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Earnings Call Analysis
Q1-2024 Analysis
Hindustan Foods Ltd
In the opening of the Q1 FY '24 earnings call, we learn that this has been a period of consolidation for the company, following rapid growth in previous years. However, it is noted that the firm has experienced subdued activity regarding new projects and has felt the impact of a broader slowdown in FMCG demand, which has affected customers' capital expenditure and expansion plans, thus influencing the company's project pipeline.
On the financial front, the company reports a solid quarter, with significant growth in profit after tax (PAT), which rose 16% quarter-over-quarter and 57% year-over-year, marking the highest ever figure, supported by new facilities and a shift to a more favorable tax regime. Revenue and EBITDA have also seen growth, with revenue increasing by 4% and EBITDA growing by 33% compared to the same period last year.
The company has transitioned to a new tax regime, which coupled with carryforward losses and significant capital expenditures in Hyderabad, has enabled it to benefit from a lower effective tax rate moving forward. This strategic tax planning is expected to enhance future profitability and shareholder value.
Despite the current challenges, the company upholds its revenue guidance to reach INR 4,000 crores by FY '25, assuming there are no extreme deflation scenarios in commodity prices. The discussion suggests that decision-making on projects has slowed due to uncertainties, but an enabling resolution is expected to remain in effect for the upcoming year, suggesting a commitment to growth in the long term.
The company maintains a strategy focused on capital allocation and remains open to opportunities for acquisitions, especially within the dedicated manufacturing space. Constraints on the shared manufacturing segment have been set with a cap on total equity outlays, balancing growth pursuits with prudential financial management.
Hindustan Foods is actively working towards reducing its carbon footprint through sustainability-driven decisions, like co-locating production to decrease logistics emissions and exploring backward integration within the manufacturing process, such as in-house production of plastic bottles, spoons, and sticks for ice creams—a hint towards future vertical integration strategies aimed at improving operational efficiency.
The company expresses a bullish stance on the beverage industry while acknowledging temporary setbacks due to unseasonal rains. Looking forward, there is an expectation of a rebound and growth in the sector, notwithstanding seasonal variances. Additionally, the company is exploring the possibility of entering new areas of manufacturing to bolster its growth trajectory.
In dedicated manufacturing, the company targets a pretax return on equity (ROE) between 16% and 22%. Current performance aligns with these expectations, and the new tax regime applied to the company's subsidiaries should further improve these returns. Health and wellness business segments are anticipated to contribute positively to ROEs beyond those of conventional FMCG businesses.
Contractual relationships within operations have a typical tenure of 5 to 10 years. The company's focus includes backward integration initiatives aimed at growth and an increased emphasis on R&D capabilities to support private label manufacturing. This strategy indicates a medium-term focus on increasing their footprint in the ODM/private label manufacturing sector.
The company recognizes the potential in export markets, exemplified by its exclusive manufacturing of Scholl products for international destinations and U.S. FDA-approved production for the American market. Although infrastructural challenges limit the scale of this opportunity, it is under exploration and shows the company's intent to diversify beyond the domestic market in the long term.
When considering new ventures like bottled water production, the company maintains a conservative approach towards counterparty risk, favoring long-term contracts with clear takeoff commitments over more uncertain agreements. This reflects a cautious and risk-averse strategy in expanding their business portfolio.
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Ladies and gentlemen, good day, and welcome to Hindustan Foods Limited Q1 FY '24 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 the guarantees of future performance and involve risks and uncertainties that are difficult to predict.
[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.
Thank you so much. Good afternoon, and welcome to our Q1 FY '24 earnings call. I'm joined on the call by Ganesh Argekar, Executive Director; Group CFO, Mayank Samdani; and SGA, our investor relations adviser. I hope everyone has had a chance to go through our updated earnings presentation uploaded on the exchange and our company website.
This has been a subdued quarter for us in terms of new projects and new developments. While I would like to claim that this was much needed time for consolidation after the breakneck speed at which we have grown in the past few years, the fact of the matter is that the overall slowdown in the FMCG demand has definitely affected the CapEx and the expansion plans of most of our customers, and accordingly has affected our pipeline as well.
Our hopes for the summer portfolio of our company were quite high, and I personally mentioned that we are keen to explore the possibilities of expanding our footprint in this area. However, this portfolio also faced the vagaries of the season in the last quarter, and hence, the decision-making of our customers vis-a-vis the new CapEx and other strategic initiatives have been delayed.
I do, however, have to say that we are beginning to see some green shoots and our customers are seeing decent volume growth in July and August. We continue to be bullish about the Indian consumption story and hope to come back to you with some good news in the next couple of quarters.
I will now hand over the call to Ganesh Argekar, our Executive Director, to brief you on the operational highlights.
Yes. Thank you, Sameer, and good afternoon, everyone. The existing factories continue to deliver steady performance. Our top line reflected a continuing fall in the commodity prices, which offset the gains of the ramping of the new factories. Our new factories ramped up production in the last quarter, and subject to the seasonal variations, we are cautiously optimistic of their performance in the future quarters.
I would now walk you through the operational and business highlights of Q1 FY '24. The second phase of expansion of the ice cream facility was successfully commercialized and ramped up during the quarter. The company's CapEx plan for setting up the soaps and bars project was commercialized in Q1 FY '24 and continues to ramp up satisfactory in July and August. The company's summer product portfolio was affected by the drop in demand caused by unseasonal rains during the quarter. The company's acquisition of the Baddi factory is delayed due to the statutory approvals, and we now expect to close the transaction towards the end of Q3 FY '24.
The factory being set up in Guwahati, Assam for the manufacture of juices is progressing well and is expected to start commercial production by Q4 FY '24.
With this, I would now like to thank you and hand over the call to Mayank Samdani, our Group CFO, who will take you through the financial results for the quarter ended 30 June.
Good afternoon, everyone. While Sameer and Ganesh have painted a subdued picture of the operational performance of the company, I am pleased to report that on the financial side, we had a good quarter. The PAT rose by 16% Q-on-Q and 57% year-on-year. Our PAT number for the quarter was the highest ever, aided by the commercialization of new facilities and the change in the tax rate regime. As I mentioned in my previous interaction, we have successfully utilized the entire med credit and have moved to the new tax regime from this financial year.
The higher tax bracket has enabled us to utilize all the carryforward losses and also leverage the deficient benefit of the massive CapEx that was done in Hyderabad. Now that we have set up new subsidiaries for the new manufacturing opportunities, we believe it is a good time to move into new tax regime, and hence, our effective tax rate going ahead will be much lower than the previous year.
In terms of specific numbers for Q1 FY '24. Revenue increased by 4% to INR 620 crores in Q1 FY '24 from INR 598 crores in Q1 FY '23. EBITDA grew by 33% to INR 51 crores in Q1 FY '24 from INR 38 crores in Q1 FY '23. PAT increased by 57% to INR 23.4 crores in Q1 FY '23 from INR 14.9 crores in Q1 FY '23. The depreciation and the finance charges in the current quarter reflect the commercialization of the new factory, which we hope will start delivering to their full potential in the next quarter or so, thereby helping us to better our PAT numbers.
Additionally, like Ganesh said, while the integration of the Baddi factory has been held up, we do believe that should happen in Q3 FY '24 and should help us further improve our performance.
With this, I would like to open the floor for the questions.
[Operator Instructions] Our first question is from the line of Aakash Javeri from Perpetual Investment Advisors.
My first question would be, on a like-to-like basis, what will be the revenue growth while profitability may remain unaffected? Just trying to understand the quantum of decline in prices.
So Aakash, as you know, we manufacture a bunch of products, and it would be difficult for us to quantify the exact drop in prices. If I just give you some examples. In case of agri commodities like tea, the price drop in the last 6 months has been close to 25-odd percent. In case of petrochemicals and all the oleochemicals, the price drop has been close to 15% or 20% as well. So that's the reason why we've been talking about this even in our previous interactions. Looking at our sales number is probably not the best way of evaluating our performance. Because any increase or decrease in, the prices get passed on to the customers immediately.
Sure. And secondly...
Sorry, just give me a second. In terms of the volumes, per se, Aakash, what has happened is, in spite of the ramping up of the ice cream factory, which, while it was affected by the unseasonal rains, we actually produced a decent volume of ice cream. And also our bar facility has started commercial production. But in spite of that, the entire gains of that were offset just by the price fall. So you'll see that while our PAT numbers have improved because of the commercialization of the ice cream as well as the bar one, the top line hasn't grown in the same proportion.
Okay. Understood. And now that prices are down, do we still expect to cross INR 1,000 crores in revenue next year? And also, could you just help us with the drivers of growth until INR 4,000 crores?
So well, the target for INR 4,000 crores remains the same, and I think we've reiterated that in our annual report as well as in our investor presentation. One of the biggest drivers, of course, is the fact that Baddi project, while it has been delayed, we expect that it will close in the, what is it now, the third quarter of this financial year.
On an annualized basis -- so we're making investments of around INR 150-odd crores in that facility, and we expect a similar amount of asset turn like we do in our other businesses. So that should give you some idea in terms of what the top line will be from that facility, while we don't have the exact numbers to share with you right now. And in addition to that, the bar project has started commercial production last quarter, but is actually getting ramped up in this quarter.
Having said all of that, we do expect volume growth to come back. You would have read some commentary from our principal customers saying that the volume growth is coming back in this quarter. So we certainly hope that in the coming quarter and the next quarter, we should start seeing some amount of traction, even as far as the new projects are concerned.
Got it. And the next question is that we took an enabling resolution last year for about INR 300 crores, INR 350 crores. And now we're looking at a shareholder approval for INR 500 crores. I understand it's just an enabling resolution, but is there any larger project on the horizon that has been delayed because of the ongoing slowdown in FMCG and is now taking shape?
So like I mentioned in my opening remarks, frankly, the decision-making for all larger projects, et cetera, has gotten delayed. While there are a bunch of irons in the fire, I do not have anything tangible to report as of now. As and when things come in, we'll definitely come back to you with whatever new developments are happening. But overall, it is an enabling resolution, and we expect that this resolution will be in force for a course of a year. We definitely expect that in the course of 1 year, we will have certain of these irons in the fire actually play out where we would require some amount of CapEx and large investments.
Okay. And how is the CapEx for shoes that you announced about a year ago?
The shoes?
Yes.
The shoes was a very small investment, Aakash. It was around INR 10 crores, and we've already commercialized that. I think we commercialized it last quarter itself. I mean, not the quarter which is being discussed, in the previous quarter.
Okay, understood. And how is it doing -- like how is the demand for the same? And how is the commercialized capacity doing?
So the shoes is an interesting situation, frankly, because of the certain trade and nontrade barriers that the government brought in, BIS registration as well as the import duties, et cetera. The demand has increased for domestic manufacturing. However, the overall stress in terms of the economy, which you're seeing in case of discretionary spend, is definitely affecting the shoe market as well.
Again, we believe that, that stress is temporary and the structural demand increase happening because of the implementation of BIS, import duties, et cetera, should lead to a greater amount of shoes being made in India as opposed to being imported from China, Vietnam, et cetera.
Sure. And just last 2 questions. So the Scholl acquisition had significant spare capacity. How is that doing now?
So the Scholl acquisition is doing well. We are continuing to manufacture the products for Scholl. As you can imagine, it's a very niche product category. We've started reaching out to other customers, et cetera, in terms of what we can do with the spare capacity as far as the existing machinery is concerned. In addition to that, Scholl, incidentally, is not being marketed in India at all. We are also in touch with the brand owners to try and see whether they have any India plans.
In addition to that, the factory also has a large amount of real estate. It has nearly 10 acres of land. We are also trying to discuss to find out if we can bring in other product categories into the same campus. But again, the overall sentiment because of the macroeconomic situation is CapEx decisions are getting delayed for sure.
Sure. And what are the current levels of debt?
We are at around INR 475 crores right now, Aakash.
INR 475 crores. Sure.
Our next question is from the line of Jay Shah from Mehta Investments.
So sir, I have a couple of questions. Firstly, in the presentation, we mentioned that the Q-o-Q revenue seems under some pressure due to a fall in commodity prices. So how do you look at the commodity price trend? And what would be our revenue growth guidance for FY '24 and beyond?
So Jay, we actually don't track commodity prices. If you're familiar with the business model, the commodity prices are a complete pass-through for us. So as a result, actually, we don't have the expertise and we don't spend any resources in trying to forecast what the commodity prices will be. What we do is we basically pass through the costs as and when they occur. And as a result, any kind of inflation or deflation ends up reflecting in our turnover immediately. As far as sales forecast is concerned, while we have time and again mentioned that we would urge the financial community to not look at sales forecast as a benchmark for our performance and look at ROE, ROCE as a better benchmark.
Having said that, what I answered to Aakash earlier, we continue to stand by our guidance for getting to INR 4,000 crores by FY '25 irrespective of what happens to the commodity prices unless we see a complete deflation scenario where commodity prices fall by another 15%, 20%, in which case, I will have to come back and do another investor call with you.
Understood. And sir, one more question. Can you elaborate what caused the delay for the Baddi acquisition?
Sure. I'm going to ask Mayank to answer that question.
Jay, there are certain statutory permissions, which we need to take from the state government for them to allow us to take control of the plant. But due to the election and change in the government and also the flood situation there, we are delayed by a month or so in getting those prior approvals from the government.
So Jay, just to elaborate on that, the law in Himachal is a little similar to Jammu and Kashmir, where non-Himachalis are not allowed to own land. In case non-Himachalis want to own land, agricultural or industrial/commercial, the state government has to give a special permission. This is under what is called as a 118 permission, which goes all the way to the Chief Minister of the state. As you can imagine, the last couple of month, the entire state machinery has been extremely busy in relief work. And unfortunately, we've become one of the casualties in terms of those permissions.
Our next question is from the line of Faisal Hawa from H.G. Hawa and Co.
What are the kind of acquisitions which we are now looking at actively and what are the ticket size of those acquisitions? And if you could just give a color on what is the kind of market cap to sales offers that we get these at?
Second is, are we facing like a lot of pressures from Hindustan Lever and Reckitt for sustainability initiatives and trying to take more permissions, or wanting you to take materials from suppliers who are nearby? And any kind of issue these sustainability initiatives that could cost us a lot of money on actually certification, et cetera?
And thirdly, strategically, are we thinking about now milking our excess land at most of these factories, so that the geographical spread and the risk of that geographical spread actually reduces for our company?
Faisal, so in terms of acquisitions, our strategy in terms of capital allocation remains the same. When it comes to dedicated manufacturing, we and the Board is very clear that we are okay to take on larger sizes in terms of acquisitions. And in case of acquisitions which have come with a dedicated contract, frankly, there is no ratio in terms of market cap to sales, et cetera, because effectively, the cost at which we acquire the facility is what is built into our revenue model, our commercial model with our principal. So as a result, as far as those type of acquisitions is concerned, we continue to be very aggressive and do not have any kind of an upper limit in terms of the money spent.
In terms of our shared manufacturing facilities, we continue to be a little bit conservative. We look at generally assets which are stressed. And again, because they are stressed, we tend to look at deals which have practically very, very low market cap to sales ratio by definition, because that's why they are stressed assets. So in case of shared manufacturing, the Board has laid down a cap of around INR 30 crores to INR 40 crores as a total equity outlay, and we continue to follow that.
The second question is an interesting one, Faisal, where you're absolutely right that with the onset of the plastic regulation coming in from next year, most of our customers are beginning to get aware and are taking steps to reduce their carbon footprint across the entire supply chain, and sustainability as well as recycling of plastics is one very large part of this entire supply chain strategy.
One of the things that we are looking at definitely is co-locating or trying to reduce the transportation of plastic products from one factory to another. Like we mentioned in our previous interactions, we are definitely trying to get into some kind of backward integration within our factory spaces to reduce that carbon footprint. We made an announcement earlier that we are getting into stuff like plastic bottles. We are evaluating plastic bottles. We are evaluating spoons as well as sticks for ice creams. All of those discussions continue to happen. I'm hoping that within the next couple of quarters, we should be able to come back to you with something definite along those lines.
Yes. So acquisitions, I mean, are we going to do anything this financial year?
Faisal, what we have announced is the acquisition of the Baddi facility from Reckitt Benckiser. And like we mentioned, it should have happened already, but we expect it to happen by Q3 of this financial year. We continue to work on a bunch of other opportunities, but I have nothing definite to report in terms of what we're going to do in this financial year.
So you mean to say that most of the vacant land of the existing factories, we will utilize by making more products which are already required in our factory and which are being supplied by third-party vendors as on date?
I would not say that all of the vacant land will be used there. What we have done is that strategically, either -- so one is volume growth will come back to FMCG, right? And that's one thing we all are banking on, which is the consumption story as far as India is concerned. So if the volume growth comes back, there will be capacity increases required in our existing facilities anyway.
Let's say, in some of our product category, or some of our locations, if we do not see volume growth coming in or capacity enhancement required for our existing products, that's when we would look at backward integration. As you can imagine, it is easier for us to stick to what we are doing rather than trying to find out new product categories. So if there's an option between doing more of what we are currently doing rather than going into something new, we would obviously choose the former.
Okay. And how is our engagement with the bottling major coming along? Is there any chance of this engagement really being enhanced at more locations, or where we do something even on the distribution front with them?
So like I have mentioned in a couple of interactions, we are very bullish about the beverage industry. And given the consumption increase in the beverage part, we are definitely hopeful that we will be able to look at it more aggressively. Again, like I mentioned in my opening remarks, unfortunately, the season for our summer portfolio definitely got affected because of the unseasonal rains. And as a result, our customers also have slowed down their decision-making process as far as new factories, new locations, et cetera, is concerned. But structurally, in the last couple of seasons, we've definitely seen growth in the beverage industry. And we expect that, that growth, subject to the seasonal variations, will come back sooner rather than later.
[Operator Instructions] Our next question is from the line of Priyanka Singh from Atidhan Securities.
So I have 2 questions. Firstly, just want to get an understanding on a broad level as to how do companies decide what level of risk they want to take with HFL?
Priyanka, I'm not -- I don't think I understand the question. What level of risk they want to take with HFL, meaning in terms of operations, in terms of financials? What exactly are you asking?
Overall.
So, that's a question which is very difficult for me to answer, right, Priyanka. I would hope that our credibility and our reputation in the market is that they can trust us with whatever they want us to. And there are some examples of this being done where we have gone into new categories. We've invested close to a couple of hundred crores in some locations. We've also gone into categories which we have never manufactured before. So I'm hoping that our customers trust us enough that we will not screw up even if it's a large project or even if it's a new product category or for that matter, even if it's a new location where we've never been. That's the only thing I can tell you, right?
You can't quantify that whether my customer is okay to take a risk of INR 200 crores and not okay to take a risk of INR 205 crores, or whether my customer is okay to take a risk with me in Jammu, but not okay to take a risk in Lucknow. It's very difficult to say that. Our performance so far should hopefully demonstrate that customers are okay to take risk with us in terms of locations. Customers are definitely okay to take risk with us in terms of new product categories. And given the size of acquisitions and new investment that we are doing, so far, I think the customers have been okay with investments of INR 200 crores to INR 250 crores in 1 location. Bigger than that, since we haven't done it, I can't comment whether they are okay or not okay to make investments of more than INR 250 crores.
Okay. That helps. And lastly, our aspiration of doubling by FY '25, so which are the areas you have identified? And will this be newer areas or in existing product lines? And like basically, what is the thought process of receiving that goal?
Sure. So when we talked about FY '25, doubling, it was some time ago. And a couple of things, actually 2 or 3 things have happened since then. So let me just take this moment to kind of walk you through that doubling journey. One of the parts of doubling that journey was the expansion of our ice cream facility, where we have invested, in our Phase II, a substantial sum of numbers -- sum of money in that expansion.
The second thing that we had talked about at that time was the expansion in our soap and bars facility and that's happened as well. It has gotten commercialized. The third thing that we've talked about, which wasn't on the horizon at that time was the acquisition of Baddi. And we have entered into an agreement where we are investing close to INR 150 crores as far as the Baddi acquisition is concerned. So from a top line -- not top line literally, but from a figurative perspective, I've kind of indicated how we will end up doubling our gross block via all of these things.
From a completely macro perspective, in terms of the areas, I have mentioned this before, we've been very bullish about the beverage industry, we've been very bullish about the ice cream industry. Both of them have been relatively recent forays for us. The beverage, the foray was in 2019. And while as a company, we don't have anything good to show as far as our beverage experiment is concerned, we are fundamentally very optimistic that beverage should be a great avenue for our growth in the future.
And the second, of course, is ice cream, because principally, ice cream capacity in India is not enough, looking at the demand and the population and the density of the factories. So from that perspective, we've been very bullish about these 2 categories. However, Priyanka, I should caveat that by saying that we are absolutely agnostic as far as product is concerned. And we would -- I mean, like someone earlier was telling me, if it happens in shoes, like we were discussing with Aakash, we would be happy to look at expansion in shoes as well.
Our next question is from the line of Dipti Kothari from Kothari Securities.
So my first question was regarding what is the ROE and ROCE we are targeting for this fiscal year? And like what will help us improve our return ratios from current levels?
So Dipti, since you are a Kothari, I'll ask Mayank to answer this question, lest everybody else on the call thinks that you and I are related.
So Dipti, as we have mentioned in various forums that in the dedicated manufacturing, we target around 16% to 22% ROE pretax. But we do have the other businesses, and also our current ROEs are around 21%, 22% currently. And we will target the same kind of ROEs going forward also.
One of the major things which will help us to improve the ROEs is that change in the tax rate, which is now with the main company. And as we progress and do the more investment in the subsidiaries, even our tax rate will come down, because those are in the 18% tax rate -- all the subsidiaries are in the 18% tax rate, the newer subsidiaries. So this is the revenues. And then we are very hopeful about the health and wellness business to give us the better ROEs as compared to the FMCG business.
Okay. And sir, are we looking at more acquisitions in the coming quarters? And are we willing to increase our CapEx cycle?
So Dipti, this question I'll answer. And yes, we continue to look at acquisitions very aggressively. If you've seen the history of the company, we have grown through acquisitions. And yes, we will continue to look at them. Of course, like I've mentioned before, I do not have anything definitive to report other than the Baddi acquisition, which would happen in the next couple of quarters.
But yes, we continue to look at acquisitions as a way to grow. And there are a couple of reasons for this. We believe that there is some amount of consolidation happening as far as the contract manufacturing industry is concerned. And then, of course, there's a change in the manufacturing footprint of our customers, which is giving us some opportunities in terms of acquisitions. We will continue to leverage both of these.
And your second question, I forget...
Sir, it was regarding the CapEx.
Yes. So given that we are a manufacturing company, and given the fact, if you look at our business model, in case of dedicated manufacturing, Dipti, once we start a factory and it ramps up, let's say, within 6 to 8 months of commercial production, our volumes from that facility are spoken for, which means that our turnover from that facility is something that we have clear visibility for, for the next 5, 7, 10 years, depending on the tenure of contracts.
So for us to grow, we have to do CapEx, and we will continue to do CapEx. So if you look at us as a company, there is no CapEx cycle, right? So FMCG, while the last couple of quarters have been bad, FMCG is not a cyclical industry. There's a structural consumption story in India. And given the lack of capacity, I don't see that we will go through any CapEx cycles. We'll continue to invest in CapEx as and when we feel opportunity. And given that there is lack of capacity in most of the product categories, I am hoping that we will have enough CapEx opportunities for the next few years to funnel our growth anyway.
Okay, okay. That was helpful, sir. Sir, secondly, what is the capacity utilization of soap and bars project, which got commercialized in this quarter? And how much will this contribute to our revenues in this fiscal year?
So Dipti, we can't disclose specific revenue numbers, et cetera, because of the fact that in case of dedicated facilities, we work with one principal. If we end up giving volume numbers, capacity utilization numbers, revenue numbers for a particular site, it effectively ends up giving out numbers for our customers, which, as you can imagine, we are strictly prohibited by virtue of the confidentiality clause in our agreements with our principles.
Having said that, let me just tell you one thing that, again, in case of dedicated manufacturing, capacity utilization is actually not relevant to our bottom line numbers. Once we ramp up the capacity, which generally takes around 3 to 4 months, post that any variation in the capacity utilization actually does not affect us, because the volumes are guaranteed by our principles. So I would urge you not to look at capacity utilization in a normal way when you're trying to look at our company.
[Operator Instructions] Our next question is from the line of Akhil Parekh from Centrum Broking.
Sameer, you mentioned in one of the questions that agri commodities have declined by 25% and oleochemicals have declined by 15%. So would it be a fair assumption that the volume growth, at least for this quarter, would have been at least 20% plus for us?
Akhil, like I said, I'm unable to give you that kind of a metric. Please understand also that when you look at volumes for us, because the product categories are so diverse, it's very, very difficult. Just to give you an idea, we manufacture ice creams, which are barely 15, 20 grams each. And if I have to give a volume in tonnage, you can imagine how many cups and cones we would have to make to be able to sell an equivalent of, let's say, a 5-kilo packet of tea or a 5-kilo packet of detergent powder.
So it's very difficult for us to get volumes on the same denominator, and of course, like I was telling Dipti earlier that in case of specific customers, we try to stay away from volume discussions anyway. All I can say is that the gains of the ice cream and the bar project as far as the revenues is concerned has been completely eaten away by the fall in the pricing.
Okay. Fair enough. And now we are almost halfway through the quarter. Do we see better demand now? Like at least on a sequential basis, do we see improvement in volume trend right now?
So again, I think that public information, if you've seen some of the commentary, which our customers are making, volumes are coming back. The entire shrink inflation is getting reversed. I think just a couple of days ago, there was this large article in Economic Times about this. And anybody who's going to a supermarket will see this happening anyway. So I think definitely volume growth is coming back. Having said that, I think it's too early to declare it a winner. You've seen the headline inflation number coming in last week or actually was it just this week, a couple of days ago.
And given the rain situation, we are hoping that the rural demand will sustain. But I really don't want to go out on a limb here and end up saying something where I have to come back to you next quarter and say that the volume growth has still not returned.
Okay, okay. Fair enough. And on the carbonated drink project, I mean, I just wanted to understand slightly more details, like what kind of work beverage is? Is it just more of manufacturing the product and packaging it? Or are there plans of managing the entire supply chain basically for this particular product?
No, Akhil, we have been very clear right from earlier that we will continue to be a contract manufacturer. We do not think that we have any kind of expertise in doing anything other than that. And even as far as CSD, carbonated drinks is concerned, we will continue to concentrate only on the manufacturing bit of the entire supply chain.
Okay, okay. And this is only for PET bottles at this part of the time. We don't intend to go to the glass bottle manufacturing?
No, it's PET bottles and it's Tetra Pak for the time being.
Got, it. Got it. And just 2 more questions. One is, the Baddi unit, which we are expected to commercialize by the end of third quarter, how do we see the ramp-up basically? How do we see the sales trajectory from this particular acquisition, say in next 12 to 18 months?
So frankly, it's an existing factory, which has been running for, I think, more than 10 years. And as a result, since it's a slump sale, frankly, there won't be any ramp-up. Revenues will start showing up from one way to another after the closing date. So I don't think we'll be going through any ramp-up as far as this facility is concerned.
Having said that, we definitely do expect to bring in new customers and bring in some more volume, which we believe will take maybe a year or 2, especially since some of these products are regulated products. Just to remind you, it's a U.S. FDA-approved site and the gestation period for bringing in new customers to this site will be slightly longer than, let's say, bringing in a new customer for a shoe factory.
Okay, okay. And would you have the gross loss number handy for this acquisition by any chance?
What we've disclosed is that we've got -- the commercial contract is for INR 140-odd crores. I don't think we've disclosed the entire breakup. And it's a slump sale. So I don't think we can disclose the breakup of that. At an appropriate time, when we do the closing agreements, I think we'll disclose that, Akhil.
Sure. But the asset turns would be largely in line with what we are doing right now at company level?
That's what we expect, yes.
Okay, okay. And last question for Mayank was effective tax rate, right, I mean, we did around 21% for this quarter. And with now new subsidiary coming in, do we anticipate this ETR, effective tax rate, to drop below 21% in subsequent quarters or at least on an annual basis?
So we believe that it will be at the same level for the year, and then when the newer more investment in subsidiaries will come, it can come down to a point or something, because already HFL is doing much of the business, and it will take some time for the new business of the subsidiary to come to that line. So we believe that this will be the tax rate for the year this year.
Okay. So it would be around 21-odd percent?
Yes, yes.
[Operator Instructions] Our next question is from the line of Akshay Jain from Jain Capital.
A few questions from my side. Firstly, on the renegotiation part. So have you gone through the cycle of renegotiation at a project level? Which are the projects that are up for renegotiation in the next couple of years. And what is the revenue contribution from them?
Akshay, I'm sorry, I'm not sure where you got in the impression that -- no, do you want to just repeat the question for a second? I'm sorry.
So it's basically on the renegotiation at a project level. So how many of them -- projects are up for the renegotiation over the next couple of years? And what is the revenue contribution from them?
Okay. So it's just an academic question, right? For a second I thought that maybe you were referring to something that Mayank, me, or Ganesh said. So from an academic perspective, I would say the average age of our current contracts would be between 7 to 8 years. And while we've had experience in terms of renegotiations, et cetera, I can talk to you about academically, from an HFL perspective, I don't see renegotiations coming up or any of our contracts for the next 5 or 7 years anyway.
Academically, however, what ends up happening is, at the time of renegotiation, it's frankly in the interest of our customer to continue business with us. And the ROEs are sustained even post the renegotiation period with a slight bump up in terms of the value of the assets left over, right? So from that perspective, I don't see a major renegotiation risk, if that's what you're referring to.
Sure. That helps. So secondly, how do you get business from a competing brand, as in there are NDAs in place with them. And I'm just asking because you know the secret of success of one brand product, which can make the principal think twice about it.
Sure. Akshay, so there are a couple of things. In case of FMCG, frankly, the secret of success is more likely the brand rather than the manufacturing process. I mean, most of the people end up buying a particular brand of product without even looking at what are the ingredients, et cetera. So FMCG is a very emotional decision.
Having said that, your question is definitely valid that there is some amount of intellectual property in terms of manufacturing, and our customers do share that with us. In fact, we believe very strongly the fact that our customers trust us with that is one of the largest barrier to entry as far as our competitors are concerned, because our customers will not trust every Tom, Dick, and Harry with that kind of intellectual property.
Given the fact that we've been doing this business for more than a couple of decades now and have been working with most of the larger FMCG companies in the country across locations, across product categories, means that we've developed some amount of trust with our customers. There was a question earlier in the call about what kind of risk our customers are willing to take with us. I think the biggest metric for that is the fact that some of our customers, or I would say, most of our customers are willing to risk their main brands with us. That itself, I think, is a statement about our credibility and our reputation.
Sure. So lastly, just wanted to understand the contract time line for a dedicated facility, which includes logistics, raw material sourcing, packaging, et cetera. So apart from this, is there any additional opportunity within the value chain for us?
So the tenure of the contract is between 5 to 10 years. Our longest contract right now would be around 10 years and our shortest contract would be, let's say, 5 years. And most of the contracts tend to fall between this range. In terms of other areas, you're absolutely right, and I talked about this, I think, earlier with Faisal. We continue to look at ways of doing backward integration within our supply chain, both from a commercial requirement as well as from a requirement of ESG, sustainability, reducing the carbon footprint of the product, et cetera.
And we definitely believe that in the next few years that can become a major source of growth for us. The other thing that we continue to look at is R&D. Like I've mentioned in some other interactions that private label for us is a very small part of the business right now. However, we have definitely got our foot in the door with most of the smaller -- most of the larger retailers as well as some of the smaller D2C brands. We expect that to grow further, and we are definitely taking some steps to strengthen our R&D as well for that.
Our next question is from the line of Jai Prakash, who's an investor.
Sir, my question is regarding these opportunities, which might be in the sports and sports equipment. So when I went to the store called Decathlon, let's say, I go to IKEA, which is more of a home improvement, right, so I don't see any -- I would say that I see very less product from India and most of the products are either from China or Bangladesh. So can you share your thoughts on this and difficulties which Indian manufacturers face?
Prakash, you're absolutely right in terms of your observation. I, however, am not the expert to be able to comment on everything. I can comment to a certain extent about shoes, but home furnishing, IKEA products, T-shirts, et cetera, sports tools in Decathlon is not within my area of competence.
As far as shoes is concerned, you're absolutely right that there is a huge potential for made in India, make in India kind of scenario as far as sneakers and sports shoes is concerned. I think the government is also seized of this. They have brought in a bunch of initiatives, including levying of import duty on the shoes as well as bringing in BIS requirements for shoes.
You will see a lot more action happening as far as manufacturing of sneakers in India is concerned. You would have read that recently a Taiwanese company has entered into an MOU with the Tamil Nadu government to set up a large shoe manufacturing facility. There are certain infrastructure bottlenecks as far as setting up large factories in India are concerned. However, I think the future is looking good.
Sameer, the other question I have is on this model where electronic manufacturing companies talk about having ODM business and prescription-based business. So I'm just thinking, are we going to move towards ODM like where you design your own products, you have your own solutions and all that in future?
So ODM equivalent for us is private label manufacturing, and we definitely are doing some amount of private label manufacturing for retailers, for organized retailers, for e-commerce platforms, as well as for a D2C company. Again, I can't comment about the electronic manufacturing guys, I can talk about the FMCG. For us, ODM is definitely one of the avenues for growth. I don't see private label becoming a very large part of our business for the next couple of years. But in the medium term, we should definitely see ODM/private label becoming far more important for us.
Just last question from my side. I think in your annual report, I think 1 year back or 2 years back, you even talked about some export opportunities because of China plus 1 or anything. So are you seeing any traction on that side? I understand the India opportunity itself is huge and you want to focus on maybe India, but just want to understand in terms of future opportunities.
So two things, right? So one is the export. Export thing definitely is interesting, the China plus 1 thing that we spoke about. And I don't remember which particular aspect of my message you're talking about, but I'm sure I had caveated it very clearly saying that there are certain infrastructural bottlenecks as far as FMCG manufacturing is concerned to become the China plus 1.
Some of these bottlenecks are being addressed, and you will see that happening in shoes far quicker than happening in case of FMCG products. We ourselves have taken some steps. The acquisition of the Scholl facility in IGK is actually 100% EOU, which is currently the exclusive manufacturer for all Scholl products going to EU, U.K., Australia and New Zealand. The Baddi facility is a U.S. FDA approved site, which is manufacturing a host of OTC/pharma/FMCG products for the U.S. market as well. While we are taking some steps, I would say it's miles to go before we actually end up having something to talk about.
We have a follow-up question from the line of Mr. Akhil Parekh from Centrum Broking.
Just one question, like on the bottled water opportunity, like if I look at IRCTC, right, I think they have been doing a fair good amount of CapEx in their Rail Neer kind of facility basically. So they have almost 16-odd operational plants, and they've done a CapEx of INR 100 crores for the first quarter. By any chance, have you thought around this like in terms of manufacturing the bottled water and supplying it to likes of IRCTC?
So a couple of things. Have we looked at manufacturing bottled water? Absolutely. So we consider bottled water to be a part of the beverage industry, and definitely, like I mentioned before, whether it's PFC, PET bottles, Tetra Pak, juices, bottled water, everything is fair game for us. As far as Neer specifically is concerned and IRCTC specifically is concerned, we haven't actually considered that at all for reasons which -- so we are generally -- if you follow the company, we are very conservative in terms of our counterparty risks. We prefer -- especially for larger customers, et cetera, we prefer dealing with companies who are able to give us a long-term contract in terms of their take off, et cetera. And from that perspective, it's difficult to get into that kind of a contract with some of our customers. And we are not comfortable with that, Akhil.
Thank you. Ladies and gentlemen, that was the last question of our question-and-answer session. I would now like to hand the conference over to the management for closing comments.
Thank you, Zico. So in addition to the operational and the financial initiatives, we at HFL are keenly committed towards our ESG initiatives as well. The company is focusing on GHG emission reduction and effective utilization of energy by selecting appropriate low-carbon transition technologies. We have identified opportunities for improving energy efficiency.
To illustrate, we are now using more than 6,000 metric tons of bio briquette annually to replace fossil fuels. HFL is also steering various other initiatives, including groundwater recharge through rainwater harvesting at its facilities, maintaining natural habitats around its plants like ponds, ensuring their maintenance and beautification as a part of its compliance requirements. We reckon that the local community's well-being is vital to our business. And accordingly, we consider their concerns and expectations in our business decision-making process.
The company's CSR initiatives are rolled out directly or in partnership with nonprofit organizations. This helps in increasing reach as well as ensuring the adoption of initiatives by communities.
I take this opportunity to thank everyone for joining on this call. I hope we have been able to address all your queries. And for any further information, kindly get in touch with us or Strategic Growth Advisers, who are our investor relations advisers. Here's wishing you all a belated Independence Day. On this special day, let's remember our past, celebrate our present, and dream of a brighter future. Stay healthy, stay safe. Thank you so much.
Thank you. On behalf of Hindustan Foods Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.