for. Please, if you can give us some light in terms of what will be the -- what has been the reaction, firstly, how was the tariff passed on, not passed on? And then going forward, how do we -- how should we presume about it?

Okay. So first part of your question about new listings. See, this is a -- it takes time for us to build up the traction in the store. So listing is a good thing. That's the first step that has happened. And now it's up to us now to deliver better numbers from those stores, and we are very confident to achieve with the team in place over there. And product also, if you have seen, there is a brand refresh, which we have done. So there is a lot of investment which is happening on people, on brand, both. And hence, we are very confident that with this new listings, which we have received, the numbers will come in, in the quarters to come in. As far as tariff is concerned, right now, we have passed on. We have not taken anything -- basically, we are selling at the same price at which we were selling it before to the distributors and then onwards, they are also selling it. So basically, any tariff which will be borne by the distributors will be passed on to the consumers into this market. Now saying this, we will have to wait and see the reaction. If you know our products are in the price bracket of like $2 to $5 largely. And hence, say, 50% tariff amounts to roughly, say, 20% in the final price to the consumers, which translates into like from $2, it will become $2.40, $2.50. And for $5, it will become like $5.5, $6. So it's not like it's a major increase for any -- for the consumers as such. So hopefully, we should not really be facing any issues on the demand side.

[Operator Instructions] The next question comes from the line of Vishal Shah from Sameeksha Capital.

Sir, what was the price increase taken? Like you have mentioned that we have kept the price same. So not even single price increase due to inflation? And second question, how many bps improvement of gross margin is due to the currency? Like we have mentioned that in the other income, but have we taken anything in the gross margin?

So typically, what happens, it gets initially when there is a foreign currency fluctuation happens, partly it gets into gross margin and partly it gets into other income. And after a quarter or so, it everything gets into the sales and gross margin. That's how the accounting generally happens because if you know when you're booking invoice to collection, whatever exchange rate is there, that gets into other income. But once you start booking invoice at a higher rate, then that income gets into the top line itself. So that's about the exchange rate. And as far as price increase, I think though we haven't taken any price increase, automatically with the foreign exchange or rupee depreciation, which has happened, we get the better realization on our sales.

The next question comes from the line of Ravi Naredi from Naredi Investments Private Limited.

Sir, in quarter 2, our top line rises by 11.5%, while bottom line rises 39%. So how this is possible? And any other income helps us?

No. So it's all a combination of everything. As I said, there is a better sales mix in this quarter. Also, if you see, our stand-alone proportion of the consol is higher. So automatically, the margins will be better in a consol too because stand-alone has a higher margin profile, better margin profile. And there is other income, too, because of the exchange rate gains, which we have. So it's a combination of everything. So sales mix towards high-margin products, higher proportion of stand-alone plus cost optimization, which happens, everything put together, we have received this better margins.

Any incentive you had received from government in quarter 2?

We -- that's -- on a quarterly basis, we do, right? I think there is no extra as such, which we have done in this quarter.

Okay. In this difficult time, with the U.S.A., how you manage these things?

Are you referring to the tariff situation or...

Yes, yes, tariffs.

So tariff as of now, I mean, the situation is dynamic in nature, and we're monitoring closely to see what competition is doing. But as of now, we've -- I mean, we've maintained our prices.

Also, I think it's expected that our government is working very hard to close the deal with U.S. So hopefully, that should also be in place in a couple of weeks is the expectation.

And when the deal completes, we will get any good response or would benefit from it?

See, not really, but our consumers will pay lesser price because right now, we have not -- they have passed on everything. So they don't have to then pay a higher price. I think we don't want to keep anything.

The next question comes from the line of Pallavi, an individual investor.

This is Pallavi from Sameeksha Capital. I just wanted to understand, you mentioned about earlier that some part of it is in the gross margin. So for understanding any of the currency gains, how many bps of gross margin can we say half of the improvement is due to currency? And any change in your guidance for the year for -- on your margin side? And my second question would be when do we get into more stores with Costco? Like any time line we have there, the trial period, when does that end? And when does the new [indiscernible]?

Yes. So I'll say in terms of right now, around INR 4 crores of ForEx gain is sitting in other income and maybe couple of crores will be in top line itself because that's a number which you cannot really identify as such. And what was the next question?

Number of stores.

And sorry, the margins at the -- for the year, I think the exchange rate, rupee has anyway depreciated against GBP and USD and these are the currencies in which we are operating. Our share of frozen is increasing month-on-month, which is a high-margin product. Our Surat factory will be also up and running, which is also largely frozen. So there's a lot of focus on frozen. People -- there is investment which we have done on both brands and people. So those also will start giving us better numbers in terms of top line. So we have been maintaining that we will be in high teens in terms of our EBITDA margin. I think our guidance now is that we will be upwards of that. We'll have to see how much, but maybe 1% or 2% at least is what we see.

Yes. On the Costco front, that's an ongoing process. So currently, we're in about 75-odd stores. As retailers, for any new brand, they always do an in-and-out. And I mean, hopefully, by next -- by the start of next financial year, we know if these existing SKUs are permanent listings, and we'll also know more on the other divisions of [indiscernible].

And lastly, would we have an idea of what is the total revenue they get from Indian ready-to-eat Costco, what is there?

No, we don't have that exact number.

The next question is from the line of Anand from [Schema] Private Limited.

So one question is regarding the U.K. India FTAs, so you can shed some light on that and the impact of the industry itself and your company specific, but catering to the industry or the impact of U.K. India FTAs?

So I mean, similar to what Shardul just said, I mean, before the -- the FTA still hasn't been signed. I think it will only come into effect in the next 3 to 6 months, last I checked.

Once it is approved.

Yes. And so currently, we pay duties in the range of 4% to 15%. Once the FTA comes in, it will effectively go down to 0, which we'll pass on 100% to the consumer. So because the end retail prices will reduce, not substantially, but they'll still reduce, we're hoping that will positively impact demand.

Okay. You're saying it haven't been signed yet. So the duties will be 0. That the benefit is passed on to the customers. So how much do you think that the top line can increase because of this?

Very difficult to say at this point of time. But I think there is definitely benefit for the consumers of our products in retail. So we'll have to see how much it will translate into demand in Q4.

The next question comes from the line of Shalini Gupta from East India Securities.

I had 2 questions. One is that the raw material costs are substantially lower than what they have been in the past. So if you could just discuss this, please?

So they are not really substantially different. If you see, there is -- but of course, there is 2% drop in our COGS in -- when you look at the stand-alone, which is your manufacturing business. And I guess you're referring to that. But yes, so it's not that raw material prices have come down, but it's also the better sales mix, which we have that's really contributing to this drop. And as far as going forward, new season is just starting. So let's hope that there is no food inflation, which we will witness in India. If that continues, then our gross margin profile should remain in this region.

And sir, my second question, actually, raw material prices have come down quite substantially. When I look at it as a percentage to sales, they're down to 35% versus 40% plus that used to be the case. So anyway, you've answered this question. So the second question is the sales growth is flat Q-o-Q. So what is that? I mean, which product category was impacted and with what?