LT Foods Limited (LTFOODS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to LT Foods Limited Q4 FY '24 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Himanshu Nayyar from Systematix Institutional Equities. Thank you, and over to you, sir.

Thank you. On behalf of Systematix Institutional Equities, we welcome you all to the Q4 and financial year '24 results conference call of LT Foods. We have with us from the management team, Mr. Ashwani Kumar Arora, MD and CEO; Mr. Sachin Gupta, CFO; and and Ms. Monika Chawla Jaggia, VP, Finance and Strategy. We will begin the call with brief opening remarks from the management team, and then we will open the floor for the question-and-answer session. I would now like to request the management to share their perspective on the performance of the company. Thanks, and over to you, Ms. Monika.

Thank you. Good evening, everyone, and thank you for joining on our Q4 and financial year '24 Earnings Conference Call. Before we start with the key highlights of the quarter and the full year ended 31st March 2024, I would like to highlight that certain statements made or discussed on the conference call today are forward-looking, 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 exchange. A transcript of this call will also be made available on the Investors section of the company's website. I will now hand over to Mr. Ashwani Kumar Arora for his comments. Over to you, sir.

Thank you, Monika. We are immensely pleased to announce that LT Food has achieved robust growth in revenue and profitability for an another year. Our 3 E segment, Basmati and other specialty rice, organic food and ingredients and ready-to-eat and ready-to-cook segment have driven a remarkable 12% year-on-year increase in growth. While our Basmati and other specialty rice continued to outperform during the year, growing by 17%. Our ready-to-eat and ready-to-cook products have gained traction by growing at 23% have further contributed to our revenue growth globally. This consistent performance highlights our strategic focus on brand building, innovation, distribution and expansion. Our market share in India currently stands at 30.1 with an offtake volume growth of 11% for financial year '24 compared to the category growth of 8.9%. Additional investment on brand distribution expansion and portfolio expansion have played a key role in this success. Moreover, the number of households consuming LT Foods products grew by an impressive 11% to reach 50 lakh-plus household in India. Our brand in U.S., Royal, has grown by 20.6% as compared to category growth of 17%. Our brand Golden Star has also grown by 30.8 as compared to category growth of 11.6%. Golden Star currently has 15% market share in the Jasmine Rice segment in U.S. In [indiscernible], our revenue grew by 11% year-on-year in financial year '23/'24 by focusing on key accounts and branded business. In Middle East, our revenue grew by 42% and our brand share in premium segment has reached to 6.7% in UAE. The revenue growth has been delivered by strategic growth market UAE and Iraq driven by investment in [indiscernible]. Our food business has grown 6x since financial year 2020, and is expected to grow at a CAGR of 33%, 35%. The growth will be fueled by increased consumer distribution penetration and launch of new products. Our organic business, the revenue was hit by antidumping duty, but still I'm happy to share the team has done a wonderful job by covering up the same to an extent. We are optimistic on the future outlook of the organic business. Looking ahead, we remain focused on strengthening our business fundamentals and by recruiting more consumers. We are confident on demand side, whereas we see a marginal impact on margins on account of Red Sea, freight issue, and investment on building digital capabilities. We're optimistic on our ready-to-eat and ready-to-cook business as well. We are doubling our capacity in U.S.A. in this segment. Our strategic initiative including strengthening our core business across geography organically and inorganically, expanding our product portfolio and adding efficiency across value chain have established LT Foods as a dominant global players. We are dedicated to optimizing operations, improving efficiency and maintaining our commitment to sustainability, guided by our ethos of quality and innovation. We aim to continue generating value for all stakeholders and achieving sustained growth in the years to come. Thank you.

Now, we open the floor for questions-and-answers, please.

[Operator Instructions] The first question is from the line of Pradyumna Choudhary from JM Financial.

So I'm a bit new to the company. So most of my questions are rather a bit over a longer-term related questions. So first thing, if we look at the data from FY '18 to FY '23, our gross margins have expanded actually by 6 percentage points or so, yet our operating margins seem to be largely at similar levels. So has it got to do something with the change of...

I'm sorry to interrupt sir, there is some background noise from your side. [Operator Instructions]

So my first question relates to, if you look at your gross margins over FY '18 to FY '23 or even FY '24, they've expanded by 5, 6 percentage points and yet our operating margins seem to be a flattish zone. So is that due to some change in how we do our sales in terms of FOB or CIF or is there some other reason? Because a lot of it seems to be going towards freight and forwarding charges. The margin improvement seems to be offset by freight and forwarding charges over the years? So that's the first question. Then the second one relates to, you've given a guidance for ROE improvement to 20% in FY '25, and we seem to be on a way there. But from a free cash flow perspective, there seems to be still a big headroom for improvement. That's probably because of inventory days. So what's our plan going forward? Like where do we want to -- or where can we get these cash flows improvement from? What are the low-hanging fruits and what are we targeting really? And the third question relates to, in recent times, we've done a fair bit of CapEx, right? Like close to 3% of our sales over a 5-, 6-year period. So has it been mostly towards maintenance, has it been towards capacity expansion? Because my sense is the CapEx requirement for our business would otherwise be quite limited. So where has this CapEx been? These are my 3 questions.

Yes. Thank you. So Sachin, you can add wherever you wanted to. So I will take from your last question on the CapEx. So the CapEx mainly has gone into 3 parts. One is the capacity increase, the second is on the maintenance CapEx and third is building -- we have in the last 2, 3 years, we have build our own green energy. We have invested in solar. We have invested in biofuel generation and some part has gone into the warehousing building. So broadly, the CapEx has gone there. And we have set up our RTX plant. We have increased our RTX facility in the U.S. So that's your third question. Second is on the free cash flow. Sachin will add into that. But broadly, on the working capital cycle, we don't see any further improvement in the working capital cycle. But with the time as our Jasmine rice business will grow as our value-added business will grow, the mix will change.

Yes, you are right. And in this respect, I want to say that over the years, if you are looking at '21 to '24. Our working capital days from 232 days, now it has come down to 188 days. And what we see currently at the -- in the rice segment, this kind of inventory levels have to maintain and we have to age our inventory and these inventory levels or the working capital cycle will remain. Of course, there can be a reduction of 1 or 2 days here and there, that is possible. But our major reduction in the working capital days will come in the RTC and RTE segment. Once [indiscernible] to have 7%, 8% of our total revenue coming from this segment, which has a lower working capital cycles, then our working capital cycle will further reduce.

And coming back to your first question on the -- our gross margin has improved, but our operating margin. But if you see in the 5-year, we have improved approximately 2% on EBITDA margin from our lower side. But as in the last 4 years, we have ran through this disruption of COVID, Red Sea, that has increased our operating cost. As far as your question, do we sell [indiscernible] majority of our business is not because we have our own distribution marketing in U.S., Europe. And we sell there as a competitive landscape. So it's not like sort of balancing the operating margin on the gross margin. So we are confident once the disruption phase will be over, we will be able to improve margin. However, we are improving on our return on capital employed as 21.7 and return on equity 19.3. I hope that answers your all questions.

The next question is from the line of [indiscernible] Analytics.

So I just have few questions to ask. So I just want to know how you're trying to grow your retail presence and distribution reach like going forward? And what factors have impacted realizations this year? And what is the outlook on the export market? And can you also share more details on the growth strategy for Basmati versus non-Basmati rice?

Yes. So on the demand side, in the international market, we are optimistic that double digit 10% to 12% growth will remain intact. And your second question was on the retail and distribution in India. We have just 140,000 outlets, although we are present omnichannel and e-commerce and modern trade. But in general trade, there is a lot of opportunity, and we are working on that to increase our distribution. So this question, I have not understood realization -- so what was your question on the realization?

So what factors impacted the export realization this year? What is the outlook on export markets in the future years?

So as I told, we are optimistic on demand side on the international market as well as in India.

The next question is from the line of [indiscernible] from NV Alpha Fund.

Congrats on a good set of numbers. Sir, my first question is, if I see in the last 4 years, we have spent close to INR 841 crores in CapEx. Now I know you have given broadly where you have spend the CapEx like on energy or ready-to-eat and all of that. But can we please put numbers to those specific numbers because 841 seems to be a big number. So if you can separate the maintenance CapEx and rest, if you can give that breakup, that will be really helpful.

Sure, we can do that. But if you can just write a mail, we will -- we don't have that...

I'll write a mail, sure. Now my second question is on the international market, if I see the rest of the world seems to be -- seems to have degrown year-over-year. Is that right? And if yes, then what happened if you could just elaborate?

No, no. International market -- Rest of the world?

Sir, Rest of the world, except of Europe, U.S. and the rest of the market as well, please.

We have grown. So I think in the presentation it's not mentioned, but we have grown across all international markets as well as in India.

Okay. And another question is, if I see, there has been margin expansion on EBITDA level, which has come due to decrease in other expenses ex of raw material and employee costs, both on a year-on-year level. So I just wanted to ask what is the sustainable level and how has this come about? I mean, what costs have we reduced?

So in terms of margin, you're asking about sustainability?

Yes, Yes.

We are confident that we will -- we are confident on the...

No, no, sir, my specific question is that the other expenses have come down significantly, ex of raw material and employee cost. So if you separate those 2 costs, the remaining costs have come down significantly. I just wanted to understand what is the reason for that?

There are basically different reasons, our operational efficiency and the reduction in the freight costs. This has led to a reduction in the other expense -- other expenditure this year.

So majority of it would be freight cost [indiscernible].

I'm talking about [indiscernible] operational efficiency and the freight cost. These 2 factors, both have led to increase in my margin, EBITDA margins.

Sure, sure. Just 1 last question. Can you please give the realization in India and international both for us per kg?

So the India realization this year is 65 and the international 138.

The next question is from the line of Hitesh Goel from CLSA.

My first question is related to the -- if you look at the selling and distribution expenses and -- it's quite high for you guys as compared to if I look at KRBL, right, your competitor, which is very low, right? I understand that they have a more established brand. So can you give us some guidance how this S&D expenses could go down? And why do you spend more versus the competitor?

So Hitesh, our business order is different from the competition you are mentioning. We have our own distribution in major of the business, which is U.S.A. we do 40% of our business. And we do our own distribution marketing there as the competition sells to distributor and they have books close there. So there will always be a difference of S&D expenses as compared to them, whereas LT is consistently growing and delivering the good margins.

Okay. My second question is, sir, in this business, obviously, there is inventory that you have to keep -- want to -- have to keep of Basmati rice, right? So can you please -- I'm new to this company, so just want you to understand how do you manage the price fluctuation? Because you're buying the rice from the farmer and then you're keeping it for, say, 1 year and then selling in the market. Can you please help us understand because your margins have been quite consistent over the last 10-year period, right? So that is very encouraging. But I just want to understand how do you manage the price fluctuations in the rice business?

So Hitesh, all is what we will do, we don't do trading or speculation. So whatever we source our inventory is all for the brand. And the brand prices has in the competitive landscape, almost there is no unhealthy competition there like when the prices comes fluctuate. So basically, the strong brands help us to maintain our margins and the global presence. These are the 2...

So, sir, you will adjust the pricing according to the market and will you help us get that?

It's not -- it's a very, very consistent all in international market and as you have seen, majority of the business is not linked to the consumer prices not linked to the commodity price.

It's a trade business, is it?

It's like any FMCG branded business.

Okay. And my final question is, when I see the Daawat versus India Gate pricing like on DMart or anything else, right? What I see is that they command -- India Gate has a premium of 10%, 15% in terms of pricing versus Daawat. I'm also Basmati lover. I've always gone with Daawat because I like the taste. So just wanted to understand why this price difference, generally, between...

Normally, we have not seen Daawat commands 30% share and we are at par with the competition. So we don't discount our brand. So maybe this store sometimes do promotion on certain brands, so maybe that kind of experience. But normally, our realization at every price point is at par with premium as compared to competition and not discounting.

Okay. Sorry, just final question on ready-to-eat business. So you are saying your margins will go up to 14%, 15% for the company, just for overall company, I'm assuming, and ready-to-eat will be the large -- strong growth of 30%, 30%-plus that you are expecting, right? So can you help us understand, right now, it's not making money, it is minus 1% margin. So at what scale does it start making money? Can you help us understand the metrics of the business there, how it will scale up?

So this business is currently contributing 2.6% of my overall revenue. So this will break even at a point of INR 370 crores of business. So currently, it is contributing by INR 200 crores of my overall business. So another 2 years is required or it's getting a breakeven.

So how will we reach 14%, 15%? So after that [indiscernible] the margins [indiscernible].

In a 5-year span, we're expecting that its EBITDA margin to be in the range of 8% to 10%, then of course, it has a higher margin territory and as I've earlier explained, the ROCE is much, much better than in the rice category.

No. So, I understood that, but you said 14%, 15% for the whole company. Our Basmati margins are at 13% today and ready-to-eat...

That is at 13.5% and further to add this -- we are expecting that it to grow at 15% now over the next 4, 5 years and the remaining -- the organic segment at the 10% to we have a 13.5% to 14%. This overall will have an impact of having an EBITDA margin of 14% and 14.5% combined this year.

So basically, rice margin also goes up. And sir, Middle East, if you can share what are you doing with SALIC because that's a big market? If you can give us some sense how will you scale up Middle East?

So Middle East is our focus and that we have seen that we have grown although the base is small, but we have grown this year 42%. As far as SALIC partnership is concerned, that we all know, so the government sovereign fund, they are facilitating us to as a government, they can't do business, but they are facilitating our entry strategy in Saudi Arabia.

The next question is from the line of [ Vipul Kumar ] from Sumangal Investments.

So my question is ready-to-eat and ready-to-cook segment. You said INR 370 crores, it will breakeven. So it will break even at INR 370 crores EBITDA level or at net level?

So what we are talking about at an EBITDA level, it will be breakeven at INR 370 crores to INR 400 crores what the revenue size needs to be. So it needs to be double from the current.

So over what time frame will it double?

Two years, what we are expecting that if everything shape ups well, 2 years what we are expected.

So in FY '26/'27, we can expect around INR 350 crores, INR 400 crores in that business?

That's what we are targeting, yes.

And sir, regarding that insurance claim update, the court has ruled in our favor and insurance company has gone into appeal. But have we received any payment or we have not received any payment?

No, we have not received any payment. The insurance company has gone to the next call. So the court has heard us, we have reserved order. So maybe in the weeks time, we would have the outcome of that. And accordingly, we will will get moved forward and get the money, yes.

And sir, my next question is regarding margins for Jasmine rice. Is it comparable to Basmati rice or is it lower or higher? Any comments?

It's a comparable.

It's a comparable. And it will have a higher growth as compared to Basmati?

In America, the Jasmine market is 3x bigger than Basmati market. And historically, we have seen that growing more as compared to Basmati. And we have seen the day we have acquired the Jasmine business. Last year, we have grown by 30%, whereas Basmati we have grown by 20%.

So we have just 15% share in Jasmine. So who is the leading player in the U.S., sir?

So leading in the private label business there. And there are other 2, other Agro is a company, which is a Spanish company, $2 billion in rice. So they are competing in that.

The next question is from the line of Kavina Desai from Skyridge.

Congratulations on a good set of numbers. My first question is with respect to the share and profits of JV and associates line item, we see a sharp decline in profits this Q4 versus previous year's Q4. But however, when we look at it on a full year basis, it did significantly well in FY '24 versus FY '23. So are such big quarterly variations in this line item a normal thing or this was unusual? Can you please throw some light on this?

This year, if you look at this year, the year or the quarter-on-quarter basis, the margins have remained consistent. There were certain -- in the last year of the same quarter, there were certain profits, which were at a higher rate. But over the year, this year, the profit has remained consistent over the quarter.

Okay. And the second question is, can you also throw some light on your current inventory situation?

So our current inventory level is that we have is 243 days of inventory and a value of INR 3,500 crores of inventory that is lying -- that is sitting in my books.

The next question is from the line of Aman from Augmenta Asset Managers.

Congratulations on a good set of numbers. So sir, my question was that, for example, if you look at FY '24, we had a volume growth of around 9% and revenue growth of around 7%. So could you highlight that going forward, what could drive the growth? Because since the last couple of years, Basmati rice prices are strong. So we are witnessing strong revenue growth. So could you break up in terms of what could be the volume growth we are witnessing? And secondly, also, how are the Basmati prices? Because like currently, it's very early because we are just early into the sowing season, so some highlight on that? And also going forward, what could be the contribution from the volume growth side, because revenue would depend on the -- revenue would depend on the value growth as well. So could you highlight on this?

So if you see the last year, we have grown by 12%, and the volume growth is 10 and value is to 2. So we are growing both volume-wise and value-wise. And in our future model also, we have built half value and half volume growth. So wherever LT foods brands and markets are, the category is growing. Be it America, be it India, be it Europe. So the the consumption of this Basmati segment is growing, wherever we are in -- Jasmine is growing and Basmati is growing. Organic is also growing. So we see both value and volume growth in the future and what we have seen historically also.

So sir, you are trying to say that going forward, around that, as you mentioned, that will grow to the tune of 10% to 12% for the next upcoming year. So you're trying to say 6% would be driven by volume and 6% of that growth will be driven by value, right?

Yes. That's -- yes. Historically, also we have done, and we are very positive that the category will keep growing and...

Okay. So sir, according to your market understanding, so how are the Basmati prices currently vis-à-vis maybe last couple of years?

Means today or as you know, the crop comes in the month of -- start from the September, October, and last year, our sourcing price was higher than the last year, around 10% to 12%, 12% higher than the last year.

So you're trying to say the current inventory which we have on books, the sourcing price of that is 10% to 12% higher than the last year, right?

Yes, you are as stated by Ashwaniji, so the current price level -- in the season, what had happened, the price crop of paddy was higher as that of the last year, but our inventory level at the current rate, if you compare it with last year, it is 5% paddy is higher than the last year.

The next question is from the line of [indiscernible] from Master Capital.

Congratulations on good set of numbers. I just wanted to understand, is there any difference in quality of Royal brand that you have in U.S. and Dabur's premium over here? Or is it same?

Yes. There are different varieties in Basmati. So in Royal, we have a very premium quality rice, whereas in Daawat also, it's a different variety of rice. There are 3, 4 popular varieties accepted in different parts of the world. So we pack different varieties in different brands.

Okay. No, sir. Why I asked is that because with the premiumization coming to India now with per capita income increasing, so is there a plan to launch if Royal is a premium than Daawat to launch the Royal brand in India? And I also see that Daawat brand is not there in U.S. So is there a reason for that or I mean, what are the plans?

No, no, Daawat is very much in U.S.A.

Okay. In your presentation, sorry, I couldn't see. And so what about -- is there any plan to get Royal premium brand to India?

So Royal will be a North America brand. They are very strong. Daawat is a very strong brand. So Daawat is present across all price points in India. And our Briyani rice, which is the most premium rice price to consumer is in the range of INR 150 to INR 190, so we are growing roughly 20% year-on-year.

Okay. And sir, my second question is, are you looking out for any more acquisitions in the domestic market or international?

So we keep evaluating. So historically, the company has been very well both organically and inorganic growth.

I mean, is there anything in pipeline? I mean in...

Nothing definite, but we keep evaluating.

The next question is from the line of Sandeep, an individual investor.

Sir, basically, I wanted to know like in your ready-to-eat business, you have said that in the next 5 years, it will contribute nearly to 10% of the revenue. So I wanted to know for the organic business, because it is a very important part of next 5 years, what is the likely amount of revenue like you contribute 2030 with total revenue of consolidated profits basically?

So Sandeep, if I understood your question right, one, the ready-to-eat and ready-to-heat in the next 5 years, we have 8% to 9% of our total business come from foods, roughly 12% will be from organic and rest is specialty will be 80% will be Basmati and Jasmine rice.

Okay. After 5 years, 80% will be a Basmati, basically?

Yes, so, Basmati category is also growing. So...

Yes, yes. I just wanted to go and get those figures. And second, sir, being an investor, I wanted to just take your guidance for next 1 year. Can we expect like [indiscernible] was very good 600 this time, can you expect 35% -- 30% to 35% increase as far as the planning and trends in next 1 year or something like that?

I can't comment on the number, but we -- as I said in our commentary that we are positive on the demand side.