Hindustan Foods Limited (519126) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hindustan Foods Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Sameer Kothari, Managing Director from Hindustan Foods Limited. Thank you, and over to you, sir.

Thank you. Good morning, and welcome to our Q1 FY '27 Earnings Conference Call. Joining me on today's call are Ganesh Argekar, Executive Director; Mayank Samdani, Group CFO; Vimal Solanki, Head, Corporate Communications; and SGA, our Investor Relations Adviser. I trust all of you have had an opportunity to review our earnings presentation, which has been uploaded on the stock exchanges and our company website. We are quite pleased with the performance of the company in this quarter. In spite of the headwinds in terms of the macro environment, especially around the elevated inflationary pressures and the geopolitical risks, the quarter's performance is a vindication that the long-term opportunity for FMCG contract manufacturing in India remains compelling. Increased outsourcing by consumer brands, rising consumption, premiumization and the growing preference for asset-light manufacturing continues to expand the addressable market for HFL. Coming to the financial performance, we have started FY '27 on a strong note. While our footwear business faced temporary cost pressures during the quarter due to higher raw material prices arising from the Middle East crisis and the implementation of the revised wage rates, the underlying performance across our other businesses remained robust. Leveraging the strength of our diversified manufacturing platform, we delivered our highest ever quarterly PAT with a growth of nearly 1/3, 33% over last year. Reflecting the continued confidence of our customers and the robust demand outlook across our businesses, we have already signed on various projects totaling to around INR 340 crores in this financial year. Including these investments and the projects already under implementation, we expect to commercialize manufacturing capacities exceeding INR 500 crores during FY '27. Additionally, we continue to engage with our customers for various new projects, which gives us the confidence not only to reaffirm our FY '27 PAT guidance of INR 200 crores to INR 220 crores, but also makes us optimistic about sustaining this growth in FY '28 and beyond. With that, I would like to hand over the call to Ganesh, who will take you through the operational highlights of the quarter.

Thank you, Sameer. I will now take you through [Audio Gap] for the first quarter of FY '27. We have started the year on a strong operational footing with healthy execution across our manufacturing networks and encouraging progress across all our business segments. The capacities commissioned over the past few quarters continue to ramp up well, while our team remains focused on improving operational efficiencies, onboarding new customers and strengthening existing customer relationships. Our Home and Personal Care business remains at maximum capacity, supported by consistent demand and efficient manufacturing operations. We are seeing some traction in demand for these products across all categories and across all sites. Based on this, the division delivered a record performance this quarter. The integration of the Aurangabad Personal Care facility has now been successfully completed with production stabilized and the plant operating seamlessly within our manufacturing network. The brownfield expansion at Silvassa is expected to commence production during the second quarter, while the greenfield Lucknow facility continues to progress as planned for commissioning later this year. Our Food and Beverages business continued to witness healthy momentum across multiple categories. The Coimbatore, Nashik and Mysore units continue to operate at record production levels, supported by efficient operations and sustained demand. The Beverage division had an excellent season and validates our belief that beverages will be one of the major avenues of growth for this division. We are also expanding our manufacturing platform with addition of a Greek yogurt facility in Goa, marking our entry into another high-growth category. The ice cream business delivered another strong quarter, supported by robust summer season and record production volumes across our manufacturing facilities. During the quarter, we successfully commissioned our state-of-the-art Panipat facility and continue to expand our ice cream manufacturing capacities. This capacity expansion will enable us to cater to growing customer demand and support the long-term growth of the category. We also continue to improve asset utilization at our Nashik operations by adding new customers across both the ice cream and cone manufacturing facilities. Within health care, we continue to strengthen our capabilities by adding new customers across syrup, tablets and lozenges while progressing our ayurvedic wellness expansion at Baddi. We also initiated the certification process for Class III medical devices at our Chennai facility, which will support our expansion into regulated international markets over time. We are actively pursuing new export opportunities for our personal care product portfolio manufactured at Baddi facility. With scalable production capabilities and a strong focus on quality, we are engaging with international customers and partners to expand our presence in global markets. Our footwear business continued to make steady progress during the quarter by expanding its manufacturing footprint and strengthening customer relationships. We added new customers while continuing to expand our manufacturing capacities across North and South India. Our order book and capacities starting from Q2 FY '27 onwards are full for the rest of the financial year. We have witnessed strong demand from some of reputed brands in the industry. Our operations experienced temporary challenges during the Middle East geopolitical crisis, resulting in short-term disruptions due to logistics and supply chain activities. To continue uninterrupted production, we had to procure material at higher prices and increased freight. The division was also hit by a large increase in the minimum wages in Haryana. We are confident that our customers will support us in mitigating the losses incurred due to these causes and that the division will return to profitability in the coming months. We continue to remain bullish about the long-term business outlook for all our divisions and remain focused on improving operational efficiencies and enhancing our manufacturing capabilities to support future growth. On the back of the emerging demand across various product categories, we have announced a series of investments. The Board has authorized additional investments towards new expansion projects of INR 190 crores, bringing the total for FY '27 to INR 340 crores. This is in addition to the INR 150 crores worth of projects carried forward from FY '26. The breakup is as follows: Food and beverages, INR 210 crores at Coimbatore, Mysuru, Goa, Aurangabad and Hyderabad plant. Ice Cream, INR 80 crores at Panipat; Home and Personal Care, INR 50 crores at Lucknow. Now before I conclude, I would like to briefly update you on the disruption at our Silvassa manufacturing facility following the record rainfall witnessed in the region during July. Production has already been partially restored, and we expect the facility to be fully operational by the end of August. The facility is adequately insured, and we do not expect this incident to have any material impact on our long-term operations or growth plans. Overall, we believe that the investments made over the past few years, together with the expansion projects announced in FY '27 have created a diversified manufacturing platform that is well positioned to capture future growth opportunities. As we move through FY '27, our focus will remain on ramping up utilization across recently commissioned facilities, executing our expansion pipeline with discipline and continuing to enhance operational efficiencies across the business. We remain confident that these initiatives will support sustainable growth in FY '27 and create a strong foundation for FY '28 and beyond. With that, I will now hand over the call to Mayank Samdani, our Group CFO, who will take you through the financial performance for the quarter.

Thank you, Ganesh, and good morning, everyone. I will now take you through the financial performance for the first quarter of FY '27. We have started the year on a strong financial footing, delivering healthy growth across key financial parameters. Total income for the quarter stood at INR 1,207 crores, registering a growth of 18% over the corresponding quarter last year. EBITDA increased by 26% year-on-year to INR 106.3 crores, reflecting improving operating leverage and better asset utilization across our manufacturing platform. Profit before tax grew 33% year-on-year to INR 56.6 crores, while profit after tax increased -- also increased 33% to INR 42.8 crores, marking our highest ever quarterly PAT. This performance is a testament to the resilience of our diversified manufacturing platform, disciplined execution and improving operating leverage across our businesses. The quarter numbers were impacted due to cost pressure faced in our footwear business arising from higher raw material costs and revised wage rates, which totaling to around INR 6 crores impact for Q1 FY '27. We have been proactively addressing these challenges by securing alternate source of raw materials, working closely with customers on appropriate cost pass-through mechanism and driving operational efficiency across the business. We expect these initiatives to progressively mitigate the impact of these temporary headwinds and support margin recovery over the coming quarters. In spite of these headwinds, the quarter performance is satisfactory and encouraging. From the capital allocation perspective, we continue to follow a disciplined and customer-led approach to investing with clear focus on returns, capital efficiency and timely commercialization. As Sameer highlighted earlier, we have planned approximately INR 340 crores for new projects during FY '27 in addition to the project carryforward from last financial year, bringing the total for this year to nearly INR 500 crores already. After having executed the record CapEx in financial year '26, it appears that FY '27 will be larger than the previous year. Supported by improving utilization of recently commissioned capacities, healthy execution across our project pipeline and sustained operating leverage, we remain confident of delivering our FY '27 profit after tax guidance of INR 200 crores to INR 220 crores, representing the healthy growth of 34% to 48% over FY '26. On the accounting-related matter, the duty inversion in GST continues to affect our cash flows of some of our business units. As the steps we have taken to address these issues, we will continue to see higher growth in our profitability numbers as compared to revenue numbers. With that, we would now be happy to take your questions.

[Operator Instructions] We have first question from the line of Faisal Hawa from H.G. Hawa & Company.

So Sameer, with the GST inversion problems and even manufacturing becoming more difficult by the day, do you feel that we are now in a position to negotiate better terms from our customers with regards to ROCE, ROE or even some kind of equity funding from them so that it reduces the risk of our business? And second is, to what extent we will try to do some backward integration like we did for the cones in the ice cream? And third question is whether we will do any kind of revaluation of assets because many of our factories are very old and depreciated. So -- but their actual value on the books must be much more. So, is there anything of that also in your planning?

So, 3 questions. Let me try and address all of them. The first one being about backward integration. You're absolutely right. We did start this journey with the acquisition of the cone manufacturing facility for ice cream and the setting up of the stick manufacturing facility in Lucknow. We've had actually very good experience in the last 1 year, where not only have we managed to get our existing customers to start sourcing from these 2 units, but we've also been able to seed new customers who are currently not the customers of our contract manufacturing business. So, I think backward integration for us will be an interesting avenue for us to explore, not only to increase the wallet share of existing customers, but also to be able to cross-sell to some other customers. So, we are actively looking at this -- how we can grow in terms of the backward integration, and we'll come back to you in the near future of specific plans along that line. Second, in terms of the GST inversion and manufacturing becoming difficult in general, yes, you're absolutely right that the GST inversion is leading to some amount of cash flow getting stuck across food industries. I'm not so sure whether that can be the only driver for people to outsource contract manufacturer products. However, given the diversity of the products that we have and our relationships with some of these brands, we are hoping that we are a little bit better placed than some of the other players in terms of handling this GST inversion. And as far as your third question, Faisal help me with your third question, please?

Revaluation of assets.

Yes. So Faisal, obviously, there's been no revaluation of the assets. And yes, you're right that a lot of these assets have been procured over a long period of time. Our business model is not contingent on that revaluation. But yes, that money definitely sits on the balance sheet and will get unlocked at some point of time.

So, my question with regard to inversion of GST was more leaning to the fact that can we have now better terms from our customer because we are dealing with many more intangibles now and plus competition is also weakening.

So yes, Faisal, the second and the third part is right, which is that we are dealing with more intangibles and competition is weakening. But is GST inversion the cause of that? That's where I'm not agreeing with you. Definitely, as we improve our scale, as we diversify our customer base, as we look at various products, we should start seeing some amount of improvement in terms of our profitability margins, et cetera, especially on the capital-based ratios, which is ROE, ROCEs. That is a given. I am still not sure whether GST inversion is going to be one of the tailwinds for that.

This investor presentation has also been done very well. A lot of changes in it and much more easier to then go through.

We have our next question from the line of Abneesh Roy from Nuvama.

Congrats on good numbers. My first question is on the cost and wage headwind. So, ex of the footwear do you have in contract in terms of pass-through of the new labor code or the cost inflation because of the Middle East crisis because you have mentioned only footwear area.

So Abneesh, as you are aware, most of our contracts other than shoes, we have a pass-through mechanism. And as a result, whether it is the changes in the labor code or whether it is the changes in the inflationary aspect of Middle East crisis, et cetera, we've been able to successfully pass on those costs. In case of shoes, the arrangement is slightly different. And that's the reason why we've been saddled with not being able to pass on those costs. I also want to just delineate the fact that this particular quarter was not affected by the new labor code. It was affected by a very local problem, which was that in the NCR and especially in Haryana, the minimum wage rates were changed. And as a result, the rates were increased by nearly 30-odd percent. And since the quantum of increase was so high, it was very difficult even in a normal business to be able to pass this on. In case of a shoe business where purchase orders and prices are confirmed nearly 6 months in advance, it was virtually impossible for us to be able to pass it on. However, we've been successful. Our customers are understanding this. And starting from this quarter, we have been able to successfully pass on the effect of both the increase in material as well as the wage increases.

One follow-up here. So, in your contract going ahead, can you build this structurally in your footwear contracts or there the industry works on separate contracts, as in, separate terms?

So, it unfortunately works in a separate paradigm, Abneesh, because these products are made at least 6 months to 8 months in advance for the season and the MRPs and orders are taken by the brands that much earlier. So any kind of change in the middle of the season is just not part of the industry playbook.

Understood. Second question is on this INR 340 crore new project win. So if you could elaborate which of the 4, 5 segments which you have bulk of this is? Is this largely ice cream and footwear?

Abneesh, Ganesh is going to answer that.

Yes, Abneesh. So the breakup that I told you would be -- for food and beverages, it's going to be INR 210 crores spread across 5 units, Coimbatore, Mysore, Goa, Aurangabad and Hyderabad. This would be for the beverage part. In ice cream, we have -- it would be INR 80 crores at Panipat. And in Home & Personal Care, it is INR 50 crores at Lucknow. This would be again for a bar and a liquid line coming up in Lucknow. This is a breakup of the INR 340 crores.

Sure. One small follow-up here. Recently, what we have seen in foods is the regulator has been clamping on some of the terms like 100% pure, natural, et cetera. I wanted to understand as a manufacturer, do you face any risk from this because they have set a deadline also by which time this has to be withdrawn from the market and stopped also. Any risk to your numbers because of this?

So our arrangement with most of the brands is that any kind of label claims, any kind of marketing is under the purview of the brand. And as a result, while we are definitely party to any of these notices, there are no risks that we assume for any kind of claims made by the brands. So the short answer is that no, it doesn't affect us at all. The slightly longish answer is, I think the FSSAI cleanup of the food sector will lead to some amount of disruption in terms of the brands. But I think in the long run, it will help all of us because the products and the production will move towards the organized market more and that should help us.

We have our next question from the line of [ Surbhi ] from [ Bellweather Capital ].

Congrats on great execution. My first question is on the shoes business. I wanted to get a sense, where are our capacity utilizations there right now? And since you've mentioned that there's a strong order book for H2, can you give some color on -- is this coming from the existing logos that we have? Or have we won any new logos? And post this order book, where will our capacity utilization in shoes business would be at?

So, capacity utilization in the first quarter was obviously not up to the mark. I think it was affected by a couple of things. One, because of the availability of material across all the imported components and the disruptions in terms of the freight, et cetera, we had a very poor capacity utilization in the first quarter. However, I'm happy to say that starting from something like August onwards, we have nearly 80% to 90% capacity utilization. I would like to say 100%. But since you know that in case of shoe manufacturing, it's a labor-intensive industry. So, we are already trying to ramp up our capacities by employing more people. We have a full order book. This is on the back of a couple of things. One, yes, there have been new customer wins, both on the domestic front as well as multinational companies who have now started working with us. I think that's a very encouraging sign for us. We've been able to broad base our customer base in the last 1 or 2 quarters. And I think that's going to play out in the next 6 months. And I know that there's a lot of unease about the shoe business and especially what we've been up to in the last 1, 1.5 years. And I think what we've done is we've been able to consolidate our operations well. And I think the customers have also recognized that, which is why order books from each of our customers, the existing ones has increased. Some of the customers who had stopped doing business during the transition when we took over the company have now come back. Even our South units, which we had started and were going up the learning curve, we now have a full order book there as well. So I think, yes, the journey has been long. It has taken us nearly 2 years to get to where we are. But I think the shoe business should finally start paying off in the second half of this financial year.

Got it. Very clear, Sameer. Also, if you -- if it's possible, can you give us a sense of how much of the employee cost that we've reported in this quarter is related to shoes business? Just ballpark?

Okay. So we have about 5,000 people working in our shoe business. However, I do not have the number. In terms of quantification, the number that we came prepared for the discussion was that the effect of the minimum wages is INR 3 crores for this quarter. But -- okay, Mayank is trying to do a back of the envelope calculation. Hang on, Surbhi.

Around 35% to 40%. So Surbhi, the labor -- the employee cost of shoe division will be around 35% to 40% of the total number of Q1.

Got it. Very clear. And congrats on the new project wins in the beverage facility. Just wanted to run by a math by you and if it makes sense. So of the INR 210 crores that was going to come on stream by Q4 FY '27, one, is it fair to assume that we will expect 100% of the capacity utilization of the same in 2028? And given our ROCE threshold of 18%, is it right to say that INR 40 crores of -- out of this INR 200 crores, like INR 210 crores into 18%, INR 40 crores is the bottom line addition that can happen over FY '28 for us from this additional CapEx?

So I will address the operational issue, and I'll let Mayank give you a guidance in terms of the numbers. From an operational perspective, we expect all of these beverage units to come online by December, Jan. And that's the understanding of the customers also because, obviously, the season starts in Jan and it would be stupid of us not to be able to catch the season. In terms of the overall capacity utilization, some of these projects, and I would like to say most, but let's say, some of these projects are on an anchor tenant basis, which means our capacities are underwritten by those principles. So unless we screw up and we actually are unable to start the project in time or we are unable to produce, I think capacity utilization should not be a problem for any of those units. In terms of the extrapolation of the number…

Surbhi, the gross number, the denominator is -- numerator is EBIT, not the PAT. So EBIT will increase by 18% on the investment which we make.

What he's trying to highlight is that we will continue to maintain a 1:1 debt equity ratio even for these projects. And as a result, there will be some outflow on account of interest.

[Operator Instructions] Next question is from the line of Ankit Dharamshi from RNM Capital Trust.

I think we have made significant changes in the presentation. So again, this is not a question. Just some suggestion, if you can kind of break out utilization? I mean, like you just mentioned about the shoe business, how it was impacted. I mean it will give a better visibility and a great amount of clarity for us. Also, you can see that CapEx and gross block has been detailed out, but that's a suggestion that can be implemented in next quarter.

So let me address that right away, Ankit, that in terms of capacity utilization, the reason why we were so forthright in case of the shoe business and why we are so reticent in terms of giving out the information for the others is because in case of the shoe business, it's a completely shared manufacturing site. So as a result, when we give out capacity utilization numbers, we are not making a commentary on which of our customers is doing well or which is not. On the other hand, when we start giving out capacity utilization numbers for some of our dedicated factories, it then ends up becoming a proxy for how our customer is doing or it ends up becoming a way of gauging the number or the production volume of our customer. And that's why we tend to avoid that. I take your suggestion, but I really am not sure whether we'll be able to give any more detailing as far as capacity utilization is concerned.

We have our next question from the line of Abhishek Mathur from Systematix Group.

Congrats on the strong business expansion. Just on this -- again, on this shoe business, the raw material cost impact, which you have talked about, just wanted to understand this better. So, you said that shoes are made 6 to 8 months in advance, and so mid-season changes are a bit difficult, and we are negotiating. But just for my understanding, how does the mechanics work here? Have we not contracted for the raw materials for that in -- 6 to 8 months in advance? And if there is a lag, then is it a difficult negotiation that has to happen for us to get that amount with a lag at least? So, I just wanted to -- and also, thirdly, is it that whenever in the shoe business there is such an event which happens which causes our raw material cost to suddenly inflate, it will be similarly equally difficult for us to maintain profitability in the business? Just these 2, 3 questions around this, please.

So, Abhishek, Ganesh will address the question in terms of how -- what prices got affected and what's the overall buying process in terms of shoes.

Yes. Abhishek, First of all, let me tell you that the shoe industry works on a fixed pricing for the season. That means the prices for the shoes are fixed almost a year in advance. The development starts a year in advance, the prices are fixed almost a year to 6 months in advance. And the rates of the raw material packaging material are also fixed. However, if there is a change in the rates, the brands do not change the prices of the finished goods. I mean the impact cannot be passed on to the brands like what we do in our other business categories. This is prevalent in the shoe business. However, what we are trying to do, for example, in shoes, let me be specific about this, a lot of material we import. We import almost 50% of our raw materials -- fabrics, laces, eyelets, soles, a lot of incoming labels also be import. Here, because of the hike in raw material costs, because of the changes in sea freight, the brands are not in a position to absorb the cost. What we are doing now, we are in discussions with the brand for the coming season to tell them -- to convince them to absorb some of the cost and which they have agreed. Maybe going ahead, we might be able to pass on the cost to the brands. What is your next question, Abhishek?

And Abhishek, just in terms of the normal process, this will work both ways, right? So, the inertia for not changing prices will work in our favor when hopefully, at some point of time, the Middle East crisis goes -- gets resolved and prices start coming down. And in that case, we are hoping that the inertia works in our favor as well when the commodity prices come down. In terms of the overall negotiation, we do build in some kind of inflation, which is expected in any of these pricings. However, obviously, these kind of black swan events where the freight rates nearly doubled or the Middle East crisis led to polymer prices increasing by nearly 50% or 60%, these kind of scenarios are not baked into the pricing ever.

Right. So is it fair to say that out of all of your business segments, probably shoes is the one unique segment which requires that 8 to 12 months of preparation time, is labor-intensive, and so therefore, this kind of impact would happen mostly in the shoe business and not in the other divisions?

Absolutely, Abhishek. In fact, I would go as far as saying that only in the shoe business and not in any other business.

The next question is from the line of Akhil Parekh from 360 ONE Capital Markets.

And once again, many congratulations for the entire team for the sharp execution, what we have been seeing for the last many years. Sameer, my first question is slightly broader, right? I mean we have seen the scaling up of company from INR 500 crores of top line to probably INR 4,500 crores, INR 5,000 crores this year and from a bottom line of INR 12 crores to INR 200 crores this year. How has the perception of our customers and clients changed over the years? How it stands now? And how do you see that, say, from next 3 to 5 years' perspective? That's my first question.