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Ladies and gentlemen, good day, and welcome to Hindustan Foods Limited Q4 and 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 a guarantee 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, Hindustan Foods Limited. Thank you, and over to you, sir.
Thank you, Sejal. Good afternoon, and welcome, everyone, to our Q4 FY '24 earnings conference call. I appreciate you taking the time during your lunch hour to attend this call. I am joined on the call by Ganesh Argekar, the Executive Director of our company; Mr. Mayank Samdani, who is our Group CFO; Mr. Vicky Solanki, who heads our Corporate Communications; 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 quarter, though challenging, has set the foundation for stage of growth that we at HFL are looking forward to.
During this quarter, we undertook the integration of the Baddi unit, a facility with complex regulatory demand, and also KNS Shoetech, a company with approximately 5,000 employees. The integration process is advancing smoothly, and I'm confident that we'll begin to witness the advantages of this integration within the coming quarters or shortly thereafter.
In fact, I have requested my colleague, Ganesh, to enumerate some of the things that we are doing for this integration. All of these efforts have reinforced my belief that successful M&As are not about getting the right price or the right assets, but more about getting the integration right.
A classic example of this has been our acquisition of ATC Beverages way back in 2019, which in spite of our best efforts continue to be a drag after the integration. I'm personally very pleased to confirm that the unit is now making money for HFL, and we expect it to ramp up even further on the back of the strong demand in this season.
Overall, however, FMCG demand remains sluggish, and this slowdown, coupled with the price deflation continues to challenge our business. However, our decision to diversify into new product categories and new geographies is helping us offset some of these headwinds. We got an opportunity to start manufacturing a new product category of ice creams in 2022 and recently we decided to expand in this category.
Similarly, after our entry in beverages in 2019, we recently expanded our beverage portfolio with an additional factory in Assam. Given the recent heat wave across the country and the resulting climate changes, we do see a strong growth in both of these categories. I'm similarly confident that the 2 new categories that we've recently added, that of OTC pharma and shoes, will similarly help us in scaling the business in the years to come.
In terms of other developments, the HFL Board has authorized us to commence some exploratory steps for examining a potential demerger to integrate the promoter-owned factory at Nashik with HFL. This is subject to further consideration and deliberation to be carried out by the Board, including the committee thereof, relevant at the point in time and the procedures to be followed by the company as per the applicable law.
Just to give you some background, however, this plant is a dedicated plant manufacturing soups and meal makers for a leading FMCG player. It has been our stated objective to bring the manufacturing units from Vanity Case to Hindustan Foods at an appropriate time.
We have done this in the past with the merger of Coimbatore and Hyderabad. We believe that with the advent of additional business from this customer at this site, it will now be appropriate to bring this manufacturing unit under HFL and we will come back to you with the extra data on this as and when the decision is taken by the Board.
To summarize, despite the ongoing decline in the consumption impacting our growth strategy, I'm optimistic that our efforts to expand our product range into emerging sectors will support our future growth trajectory. We remain dedicated to grow our business and achieve the goal that we have stated earlier.
I will now hand over the call to Ganesh Argekar, our Executive Director, to brief you on the operational highlights.
Thank you, Sameer, and good afternoon, everyone. I will now walk you through the operational and business highlights for Q4 FY '24. While the deflation in input material continues to affect our top line, the operations at our various factories have been stable in terms of volumes. Some of the factories manufacturing seasonal products are witnessing record production in spite of the overall slowdown in the demand of FMCG products.
The factory set up in Guwahati, Assam for production of juices commenced production as per schedule. The total CapEx incurred for the same is approximately INR 20 crores. The scope of work for the new ice cream factory being set up in Kundli, Haryana has increased. This will result in an overall CapEx of approximately INR 150 crores as against an earlier estimate of INR 100 crores. The company expects to commence production by Q3 FY '25.
Investment of INR 50 crores has been planned at Hyderabad plant for expansion. The Board has approved to invest up to INR 40 crores for its color cosmetics plant located in Silvassa. Investment of INR 20 crores for expansion of capacity at the ice cream plant in Lucknow. The company has completed the acquisition of all the facilities under KNS Shoetech and operations are expected to stabilize from Q2 FY '25 onwards.
As mentioned by Sameer, let me take a couple of minutes to explain the work that we as a team are doing to make this new acquisition successful. While we read and talk about acquisitions on paper, it is really a tough task to ensure that the integration is properly set up in the company, supply chain and within various departments of the company to continue an uninterrupted manufacturing and dispatch cycle. We are exporting to more than 20 countries from our Baddi factory, which has approvals from the U.S. FDA, MHRA, WHO, Russian GMP, TGA, Ayush well as BSI 13485.
A change of ownership would necessarily mean transfer of all pertaining licenses, new regulatory approvals of products and changes in all the packaging materials. While we do chart out our action plan right from the acquisition, it does take some time for the documentation and changes to happen. For instance, product approvals for some countries may take a year to complete the entire process.
The ERP also plays a vital role as we changeover to a new software and for all the modules that we have to implement. Training and implementation needs to be conducted for the inducted staff before we move on seamlessly to the new systems. Our IT and external ERP teams are already on the job coordinating the implementation of the system processes.
Our new shoe manufacturing unit based out of Kundli, Haryana, and from the sites in Himachal Pradesh currently employ more than 5,000 staff and workers. As mentioned earlier, we have to complete the transfer of the existing employers to the parent company. This also involves timely execution and settlements for which our HR team is in charge.
New registration [Audio Gap] vendor, customer, tax master in the system has to be carefully incorporated and plotted. The shoe business itself has more than 2,500 vendors and 50,000-plus material RMPM item masters. I would specifically like to mention that some categories of this business have to programmed and customized for the MRP, SOPs and MIS reports as per our requirement.
The customization can be done only after we have onboarded the company and after having conducted a system requirement study. Our past experience in integration of units gives us the confidence that these 2 acquisitions should start contributing soon.
With this, I will now hand over the call to Mayank Samdani, our Group CFO, to take you through the financial results for the quarter ended 30th June 2024.
Thank you, Ganesh. I will now run you through the financial performance for the quarter that went by and the year FY '24 as a whole. As far as the financial numbers are concerned, we posted a decent set of numbers on the back of steady performance across our existing factories and that's despite the quarter being affected by the integration of the 2 of the largest acquisitions done by the company.
Financial highlights of FY '24 are as follows: Revenue increased by 6% to INR 2,761 crores in FY '24 from INR 2,602 crores in FY '23. EBITDA growth grew by 29% to INR 228 crores in FY '24 from INR 177 crores in FY '23. PAT increased by 31% to INR 93 crores in FY '24 from INR 71 crores in FY '23.
Now the financial highlights of Q4 FY '24 is as follows: Revenue increased by 11% to INR 734 crores in Q4 FY '24 from INR 660 crores in Q4 FY '23. EBITDA grew by 28% to INR 64 crores in Q4 FY '24 from INR 50 crores in Q4 FY '23. PAT increased by 13% to INR 23 crores from (sic) [ in ] Q4 FY '24 from INR 20 crores in Q4 FY '23. We posted a record EBITDA for the Q4 FY '24 and FY '24, highlighting better utilization of our existing factories.
The company has incurred an additional INR 38 crores in depreciation and interest expenses compared to the previous quarter primarily due to the acquisition of Baddi and the shoe unit. However, the delayed ramp-up of Baddi factory caused by licensing and other regulatory issues led to lower than expected revenues impacting both PBT and PAT for the quarter.
Net worth as on 31st March 2024 stood at INR 646 crores. Gross block as on 31st March 2014 stood at INR 1,129 crores. Debt to equity stood at 1.06x, and we maintain a healthy ROE of 18.2%.
As the funds from the new capital raised are put to use, we hope to be able to better our ROE performance in the coming quarters. The company has to invest in the working capital in form of raw material, packaging material and finished goods due to acquisition of the Baddi and the shoe unit. And in spite of that, the company generated a healthy cash flow from operations of INR 87 crores on the consolidated level.
As indicated earlier also, the working capital cycle of shoe business is different as we need to invest in working capital because of the advance payment to export and high conversion time from RM to FG. This will lead to increase in the cash conversion days of working capital going ahead.
With this, I would like to open the floor for questions.
[Operator Instructions] The first question is from the line of Akhil Parekh from B&K Securities.
Congratulations to the team on a good set of numbers in a tough environment. Sameer, my first question is on the sales guidance that we are maintaining it at INR 4,000 crores for FY '25. So is it fair to assume we are kind of assuming similar pricing trend for FY '25? And so incrementally, INR 1,200 crores is possible assuming the same price inflation is there?
So Akhil, while we maintain the guidance in terms of the turnover, you know that our revenues are completely dependent on the inflation, deflation as far as commodity is concerned. While those inflationary or deflationary pressures actually don't affect our bottom line, the INR 4,000 crores number, the guidance that we are giving is assuming that prices will not fall further.
Having said that, Ganesh, my colleague here, can testify that even in the last couple of months, the trend in terms of the commodity has been trending lower. I really do not want to take a call on how things are going to shape up on the price front. Having said that, let me just break it down operationally.
Operationally, we do believe that the shoe business should get fully integrated in this financial year and should start contributing to the top line and the bottom line. We do expect that Baddi should start ramping up once all the licenses have been transferred, et cetera. And that should start contributing towards the top line and the bottom line as well.
The NIC ice cream project in Kundli, as Ganesh mentioned in his opening remarks, we are hoping that we'll be able to start production from Q3, definitely by beginning of Q4 is when the season will start. And as a result, that should start contributing towards the revenues as well.
So broadly, that's what gives us the confidence in terms of our growth numbers. But I really, in view of so many variables as far as the pricing is concerned, I really do not want to take a call on where the inflation is going or not going.
Okay. Fair enough. And whatever incremental -- I mean, let's assume if the price trend remains constant, so incremental sales is going to come from shoe, Baddi and a bit from NIC. Is that understanding correct? These are the 3 big levers basically for FY '25?
Absolutely.
Okay. And Baddi, we have not highlighted like when we are expected to make it on stream. Shoe, I'm assuming it's going to start by 1Q of '25. Is it fair to assume Baddi will start around similar timeframe?
So Baddi, in fact, we started booking the revenues in our systems from the previous quarter. So this quarter, which has passed, which is the March quarter, also had some amount of Baddi. However, because of the licensing issues, Baddi is not functioning at its full capacity. I have, again, very little visibility in terms of the regulatory issues because we are dealing with regulatory authorities across countries.
To just give an idea, the Russian authorities have indicated that it might take them at least 8 months to get the re-audit done for the site because of the name change, et cetera. So from that perspective, I'm again hesitant to tell you when exactly we'll be able to get to the peak capacities or the stated capacities in Baddi. But work has already started in terms of revenues. They have started accruing since the last quarter itself.
Okay. And would you be able to quantify like what is the true potential of the unit in terms of sales?
We generally avoid doing that, Akhil, from a perspective of individual units for -- just because you know that some of these units are dedicated to our customers and then it ends up disclosing information about those particular customers as well, right?
Broadly, we continue to say that we had invested around INR 120 crores in Baddi. We do expect an asset turn of between 3 and 4, that's what Mayank has mentioned a bunch of times before. We continue to believe that we should be able to deliver that kind of asset turns across all our assets.
Sure, sure. And just 2 more questions. One on the gross block we've crossed INR 1,100 crore plus, including CWIP. And in last con call, you had highlighted we should kind of try and reach INR 1,800 crore mark in the next 2 to 3 years. So this year, probably, I think based on whatever guidance you have given in the press in terms of capacity expansion. So hopefully, we should touch INR 1,500 crores thus and INR 1,800 crores by '26 or of course, out of '27. Is that fair understanding?
So obviously, Akhil, the ones which have been announced, et cetera, are in the press release already. And that's pure mathematics. We just have to add them up and get to that number. In terms of the future, we continue to look at it quite positively.
Having said that, I mentioned this in a couple of our investor interactions as well as in the last couple of investor calls that the overall operating environment for FMCG has been tough in the last few quarters. The growth pipeline is definitely far less populated than it was, let's say, about 1.5 years ago.
Post this election and especially post this monsoons, we are hoping that things will start showing up again. But again, I really don't want to go out on a limb on this because this is way beyond my pay grade in terms of trying to explain whether the consumption story is going to come back to India soon or late.
Sir, just to clarify, that INR 1,100 crore number, what does it include and what it doesn't include in terms of shoe, Baddi I'm assuming is already a part of that INR 1,100 crore number. So NIC is not part, I believe, and shoe INR 100 crores is not part of it, right? Is that correct?
Akhil, Mayank here. You are correct that Baddi is included in this. And shoe INR 30 crores is included, which we have done, we have closed in Feb. The rest is not included yet, and this -- that will come in this quarter. NIC is not -- the ice cream of NIC is not included in this. And whatever we announced in this Board meeting, those are not included.
Okay. That's clear. And lastly, on the margin expansion front, right? I think deflationary scenarios, we do see margins expand. But if I do a math of consol minor stand-alone, right, I see a gross margin of 30% plus and EBITDA margins of 14%, 15% plus. So is it because of the beverages and the ice cream facility which we have -- just 2 categories why we are seeing the margin expansion?
Akhil, we've urged people earlier as well that margin for us as a percentage of sales has got to do completely with things which are beyond our control. The entire RMPM cost is a pass-through for us in most categories. And as a result, in case of a deflationary environment, frankly, our margins start looking up even without us doing anything. I would again urge you that, yes, there has been an expansion of margins in -- which is evident in this quarter's results. While you can give us credit, frankly, we don't deserve any for it.
Okay. But ice cream and beverage has nothing to play. I mean there's no role of these 2 categories in terms of margin expansion?
So they do have a role to the extent that there will be better utilization of both the ice cream as well as the beverage facility because of the enormous amount of heat that all of us are putting up with, right?
Out of that, the ice cream facility is a dedicated facility, so frankly, while there is 0 operating leverage in that, which means while we are very happy that we are currently producing record amount of ice creams for our customer, the fact of the matter is it's not going to make too much of a difference to us in terms of our bottom line.
On the other hand, the beverage, you're absolutely right. The beverage is an anchor-tenant model where the current capacity utilization is definitely going to help repay for my earlier sins of ATC Beverages, where we've been making losses since 2019. So I'm hoping that we'll recover some of that money in the next quarter or so.
The next question is from the line of Kashyap Javeri from Emkay Investment Managers.
My first question is on the CapEx on our ice cream facility, which has gone up by about INR 50 crores. Does this commensurately increase output over there also or otherwise why is this about INR 50 crore increase there?
So Kashyap, first of all, just maybe I should take a 30-second gap in explaining to you our business model as far as dedicated sites is concerned. So when it comes to dedicated sites, the entire CapEx is decided in discussions with the customer.
Any increase in the CapEx side is got to do with a scope increase, which means either the customer has asked us to set up some additional facilities or has asked us to increase the capacity of certain lines, et cetera. And that's what is reflecting in this update where we had initially announced that we will be investing around INR 100 crores CapEx in this project, which has now gone up to INR 150 crores.
It basically means that, yes, we are going to probably end up making more ice creams than what we had envisaged, and we'll also probably end up making better ice creams than what we had envisaged. And the better I mean because we're going in for more sophisticated machines than what we had planned earlier.
In terms of our bottom line and our top line, yes, our asset turn guidance remains the same. So any increase in our gross block should reflect a commensurate change in our top line. And as far as bottom line is concerned, especially for dedicated units, since they are ROE based, any kind of increase in the gross block or increase in the CapEx definitely helps us in earning a little bit more money.
Okay. So basically, it could be higher revenues, maybe it is driven by more output or the same output in a better -- with a better product?
Absolutely.
Okay. Got it. Now in terms of ramp-up in the ice cream facility, you also highlighted about the existent heat wave which is there probably across India. So this quarter 1 revenues should potentially reflect then the peak output? Or is it beyond that there's a ramp-up possible, we may not still touch the full output even in Q1?
So again, Kashyap, I request you not to look at revenue numbers for dedicated sites. Just to satisfy the academic curiosity, yes, we are manufacturing ice creams at our peak capacity right now. It's obviously as hot as it gets outside. So from that perspective, we'll definitely be at our peak capacity utilization for the year in this particular month.
However, please appreciate that the operating leverage coming in from this peak capacity utilization does not flow to us completely. Because it's a dedicated side, a large part of the operating leverage flows back to our customer.
And as a result, our bottom line may not reflect the exact or the complete effect of this increase in the capacity utilization. Having said that, you're absolutely right, people are selling ice creams as if there is no tomorrow.
And on the standalone business, you mentioned that on the FMCG side, there is still no green shoots yet visible from our customers at this point of time. Because what we heard across most of the FMCG is that finally, after such a long time, rural has started looking up after a long, long time.
Kashyap, we promised ourselves as a management at this time, we will not use the world green shoots because we've been using this for the last 3 quarters. And we said [Foreign Language]. So the short answer and the formal answer is that I don't know. I think unless we see a sustained increase in the consumption I really do not want to comment whether we are seeing a revival of the consumption in India.
All I can say is the last year, 1.5 years have been tough. We'll see. I really do not want to go out on a limb and say that things are turning around. We are hoping that because of the election and because of the monsoons, et cetera, demand will come back, but it's too early to say here.
Okay. And just last question from me. On this facility that we would be merging from Vanity Case, the presentation says that potential CapEx could be roughly about INR 25 crores. Now also sort of talks about the amount of land available there, whether it is leasing and then the consequent civil construction over there also. What kind of, let's say, revenue or profits or something that one could expect from this? Would you be able to disclose that?
Too early, Kashyap. So right now, we've just taken an in-principle approval from the Board to start the process. The reason -- and maybe I should spend 30 seconds on this because this is an important aspect of our -- this quarter's update. So we traditionally, the Vanity Case Group has been doing contract manufacturing much before it acquired Hindustan Foods, and the stated objective was to fold everything into Hindustan Foods.
Because of various operational issues, we did Hyderabad and Coimbatore much earlier. And as of the end of the last financial year, nearly 90% or more of the business has been -- is in Hindustan Foods and just about 10% or even lesser is in the privately held companies.
We got an opportunity to do this particular consolidation because we -- the customer in question is asking us to double our capacity, which is in the current factory. And it will become a strategic site for the customer as well.
So we discussed it with the Board that while it will involve some amount of operational difficulties, especially for Ganesh to manage all the raw materials, packing material, et cetera, we thought it would be a worthwhile time to do this because we do intend that this will become a strategic site for our customer, being one of the only manufacturers of that product category.
Having said that, from a commercial perspective and more importantly, from a financial perspective, Mayank, our CFO is working on it, along with, Bankim, our Company Secretary. So once they have all the details, they'll come back to you with the various numbers in terms of swap ratios, et cetera.
Sorry. Just 1 or rather 2 last questions. One, are there any more assets in Vanity Case, which can be merged later? And second, this quarter's cash conversion cycle, which is roughly about 30 days, now is that a steady state, including the shoe business overall working capital cycle to look at in future?
Okay. So the second part of the question, I'm going to ask Mayank to talk about in terms of the cash conversion cycle. But as far as other assets is concerned, yes, Vanity Case does have, I think, 2 more factories which are yet to be consolidated into Hindustan Foods. I think put together, they would account for maybe less than INR 100 crores of turnover.
And within that INR 100 crores, they are probably dealing with a lot of B2C and a lot of smaller brands, et cetera. So the complexity of bringing those into Hindustan Foods, frankly, right now outweighs the benefits of bringing them in. But at an appropriate time, we've undertaken that we'll bring those into Hindustan Foods as well.
Now as far as the cash conversion cycle is concerned, Mayank?
Yes. Kashyap, so as you correctly mentioned that our cash conversion cycle today is around 26 days. And in my speech, I have indicated that shoe will require some additional working capital because of the nature of the business. It requires importing goods with advanced payments and also the conversion from RM to FG is longer than what our other factories do. So we believe it's a little bump up from today's working capital cycle, but it still will be not be much.
The next question is from the line of Abneesh Roy from Nuvama.
My first question is more on the industry level. We have seen a few international issues for spices. So are you also seeing more checks, more diligence in terms of the product quality, given this has come in the media a lot. While the Indian regulator has found no issue, we have seen Singapore, Hong Kong, et cetera, generally find issue with all the spices. So do you see that the overall testing and quality parameters, et cetera, being under higher surveillance currently?
So Abneesh, okay, let me first tell you that everybody around here that we will take all the questions even if we run over the 1 hour. And the reason I'm giving this caveat right now because Abneesh has asked a general [Foreign Language] question and everybody in the room knows that I love to speak about this anyway. So I'm going to spend a couple of minutes addressing this, Abneesh.
I don't think people have completely understood the ETO issue which is being flagged out in the media right now. Ethylene oxide is a treatment which is used to sterilize the spices. And it's a commonly used treatment in India, not only for spices, but also for a lot of other cosmetics and food items.
The issue in question is the residual ethylene oxide in the product. There are limits which are suggested by various governments across the country for how much of ETO residual is allowed after having done the ETO treatment. That does not say anything about not doing the ETO treatment or about the harms of the ETO treatment.
Now in terms of the residual limits, incidentally, and while I can't comment about the cases in question, all large food companies are extremely cognizant about this. It is a norm which has been set across, regular testings are done for the residual ETO anyway and I would be really surprised if any of the larger known brands are actually falling foul of those.
Having said that, the sensitivity of the residual ETO varies from batch to batch and it also varies from country to country. So I'm not actually completely taken aback by the fact that some of the countries have raised this as an issue while our Indian regulators have not found similar issue in this.
Having said that, let me also just address it at a top level that, yes, all companies obviously are extremely serious about the kind of food that we deliver to our customers from a product safety perspective. I think it would be unfair to say that just because there have been a couple of cases in the media or in the social media that suddenly companies have woken up and have started doing stuff. Be rest assured that we, as contract manufacturers and more importantly, the brand owners, strive hard to ensure that the product which is being delivered to the customer is as safe as it can be.
There are sometimes some misunderstandings about the law. There are some evolutions about the law where the law needs to catch up with the actual practices, et cetera. That takes time, and that leads to some amount of issues. There has been some issue recently about the baby food and the amount of sugar, et cetera.
It's just a question of the law catching up with let's say, the social media warriors, right? Having said that, all brands, and I can say that with a lot of confidence because we do work with most of the brands in the country, are extremely serious about food safety and go above and beyond in terms of what they deliver to the customer.
Sure, that's useful. My last question will be on the summer category, which you mentioned. So we are seeing very strong demand, which you also mentioned. In the nonexclusive factories, are you seeing good utilization, given so strong demand, especially in talcum powder, ice creams, et cetera, deo, et cetera, possibly.
So are you seeing that benefit? I know it's a smaller part of the business, but are you getting more of that and possibly higher margins because too much of demand is there and supply might be a bit of a challenge?
So Abneesh, theoretically, yes, from a financial perspective, it may not make too much of a difference to HFL because you rightly identified that it's a small part of the business. But the fact of the matter is, yes, this heat wave has created a phenomenal demand for all the summer season products.
We did have a little bit of a dip in the month of April, where again, temperatures actually dipped. But then second half of April and May has been extremely hot. And right now, yes, you're absolutely right, there's no capacity across the entire ecosystem as far as beverages, ice cream, all the summer products, including talcum powder, et cetera, is concerned.
The next question is from the line of Nitish from ChrysCapital.
My question is on Baddi and the shoe business. So how much do we expect the Reckitt Baddi and the shoe business to contribute to our FY '25 revenue?
So Nitish, like I said earlier, we try to avoid giving out unit-wise level revenue and financial numbers. Mayank has time and again mentioned that we will strive to maintain a similar asset turn at the company level across all of these. There will be some differences.
We've also mentioned that in case of shoes, probably the asset turns will be higher as compared to, let's say, a factory like Baddi or ice creams where the CapEx is much more. But overall, we do believe that we should be able to end up with a 3 to 4x asset turn as a company as a whole.
Like I said in response to Akhil's question, difficult for us to give you specific numbers for Baddi unit or for the shoe unit because of the large concentration of customers that we have in a particular unit, especially the dedicated ones. We might end up disclosing more than what we want.
Okay. Got it. And what would be the margins for both these business?
So the Baddi factory is an anchor tenant model. Nitish, you asked for both the businesses or only for sports shoes?
Sorry, for sports shoes and Baddi.
Right. So let me address Baddi, it's easier. So Baddi is an anchor tenant model. And we have a certain guarantee from 1 of our largest customers there for a certain part of the capacity. And for the balance, we are free to go out and get additional businesses, which means we will have some benefit of operating leverage in that facility.
And the way we look at it, it's not again margins. We tend to look at it as ROEs or ROIs. And because it's an anchor tenant model, while the contracted ROE is lower, if we get the operating leverage right and we are able to get the other customers coming in, the overall delivered ROE for that site could be much, much higher than our ROE for the entire company, right? And those are numbers that we've given broad guidance about.
In terms of the shoe business, the shoe business is interesting. It's a very manual business. It's a very labor-intensive business. So from an ROE perspective, if we get the operating leverage right, the ROEs should be very, very high.
Having said that, Ganesh and I spent a large part of our opening remarks talking about the difficulties of integration, et cetera. So once we get past that, we do believe that the shoe business should generate a decent ROE as well. But right now, we're still trying to get the integration done successfully. So maybe in the next quarter, we'll be able to give you a little bit more color about the margin profile, et cetera.
The next question is from the line of Amruta Deherkar from Wealth Managers (India) Private Limited.
So my question is regarding like if you could give us the revenue breakup between the DMU, ATM, SMF and private labeling and, say, 2 to 3 years down the line, how do we expect this proportion to change.
Amruta, can you just repeat that for a minute? I'm sorry.
Yes. So I was asking for FY '24, if you could give us a revenue breakup between the Dedicated Manufacturing Unit, ATM, SMF and private labeling. And how do you see this changing like say 2, 3 years down the line?
Okay, Amruta, of course, we can't give you exact numbers, but we've given a broad guidance that nearly 80% to 85% of our business will continue to be coming in from dedicated sites. And we do expect that for this financial year as well as probably the next, we will continue to maintain that ratio. So I don't think that's going to change drastically in the next couple of years. Is that -- was that your question?
Yes. And it was regarding like now with the shoe business, which is under the Shared Manufacturing Facility. So do we expect like the proportions to change?
So you're absolutely right, the shoe is on a shared manufacturing model. Having said that, the shoe business as a part of the overall business of the company is still much smaller. So it's around -- between 10% and 15% of the company. And I'm not sure whether that's going to make a real big change as far as the nature of the company is concerned.
And having said that, and this is something which I am passionate about, we are basically trying to ensure that this model of dedicated manufacturing, et cetera, is propagated in the shoe industry as well. So maybe we will be able to be successful in that where we actually manage to convert it from a shared manufacturing business into an anchor tenant and then later into a dedicated manufacturing model.
The next question is from the line of Vishal Gutka from HDFC Securities.
Sameer, hope you are doing good. Two questions from my side. Any differential skill set required for running the Baddi plant too because it's OTC business, so a bit of APIs will be involved into it and the margin profile for the same business? Is the margin profile better than the core FMCG business that you have?
And another question is on the seasonal categories. What are we seeing the trend that a lot of seasonal categories such as ice cream or beverages, you're setting a plant for those categories. So is it -- does it make much more sense for the original brand owner to outsource rather than manufacturing on own because if he doesn't own by himself, then the return could be suboptimal for him?
So are you seeing any trend that more and more seasonal category players are likely to outsource to contract manufacturers? Your comments on this I think will be really helpful.
Vishal, about the margin profile, I'll let Mayank answer it. But let me talk about the attractiveness or not of contract manufacturing for seasonal production, right? In a category like ice cream, frankly, the seasonal production part is a little bit of -- it's a difficult parameter to talk about, right?
Because what ends up happening is, generally, people would -- if you're looking at a product where the demand is not constant, you want to get economies of scale by going to a contract manufacturer who can then aggregate demand from various players and manufacture that product.
However, in case of ice creams, what ends up happening is that the peak demand for all brands is exactly at the same time. So if you had to set up a facility which had a larger capacity, as a brand owner, you probably want the maximum capacity in the same month as your competition. And it's very difficult to share this facility with somebody else.
So in ice cream specifically, and the same is true for beverages as well, right, where the peak demand is the same for all the brands. And as a result, the brand owners actually do not like a shared manufacturing contract. They prefer a dedicated manufacturing facility because then they have complete visibility that during the season when they need the capacity, they'll get it.
Because otherwise what ends up happening is that, let's say, in the month of May and everybody wants to make beverages, and the contract manufacturer gets to a situation where we gets to choose which brand gets to the market or not. That's not a great place for a brand to be in.
So yes, you're right that from a seasonal perspective, it would make sense because the season is the same for all brands, they actually prefer dedicated manufacturing rather than shared manufacturing. Does that answer your question?
Yes. And are you seeing trend that more and more people involved with seasonal categories, there will be more seasonal categories like cooling oil, for example, talc powder, where the -- as you told that asset utilization might not be constant throughout the -- might not be uniform throughout the year. So are you seeing any trend that the trend is picking up where we are seeing that this trend is picking up that for seasonal categories there's like even more outsourcing?
So frankly, I think the trend as far as contract manufacturing is concerned has got to do with growth. The trend as far as contract manufacturing has to do with capacity additions given what we talked about the tepid growth of FMCG in terms of volumes, frankly, whether it is seasonal or not seasonal, there has not been tremendous volume growth as far as even categories like hair oil or talc, et cetera, is concerned.
And as a result, I think it will be premature of me to say that we are seeing some kind of a trend, et cetera. Because you would look at contract manufacturing facility or an option only if you needed the capacity. Given the fact that you are currently in a situation where your existing factories are probably underutilized, even at the peak of the season, you probably are not looking at adding capacities or adding contract manufacturers.
So I think the biggest tailwind for us has to be the increase in the volume and consumption of the country. And then within that, we'll then slice it between seasonal products and products which are nonseasonal. But right now, we're seeing a problem in terms of the volume growth across product categories, both seasonal as well as perennial.
For the OTC business, Mayank?
So in an answer of before this, Sameer has mentioned that margin profile is to do with the commodity pricing also, right? So 80% to 85% of our sales cost is the cost. So any change -- so that is why we don't give the margin profile across the factory. But the trend -- it will be affected by the change in the commodity prices because in most of the cases, in majorly all the cases, it is a pass-through cost.
No, I'm telling because OTC is more technical in nature. So logically, the margin should be higher than the core FMCG, right? Because you're...
You are absolutely right, Vishal. From that perspective, obviously, manufacturing a floor cleaner versus manufacturing, let's say, an ingestible syrup dealing with acidity requires a whole different skill set and sophistication, which is reflected both in terms of cost of people, it's reflected in terms of the cost of infrastructure and all of that.
What we are trying and what Mayank is trying to do is trying to shift the perspective away from margins as a percentage of sales to margins or ROEs as a percentage of the employed capital. But you're absolutely right. If you had to concentrate only on margins as a percentage of sales, pharma definitely delivers a better margin profile as compared to FMCG. I mean that's a no brainer.
Great. And just last 1 more question from my side. A CEO from a reputed company highlighted 2 points for outsourcing, what he highlighted that 2 things are important if someone has to insource or manufacture in-house or outsource outside. So what he told is that if the product is differentiated, logically, FMCG companies will prefer manufacturing in-house, if they're on IP.
And the second thing he highlighted that if the market share with respective category is very high, then it will make much more sense for FMCG brand owners to manufacture in-house. So in case of FMCG, what we see that in each respective categories, 2 or 3 meaningful players contribute a meaningful market share. Means the tail is very small in many of the categories, hardly any players are there.
So in that context, the larger category, do you see that more and more companies are outsourcing or -- because second point I was just trying to harp upon because respective -- the relative market share of the -- market share of the respective categories would be commanding 80%, 90% market share. So just wanted your thoughts on this?
So I did read the transcript of the company in question. And while I have utmost respect for the management of that company, I do have some -- it's obvious, right? I mean, I do have a difference of opinion as far as the contract manufacturing perspective and the framework that they use versus what we would like them to use.
If you look at the argument about IP, I think if you look at the beverage segment, it's got 1 of the most strongest IP, right, in terms of the formulation of, let's say, a Pepsi or a Coke which is globally guarded as a secret. And yet globally, it is bottlers and contract manufacturers who manufacture a large part of the entire beverage production.
So from that perspective, there are ways and means of protecting the IP. I don't think the decision about whether the contract manufacturer or not has got to do with the IP. I mean the whole idea of us as contract manufacturing partners is we do believe that we look at it. We are not fly-by-night operators where we would take some company's IP and go and distribute it to their competitors, et cetera.
In fact, that's 1 of the reasons why contract manufacturers are looked at as partners, contract manufacturers need to be strong companies who are sustainable, et cetera, rather than looking at smaller guys. I read earlier today morning that a large contract manufacturer in the EMS space has signed up with Google, and is going to manufacture their flagship phones in India.
Obviously, there's a lot of IP involved in manufacturing, let's say, an Apple phone or a Google phone. The fact that these large companies are willing to partner with contract manufacturers and give this IP to them is a clear testament to the fact that contract manufacturing -- contract manufacturers can work ethically and with integrity as far as intellectual property is concerned, and that should not be an impediment for the decision of whether to contract manufacture or not.
As far as the other argument is concerned, I frankly don't follow that argument. I mean I'm not sure what the market-facing sales parameters have to do with the manufacturing decision. So maybe I need to understand that a little bit better before I can comment on it.
Got it. The question was that if a company has a very low market share, there's a tendency to outsource. If it's a very high market share, then logically, they try to avoid outsourcing because they will be having [indiscernible] and they manufacture in-house. So that was the premise that was given by the CEO.
Sorry to interrupt you, sir...
I mean -- sorry, Sejal, let me just finish this and Sejal, like we mentioned, we will -- even if we do run over the time, we'll definitely address all the questions.
But Vishal, so it's not that I do not understand the question, right? I understood the question. I read the statement as well. So I think at a very simplistic level, what the gentleman in question was trying to say is that if you've got a small market share, you probably have smaller volumes. You do not have the economies of scale. So you go to a contract manufacturer who has large economies of scale. And as a result, you will get a better COGS or cost of goods sold as compared to, let's say, where you had to do it by yourself.
Having said that, again, like I said, I do not subscribe to that argument because if you look at even large companies who have a dominant share of a particular product category, we have a solution for them where we are basically doing dedicated manufacturing where we do pass on the entire operating leverage benefit to them.
We have come up -- we at Hindustan Foods have come up with various solutions. If you're a small brand, if you are in a fragmented market, if you are the only brand in a very large monopolistic market, if you've got volume, you've not got volume, you've got intellectual property, you don't have intellectual property, I think we have solutions for all of them.
So which is why I said that I am not sure I subscribe to the argument that contract manufacturing can be done only in specific cases. And as a salesman, my pitch to the company in question is that, yes, we can manufacture for them anything and everything.
Great. Can I take 1 more last question, one short question, if you allow me?
Yes, of course, Vishal. Go ahead.
So recently I had visited the Contract Manufacturing Expo in Bandra. So there, we found a lot of actual contract manufacturers who are going overseas as well. So they have units in Nepal, Sri Lanka, Philippines. Just wanted your thoughts would you like to restrict yourself to India or you would like to go abroad as well, in case one of the large players invites you set up a unit out over there?
So frankly, we have stayed away from international expansions. We believe that we do not have the management bandwidth to be able to handle manufacturing operations out of the country. Manufacturing is a very brick-and-mortar business. It's a very hands-on business. And like Ganesh was talking about in terms of his integration, et cetera, there's a lot of work which needs to be done.
And as a result, so far, we stayed away from international expansion. Never say never. We did -- we've discussed with our customers and we've mentioned earlier that we are not okay, but things would change. And maybe we'll look at international expansions as our management team and our management bandwidth improve.
The next question is from the line of Priyank Chheda from Vallum Capital.
Question is on what would be the total investment that we have done till now in ice cream, given the Lucknow plant, we plan to increase, so Haryana plant, we plan to increase, even in Lucknow. So what will be the total investment that we would have done in ice cream?
So we have currently done the investment of around INR 200 crores, INR 225 crores in Lucknow plant. We have announced that we will do another INR 20 crores in that plant. So that will take it up to around INR 250 crores. And we have announced that for the NIC ice cream, we will additionally do INR 150 crores in a new plant, both are different plants and different states, Priyank.
Perfect. So total investment in ice cream as a category will go to around INR 400 crores?
Yes, yes, yes.
Perfect. Coming to the Baddi plant, again, given the anchor tenant model that we have, the contracted portions from the Reckitt which we would be having, we would be getting the current EBITDA numbers, right? I mean the difficulty that we should be facing in terms of scaling up the Baddi unit, which you have mentioned in our press release, it has to do with the balance portion which we would go out in the market and find the new tenant, right? Am I understanding correct?
Your understanding is absolutely correct, Priyank. The only delta being that there are some amount of semi-variable expenses, while the fixed expenses as per our business model are taken care of by the contract that we have signed.
Because of the suboptimal usage of capacities, there are certain semi-variable expenses, which are currently depressing our P&L, which we are hoping that once everything falls in place, will stop depressing. But the totally fixed costs, which are a part of those expenses, will get reimbursed to us as per the contract.
Right. So currently, we're getting reimbursed the fixed cost while the revenue scale up would not happen until now in the Baddi given the challenges on the regulatory side. So now going ahead, in case everything settles down, the revenue would scale up. Maybe the reimbursement towards the variable portion will only be scaled up as far as HFL is concerned?
So as far as the anchor tenant is concerned, yes, what we are hoping is as far as the anchor tenant volumes scale up, the losses on the semi-variable expenses will get recovered. And the second is the operating leverage kicking in once all the licenses are in and we are able to attract other customers.
That's when, frankly, we expect Baddi to really start contributing because the entire premise of Baddi was the fact that we got access to a fantastic factory, which is approved by most of the global regulatory authorities, and that we'll be able to offer this to our other customers. So once we start unlocking towards that operating leverage or that capacity is when Baddi will actually start paying off.
Perfect. And any challenges outside the Reckitt as a client that we've identified or any high level thoughts that we would be having with our customers? How much are you confident on scaling this plant in FY '25?
Yes. Priyank, we were confident. That's why we acquired the asset, right? I mean we continue to be extremely bullish about growth as well as consumption in the country.
Having said that, and I have time and again mentioned this, that it's been tough in the last 6 to 8 months. Most of our customers are not selling as much as they would like to and because they are not selling as much as they would like to, there are existing capacities, which are idle. So they are probably not looking at additional capacities right now.
Once the consumption story returns, once people start spending more money on FMCG, we will get very quickly to a situation where additional capacities will be required. We've got on our hand in Baddi a fantastic facility which we'll be able to give this capacity very easily to our customers. But till they start needing that capacity, that risk continues that and that operating leverage will end up hitting us.
Perfect. And the investment in the Hyderabad plant, if I missed out is into the same soaps and bars plant, which where we had invested INR 150 crores, or is this something different?
So Priyank, we have taken the approval of INR 150 crores, but we invested lesser than that because this was delayed. Now after this INR 40 crore, INR 50 crores, it will go to INR 150 crores in bars and -- so we will complete that cycle.
Okay. So the total investment of -- in Hyderabad soaps and bars would be INR 150 crores, which...
Yes, with the additional investment.
Perfect. And any guidance on what would be the revenue for the Nashik plant, which we plan to merge with HFL, what would be the revenue that, that plant would have generated in FY '24?
Priyank, currently, it is too early to say that because just we have -- Board has just given us the approval to start the process, and it will take time to us for all the regulatory things to come in. And at the appropriate time, after the Board approves it, we will come back to you about all these details.
No problem, Mayank. Just last question on the capital allocation part. So now we have warrant approval of around INR 400 crores of which INR 100 crores we have a utilization which you had explained in the last quarter. Now my question is our gross debt has gone up by 1x to the equity. So what are -- what do you plan around the warrant as well as the debt. And given the expansion plans on the shoe side we have, so how we will manage warrant versus the expansion from the internal approval?
Priyank, we have indicated when we were raising the equity that we will try to maintain near to 1:1 debt equity ratio for our future investment also. This quarter, our debt-to-equity ratio is very near to 1:1. And given that we have some money which we have already raised and money to come in, we expect this to be near to 1:1, then beyond that, yes.
Priyank, as far as utilization of the money is concerned, I think when we raised the money, one of the reasons why we raised it by way of warrants is because we were not sure in terms of the growth as well as the pipeline in terms of how new projects are coming in, et cetera.
And as a result, that's the reason why we also raised the money as warrants which gave us a breathing space of around 18 months to be able to draw down that money depending on how projects pan out. It goes back to my earlier statement about the fact that we are hoping post this monsoon, consumption story will return, growth will return to the FMCG sector. And then we should be able to come back with additional growth plans. But right now, that's the way things are.
The next question is from the line of Dhimant Shah from ITI Mutual Funds.
I was slightly late in the con call. So do pardon me if it's a repetitive question. Just question number one, you -- in the presentation, you have shown a procrastinated turnover of INR 4,000 crores. Now how much is this inclusive of incremental, if you can just help us, Nashik and the shoe business and a little bit of Baddi, if I'm not wrong, how much does that contribute to this incremental forecast?
So Dhimant, actually, the Nashik discussion is too premature, and it's really new. I don't think...
But there is nothing included from Nashik into this projection.
That was not the plan. I mean, we've been talking about INR 4,000 crores now, I think, for more than a year or maybe even 2 years, all of the guys in the room are pointing out that it's been 2 years that we've been talking about it. So no -- and Nashik was not even on the radar at that point of time, Baddi definitely was and is. The shoe business was and is. The newer project of NIC, I think, was and is.
So I did kind of layout the glide-path of these are 3 new projects, which we are hoping will contribute as far as the turnover is concerned from where we are at the end of this financial year to where we want to be at the end of next financial year. And then in between, of course, we are hoping that some other things will fall in place and we'll be able to reach their pick up.
Having said that, I have to tell you that our commentary on this INR 4,000 crores and I explained that to Akhil in the earlier part of the conversation, has also got to do a lot with the inflationary deflationary pressure as far as RMPM is concerned because our model envisages a situation where any kind of changes in the raw material prices or packaging material prices get passed on to the customers immediately.
While we do expect that the current pricing scenario will remain constant, if there is any change on that, of course, it will end up affecting us as well. Our bottom line, however, would not get affected, especially to the extent of the dedicated factories. So even if the turnover increases tremendously or it falls, our bottom line would remain the same.
I did talk about it in response to some other questions where our gross margins are looking better in this quarter without us having done anything better. So that kind of caveat, you need to keep in mind when you're looking at only a top line number. I would urge you to look at ROEs for us. I would urge you to look at ROCs, I would urge you to look at our PAT numbers, but if you do insist on looking at top line, I would say, just look at it with all these caveats.
Perfect. So incrementally, would you say that both ROCE and ROE if you cull out the incremental contributory avenues, those would kind of enjoy better ROEs and ROCs in your opinion?
Okay. Now I've lost you.
So let's say, till date, whatever business is contributing, you are obviously including shoe and a little bit of incremental ice cream and some other business into the forecasted INR 4,000 crores. Now if we don't take that incremental business or rather, if we take only that new business that you have forecasted will be included as a part of INR 4,000 crores, does that incremental capital employed and incremental turnover enjoy a better ROC, ROE, in your opinion? So incrementally the numbers...
It's not about better ROE, ROC because, Dhimant, right now, we've deployed the capital [Foreign Language] obviously, ROE will start improving, right? If you look at it from a perspective of our fund raise, so we've already raised money.
We've got around INR 175 crores of money from the INR 400 crores that we have raised as warrants. And I think Mayank in his remarks has mentioned that as we deploy this, we do expect our ROEs to improve because right now we've not fully deployed that.
Broadly, we expect that we should be able to deliver around 20% to 22% ROE. We do expect that the debt equity profile of the company will remain 1:1. Given what we are projecting in terms of the gross block, I think it's an easy calculation to arrive at our PAT numbers.
Right. So the incremental block will contribute slightly better than the existing block is my question. In a way, incremental ROC will be improving.
Incremental ROC will be improving, yes, predominantly because we've already raised money for it and it's not earning anything. Right now, the only thing that the money is doing is earning us either FD interest or has been used to repay debt, right, which is why the debt equity ratio has come down.
So if you look at the overall ROE last quarter, we were at around 21-odd percent, we've come down to 18% in this year because we've ended up raising that money, which has not been deployed as yet. So as Baddi as well as the other projects start delivering money, we will end up definitely improving our ROE, Dhimant. I'm not sure I'm getting your question.
Okay. I'll take it separately. Question number two, I mean, you did allude to some amount of operating leverage to kick in, which will take care of some of the expenses that have not been sort of absorbed by the level of activity, in particular, the employee and the other expenses. So how do you think will that be absorbed in the current year?
Are we talking about a specific unit or we are talking about in general?
No, in total.
So in total, that's where operating leverage comes in, right? So in case of our dedicated factories, we don't enjoy the operating leverage. So any fixed cost in terms of employees, depreciation, interest gets reimbursed to us by the customers anyway. However, in case of the shared manufacturing or even anchor tenant model, there's some element of fixed cost which is not reimbursed by our customers, which is what we are supposed to either earn on or spend on.
And that's the one which we are hoping that we'll be able to earn on. So for example, in case of the shoe business, we are definitely hoping that we should be able to integrate the facility successfully in the next quarter or so and then start earning on the fixed cost, which is currently being paid.
Similarly, in case of Baddi, while there's an anchor tenant, which is paying for a certain part of the fixed cost and certain part of the employee cost, we're hoping that as we are able to get the licenses in place and attract other customers, we will start earning on the unamortized fixed cost as well. So it's a very simple way of earning from fixed cost. As we increase our capacity utilization, our operating leverage benefits should start kicking in.
Okay, okay. And somebody also alluded to the capital allocation policy. This is the last question. Would you say that -- how would you want to achieve balance between our dedicated guy, a tenant and all in one kind of -- and against that, a completely open-ended kind of manufacturing where clients can come in irrespective, so how would you want to balance here? Number 1. Number 2, also, is there certain parts in the contract, which will allow us a better recovery just in case?
Dhimant, principally as a company, we do -- we are more comfortable with dedicated manufacturing, right? I've mentioned this time and again that we are predominantly risk-averse company. We would like to tie up with brands which are strong. We like to tie up with brands which have visibility for the next 5, 10 years. We'd like to tie up with the brands and companies who are able to give us the visibility and sustainability of our future as well.
I don't think the capital allocation policy is going to change drastically from that. We did make some correction based on the overall environment in terms of the FMCG growth, et cetera, the overall feedback that we are getting from our larger customers.
And we did change our risk profile in terms of getting into more shared manufacturing facilities, which is, let's say, the entire shoe business, or trying to tie up with newer brands, let's say, the new ice cream brand that we've signed up. So while we are making some changes depending on the realities of the market, in a perfect world, we would like to be predominantly doing only dedicated manufacturing.
As there are no further questions from the participants, I now hand the conference over to Mr. Vimal Solanki, Head Corporate Communications and Emerging Businesses, for closing comments.
Thank you, Sejal. At HFL, we have established a sound -- solid foundation for success with FY '24 demonstrating promise despite various challenges. Our 2 largest acquisitions during FY '24 highlight the company's resilience and performance trend. We demonstrated our diverse capabilities by successfully capitalizing on opportunities across various segments.
Integrating the Nashik plant into HFL will further enhance our position. Although the slow ramp-up of Baddi factory due to licensing and regulatory issues has not yet yielded expected revenues, we remain confident in our ability to perform in the upcoming quarters and achieve our targets for FY '25.
Allow me to summarize today's session. So as indicated by Sameer, the new businesses that should make much required difference are, of course, the 2 large categories, which have come up in the past couple of years. One is footwear overall. That is leather and sports and the ice cream. And these would become significant in the coming years for us. Like Ganesh had mentioned, while statutory compliances that are beyond our control would take time and seamless integration also take up time, we are hopeful for a brighter '24, '25.
I take this opportunity to thank everyone for joining on this call. I hope we have been able to address all your queries. For any further information, kindly get in touch with us or SGA, our investor relations advisers. Last week, each one of us at HFL took time out to exercise our right and cast our votes. Trust you all did, too. Thank you so much.
On behalf of Hindustan Foods Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.