LT Foods Limited (LTFOODS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the LT Foods Limited Q2 FY '22 Earnings Conference Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumant Kumar from Motilal Oswal. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and a very warm welcome to LT Foods Limited 2Q FY '22 Post Results Earnings Call hosted by Motilal Oswal Financial Services. On the call today, we have management team being represented by Mr. Ashwani Kumar Arora, MD and CEO; Mr. Vivek Chandra, CEO, Consumer Business; Monika Chawla, VP, Finance and Strategy; and Mr. Sachin Gupta, Group Finance Controller. We will begin the call with the key thoughts from the management team. Thereafter, we'll open the floor for Q&A session. I would now like to request the management to share their perspective on the performance of the company. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on our earnings conference call. 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 the 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 6 months financial year '22 performance. Our consolidated revenue for 6 months was up by 3% at INR 2,545 crores versus INR 2,475 crores in the 6 months financial year '21. This is on account of increased sales from our India business, backed by the recovery in the HoReCa business and the Organic segment. The gross profit was up by 7% from INR 809 crores to INR 866 crores. The margins were up by 136 bps to 34% due to change in product mix and due to partially passing on hike in the freight cost to the consumers. The company did an additional investment in the brands amounting to INR 12 crores. And also there was an increase in the freight cost that led to an increase in the other expenses that were up by 188 bps versus last year. The EBITDA margins were down by 101 bps to 12% versus 13% in 6 months financial year '22, stood at INR 305 crores. The company has generated significant free cash flow amounting to INR 478 crores, up by 22%, driven by strong performance in 6 months financial year '22. That has led to a decline in overall debt by INR 301 crores. The finance costs reduced by 34%, and the overall fund cost was down by -- from 6.3% to 4.3%. The PBT margins were down by 45 bps to 8.4% versus 8.9% in 6 months financial year '22, stood at INR 214 crores. The PAT stood at INR 157 crores, while the margins contracted by 30 bps to 6.2%. The earnings per share stood at INR 4.67. The cash profit was up by 1% from INR 212 crores to INR 215 crores. Now I would like to highlight the key ratios of our balance sheet. The debt equity ratio improved from 0.64 to 0.43x as the overall debt of the company was down by INR 301 crores to INR 878 crores on the yearly basis. 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 between 2 to 3x, which stood at 1.4x versus 1.8x. The current ratio has also improved significantly to 2.04 from 1.79 last year. The return on capital employed stood at 17%. And the normalized return on capital employed on account of insurance claims stood at 18%. The return on equity stood at 15.5%. On a quarterly basis, the consolidated revenue for quarter 2 financial year '22 stood at INR 1,323 crores, up by 7% on account of increased sales from our India business, backed with the recovery in the HoReCa segment and the Organic segment. The gross profit was up by 11% to INR 408 crores to INR 453 crores. The margins were up by 130 bps to 34.3% from 33% due to change in product mix and due to partially passing on the hike in the freight cost to the consumer. The company also made investment in the brand amounting to INR 10 crores in this quarter. And also there was increase in the freight cost that led to an increase in other expenses [ that raised ] 5% versus last year. The EBITDA margins reduced by 109 bps to 11.9% from 12.9% versus last year. There was a reduction in the finance cost by 29%. The overall fund cost was down from 6.3% to 4.3%. The PBT increased by 2% to INR 111 crores, while the margins contracted by 42 bps to 8.4%. The PAT increased by 4% to INR 81 crores, while the margins contracted by 18 bps to 6.1%. Now I would request Mr. Ashwani Arora to share his thoughts on the business outlook.

Thank you, Monika. Good afternoon, and thank you for joining us on the call today. The company is performing well and in line with this annual plan across all its segments. Basmati and Other Specialty lines, Organic and Health & Convenience. The Basmati and Other Specialty rice segment, led by our flagship brands, Daawat and Royal and other regional brands such as Heritage, Indus Valley, 817 Elephant, Rozana, Devaaya is growing. In India, we have witnessed a significant growth in our consumer business, which was up by 31% versus last year. With the economy gradually opening up, the HoReCa segment has recovered substantially and has now bounced back almost to the pre-COVID levels. The small pack business was up by 9%, and the large pack business almost doubled versus last year. In the international market, this segment has performed well across all geographies, being U.S., Europe, Middle East and other parts of the world. The Organic segment witnessed a growth of 28% versus last year. LT Foods has been consistently capturing a significant share in this space as well. The Health & Convenience segment also grew by 36% versus last year. The product portfolio includes oil Royal ready-to-heat, Daawat sauté sauces, Daawat Cuppa Rice, Kari Kari. All the products have been very well accepted by the consumer, and we are optimistic on this segment's growth trajectory. The company will continue its journey of creating a strong, progressive, sustainable, profitable and growing business across all geographies. Thank you. Now we open the session for questions and answers.

[Operator Instructions] We have the first question from the line of Sudhir from Right Time Consulting (sic) [ Consultancy ] Services Pvt. Ltd.

Congratulation for good cash flow and repayment of the debt. Sir, my questions are like -- we are always trying to improve the margin, but it is not reflecting in the results. And it is -- if you see the EBITDA margin, it is down this year, but it is not improving. So how do you see EBITDA margin going forward once this freight cost and logistic costs are stabilized?

Sudhir, if you have gone through the presentation, we have 3 revenue segments, which is Basmati and Other Specialty rice. Second is Organic. And third is this new product we are developing. So if you see, for basmati, the margins are improving year-on-year. The margins have improved from [ 13 ] bps, 13.6% to 13.8%. The hit we have got in Organic business. And there are 2 reasons for that, and that we think is an exceptional, and we will come back to the normal margin. In Organic business, we have got 5% hit on EBITDA margin, and that's mainly because of -- the input cost has gone up and the steamer freight has gone up. So -- and the third vertical, which is the new business on the convenience platform, that's a negative EBITDA. So overall, in the medium to long run, we are seeing, in absolute term, the margin will improve.

Yes, it has improved in absolute terms. But in the percentage of what is our aspiration margin going forward, for the next year, what we are aspiring for?

So in the next 5 years, we have given ourselves that with all these revenue streams, we will be improving in the range of 150 bps because the new line of business will be -- in the next 5 years will be a negative EBITDA margin. But the Basmati and Organic business will improve year-on-year.

So next year, you'll see the improvement in the EBITDA margin?

That's what we are targeting.

And sir, what is the quantity -- the volume growth for this quarter or degrowth maybe in all your verticals because it is...

It's very muted. If you see the Basmati in the first half year, it was a very pent-up demand in -- especially in Europe and America in the -- and we are very happy that we are able to sustain that growth because in that year, we have grown at a company level 25%, but in Europe and America more than 25%. So quantity growth in absolute from year-on-year is almost muted.

If you compare the quarter-wise, this quarter as compared to last quarter, if we exclude the first quarter and include this quarter compared with the last quarter, so it is a growth of 5% in quantitative terms. If we remove the COVID effect of the last year and reduced the COVID effect of this year, so it is a 5% quantitative growth.

Now that base effect of the COVID is stabilizing in next -- last December, there was no COVID, like, pent demand. So do we expect some good quantity volume growth going forward for the next 6 months?

So India, as I said, we have grown over last year, 31%. That's only because of the COVID impact is going, and we are expecting that we will grow better than the category.

Yes. And sir, one last request from our shareholders' side. In the dividend policy, you are saying that percentage of stand-alone profit, but see, sir, majority of profits are coming on the consol level. So if you can consider the consol profit on the dividend side, it will have a great impact on the shareholders' value. So that's my suggestion.

Sudhir, your suggestion is well taken, and we will look into that.

We have the next question from the line of Sarvesh Gupta from Maximal Capital.

So sir, this quarter, of course, we saw some increase in the gross profit margin, but that was more than nullified because of the freight increase. So what is the excess amount of freight that we would have paid for this quarter and for 6 months compared to, let's say, last year? Can you please quantify that?

I can tell you what is the percentage. The freight cost -- let me give you freight -- the last year was 4.2%, and this year is roughly around 6% of the revenue.

I mean last year, it was 5.5% of the revenue. Currently, it's 7.2%. So there is an increase in the 170 bps of freight cost as compared to last year.

Okay. And from this quarter, have we seen normalizing -- this normalizing? Or what is the situation now? When do we expect this to normalize?

The freight market has not yet normalized. So we are waiting for another 3 months. We are expecting that it will come down because this is something very exceptional. Freight market also is saying that it will -- it should become next year normalized. It has started softening, but not to kind of original level.

Understood. Second thing, which I could not understand, is that since we have a new product business, we always invest in our brands. So that's a regular sort of investment or other expense that we book. So what is this additional investment in brands, which is up by 70 basis points?

So not -- this year, in the first 6 months, we have released a new campaign on Daawat. And that's why it was -- the first 3, 4 months was very heavy because this is a new proposition we have. Vivek, you wanted to add into this?

[indiscernible] on what we have said that we are continuously investing on the brand. And with a new campaign, we have a much sharper proposition, which will get us more consumers and more market share, then we put an investment level of spend on it.

So this additional investment will go away from the current quarter?

[indiscernible] marketing actually are being done up, but the [indiscernible] really works in a long...

Sir, your line is not clear. I can't hear you.

So he is in U.S.A. So you have to -- so yes, please. Continue Vivek.

I'm saying exactly the -- exact spendings are to be finalized. But we will be continuing with the higher level of investment behind the brand.

Okay. So this 70 basis point of additional investment will continue for the foreseeable future?

The higher level will continue. Exactly how many [ assets ], et cetera, has not been finalized yet.

Okay. Okay. Understood. And sir, the second request was that now our debt-to-EBITDA has actually fallen down considerably to 1.4x. Now today, our earnings per share is INR 10. So if you look at what is the earnings yield at the share price, today, you're getting share at 14% yield. And against that, our post-tax cost of debt might be 5%. So instead of paying down the debt so massively, when most of the debt is anyways working capital debt, which is there as per the working capital. So instead of saving 5%, you should probably do buyback of your own shares, which...

So we're evaluating. We are evaluating. We are evaluating.

Sir, for last 3 quarters, our share price has been trading on such attractive yield, while we have been paying down debt, saving 5%, which is not going to meaningfully save any cost for us. It is much better if the company takes a decision on this aspect. And buybacks, the share price, which is trading at 14% yield, sir. So you will save much more for the shareholders by reducing the number of shares, which are there in the market.

So Sarvesh, a very good suggestion and suggestion well taken. And there are 2, 3 opportunities, which we are evaluating. And we are very clear, this is a good strategy, too, and we are evaluating. That's the only thing I can say at this moment.

Okay. And sir, my final question is that one thing, which I could not understand fully, is how come the gross margin of our Organic business and our Health & Convenience segment lower than the rice business. Because I was expecting these to be much higher gross margin business because these are premium products, and these are not at all commodity-like products, which are facing competition. These are pure branded products.

Right, Sarvesh. First, I will comment on the Organic. As I said, Monika just told that we have got a hike in the input cost. Normally, the gross margins are in the range of roughly above 30%. And it will come back. That was exceptional in Organic business. And on the -- this NPD, the benchmark for us is above 35%. But I think in the last -- the marketing has taken a call to grow the business. And then they have taken a marketing call on that.

Okay. No, I was thinking that maybe the...

But the gross margin, as per our plan, all the NPD will be more than 35%. Vivek, you wanted to add into this?

Should I be [indiscernible] superior gross margin. However, what we are seeing there is also that there are some NPDs, which are -- which -- the products that we launched in this quarter. So there was a part of the expenditure that you're seeing in [indiscernible] in the last 6 months. If you [indiscernible], we are giving certain attractive client price offers, and that impact [indiscernible] gross margin. But fundamentally, the profitability of the new products is at least at 35%.

Okay. Okay. Okay. I was thinking that over the long term, our gross margin in the non-basmati rice business should be like 50%, 60% or so because these are very health-oriented and high margin. And I think 35% is what -- 30%, we are anyways earning in our rice business also. So is there an aspiration to reach that sort of a gross margin business? Or this is more like a 35% sort of a gross margin business?

So we are -- you could do 50% or 60% gross margins, but those become very niche products. So we are looking at the [indiscernible] things are those with great volume, great business potential, which has been coming with a lot of [indiscernible]. And so there is a balance that we have to strike between margin and the price at which we will develop the offerings to the consumer. And we've chosen a path, which makes us robustly profitable, generates resources in the long term, which can sustain the growth as well as deliver profits, but also have a very large base of consumers in our business.

Understood, sir. What percentage of your Organic business would be international versus India, sir?

Almost except the byproduct, so all the sales in Europe and America.

[Operator Instructions] We have the next question from the line of Nilesh Doshi from GL Capital.

Is it possible to quantify the revenue out of HoReCa business in this quarter and the half year?

At the moment, we are not ready, Nilesh, but we will let you know.

Because what I observe is from the volume growth that the volume growth has come largely from HoReCa. So -- I mean I want to -- is it that we are saturated in the basmati penetration business and we would not see any growth in basmati going forward, India as well as globally?

No. If you see, I think I have told that in our small PAT business, we have grown by 9%. And overall, we have grown 31% as a company. So if you ask me, and Vivek, he can add into this, as per Kantar, we are adding new homes and we are improving our share. So the category is not -- the category is growing, and we are also growing.

Yes. So I'm, sir, excluding other products, that is Organic and the small pack. I'm saying, particularly basmati, are we seeing a saturation kind of a situation?

No, Sachin (sic) [ Nilesh ]. As I said, the first half year, it was a pent-up demand, and we are able to -- that was an exceptional, and now it has become normal. And especially in India, as I'm repeating, our -- we call it 2 business, one is consumer, and one is HoReCa. So the HoReCa has just been doubled, but the consumer business is equally growing.

Okay. And even, sir, you expect that to happen in U.S. and Europe?

U.S. and Europe was more -- I think it was not having impact of HoReCa. Overall, the bigger part of HoReCa is in India. Overall, as a company, we are dependent on 10% to 15% on HoReCa. But India is almost 25%. And that has -- doesn't have any impact in...

Yes. So sir, next year and going forward, can we expect double-digit growth in basmati, particularly basmati?

That's what the effort is we are putting in.

Okay. Sir, second is on the EBITDA and EBITDA margin. And I mean yes, you did explain the freight cost and other expenses. But the point I just want to understand is that is it very difficult to even increase the price by 2% to 3% point? I mean is it so difficult and so competitive products that we can't even raise prices by 2% to 3%?

I think...

Sir, let me -- what we have observed is, you see, even the paint companies or other FMCG companies, durable, they have taken price increase from 4% to 12%. And across the world, you see anywhere in any country, everybody is passing on the cost push. So only what we are observing in our case that we have not been able to pass through the costs. So is there any such a competitive landscape or something else which you are driving through?

No, this is a very, very strategic call we have taken to take only this kind of hike that we wanted to grow our share and take share from the competition. That's a strategic call.

[Foreign Language] Because I thought that even a $1 price product, if we increase by $1.05, I mean, consumer is not affected at all.

I think in the history, we have seen the input cost has gone by 10%, 15%, and we were able to pass on that price. But this is a very strategic call.

So are you, sir, now looking to pass through or take a call going forward by increasing the price?

Again, we'll review and take a -- yes.

We have the next question from the line of Aman Madrecha from Augmenta Research Private Limited.

Yes, sir, can you let me know about the current paddy prices and how they are looking going forward? And what is the inventory we have on books on the paddy prices? And also about the situation on the rice prices, how are the rice prices behaving? And similarly, inventory on the same, like how many days of inventory we have on books? And what is the amount of inventory we have on books for both paddy and rice?

Okay. So first, I will answer your first question, the paddy prices. Overall, this year, the crop is lesser by roughly around 5% to 7%. But with this untimely rain, a little bit crop has damaged and the sentiments are a little bullish at this moment. It depends on variety to variety. Some varieties are expensive than last year by 50%. Some varieties are expensive by 15% to 20%. And some varieties are cheaper than last year. So overall, this year, prices will be -- we are expecting the prices will remain bullish on the paddy side.

And then the prices would remain inflated, right?

Yes, yes.

And what about the rice?

So immediately, paddy is -- we'll be bullish. Rice is a converted product of that. That will be, again, accordingly that.

And what is the inventory we have on books for the paddy, the lower priced paddy and lower priced rice? Like how much days which can serve it?

I'll give this to Sachin. He will explain...

So we have a paddy of INR 136 crores in our books, and the rice is INR 814 crores.

And like -- and how much we can expect -- like what is the proportion? Like INR 136 crores -- INR 816 crores of rice would be -- like what could be the revenue from this expected, like if you sell this thing?

So we have a gross margin of 35%. So that is -- that will be equating another INR 135 crores to mark up that. So it is around INR 170 crores, INR 180 crores. So this is the seasonal and we are able to be securing for the next season.

So now if we are going to procure, we'll be procuring at higher prices, right?

We have the rice one also. So we have this top-up rice also.

So overall, paddy and rice inventories, what he is going tell is...

Around INR 1,000 crores. So it is INR 1,000 crore that of inventory.

Okay. Okay. And how do you see demand shaping up in both the Indian markets and -- like given that there was a ban -- like there was an import ban on Thailand for urea fertilizers. Like the prices were increased for urea fertilizers, given that Thailand is the largest exporter of rice. So how do you think this demand coming to us or Indian players?

So as far as our segment, basmati is almost a very specialized product, and only 80% India export and 20% Pakistan. So this is a very, very specialty rice. So it doesn't have any competitive like with Thailand or Vietnam basmati. So as far as demand is concerned, we are seeing no impact on the demand.

We have the next question from the line of [ Chetan Doshi from Tulsi Capital ].

Congratulations for good numbers to the entire team. My first question is regarding what -- any new products which you are planning to launch in the current -- coming quarter? And what impact you have compared to competition because competition is the next player, they have got almost 3 to 4x the inventory what we are carrying today. So how we shape up in the second half of current year?

So we have -- to our sales, we have inventory [indiscernible]. So we are not worried on that.

Any new product launches and any...

Not at the moment. Whatever we have lost in the 2 years, the product...

You want to capitalize on that only.

We wanted to nourish that first.

You look forward to any takeovers in the coming years, any company related to rice?

We are open to that kind of opportunity. We keep evaluating. If it makes sense strategically, then definitely, we will look and evaluate.

Yes, because we have a healthy reserve position right now.

Yes. So we -- any business will be open to all these things. And therefore, we will also be open if it will make sense, then definitely.

[Operator Instructions] We have the next question from the line of [ Rahul Talwar from AB Advisors ].

So my first question revolves around the domestic market. I would like to know when the market is opening up, what are your views, especially to the domestic market regarding the growth? And if you could explain as to what do you expect in the remaining half year?

So [ Rahul ], as I said, the -- in India, the category is growing and especially in the consumer space. But in HoReCa, it has just doubled up because -- with this cushioning of HoReCa. And we are expecting that the basmati categories will keep growing in the coming years.

Okay. Okay. Got it, sir. That does answer my question. And I had another question. So there was a legal matter pending. Can you share any updates on that?

So we all know the Indian courts are a little slow. And with this COVID, it has further delayed. And let's see, we are expecting that in this financial year, we should get some kind of verdict.

We have the next question from the line of [ Preeti Nair from JP Investments ].

Congratulations on the good numbers. Sir, my question to you is if there's any government policies or incentives we are expecting related to the business and how can we benefit from that?

First of all, thank you, [ Preeti ]. There are -- we are expecting a RoDTEP from government, the incentive that they have given in the exports. And we are also expecting -- we have almost got approved on the PLI benefit also.

[Operator Instructions] We have the next question from the line of [ Bella D'Souza from JK Investments ].

Just wanted to know, with the lockdown restrictions in some European regions and the rising cases in USA, what will be the impact on the HoReCa segment?

So as I said, HoReCa for us is not as big in Europe or America, but we are not seeing any impact of this, whatever you just explained. So it's rather the demand is slowly, slowly growing up.

[Operator Instructions] We have the next question from the line of [ Devraj ], an investor.

And limited understanding. Actually, sir, I got one question, right, that sir, in the organized retail, right, whenever we go to, example, Reliance Retail, DMart, then sir, they have got in-house brand also, right, of their own. And then they manufacture or do contract something. So sir, how our company competes or in future with these people with JioMart and everything coming?

Vivek, you can add into this. This is a very, very common phenomenon in every category. The stores have their label. But the brand has its own strength, and as Daawat, our promise to the consumer is that we will deliver you the finest quality consistently. And we are very true to our proposition, and that's how we are able to retain our consumer and acquire new consumers. And we are confident that, as a brand, both in the emotional space and on the product level, we have a better proposition to the consumer. Vivek, you wanted to add into this?

Certainly, to add to what Ashwani said, private label has -- the more generic and the more undifferentiated categories, the more is the play of the private label. Basmati, we've created, as Ashwani-ji explained, very differentiated superior products with superior propositions and emotional connect. So there will be some play of private labels more in the mass production. When people are looking for something, our brand loyalties are very strong in this category. And we are continuously investing in our brands and strengthening our loyalties and, on those, showing that we bring in new consumers into the franchise.

Okay. Sir, and one more question in organic thing. Sir, whenever on the ground level, the organic example, right, so there was a laboratory and where actual organic thing is being judged by that land being idle for 6 to 1 year, and after that, whatever, there is no fertilizer and they have used. So sir, while we are sourcing organic other produce, so do we follow same process or...

Organic has to be the way the organic is grown. And we are following -- unless and until you follow that process, you cannot call that organic. So there are certifying agencies who certified that we have followed that and they check all the levels of metrics of being organic.

[Operator Instructions] We have the next question from the line of [ Natasha Singh from Galaxy Investment ].

My question was more regarding the Saudi market. And I just wanted to know, there were some issues regarding the inventory in the past. So just wanted to check, are those issues resolved? And also, on a broader perspective, how do you plan to scale up that market?

First of all, in Saudi, there is little less export, and that is only because of the HoReCa segment was not opened. And as you know, across world, the economy is opening up, the travel is opening up. I'm sure it will get back to that. As far as LT is concerned, Middle East is in our focus, and we have a plan to grow that market.

Sir, I just also wanted to check, have the market scenario -- is the demand recovering and you're seeing good demand coming back from that market now?

In Saudi?

Yes.

So consumer space, the demand is growing, but HoReCa is, I think, subdued. We are not a big player there, but I'm reacting on the -- that [ food data ].

Okay. And how are we placed in this regard in the Middle East market regards as to pre-COVID levels?

Again, the consumer, we are growing. HoReCa is yet to recover to the -- like in India, it has recovered. I think Middle East is taking some time to recover, especially in Saudi Arabia.

We have the next question from the line of Mohammed Patel from Care Portfolio Managers.

So can you just quantify what kind of PLI benefits that you are expecting?

So what we have got a sanctioned for 5 years, we have got a INR 50 crore sanction.

Okay. And what kind of rates you're expecting from the RoDTEP government scheme?

This is approximately 1%. Sachin...

On the rice, it is 1%.

Okay. And what was this earlier?

It was never given. It was never given. It is from January 1, 2021.

Ladies and gentlemen, that was the last question. I would now like to hand the floor back to the management for closing comments. Please go ahead.

Thank you, everyone, for your continued support. Hope we were able to address all your queries. Should you have any further questions, please feel free to contact our Investor Relations team. Thank you, and we look forward to connecting with you again. Thank you, and stay safe.

Thank you, members of the management. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.