LT Foods Limited (LTFOODS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the LT Foods Limited Q1 FY '21 Earnings Conference Call, hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Depesh Kashyap from Equirus Securities. Thank you, and over to you, sir.

Thank you. On behalf of Equirus Securities, we welcome you all to 1Q FY '21 Results Conference Call of LT Foods Limited. We have with us today are Mr. Ashwani Kumar Arora, the Managing Director and CEO; Mr. Vivek Chandra, CEO of Consumer Business; Ms. Monika, VP, Financial Strategy; and Mr. Sachin Gupta, the Group Finance Controller. Now I hand over the call to the management for the initial remarks, and post which, we will open the floor for a Q&A session. Over to you, Ms. Monika. Thanks.

Thank you, Depesh. Good afternoon, everyone, and thank you for joining us on our earnings conference call. I hope that you and your loved ones are all well and safe. I would like to highlight that certain statements made or discussed on the conference call today will be forward-looking statements, and a disclaimer to this effect has been included in the results presentation shared with you earlier. Result documents are available on company's website and have also been uploaded on the stock exchanges. A transcript of this call would also be made available on the Investors section of the company's website. I would like to begin by taking you through the key highlights of quarter 1 financial year '21. In spite of many challenges faced by the economy, due to ongoing COVID-19, we delivered a healthy quarter with surge in demand, increased volumes and healthy margins across geographies, including India. Our consolidated revenue for quarter 1 financial year '21 was up by 24% at INR 1,221 crores versus INR 985 crores last year. The gross margins also expanded by 86 bps to 27.9% due to change in product mix towards high-margin products and cost efficiencies. The EBITDA margins also expanded by 52 bps to 13.3% versus 12.8% last year despite the spike in the logistic cost because of COVID. In absolute terms, the EBITDA was up by 29% from INR 126 crores to INR 162 crores, aided by higher gross profit. The PAT increased by 82% to INR 83 crores, while the margins expanded by 216 bps to 6.8%, supported by 27% savings in finance costs. The earnings per share was also up by 85% to INR 2.46 per share versus INR 1.34. We have performed exceedingly well in terms of the cash flow front as well. The cash flow generated from operations up by 44% to INR 235 crores, and a part of it was paid utilized -- was utilized to repay our borrowings. Now I would like to update you on all the efforts taken towards strengthening the balance sheet of the company. ROCE has improved by 410 bps to 18.4%. Return on equity has also improved from 12.4% to 19.6%. The debt equity ratio improved from 1.02x to 0.77x as the overall debt of the company was down by INR 200 crores to INR 1,282 crores on a year-on-year basis. Long-term debt to equity has reduced to negligible levels of 0.12x from 0.15x last year. This is to reiterate that majority of our debt is working capital debt, which is required because of the nature of our business, and our focus is to maintain the debt-to-EBITDA ratio to less than 3x. The debt EBITDA ratio for this quarter is 2. The current ratio has also improved significantly to 1.6 from 1.50 last year. Because of our continued focus on the working capital optimization, our net working capital -- investment capital has reduced by 51 days to 183 days in this quarter versus 233 days in financial year -- quarter 1 financial year '21. I now hand over to Mr. Chandra for the further business update for quarter 1 financial year '21.

Thank you, and good afternoon to all. The quarter revenue growth of 24% comes from all segments of our business. The Basmati and Specialty rice segment of our business grew at a very strong 20%, bolstered by the growth in demand, especially in our international business. Organic business grew by 79% versus quarter 1 of FY '20. And the third segment of new product business has doubled to now become near 2% of our revenue. All our business entities have performed well during this quarter. Our India consumer business saw a good growth in quarter 1 FY '21, resulting in our increase in our market share to 27% from 24.5% in the previous quarter, as reported by AC Nielsen. Our market share, as per Nielsen, in the rural segment has also increased from 31% to 44% in Q1 FY '21 versus last year quarter. Overall performance in India was impacted by the near-nil sales to hotel and restaurants, i.e., the HoReCa segment. Sales to HoReCa have been adversely impacted globally due to the pandemic, but we felt the impact higher in India because we do a larger percentage of our sales to HoReCa in India as compared to the other markets. We have seen some pickup in HoReCa, but it will take a while before this business recovers to previous levels. HoReCa business also carries a higher sales realization. And this change in the sales mix away from HoReCa has also resulted in a lower overall sales realization in India during this quarter. The consumer business remains strong and has, in fact, further strengthened. In this quarter, we were able to get a significant jump in our e-commerce business based on our existing strong partnerships with the online players. Our new go-to-market approaches have been yielding positive results. And in the following quarters, these will be pushed forward more aggressively. The company has been working on various marketing initiatives and our recent campaigns of Pehli Daawat has received a lot of traction across social media, and many well-known personalities from all walks of life have participated in the campaign. LT Foods has also witnessed a good traction in its health and convenience products. The newly launched Daawat Sehat on the health platform and Daawat Rice Sauté Sauces on the convenience platform have received very positive response from the consumers in this time of eating at home and eating health foods. The company also launched a unique product this quarter, Daawat Cuppa Rice, that provides tasty and healthy food instantly. And this too has met with a very positive response. Our U.S. business saw a double-digit growth in revenue and also saw an expansion in its margins. We have a strong leadership share in North America and have built a very deep and wide distribution reach. The business leveraged this reach to perform well across all channels, including the traditional channels like clubs and grocery and the newer e-commerce channel. LT Foods has also worked proactively to ensure availability of its key products and was able to expand its consumer home penetration in the U.S. Our ready-to-heat business that we launched last year also performed very well and is exceeding our expectations, as we saw more demand for convenience products for in-home consumption. We also received new listings in chains and have thus expanded our availability and consumer base. Our RTH business saw a growth of 250% in quarter 1 FY '21 on a year-on-year basis. Our Europe business has also been performing well quarter-on-quarter in terms of revenue and margin profile. The revenue for these quarters were up 140% on a year-over-year basis, and the business has delivered another EBITDA positive quarter. Europe is working on further expanding its presence on the branded business across U.K. and Europe and supporting it with well-devised marketing and advertising plans to further strengthen the brand. The Middle East business also registered double-digit growths. Our Middle East business has performed well across all channels, except for HoReCa, which was impacted due to the ongoing COVID situation. But the HoReCa channel has seen some recovery in the month of June and is expected to further recover in the next few months. Our Far East business also saw a double-digit growth in this quarter. Dedicated marketing initiatives have been launched to strengthen our position and acquire new consumers. The company is also working on expanding its product portfolio in line with changing consumer trends. I would now like to hand over to Mr. Ashwani Arora.

Thank you, Vicki. Good afternoon, everyone, and thank you for joining us on the call today. I would like to start by thanking the LT Foods family for their continuous efforts and support over the last few months. It's truly the effort of all our team members and partners, which ensure production, supply and availability of our brands across geographies. I thank them all for their efforts, commitment and service. My colleagues have shared the result of quarter 1 financial year '21 with you. We have delivered a strong operating performance for quarter 1 financial year '21. While the quarter undoubtedly carries some impact of the COVID-led consumption spike, we believe that fundamentally, the results show the impact of our strategies in action. And while we should recognize that these are uncertain and unpredictable times, we believe that the revenue margins and profit will continue at a higher level than the last year. Our goal is to build a sustainable, profitable and growing business. Quarter-on-quarter, we are gaining new consumers, customers and the core of our sustainable business is being built. Margin expansion from efficiency, product mix and improvement in margins from scale is being delivered. Quarter 1 business growth has come from the result of our 3 strategies of growth, margin expansion and strengthening the financial metrics. The core is growing. Pandemic gave our brands increased penetration in new homes. While some of these may lapse in subsequent quarters, we are confident that this will retain most of the newly acquired homes and have strengthened our base growth trends. In current times, consumer habit, preference and spend patterns have changed. The home consumption of packaged health and convenience products have increased globally. LT Foods has also witnessed this strength and has seen a good traction in this health and convenience product. As Vivek said, the new product launched, Daawat Sehat, Daawat Rice Sauté Sauces, Daawat Cuppa Rice and Royal heat-and-eat in the United States have also performed well in this time and have gained many new consumers. This should form a new base for these initiatives to further expand and grow. Now as the season is underway, I would like to give you an update about 70%, 80% sowing of the Basmati is already completed. The crop health based on survey is normal and rainfall is adequate. As the return to the farmer was comparatively less last year, so we are expecting slightly less production of the Basmati this year to the tune of 5% to 10%. And consequently, the prices may stay from -- to the extent of 5% to 10% compared to the last year. Thank you. Now we open the session for question and answers.

[Operator Instructions] The first question is from the line of Nisarg Vakharia from Lucky Investments.

Congratulations on an outstanding result. My question was first, sir, that our -- we have seen an EBITDA margin expansion in this quarter purely because of the gross margins increasing. When do you think that the operating leverage in the P&L will start playing out for us in terms of the cost not going up as a percentage of your top line and your margins expanding even further? That's my first question.

Okay. That's the only question you have? Or you have others?

Sir -- no, sir. This is my first and I have questions relating to this only.

Okay. No Problems. So I think on this quarter, as we know that because of the COVID situation, our logistics and distribution cost have increased. But going forward, we will see some improvement of the scale in the EBITDA margin. But if you see our ROIC and return on equity has improved to 18.5% and 19.3% on the return on equity.

Sure. But we are still doing the same -- practically the same margins that we were doing at maybe 1/3 of the size of what we were, let's say, 4 years ago?

And there was another difference. This quarter, the mix has changed. If you see the India sales has declined and the export sales has increased. And in export sales, the distribution cost -- the entire cost come on our books. Whereas in India, it is on the distributor end. And that's the difference. But as I said, definitely, going forward, as we said, as the scale will increase, we will get an efficiency on the people and on whatever the fixed cost is for advertising. Yes.

Okay. Now this top line, generally, over the last 3, 4 years, sir, whenever I have seen your company, there's not too much volatility in earnings on a quarterly basis unless and until there is some one-off here and there. So this is more or less a sustainable number for us now in terms of margins probably...

As I said, our growth is led by 4 things. One is the new product portfolio, some in organic and some in the convenience platform. The second is we have acquired new homes, some acquired new customers. And some is definitely has an impact of the COVID spike consumption, people stocking up the supply chain. That will definitely have impact. But the 3 parameters, which is the new portfolio, new homes, new customers, that, we are confident, is going to stay.

Okay. See, sir, this initiative you've taken of launching this Cuppa Rice, you just launched it, right?

Yes, just 1.5 months back.

Is there any meaningful size in that right now? Or do you have a guidance on how big this can become over the next 1 year or so?

This was -- we have just built a small factory, and this was to test the market. And we are getting very good response on this. And we will see 1 or 2 months. Of course, we are looking for any product which has this good opportunity. But in this space, if you see, it's a big space where we are entering. And we're quite confident whatever the response till time we have got, we can make it big.

Okay. And last question, sir, what is the gross margin on this product versus your normal business gross margin?

So normally, whatever the new product we are introducing, the aspiration is -- it depends on the size of the business from 30% to 40% gross margin.

The next question is from the line of Resham Jain from DSP Investment Managers.

Congratulations, sir, for a very good set of numbers in this uncertain time.

Thank you. Thank you.

So I have a few questions. So first is we have seen a sharp increase in your market share overall also and within the rural market also. Is there any specific because -- or is there any specific players who have lost market share because of that we have gained? Or what explains this significant increase in market share?

So although the category has degrown by 11% because of our agility in the distribution and making sure that we are available and -- across channels wherever possible, I think the team has done a good job, and we are able to deliver the growth in our market share.

Okay. But has your competitors also, like the major competitors, 1 or 2 competitors, have they also...

I will not be able to comment on that. I will not be able to comment on that, but -- yes.

No, what I was trying to understand, is it that the smaller players have vacated the market or are larger players losing share?

I think, of course, the larger player will have, yes.

Okay. Okay. Sir, my second question is, we have seen very good season because of prebuying and consumers stocking up extra groceries, both in India as well as outside India. So how do you see the situation normalizing? Are you seeing it normalizing from quarter 2? Or are you still seeing a pretty healthy demand in the current quarters as well from your interaction with retailers and all?

As I said, the home consumption have definitely increased and that I'm sure is going to stay. And the only thing which will impact this whatever, because of the COVID spike, the stocking happen either in the homes or in the complete supply chain, that's the only -- I think the correction will come, but as far as LT Food is concerned, as I said, the growth has come from 3, 4 -- the new products, new homes and new customers. And spike is going to be corrected here.

Okay. And sir, my third question is on -- you have reduced your debt overall since last 5, 6 quarters. We are continuously seeing a fall in the debt level. Getting into next year, how would you strategize yourself? Because these are uncertain times. Will you go for growth and will it have a higher -- leading to higher inventory and higher debt? Or you will have more consolidation in this year also and further reduce the absolute level of debt? How do you see debt levels, especially in the current situation?

If you see -- yes. So if you see for the last 2 quarters, whatever earnings we are getting, cash flow, we are reducing our -- the borrowings. And if you see the -- whatever the growth we have given, so our capital employed has not increased. So therefore, the ROIC has also improved and return on equity also improved. But going forward, as you see, of course, we -- in our strong market, wherever we are operating, we are growing very responsibly and making sure that our debt EBITDA level remain in control. And in the meantime, we are not consolidating at that level that we lose our market share. So if wherever we are operating, if the category is growing and as a strong brand, we are also getting an opportunity. But we are not getting any irresponsible business where only for the sake of revenue we are doing the business.

In the absolute level of debt, sir, as far as looking at, let's say, next year or 2 years' time?

So it depends -- as I'm repeatedly saying that we will be in control of debt EBITDA will remain 2 and 3. It depends on the paddy prices and all these things. But the intention is that we should reduce our borrowings.

And sir, any full year guidance you like to just be the ballpark number? How should we look at FY '21, I suppose, because 1Q has better -- very high response. So how do you suppose...

As said, in these times, something is very difficult to predict because you never know tomorrow where lockdown and all these things are happening. But broadly, we are very confident that this year, we will be growing than last year.

And sir, one final question. We have seen a very strong reduction in the interest cost. So sir, if you can bifurcate how much is the cost of fall in the interest cost? And overall, what is the fall in the borrowing cost also?

It's a mix of 2 things. One is, of course, the lesser borrowing and other is the cost of funding. So it has reduced by?

It has reduced by 0.6%.

0.6%, it has reduced by, during this quarter.

Okay. And is this run rate so sustainable that...

On the interest cost? Interest cost, yes.

Interest cost. Yes. Yes.

Yes, yes, yes. So rather, we are trying to improve this further.

The next question is from the line of Sarvesh Gupta from Maximal Capital.

Congratulation, first of all, for a very good set of numbers.

Thank you so much.

Yes. I just had a few questions looking at your presentation. One, if I see your -- I missed the initial commentary, by the way. I was stuck in another call. So one, if I see your Indian versus international business, I think both have got very different performance metric. So we see almost a 22% volume reduction and 12% price reduction for the Indian market. And we'll see a stable price and 47% volume increase for the international business. So sir, if you can give some color on what is happening in the Indian market and the international market.

Sure, Sarvesh. I think we have said in commentary, but we will repeat that. In India, the -- we have got a hit from HoReCa business, which was a substantial means 25% of our total sales in India. But we have improved in our consumer business. So as per Nielsen, we have improved our market share by 2.7%. So -- but as far as international is concerned, we have a lesser impact on the HoReCa business. And therefore, we have improved on that across all the geographies.

Understood. And this INR 211 crore that we have got in the Indian markets. Now going forward, what is the trend that we see? Do we expect to at least maintain this? Or we see any further degrowth in pricing or...

In India, as the consumer business have gained share. But HoReCa, we have to see, as we have started seeing the improvement in HoReCa. But we have yet to see how the HoReCa improves. But overall, if you talk about the overall company, we are positive about our company.

And on pricing, sir, like we saw a 12% decline and 14% even by your few [ pure foods ].

No, no. Yes, Sarvesh, [Foreign Language] food service [ net EBITDA ], so that has a higher realization. Whereas in consumer business, our price point is 32%.

Okay. So that is because of the mix change, but otherwise, prices are stable?

Yes, yes, yes.

Okay. And secondly, sir, just for my understanding, your international realizations are much higher than your domestic realizations.

So main product mix difference and exports, different price point go in India, different -- different price points.

Okay. But since the business has tilted in favor of international business, which is almost like 80% for this quarter, I would have expected some gross margin increase. So if you can throw some color on that.

So the gross margin has improved. But as in international also, the product mix is different. We have got growth in organic business in private label business and brand business. And that's why you see our ROIC and return on equity has improved.

The next question is from the line of Jayant from Care PMS.

Congratulations for a solid set of numbers.

Thank you so much.

So my first question is on international business. We have achieved almost 50% growth in international business. Can you give us bifurcation how the usual distribution of these figures?

It's across geography, we have gained, America, Europe, Middle East and Far East. Across geography, we have gotten growth and in...

Can you give us the number of Europe and U.S....

In our organic business. So in our organic business, we have got a growth of roughly above the 50%. Yes.

Yes. That has grown 79%, yes.

Yes, yes.

Will you provide numbers for Europe and U.S., at least?

So in U.S., we have grown more than double digit. And Europe, of course, it was new, and we have grown more than 60%.

And can you tell us the realization part in case of U.S. and Europe?

Definitely, we will provide you the realization. But at the moment, these will not be...

Yes. Yes. Actually, you have grown...

Yes. Yes, please carry on.

Yes. In volume runs, we have grown by 50%. So are we willing to extend this volume in the current quarter also? It is almost 1 month past. Will the volume continue in...

Again, the same answer is that some growth has been come from the product portfolio, new homes, new customers, and some is because of this COVID situation. COVID situation will get corrected, the stock-up situation. And -- but year-on-year, we are confident that we will do better.

So what percent of growth will allocate the COVID...

Difficult situation, but definitely, we will be doing better.

Yes, yes. Sir, can you throw some any light on the organic business, which has grown 79%. What is your guidance...

So we have added -- we have added a new product portfolio. We have added the soya meal as a new product, that has given the good growth. And overall, globally, the people are becoming health conscious. And the whole portfolio has increased.

Sir, what is the contribution from soya meal?

So rough -- on the overall revenue of -- you're asking?

No, no. For the organic business only.

So roughly 25% -- 20%, 25%.

Okay. So the soya meal business added in this quarter or it is...

Soya meal last quarter was there, but this quarter has done better.

So this INR 160 crore run rate will continue in the subsequent quarters?

Again, organic business also has the impact of stock up, but we are confident in our organic business will do also good in the coming quarters.

Okay. Sir, can you tell us the share of e-commerce business in India and in the international business?

In India, we are doing roughly...

15%.

Roughly 10% to 15% of our total revenue.

And what about international business?

International businesses is small. In U.S.A., I think it's 2% to 3% of our total revenue.

Okay. Sir, can you give us debtors' figure as of June 30?

Debtors?

Sundry debtors on June -- 30th June, yes.

INR 600 crores.

INR 600 crores.

The next question is from the line of Nitin Awasthi from East India Securities.

Congratulations on a solid set of numbers.

Thank you so much.

A lot of my questions have been answered. However, the curiosity remains after I saw your presentation, the large portion of, let's say, profitability has come in and -- ratio and improvement. Correct me if I'm wrong, has come in because of the organic plus the new business? Because you have a higher and better ratios in that segment compared to your traditional businesses, am I correct?

So can you repeat? What is your question, please?

Okay. So my question is the largely -- the improvement which we are seeing in ratios and this was...

Ratios on what?

In your return ratios that you have mentioned. RFPs and ROEs on back of your organic and your new launches because...

Which page you're referring? From where you're referring?

Sorry, sir?

Continue, please.

Yes, yes. So when I look at these 2 businesses, and we had a discussion even in the last con call that these businesses have a substantially better return ratio profile, lower working capital days and then compared to your traditional Basmati rice business. And this time around, these businesses have done exceedingly well, leading to a very good improvement in your ratios. Am I correct in -- to look at it in that perspective?

Just a minute. Give me time. No, I think we have seen the improvement, both in organic and our -- the basmati rice business. Both are -- we have improved ROIC and both parameters.

Okay.

Yes.

Okay. Got it. And sir, in your -- normally, if I look at last year, all the quarters, you had a sustainable similar run rate when it came to your organic business. This time around, we are seeing a substantial jump. You had mentioned this, we can be broken down into 2 parts. One was newer product addition, which was -- one was the main one, the soya meal, which is obviously a very large-term contributor to that; and the second would be stocking up. Now if you remove the stocking up of part, what would be the sustainable per quarter run rate that you're expecting? Or are you still expecting further addition of products in this category during this year?

This year, we are not going to add any product portfolio in organic business, but the stocking up will have -- we will see in this quarter, how much impact. But more or less, it will not be more than -- of the organic revenue 10% to 15%.

Okay. Got it, sir. And sir, lastly, on your new launch during the quarter, Cuppa Rice, there was a newspaper article stating that you had got orders from Railways of India. Any other such institution orders that have flown in or inquiries that are going on?

There is a good traction on this -- on the Cuppa Rice. But till time, we are not even -- whatever the capacity we have is we have a very small capacity. We are not able to service the railway demand only. So that -- our marketing team is working on the other parameters. But we are getting good traction. That's the only thing I can add.

So the subquestion, in -- the newspaper article only stated the initial orders. So subquestion, please. There has been...

We are getting repeated orders.

Repeated orders from railways?

Yes.

The next question is from the line of [ Satish Shah ] from Lucky Investments.

Sir, I have a couple of questions. One, considering a little bit of country stocking that would have been there, what would be your best guess for full year volumes for the company versus the 4,64,000 tonnes that we did last year?

Again, as I said, a little difficult to say, but we will definitely -- not definitely. We are confident that we will do it better than last year. We will have a growth on full year basis.

Okay. My second question is, would there be a mix improvement in terms of volumes sold in international within the Middle East?