Categories Consumer, Earnings Call Transcripts, India

Hindustan Foods Ltd. (HNDFDS) Q4 2021 Earnings Call Transcript

HNDFDS Earnings Call - Final Transcript

Hindustan Foods Ltd. (NSE: HNDFDS) Q4 2021 earnings call dated May 28, 2021

Corporate Participants:

Sameer R. Kothari — Managing Director

Mayank Samdani — Group Chief Financial Officer

Ganesh T. Argekar — Executive Director

Vimal Solanki — Head, Emerging Businesses & Corporate Communications

Analysts:

Faisal Hawa — HG Hawa & Company — Analyst

Keshav Kumar — RakSan Investors — Analyst

Aakash Javeri — Perpetual Investment Advisors — Analyst

Subham Rajgaria — WestBridge Capital — Analyst

Kedia — — Analyst

Amit Chordia — World Foods LLP — Analyst

Shreyas Patel — — Analyst

Rajan Shah — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Hindustan Foods Limited Q4 and FY ’21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict.

As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sameer Kothari, Managing Director. Thank you and over to you, sir.

Sameer R. Kothari — Managing Director

Thank you very much. Good afternoon and welcome everyone to our Q4 FY ’21 earnings conference call. I apologize for having kept you waiting for a few minutes. We were having technical issues. I hope each of you and your families continue to remain safe and healthy during this COVID times. I’m joined on the call with Ganesh Argekar, who is the Executive Director on the Board; Mayank Samdani, who is our Group CFO; Vicky Solanki, who is our Head of Corporate Communications; and SGA, who are our Investor Relations Advisors.

I hope everyone has had the chance to go through our updated investor presentation, which was uploaded on the exchange and as well on our company website. Coming to the financial performance of our company. We had a record year and a quarter with the highest turnover, the highest EBITDA, and the highest PAT in the history of the company. However, the second wave has had a major sobering effect on our exuberance. The loss of life and the suffering has been a reality check and while the company and its operations have not been affected, it has made us far more circumspect than what we were earlier.

While the FMCG demand continues and continued to be resilient throughout the pandemic, the effects of the spread of COVID into the rural areas needs to be seen. With the abatement of the second wave and the expectation of normal monsoon, we believe that the FMCG industry should escape unscathed. Like a lot more intelligent people than me have recommended recently, I am hopeful that the government will take steps to stimulate demand in the rural areas by announcing some fiscal stimulus.

In the meantime, coming to Hindustan Foods specifically, all our factories continue to produce at optimal capacity utilization and we are taking all adequate precautions to maintain the safety and health of our team members. In terms of a medium-term view, I have mentioned before that this disruption caused by the pandemic will only help the concept of contract manufacturing in the FMCG industry and we continue to remain optimistic about this and about the long-term potential of the industry.

Based on this optimism, we have and continue to put our money where our mouth is. I am pleased to inform you that both the new factories in Silvassa have started production and we expect them to completely ramp up in this quarter. In terms of the new projects in UP and Hyderabad, we have unfortunately been hit by the localized lockdowns and more specifically, by the unavailability of steel in the last month or so. Our teams are working hard to ensure that we will meet the project deadlines in spite of all these hardships and we are hoping that normalcy will return soon enough not causing any serious delay to the projects.

In terms of misses, the jinx with our beverage foray continues and in this quarter, which was the peak summer season, unfortunately, the entire season has been washed out. We had a full order book for our beverage factory this year like last year, but unfortunately, we’ve not been able to produce to the full capacity. In order to hedge this risk, we have now started working on a personal care and a home care facility to be set up in the same campus. We are confident that with this new facility, we will be able to derisk the beverage business, especially the seasonality of that.

Another casualty of the COVID restrictions has been our merger application, which was passed nearly six months ago. I am pleased to inform you that we have finally started seeing some light at the end of the tunnel and Mayank will share some details on the merger of our beverage plant in Mysuru and the Malt Beverages factory in Coimbatore.

Lastly, I just wanted to touch upon some of our long-term plans. We continue to remain as optimistic and aggressive about our growth plan as we were a few years ago when the company turnover was INR20 crores. We are confident that we should be able to hit our goal of INR2,000 crores in this financial year and are working hard to set our goals for the next few years.

We had actually promised in our last call to give guidance about what we are looking for in the next few years, but this second wave is a symbolic of the phrase which I have come to love in the last few months, the phrase is, if you want to make God laugh, tell him your plans. COVID and the pandemic has upended the plans for all of us.

Having said that, we will come back to you next quarter with some more clarity on our future plans and our future goals as we expect the haze around the COVID second wave to reduce in the next couple of months. I will now hand over the call to Mayank Samdani, our Group CFO, to take you through the financial results of the quarter and the full year ended March 31, 2021.

Mayank Samdani — Group Chief Financial Officer

Hello, good afternoon everybody. This is Mayank here. I will get you through the financial results for the quarter and the full year. First, we talk about the quarterly performance of Q4 FY ’21. We are happy to share that the growth momentum in the business is on track to our guidance in spite of some of the hiccups caused by the pandemic. Our total revenue for the quarter grew by 95% year-on-year and stood at INR483 crores, which is nearly about what the guidance we have given. This was on the back of the ramping up of the Hyderabad factory, startup of the Silvassa unit, and continued increase in the raw material and the packing material prices which were passed on to our customers.

Our EBITDA for the quarter has seen a growth of 50% year-on-year, which stood at about INR27 crores as against INR18 crores in Q4 FY ’20. Our PAT has registered a growth of 95% [Phonetic] year-on-year, which stood at stood at around INR11 crores as against INR7 crores in Q4 FY ’20. Now if we talk about the performance for full year ’21, our total revenue has registered 80% year-on-year growth for FY ’21 and it stood at around INR1,390 crores as against INR770 crores in FY ’20. As compared to the last year, the company sales increased due to ramping up of Coimbatore facility, Hyderabad facility, and Silvassa facility and the inflationary effect of the input prices in last two quarters.

Our EBITDA for FY ’21 has seen the growth of 51% year-on-year, which stood at about INR86 crores. While we are able to protect our EBITDA from the increased RM, PM prices — raw material, packing material prices by passing on the same to the customer, it did affect our margins. However, the operational leverage benefited due to the ramping up of the factories helped in shoring up the PBT and PAT margins. Our PAT margin has registered a growth of 60% year-on-year, which stood at around INR36 crores as against INR23 crores in FY ’20. PAT of FY ’21 includes benefits from reversal of the excess provision of tax for the year ’19, ’20 in tune of INR3.8 crores. The same has been adjusted after the filing of the returns. The strong business performance was well supported by strong operating cash flows, which grew by more than four times to approximately INR74 crores. This was due to the strong operating performance led by optimal management of working capital.

Our net worth for the FY ’21 stood at around INR224 crores. During the year, we have focused on sweating our existing facilities, which has helped us to improve our net fixed asset turnover to more than five times. This has led to an improvement on return on capital employed as on [Technical Issues] stood at around 19%. However, we are confident to improve this return on capital employed further.

The factors that give us such confidence is that this was achieved in a year where our first quarter earnings were hit by COVID and also in an year where large part of our capex is either — is yet to deliver at the full capacity due to rather [Phonetic] of the ramping up process or it is not being capitalized still.

As Sameer mentioned in his speech, we have been constantly investing in capex. Company has invested nearly INR200 crores in the last two years. In addition, we are expecting to invest additional around INR200 crores in next one year for manufacturing of personal and home care products and the food and beverages products.

Despite constantly investing in our capex, our debt-to-equity ratio stood at 0.97% on 31st March, 2021. In this low interest regime, we will continue to use debt to fund our expansion while being completely aware of our responsibility towards maintaining the proper mix of debt and equity. With this, I will like to open the floor for the questions.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Faisal Hawa from HG Hawa & Company. Please go ahead.

Faisal Hawa — HG Hawa & Company — Analyst

Hi Sameer. Congrats for a good set of numbers and almost reaching the target at least on a quarterly run rate basis. My question is that, can you give an example of around thre capex decisions that you have refused over the past one year. This will give us an idea of how your mind runs on key capital allocation details.

And second is, is it possible that we give capacity utilization numbers of most of the factories as now we will be constantly adding factories. So it’s almost like a retail franchise where there is a same stores growth and there is new stores growth. So we will be able to better understand where the growth is coming from.

Sameer R. Kothari — Managing Director

Okay, Faisal, hello, Faisal, you asked a couple of questions. I’m going to start with the capital allocation strategy. Instead of giving you examples of decisions which we refused, I’m going to give you an example of a decision which we did and we went strong. So for example, we decided to invest in a shoe manufacturing unit, which we acquired in Mumbai. We decided to allocate nearly INR2 crores of capital towards goodwill and I think in total we paid around INR5 crores for the entire unit. This was a shared facility and in spite of our best efforts, we’ve actually made a mistake and we’ve lost money in it.

So what I can tell about the capital allocation strategy and what we’ve discussed as a Board is very simple. If it is a dedicated site, which has a take-or-pay contract, we have no limitation on the capital that we will allocate to such a project and that’s visible from the investments that we have done which are upwards of a couple of hundred crores in one particular site. If it’s a shared facility where we believe that there is a lot of potential, but there is a possibility of us going wrong like we did in the shoe factory or like we did in the Mysuru beverage factory, the Board as well as the management has decided to restrict this capital allocation to around INR10 crores to INR15 crores.

And third is that in case of this capital allocation, what we’ve also been — what we have decided as a corporate policy is that in case of shared facilities where we believe that the operating leverage is very high, we will fund this capital using equity while in case of the dedicated site, we will be using a judicious mix of debt as well as equity because we have a take-or-pay contract. So I hope that gives you some idea about how we look at capital allocation.

We are a contract manufacturer with relatively very thin margins. We are very, very seized about the fact that we cannot afford to make too many mistakes as far as capital allocation is concerned. That does not mean that we will not make those mistakes. We will, but we are hoping that those mistakes will be small enough in the grand scheme of things not to affect the working of the entire company. The second question that you asked about — I hope that answered your question, Faisal?

Faisal Hawa — HG Hawa & Company — Analyst

Yes, yes, fully, yes, yes. It in fact it more than makes me understand your thought process in allocating capital.

Sameer R. Kothari — Managing Director

Okay, the second question you asked about what capital — what capacity utilization for our sites. Unfortunately, we do not want to get into a situation where we are talking about capacity utilization or growth in a particular area or in terms of product categories just because we manufacturer for competing brands in case of other sites etc. We do not want to give away information about what we are manufacturing, how much we are manufacturing and stuff like that for obvious reasons.

You are absolutely right that as a company as a whole, we will continue to invest in more and more factories. All I can say is that as a shareholder and as an analyst, when you look at the facilities, which have take-or-pay contracts, they will continue to have the same figures in terms of growth as well as EBITDA for the tenure of the contract.

So from a same-store sales perspective, what you talked about, our same-store sales are actually guaranteed for the tenure of the contract for the next five or 10 years, we know that we will deliver the X amount of sales from that facility and the new ones will add to those sales. So I hope that gives you some idea of how to look at us in a situation where we are growing rapidly.

Faisal Hawa — HG Hawa & Company — Analyst

Yeah, I’m fully able to understand. Yeah, thank you so much.

Operator

Thank you. The next question is from the line of Keshav Kumar from RakSan Investors. Please go ahead.

Keshav Kumar — RakSan Investors — Analyst

Hi, sir. Thanks for taking my call. Sir, my first question is that if Vanity Case is synonymous to HF in terms of clients or is there a clear demarcation of it? And like the second part to the same question would be, how do you choose between HF and Vanity if you get an opportunity to board a fresh client?

Sameer R. Kothari — Managing Director

Okay, sorry, I didn’t catch your name though.

Keshav Kumar — RakSan Investors — Analyst

Keshav.

Sameer R. Kothari — Managing Director

Keshav?

Keshav Kumar — RakSan Investors — Analyst

Keshav, Keshav, yeah.

Sameer R. Kothari — Managing Director

Keshav, hi. Keshav, Vanity Case is the name of the group. As you are aware, we’ve been doing this business for nearly three decades now under the name and aegis of Vanity Case. Hindustan Foods became a part of Vanity Case only in 2012, ’13. However since 2012 and ’13, all new businesses as well as all new customers are being brought into only Hindustan Foods and not in HFL. What we had agreed in order to address the minority shareholder concerns that we will assimilate and merge all the business of Vanity Case into Hindustan Foods over the next couple of years.

We have started that process around two years ago when we did the first merger of the Hyderabad facility. We are currently at the NCLT doing the merger for one more facility of ours which is in Coimbatore and we are hoping that in the next couple of years, we will be able to merge the entire Vanity Case business into Hindustan Foods. And to just give you some more color around that, more than 90% of the Group’s business is in Hindustan Foods. Just around 10% of the business is going to remain in Vanity Case’s other group companies once this merger is done.

Keshav Kumar — RakSan Investors — Analyst

Okay, perfect sir. Sir, my second question would be, when you say being an organized player helps you — helps at your part. Sir, do you have any other competitors maybe listed or unlisted having relevant market share vis-a-vis you or better.

Sameer R. Kothari — Managing Director

So I’m hoping not better, Keshav. I’m hoping we are the best, but you’re right. Obviously, we have a lot of competition, right and I’ve tried to address this before that we have competition from regional players, people who are very well entrenched in a particular region. So when we go to a place like UP and we compete with someone being in UP who has the experience of running factories in UP etc.

We also have competition from domain experts. So when we decide to get into a beverage factory or we decide to get into an ice cream factory or we decide to get into a home care facility, we compete with people who have been manufacturing ice creams for all their lives, who have been manufacturing beverages for all their lives etc.

The aspect which set us apart is that one we are agnostic about the product. You would have noted that just in this quarter, we’ve actually started manufacturing knitted shoes, which is sports shoes, which is a completely new product category for us. We are completely agnostic as far as product is concerned. We are agnostic as far as geography is concerned. This is our first venture in UP which we’ve announced a couple of quarters ago and we’re hoping that we’ll be able to start production sometime in this financial year.

So we are agnostic about product category, we are agnostic about location and we have a very clear idea or rather a mandate from our Board that we ought to diversify our customer base enough that we are not dependent on any single customer. So I think that’s what sets us apart from our competition because you have a lot of players who focus on a particular geography or focus on a particular product or focus on a particular customer.

Keshav Kumar — RakSan Investors — Analyst

Yes, sir, I was actually about to ask that in follow-up only that is your ability to handle a diversified portfolio, but you clearly mentioned it before that only. Sir, can I ask another one, a very quick question.

Sameer R. Kothari — Managing Director

Of course, sure.

Keshav Kumar — RakSan Investors — Analyst

Yeah, so sir, a typical long-term contract for you is five to 10-year timeline, right?

Sameer R. Kothari — Managing Director

Yes.

Keshav Kumar — RakSan Investors — Analyst

So, sir, under what conditions would these contracts be scrapped before the timeline or has anything — has such a situation occurred in the past?

Sameer R. Kothari — Managing Director

So what could, yeah, I mean periodically contracts can be canceled at any point of time. The way the contracts are structured if the contract is canceled, they have to repay — the customer has to repay the entire project investment, which has been on made on the project and — I would hate to use the word compensate, but at least do something for the loss of profit that occurs because of the cancellation of the contract. Having said that, yes, we’ve had certain occassions where contracts have been canceled and yes, we’ve had the occassions where our counterparties have risen up to the occasion and met the entire contractual requirements both in letter as well as spirit.

Keshav Kumar — RakSan Investors — Analyst

Okay, all right sir. Thanks a lot, sir. That’s all.

Sameer R. Kothari — Managing Director

Sure.

Operator

Thank you. [Operator Instructions] The next question is from the line of Aakash Javeri from Perpetual Investment Advisors. Please go ahead.

Aakash Javeri — Perpetual Investment Advisors — Analyst

So, hi, Mr. Kothari and congratulations for an amazing quarter and a wonderful year. Sir, just wanted to know like is there any discussion for any investment related to the PLI scheme?

Sameer R. Kothari — Managing Director

Aakash, the PLI rule — so the PLI scheme was announced a couple of months ago. The rules have actually come in just about a couple of weeks ago or maybe three weeks ago. We are definitely trying to evaluate what we can do. We are making representation to the government for it. I am not in a position to tell you anything definite about what is happening, but as soon as something happens, we will definitely inform the stock exchanges and all of you.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, perfect. And just as a follow-up with that. So this would be only in the shared facility, right or would it even be for a dedicated facility because I’m coming from — if it’s a dedicated facility, would you have to pass on the benefit of PLI to the client?

Sameer R. Kothari — Managing Director

So that’s a very interesting question, Aakash. So in case of PLI benefits, as a contract manufacturer, it’s going to be an interesting tug of war between what — how much percentage of the benefit will be passed on to the customer versus how much will be retained by the contract manufacturer and I think that’s a tug of war which is going to happen with all the contract manufacturers who are in the market, whether it’s in the electronics field whether it’s in the home appliances or whether it’s in the home care and personal care cosmetics, FMCG field like us. I frankly don’t know how it’s going to pan out because the PLI scheme itself is too new. We’ll find out in the next, I would say in the next year or so about where and how those proceeds are split between the customer and us.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, okay, perfect. Understood, thank you so much for that.

Sameer R. Kothari — Managing Director

I don’t think — sorry, Aakash, I just clarify that, maybe I was just going round and round. So let me just clarify. I think your point is absolutely valid and bang on that I don’t think as a contract manufacturer, we will be able to retain the entire benefit of the PLI scheme. I don’t think that’s going to happen.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, okay, got it, got it. And just a question that — so year-on-year our EBITDA margins are slightly declining, but that’s due to a change in mix. So for our business, isn’t it futile to look at margins and — so as a business we should focus on our ROCEs right? Is my thought process correct in that aspect?

Sameer R. Kothari — Managing Director

Absolutely. So I’ll be happy to hand it over to Mayank who can give you some more clarity about why the margins have declined and what happened, but principally, you’re absolutely right that looking at ROE, ROCE is the way to look at us for sure. Aakash, did you need any more color on the margin profile. I’ll be happy to ask Mayank to give some color around it.

Aakash Javeri — Perpetual Investment Advisors — Analyst

No, I’m fine. Perfect — yeah, that’s perfect if Mayank could just —

Mayank Samdani — Group Chief Financial Officer

So, Aakash, yes, you are absolutely correct that our EBITDA margins have decreased, but this is majorily because of the change in raw material and packing material prices, which we have passed on to the customer, but due to the say percentage on sales, it goes down and also the mix is also as you had rightly mentioned, but we are sure that we will continue to be in range of 5.5% to 6.5% of EBITDA margin going forward also.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, perfect, perfect. And just a follow-up question on that. So is there any kind of automation or cost efficiency capital expenditure that will help us improve our ROCE going ahead?

Sameer R. Kothari — Managing Director

You have to say that again, Aakash, you said automation will help us improve our ROCE?

Aakash Javeri — Perpetual Investment Advisors — Analyst

Yes, I’m asking that is it possible for us to take on any automation on cost efficiency, capital expenditure, which will help us improve our ROCEs going ahead?

Sameer R. Kothari — Managing Director

So that’s a continuous process, right. So we are as brick and mortar as you can get. So we’re doing manufacturing. So any cost saving proposal, anything which reduces labor cost, anything where we can do some automation and do a cost benefit analysis and see if the amount of investment in the automation is repaid within a couple of years, will definitely add to the ROCE, absolutely.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, perfect. And is it fine, I just want to squeeze in another question. So in the knitted footwear category that we’ve gotten into. So traditional norm [Phonetic] is top brands like Nike, Adidas are like a Tier 1 sort of brand or like from what kind of — or are these regional players. What is the kind of customer base? I’m asking because — yeah and actually if you could answer that question first.

Sameer R. Kothari — Managing Director

So what’s happening with the knitted wear is that, thanks to the government’s Atmanirbhar Bharat plan, the government has imposed substantial import duties on import of finished goods — finished shoes from China. So not only the regional brands, all the international brands are definitely looking at Make in India, which is an evolving phenomena. We have just gotten into the category now.

One thing is very clear, we will continue to do contract manufacturing, which means we will not be launching our own brand of sports shoes or anything and we are happy to work with any customer. I mean if that answered your question. I can’t discuss with you which particular customer we’ve signed up with and how much we are manufacturing for them, but as a principle, happy to work with anybody.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, perfect. And just one last question from my side. So now with our current quarterly run rate and the capacity coming in UP and Hyderabad starting this year, so that we have coming in UP and Hyderabad starting this year, so we know the way to reach about say INR3,000 crore in annual turnover by FY ’23, just wanted to get a insight on how we plan to move from say INR3,000 crores to INR5,000 crores or INR6,000 crores in annual turnover. If you could just give your insights on that.

Sameer R. Kothari — Managing Director

You didn’t listen to my opening remarks which said that if you want to make God laugh, tell them your plans beyond FY ’23.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, fine, fine.

Sameer R. Kothari — Managing Director

But on serious note, so, in fact, we discussed it internally, we do have a target internally that we are working on. We were a little bit more circumspect in giving out this target right now because frankly the COVID second wave came as a complete surprise not only for us, but I’m assuming for the entire country. We do not want to get into a situation where we publicly talk about something and then find out that some extraneous factors something which we have no control upon ends up completely upending those plans. We will definitely by the middle of next this financial year, which means next quarter, hopefully in the next investor call that we attend, we should be able to give you some more clarity on our numbers going ahead.

Aakash Javeri — Perpetual Investment Advisors — Analyst

Okay, perfect. That’s it from my side. Thank you so much. All the best and please continue the amazing work you are doing.

Sameer R. Kothari — Managing Director

Thank you, Aakash.

Operator

Thank you. [Operator Instructions] The next question is from the line of Subham Rajgaria from WestBridge Capital. Please go ahead.

Subham Rajgaria — WestBridge Capital — Analyst

Yeah, hi, Sameer. Congratulations on the great numbers. Just one question. Building on the margins front, we have seen some decline in gross margins as well as EBITDA margins even quarter-on-quarter. If you could maybe help understand what has changed in this quarter, especially on the gross margins front?

Sameer R. Kothari — Managing Director

Okay, hi, Subham. Subham, so like Mayank was trying to explain to Aakash, when you look — so there has been some trading [Phonetic] inflation in a lot of raw material plus packing material prices in the last two quarters. What ends up happening is since our business model is that we pass on those costs to the customer, it results in an increase in sales and which results in an increase in denominator. So just if you look at mathematically, our margin percentage would go down in case there is an inflation and we are just passing on the cost to the customer.

In addition to that, over the — and this is what I’m talking about for the last couple of quarters. If I look at it over the last two years, I think the product mix and the business mix has changed completely — not completely but rapidly or significantly, a large part of our business in a couple of years ago was shared manufacturing, the shoe business and leather business contributed to a large part of our business where the margins are far more healthier than — and when I talk about margins, I’m talking about gross margins based on sales as a denominator. So the margins are far more healthier in case of a shared facility.

They get far more thinner in case of dedicated facilities and what you are seeing is a mix of both which is change in the product mix, change in the business and also inflation. However, as a company, we — like we spoke to somebody else earlier, we actually focus only on the absolute number of the gross profit and the EBITDA and we look at how we can control our opex, the operational cost because for us looking at sales, frankly — looking at sales as a metric is not the right metric for us.

Subham Rajgaria — WestBridge Capital — Analyst

Thanks, Sameer, thanks for that. And on that note, actually as you rightly pointed out that the operating cost has been very, very fairly controlled and congratulations on that, but just curious I saw that about other expenses rose sharply this quarter compared to Q3. If you could maybe shed some light there that what happened there and what do these other expenses contribute and also on your remark on the shared versus dedicated facilities, if you could help us understand how has growth been in the shared versus dedicated facilities this quarter or year-on-year?

Sameer R. Kothari — Managing Director

Sure, I’m going to request Mayank to give you the details about the other expenses and the operating margin.

Mayank Samdani — Group Chief Financial Officer

So, hi, Subham. This quarter, all the factories were running at full capacity. So obviously some of the other expenses have increased due to that but we are definitely controlling all the operating expenses as Sameer told you. So this was the major reason and the major part of these are testing expenses and other things [Phonetic], which rose sharply and because of the product mis also.

Sameer R. Kothari — Managing Director

And Shubham, your second question was yeah — second question was [Speech Overlap].

Subham Rajgaria — WestBridge Capital — Analyst

Yes, the percentage of shared versus dedicated versus shared and how has growth been in both the cases.

Sameer R. Kothari — Managing Director

Yes, Shubham, given the capital allocation that we are doing, we are investing a substantial amount of money in dedicated facilities. I think for the next couple of years, we will continue to see a disproportionate amount of growth in terms of absolute numbers in case of the dedicated business. The shared facility business for us is doing very well, but given that both as a policy as well as a decision, we are restricting our capital allocation to the shared facility business. Frankly, it will get compromised in favor of the dedicated factories.

Subham Rajgaria — WestBridge Capital — Analyst

Great, thank you. Thank you so much. That were my questions.

Sameer R. Kothari — Managing Director

Pleasure.

Operator

Thank you. [Operator Instructions] The next question is from the line of Mr. Kedia [Phonetic] from [Indecipherable]. Please go ahead.

Kedia — — Analyst

Hi, Sameer, I wanted to understand how broad the spectrum of your products is going to be right. You are now making shoes to ice creams. So, is there going to be everything in FMCG that you will make or you have some dedicated area?

Sameer R. Kothari — Managing Director

So, Mr. Kedia, we basically said that we are completely agnostic as far as products are concerned. We will restrict our business to FMCG. We don’t intend to get into contract manufacturing of phones or contract manufacturing of electrical appliances etc., but within the FMCG space, frankly, we are open to any kind of product. Like I said, like you rightly said, we are going from ice creams to shoes. We are manufacturing infant food formula, we are manufacturing home cleaners, toilet cleaners. So we are absolutely agnostic as far as the product category is concerned.

Kedia — — Analyst

Okay and with the pandemic, are you finding some exciting sick units that you can look at as inorganic acquisitions?

Sameer R. Kothari — Managing Director

So we continue to look at M&A as a very important part of our growth strategy, Mr. Kedia. As you would have seen from the history of the company, we have acquired a bunch of companies. You are absolutely right that this current situation is leading to a lot more attractive opportunities being presented to us. I’m not in a position to discuss anything in specifics, but in principle, absolutely yes.

Kedia — — Analyst

Okay, all right, thank you.

Operator

Thank you. [Operator Instructioins] The next question is from the line of Keshav from RakSan Investors. Please go ahead.

Keshav Kumar — RakSan Investors — Analyst

Thank you. Hi, sir. Sir recently on a mid-sized FMCG company call, there was a reluctance by the management to go for contract manufacturing in future because for them in-house manufacturing helps them with more control over processes and the product overall. So, sir, when does a company with an in-house manufacturing base already decide to go for contract manufacturing and is there value for big and small FMCG players alike?

Sameer R. Kothari — Managing Director

Sure, so Keshav, the normal issue [Phonetic] is as follows, right, the company would do contract manufacturing in a bunch of possibilities. One is, if it’s a new product, it’s a new product extension and they are not, they do not have the facilities or they do not want to invest money in setting up the facilities for that project — for that product, the FMCG brand would look at doing contract manufacturing. They would come to somebody who had a shared facility like ours and we would be happy to do contract manufacturing for them.

The other possibility is that a large established brand is running a promotion is got a seasonal demand, has got a demand which has come in. I mean, to give you an example, which is pertinant about COVID, suddenly handwash demand went through the roof, hand sanitizer demand went through the roof, cleaning products demand went through the roof. It’s very — capacities are sticky. You can’t generate capacity as quickly as the market moves. That would be another avenue for a FMCG brand to look at contract manufacturing. In both of these cases, they would look at shared manufacturing facilities.

The areas or the time when they would look at a dedicated manufacturing facility is a completely different scenario. You would look at a more mature product, you would look at a product which has been around for a while, you would look at a product where the FMCG company is very confident about the performance for the next five or 10 years. As you can imagine that most of our dedicated sites work for large FMCG brands and the reason is very simple, if they have to give us a commitment or visibility on their volumes for the next 10 years, they better have tremendous confidence about the performance of that brand and they also have to have some track record and history trends about the performance of that brand.

So in terms of evolution, you look at new products, you are happy to do contract manufacturing if you don’t have shared facilities. In case of [Indecipherable] again, happy to do contract manufacturing if you don’t have facilities. In case of the medium brands or mid-size brands like you rightly said, it’s a toss up between whether you want to allocate your capital to manufacturing assets or whether you want to allocate your capital to marketing. A lot of companies decide and for reasons, which are pertinent to that company, they decide that they want to keep the manufacturing in house and they’re happy to invest money in it. A lot of the other companies decide that they would get a bigger or a better bang for their buck if they invest that money in marketing as opposed to investing it in manufacturing assets.

The second category of those companies would come to us and ask us to do contract manufacturing. The first ones would not. The third one, like I said, is a very evolved product. So if you look at the product lifecycle, these are products which have been around for a while and in that case the brands would be more than happy to look at contract manufacturing because there is a definite arbitrage in terms of what we can do versus what they can do.

Keshav Kumar — RakSan Investors — Analyst

All right sir. So if we see on a global basis between developed economies and India and if you were to develop a metric as to how much of production happened through contract manufacturing in FMCG vis-a-vis total production. So do you already see India moving in that direction and what’s your vision for next five to 10 years if you just purely going by that number.

Sameer R. Kothari — Managing Director

So global comparisons are a little difficult because global comparisons have to do — FMCG especially has to do with consumption. So if you look at a country like the U.S. or Europe, the consumption patterns are absolutely not similar to India. The second thing that happened is since they opened up their market, a lot of the FMCG products that they use are made in other countries including China right. So from a historical perspective I would be very, very reluctant and I will be averse to draw parallels between what happened in the U.S. or what happened in the Europe as far as contract manufacturing is concerned.

The one aspect which is definitely comparable is the evolution of a contract manufacturer in the U.S. or in Europe. What happened there is contract manufacturers grew and after having grown, they got into contract research as well as contract development of products and then brand relies on contract manufacturers to develop new products.

A bunch of Italian companies have pretty much defined everything that is to be done in color cosmetics. They define what are the colors of the season, they define what products will be used and then all the color cosmetic brands, which includes the L’Oreal’s and the Unilever’s of the world will basically pick products from these contract manufacturers.

I think that’s going to be the evolution in India. India of course is atypical as we all know. The taxation system, the entire consumption matrix here with 1 billion plus population will probably throw up different business models and I would be very, very averse to comparing it to what’s happening in the U.S. or Europe.

Keshav Kumar — RakSan Investors — Analyst

Got it, sir. Sir, when you sign a new customer and decide to set up a manufacturing facility for them. So who funds the initial capex? Is it completely upfront funded by the client or partly funded and who bears the cost upfront?

Sameer R. Kothari — Managing Director

So it depends on the contract, right. So if it’s a dedicated facility where the contract — where the customer has a lot of confidence in their brand and are able to give us a guarantee of take-or-pay and more importantly if we have got a tremendous confidence in the customer as a counterparty, we will invest all the money. In case of certain customers where either they are not confident about the product or about the brand or we are not confident about the counterparty risk, we might ask them to derisk our investment by either contributing some money or giving us some assets or something like that.

Keshav Kumar — RakSan Investors — Analyst

Okay. So right now all your dedicated clients are all big companies. So am I right to say that whatever capex has happened on the dedicated side has all been funded by you till you?

Sameer R. Kothari — Managing Director

Yes.

Keshav Kumar — RakSan Investors — Analyst

Okay, all right sir. Thanks a lot, sir. That’s all from me.

Operator

Thank you. The next question is from the line of Amit Chordia from World Foods LLP. Please go ahead.

Amit Chordia — World Foods LLP — Analyst

Are you seeing inquiries like from China plus one perspective from the larger companies like the chemical sector is seeing?

Sameer R. Kothari — Managing Director

Amit, China Plus One, okay, so the short answer is yes, the long answer is, depends on the products. The short answer is, for example, the knitted shoes example that I gave earlier is definitely business which is moving out from China and going into other countries. The long answer also is that the China Plus One is not going to happen overnight. Just the lack of infrastructure in India as compared to other countries is going to ensure that China Plus One strategy for it to be really meaningful for any brand owner is going to take a few years.

So what we are hoping is that in the next couple of years this China Plus One strategy will play out in favor of Indian players. I do not expect it to make a huge difference to any of the Indian players in the FMCG industry in the next year or two. I can’t say anything about the chemicals and pharma API manufacturers.

Amit Chordia — World Foods LLP — Analyst

All right and with climate change becoming a major concern, especially in the western world, are you building processes and factories which are more environmentally sustainable. Is that a thought in the design?

Sameer R. Kothari — Managing Director

So, absolutely, and not only is it required. I think, I mean, not only is it desired, it’s also required. A lot of — I’ll give you an example of a small territory, a union territory called Silvassa where the local administration has necessitated that a part of your power has to be generated out of renewable sources.

So as a result, I think the government is doing a fantastic job in encouraging sustainability from an environment perspective. There is zero discharge policies in most of the states. We are looking at, in case of our largerst facility in Hyderabad, we are trying to become a facility which would take zero water from the ground. We are trying to ensure that all the water requirement comes from above ground sources and the government is also helping and pushing in achieving this.

In addition to that, since most of our customers are multinational companies, they have their own requirement in terms of social compliances, environmental compliances which we have to cater to. So it’s not only that we desire to do it, in most of the factories, we are also required to do it.

Amit Chordia — World Foods LLP — Analyst

That’s great to hear. Thank you.

Operator

Thank you. The next question is from the line of Shreyas Patel [Phonetic], an individual investor. Please go ahead.

Shreyas Patel — — Analyst

Hello, sir. I track your company since quite long and year-on-year I am impressed with your performance and the decisions you have taken in the last few years. I just want to understand, like in any plant which you acquired for contract manufacturing capacity, what are the key parameters which are common across the plants which you give more weightage such as stress acquisition?

Sameer R. Kothari — Managing Director

Chirag, so in case of stressed assets. I think the first thing that we would look at is basically the stress, right. I mean, given the fact that the company and the management is extremely focused on ROCE and ROEs, the greater the stress, the more attractive the asset is to us. Having said that, what we look at it is in addition to the stress value or the distress value, we would look at whether we would be able to add value to that asset and again, I would like to draw example of ATC Beverages which we tried to take over.

We were very confident that we’ll be able to add value to the business. And frankly, we’ve done our best. We’ve actually been able to get customers and we’ve managed to get the order book to be full for that company as compared to the fact that for nearly 15 years, they’ve not been able to get their capacity utilization beyond 30%. We were able to get to a situation where at least on paper we were booked for 100% of the capacity. Unfortunately in both the years, COVID hit, but from a management perspective, I’m extremely pleased that we got an asset which was stressed. We got it at a very good value and we were able to add substantial value to the business itself. I am quite confident that we should be able to get it up and running as soon as this COVID pandemic restrictions are lifted and I think we’ll be able to create substantial value out of that asset.

Shreyas Patel — — Analyst

Okay and any [Indecipherable] which we put before entering into such acquisition contracts like in terms of amount that we don’t want to spend beyond this figure for this particular asset or something like that.

Sameer R. Kothari — Managing Director

So that depends the nature of the business, Chirag. Like I mentioned earlier, when I think Faisal had asked me about the capital allocation strategy, very clearly the Board has told us that we would look at a shared facility as long as we are investing between INR10 crores to 15 crores. Anything above that, we would necessarily look at an asset which has a contract or a confirmed business, but if there is stress or not, that’s irrelevant as far as the capital allocation strategy is concerned. We’re not going to buy an asset and keep it just because it’s available cheap.

Shreyas Patel — — Analyst

Okay, got it, got it. And my final question, is there any plan to launch our own brands going forward moving from contract to our own brand manufacturing.

Sameer R. Kothari — Managing Director

Shreyas, so since you’ve been following the company for long. I am hoping that you are happy with what we are doing. We have no intentions of getting into brands or changing the focus of the company from a B2B into a B2C company.

Shreyas Patel — — Analyst

Okay and is there any plan to help brands which are associated with us to provide them like supply chain kind of services or to make them their shipment also backend kind of services other than contract manufacturing?

Sameer R. Kothari — Managing Director

Absolutely, so we do private labeling. Ganesh is here with me and Ganesh can talk about how he helps people with vendor development etc. I’ll just hand it over to Ganesh.

Ganesh T. Argekar — Executive Director

Okay, in terms of development of vendors, we have our full-fledged procurement team from the head office who are in continuous touch with our customer. They also correlate with the customer procurement team and we develop the vendor. So if there is vendor A, we on our own — we develop vendors and we deal with all the vendors over here in the business in the industry. We share this knowledge with them and what we do is that we decide upon a particular way that with any cost savings from that vendor would be shared between us and the principal. This is what we do.

Sameer R. Kothari — Managing Director

So in terms of the help that Ganesh’s team offers to brands, Shreyas, we actually also help them with vendor development, design development, packaging development. So because Ganesh’s team has so much experience in dealing with various forms of packaging, if a customer or a brand comes to us and says they want to launch a new product, but this is the kind of packaging that they’re looking for which they are not able to get, someone in Ganesh’s team helps thgem connect with the right vendor and so on, so forth. In addition to that we are in the process of setting up and recruiting people for R&D where we will start helping people for formulations as well as product development.

Shreyas Patel — — Analyst

Okay, nice, and best of luck. Thank you.

Operator

Thank you. The next question is from the line of Rajan Shah [Phonetic] from Amesty [Phonetic] Securities Limited. Please go ahead.

Rajan Shah — — Analyst

Hi, thank you for the opportunity. Congratulate your team for great numbers. I just have one question, Sameer for you if you can answer broadly is that you guys are pretty much the largest contract manufacturers in India at this point and pretty much the best that we can have. What is something that you look up to is my question like is there a benchmark or some competitor that’s not in India, but a global contract manufacturer that you aspire to match at some point in the future? Thank you.

Sameer R. Kothari — Managing Director

Sure, so Rajan, thank you for your kind words. So a large part of our growth as well as our vision has actually been based out of pharmaceutical and I think the Indian pharma industry have done a phenomenal job of evolving from a contract manufacturer to a stage where I mean maybe this is not the right time, but we are effectively the pharmacy of the world. So if you ask me what we are looking up to. We are looking up to a bunch of pharmaceutical companies who are doing some phenomenal job in terms of contract manufacturing for global brands, global pharmaceutical companies and doing a fantastic job of it.

In terms of specifics, the other company that we look up to is also companies in the color cosmetics area where, like I said, the contract manufacturers now define and decide the agenda for brands, it would be a great achievement if we can get to that kind of a level, where let’s say, if a brand wanted to launch an environmently friendly home cleaner or personal wash that they would come to Hindustan Foods because we would be the technological leader in terms of providing that solution. So that’s the kind of aspiration or ambition that we would look up to.

Rajan Shah — — Analyst

Great, great. Yeah, that answers my question. Thank you so much and all the best.

Sameer R. Kothari — Managing Director

Thank you.

Operator

Thank you. Due to time constraints, that was the last question. I would now like to hand the conference over to Mr. Vimal Solanki, Head Corporate Communications and Emerging Businesses for closing comments.

Vimal Solanki — Head, Emerging Businesses & Corporate Communications

FY 2021 will be imprinted in our memories for a long, long time as we collectively face tough times. However, owing to our strong and resilient business model and also the commitment of the team, this year ended as the best year in the history of the company. I’m sure we would have done even better without this virus hovering on our heads. Luckily for us, pandemic or no pandemic, people don’t stop drinking tea and coffee or washing their hands and hairs and clothes and floors and toilets or having babies and feeding them baby food.

So luckily the need and demand for contract manufacturing in the FMCG industry has only been growing year-on-year. We are in continued discussions for new projects with new and even our existing customers. We are confident we’ll keep adding new names to our list of customers. We are confident of achieving our goal of revenue of INR2,000 crores by FY ’22. I take this opportunity to thank everyone for taking out time and joining on this call this afternoon. I hope we have been able to address all your queries. For any further information, kindly get in touch with us or SGA that is Strategic Growth Advisors, who are our Investor Relations Advisors. We hope to see you with better results, better performance next time. Until then, take good care, stay safe. Thank you.

Operator

[Operator Closing Remarks]

Disclaimer

This transcript is produced by AlphaStreet, Inc. While we strive to produce the best transcripts, it may contain misspellings and other inaccuracies. This transcript is provided as is without express or implied warranties of any kind. As with all our articles, AlphaStreet, Inc. does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of AlphaStreet, Inc.

© COPYRIGHT 2021, AlphaStreet, Inc. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited.

Most Popular

Seagate Technology beats Q1 earnings estimate: Infographic

Seagate Technology (NYSE: ALK) reported first-quarter 2022 financial results before the regular market hours on Friday. The company reported Q1 revenue of $3.12 billion, up 35% year-over-year and higher than

Infographic: Schlumberger (SLB) Q3 2021 Earnings Results

Schlumberger Limited (NYSE: SLB) came up with its third-quarter 2021 results on Friday. Revenue increased to $5.8 billion from $5.2 billion last year. Analysts had expected revenue of $5.09 billion.

Honeywell (HON) Q3 2021 Earnings: Key financials and quarterly highlights

Honeywell International Inc. (NASDAQ: HON) reported third quarter 2021 earnings results today. Sales increased 9% year-over-year to $8.4 billion but missed projections of $8.6 billion. On an organic basis, sales

Add Comment
Loading...
Cancel
Viewing Highlight
Loading...
Highlight
Close
Top