LT Foods Limited (LTFOODS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q2 FY '23 Earnings Conference Call of LT Foods Limited hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumant Kumar from Motilal Oswal Financial Services. Thank you, and over to you.

Thank you. Good afternoon, everyone, and a very warm welcome to LT Foods Limited 2Q FY '23 Post-Result Earnings Call hosted by Motilal Oswal Financial Services. . On this call today, we have management team being represented by Mr. Ashwani Kumar Arora, MD and CEO; Mr. Vivek Chandra, CEO Consumer Business; Ms. Monika Chawla Jaggia, VP Finance and Strategy; and Mr. Sachin Gupta, CFO. So we will begin the call with key thoughts from the management team. Thereafter, we will open the floor for Q&A session. I would like -- now like to request the management team to share their perspective on the performance of the company. Thank you, and over to you.

Thank you. Good afternoon, everyone, and thank you for joining us on our earnings conference call. I would like to highlight that certain statements made or discussed on the conference call today will be forward-looking statements, and a disclaimer to this effect has been included in the results presentation shared with you earlier. Result documents are available on the company's website and have also been uploaded on the stock exchanges. A transcript of this call would also be made available on the Investors section of the company's website. I would like to begin by taking you through the key highlights of quarter 2 financial year '23. Our consolidated revenue for the quarter 2 financial year '23 was up by 31% at INR 1,732 crores versus INR 1,323 crores in quarter 2 financial '22 on account of increased sales from Basmati & Other Specialty Rice and the Convenience business segment. Our gross profit was up by 43% from INR 453 crores to INR 650 crores due to change in product mix and the partial price increase implemented on account of trade change. The freight cost was up by 660 bps that led to an increase in other expenses by 527 bps versus last year. The freight expenses are expected to stabilize or decrease from the forthcoming quarter. The EBITDA was up by 14% from INR 157 crores to INR 178 crores. The [indiscernible] was up by 17% from INR 111 crores to INR 131 crores. The PAT was up by 18% from INR 81 crores to INR 95 crores. The earnings per share stood at INR 2.80, up by 17%. The cash profit was up by 14% from INR 110 crores to INR 126 crores. Our consolidated revenue for 6 months financial year '23 was up by 32% at INR 3,352 crores versus INR 2,545 crores in 6 months financial year '22. This is on account of increased sales from the Basmati & Other Specialty Rice segment and the increase in Convenience business segment. The gross profit was up by 41% from INR 1,222 crores to INR 866 crores and the margins expanded by 241 bps from 34% to 36.5%. There was an increase in freight cost by 540 bps that led to an increase in the other expenses, which were up by 432 bps versus last year. The company also brought an efficiency at the manufacturing level. The EBITDA was up by 16% to INR 355 crores from INR 305 crores in financial year '22. The PBT was also up by 22% from INR 214 crores to INR 260 crores. The PAT is also up by 21% from INR 157 crores to INR 191 crores and earning per share stood at INR 5.6, which is up by 26% -- 20%. The cash profit was up by 16% from INR 215 crores to INR 250 crores. Now I would like to highlight the key ratios of our balance sheet. The debt equity ratio stood at 0.5x. This is to reiterate that the majority of our debt is working capital debt, which is required because of the nature of our business, and our focus is to maintain the debt-to-EBITDA ratio between 2 to 3x, which stood at 1.6x. Current ratio has also improved significantly to 2.08 from 2.04 last year. The return on capital employed stood at 16.9%. The normalized return on capital employed on account of insurance claims stood at 17.5%. The return on equity stood at 16.2%, which is up by 64 bps and the interest coverage ratio also improved from 7.5 to 8.6x. On the cash flow front, in 6 months financial year '23, the net cash generated from the operations was INR 84 crores. During the year, the company made investments in the fixed assets or our capital advances amounting to INR 70 crores and investment in the JV with Golden Star that we have done in the U.S. that is amounting to INR 65 crores. Now I would request Mr. Ashwani Arora, the Managing Director of the company to give you a strategic update on the business. Thank you, sir.

Thank you, Monika. Good afternoon, and thank you for joining us on the call today. Happy to share that the company delivered a record growth of 32% backed by expansion and distribution network and strong marketing programs. In India, our retail outlet reach increased by 40% and stood at 176,000 outlet. As per AC Nielsen, our market share in India expanded by 180 bps and stood at 28.5%. Additionally, as per Kantar Home Panel Data, Daawat consuming household also increased by 36% on a year-on-year basis and today stood at 37 lakh household. We are optimistic on the outlook of the overall business. The category is growing, and we are well placed to capture the growth across all our business segments. With the combination of our strong brands such as Daawat and Royal, global supply chain hubs, wide distribution network in India and across geography. Going forward, the company will continue to maximize shareholder return by keeping our focus on profitable growth. Other enablers of growth such as digitization and transformation and ESG are being well executed and are going in line with strategic goal of organization. Thank you. Now we'll open the session for question and answer.

[Operator Instructions] We'll move on to the next question from Devvrat Himatsingka from Augmenta Research. Since there is no response, we will move on to the next question from Amanjit Singh from Oculus Capital.

Yes. Am I audible?

Yes, Amanjit.

So my first question is, so we've seen on a sequential basis, that is Q1 to Q2, an improvement in the gross margin in the Basmati & Specialty Rice, but the EBITDA margins have fallen slightly by 50 bps. So what is the reason for this?

So basic reason for the drop in the EBITDA margin [indiscernible] logistic cost during this quarter has increased. So if we compare it with the immediate preceding quarter, there is an increase by 2.5%. And if I compare it with the year on performance, it has increased by 6.6%. So this has led to my decrease in the EBITDA margins this quarter.

Understood. Secondly, so there were certain news articles on priority equity evaluation and our fundraising. So could you help us understand what kind of proposals is the Board considering? And what are -- what should we watch out for it?

So there was a strategic proposal that Board is evaluating it and seek more information. So maybe in the next coming Board meeting, they will decide.

Okay. But was it a complete buyout of majority? Or is it like a minority stake that they're considering?

I can't disclose much, but yes.

We have our next question from the line of Siddhant Dand from Goodwill.

I just wanted to get some guidance on how much Basmati have we procured compared to last year? Secondly, I wanted to understand why our margins are lower than the largest player in the industry. Is it because we age our Basmati rice less? And are we getting any ForEx gain from or benefit of ForEx because of our export market currency becoming stronger?

Okay. So first of all, I will answer your first question. The procurement season has just started roughly 15 to 20 days back. It was late because of the heavy untimely range. So the procurement is in progress as per plan. So we will be achieving our procurement targets.

So how much is it over last year in volume terms?

Okay. So you wanted to know the crop size or our data?

Yes, just the volume target. Last year, let's say, we preferred 100 [indiscernible].

For the total requirement, we have sourced around 15% to 17%. So answering to your second question. Second question was around margins.

Margin.

Margins. So we just explained our gross margin has improved, but the logistic cost has gone up. And strategically, we were not keen to pass on this kind of cost to the consumers as this is -- we believe that this is a kind of temporary and the freight trade will settle down soon.

Okay. And whether we're benefiting from imports, ForEx gains or something?

Sorry?

Because of our currency weakening, are there any benefits in the export market?

Yes, yes. So it is becoming -- if Indian currencies devalue, India is becoming more competitive. So that, of course, is helping us in our business.

What is that share of export?

In terms of -- you need to say, branded in USA, we have 50% market share. In USA, we have around 15% market share. So India, we have 28.5% market share. So we export to 65 countries. So if you talk about the branded rice which is owned by India, I will state, but we have a remarkable good share here.

And what is the share of exports of our sales? Like in our top line, how much comes from exports?

In the past, Martin, in the specialty segment, 70% of our sales comes from exports.

We have our next question from the line of Anand Venugopal from BMSPL Capital.

Yes. So could you help me understand what is the current state of the Basmati rice industry? And how are prices for Basmati rice holding up? And what is the outlook for Basmati rice prices going into 2023? And lastly, what are the demand factors that are leading to this outlook? That's all from my side.

As far as Basmati rice's industry, it's doing very well. It has become consolidated, stable, doing pretty well. On the pricing front, as compared to last year, the opening price is roughly 25% to 30% higher as compared to last year. And this is mainly because of the strong demand. And on the supply side, there was a constrain. But this year, the crop is better. We are expecting roughly around 12% to 15% higher. But demand is -- will pick up the success by and the prices, we believe that, will remain higher than last year.

We have our next question from the line of Abhishek Maheshwari from SkyRidge Wealth Management.

Am I audible?

Yes, Abhishek. Yes, very well.

Yes. So you were able to deliver a very good sales growth. And we just also know that the current harvest as we just begun. And how are you seeing the crop? Do you think the procurement prices might come down a little thereby helping us improve our gross and profit margin a little more in H2?

So Abhishek, because your voice was not clear if I'm able to understand your question. You're right. The crop is, as I told, is in the overall Basmati, all Basmati. It is 12% to 15%, we believe the higher production is there. But there is a strong demand across all geography in the world. So prices are roughly 25% to 30%. It depends on grain to grain higher than the last year. And we believe that, one, because of this weaker rupee, there will not much impact on the consumer price on the export market. And India, we have already started passing the hike in the consumer and this is well accepted. So on the gross margin side, we will be able to maintain the gross margin like this year.

Perfect. And secondly, regarding packaging and freight costs. Sir, in freight costs, the increase was mainly due to road logistics or Asian logistics?

The ocean freight, yes.

Sir, so ocean freight, we are hearing that it has started to moderate considerably in the last few months. So do you think H2 should be better EBITDA margin-wise?

Yes. So for the last month, it has started softening. And the impact we will see in the coming quarters.

Okay. Is it a substantial impact or just a little?

I think little not very substantial. It has softened, but not to the pre-COVID level or earlier [indiscernible]

Okay. And sir, packaging costs?

Packaging costs, stable, whatever the inflation has come. So packaging cost is not coming down. It is in the almost same range.

Sir, earlier your noncurrent borrowings...

[indiscernible] please?

Yes. Yes, Abhishek.

Yes. So regarding the noncurrent borrowings, they had increased by around INR 100 crores. Any particular reason for this?

Sachin will answer.

During this year, of course, this half year, we have actually made an investment in one-off -- we have acquired one-off -- one in joint venture in JV in U.S. that was Golden Star. In that, we have made an investment. That has related an increase in our borrowing.

Okay. And 2 more questions just. And any -- since your working capital experiments are very high -- do you think -- what do you think the rate hike impact is going to be in coming quarters? Will it be a substantial impact or just marginal?

It will be -- there will be an impact, but it won't be a substantial impact. It will be the margin impact by cost. Cost of the capital will increase. That is for sure. currently, it is at 6%. It will be increased to another half.

Okay. And sir, one last question. How is the demand coming from North America and Europe at the moment? Because there are some fears and supply chain issues there?

So demand is good as this, as such you said, 70% our revenue comes from export and last H1, we have delivered 31% growth. So it's a healthy growth, both in the Western world, Europe, America and India.

So any new geographies you're entering right now?

We are almost present across the possible area where the consumption of Basmati can be consumed. So we are available, yes, in all the major consuming, yes.

We have our next question from the line of Amit Doshi from Care PMS.

And congratulations on achieving that 2% additional market share in the domestic market. Sir, just one question about this Golden Star. Now we have 51% controlling stake. So how are we accounting for it? And so for example, what growth that we have seen from INR 1,300 crores to INR 1,700 crores? So what portion is contributed from that Jasmine rice business?

So as far as the accounting is concerned, we are doing equity method of accounting. In that, we are just recognizing the share of profit and that is accounted for in our financial statements in the 6 months financial statements that we have disclosed.

Okay. So the top line -- I mean so sales figures are not accounted for in the current numbers that we look at it.

No.

Okay. Okay. Okay. And sir, secondly, about this domestic growth, significant. I'm sure there will be some significant steps that were strong number of outlets as well as distributors have been increased. So what is the plan for going forward for the next year or so?

Yes. Vivek?

What we are seeing now is a result of some very fundamental work which has been done in our route to market and in our brand building over the last 2 years. And that is now playing out in terms of increased home penetration, in terms of increased distribution. And these programs that have been put in place, they still have a lot of headroom. So going forward, these sort of growths in the fundamentals of consumer acquisition and retail store expansion, we believe we will continue to see, and it is being supported also with the with an increase in the category demand in the country.

So we have more marketing spend to do? Or this has kind of fundamental steps have already been taken, as you said?

No. The marketing spend is a continuous process. In fact, it's a brand that we will keep supporting and building. And our marketing spends are higher than what we did last year and in response to business, we will adjust and grow, but I think we will keep growing the marketing in relation to the growth in sales.

Okay. Okay. Okay. On the freight cost, sir, just a couple of points. So basically, what we read in the newspaper or the freight index that we track. There is a significant reduction already in place is what we understand. So why the same has not flown in the real numbers, which you are indicating that it has just started softening from last month. And what we see from the articles or the numbers indicates otherwise. So if you can just throw some light on that? And second, while freight cost, I understand is more on the export side or on that side. Our domestic margins are also not very great. I mean despite increasing such a sharp domestic business. So can you just clarify on this point?

Sure. So as far as the steam freight, as I said, it kind of started softening for the last month, and it will have a positive impact in the coming quarters. Regarding India, India, the margin has improved for us.

Okay. So when I look at stand-alone numbers, I understand stand-alone, we'll have export numbers as well. But when I look at stand-alone, there is no improvement in the operating margins.

Yes. But in stand-alone, there was a -- you're seeing because it's a mix of trading also we have done with China. So that's a mix of -- but as far as branded business is concerned, we have improved margin on that.

Okay. Okay. Okay. And sir, this China contribution, what would that be in terms of...

China will be how much?

In this half year, the China was contributing INR 140 crores of [indiscernible]

In the H1, you are saying, not in the Q2.

H1, I'm saying.

Okay. Okay. Okay. Fine. Sir, in terms of this pipe, whatever freight costs that are being passed on. We have done it partially only. Our brand, whether it's Royal or Daawat, it's such a strong brand. Where are we not able or we don't intend to pass on the full freight because we are at quite a fag end or the lower end of the margins that we have been in our history.

So as I said in the starting that there's -- Daawat and Royal, very, very strong brand roles a 50% market share. But being leader, we have a responsibility also. So we have to see which cost is sustainable, which is not and we don't want it to be volatile in consumer pricing. So we believe that the stream of freight will come out and this is -- we have to take the hit documents of whatever that temporary has gone. So whatever was sustainable, we have passed on to the consumers.

Okay. Okay. Okay. And sir, in this Convenience -- Health and Convenience segment, when do you plan to break even?

I think at this point in time, the real question is that this is the -- we proposed to make this a significant part of our business. So really, it's more about expanding that range. There are, for each of the projects. So there is individual P&Ls with breakevens projected that have been made, but our current focus is for them to become meaningful and significant part of consumers' lives, which then translates into a good share of our revenue. And it will follow the pattern that you see with most consumer companies with product launches.

Okay. Okay. Okay. So we have some pipelines with new products, say, in next 2 quarters or so?

Yes, we do. But we've actually just launched a very exciting product with Biryani Kit, which is gaining very good consumer acceptance. Kappa rice continues to build. So if you were talking of the next 1 or 2 quarters, our focus is going to be on building these India and international and to continue to build the strong position that we are acquiring with RTH that it needs into the U.S.

Okay. Okay. And can you give this HoReCa segment growth, how things have been because, of course, one year was very bad. So now how HoReCa segment is doing and what kind of growth have we seen or some contribution that is there as of now?

HoReCa segment -- can you give certain data? As compared to last year, mostly growing more than 50%, I think, but we will have exactly...

HoReCa segment now is contributing 19% of overall revenue. So it has -- and it has grown by more than 15% from the last year.

15%, 1-5?

Yes.

Okay. Okay. Okay. Any number? I mean, what would be the sorry, 19% you said already. Okay. Okay. Okay. Fine. And sir, lastly, I understand that this thing or whatever acquisitions or whatever. So I'm not getting into that, but what I want to know from you is you have been so far guiding of 10% to 15% growth and of course, some margin expansion that you've already indicated in past multiple times. So now that we are planning for some fundraising and presuming we already generate INR 500 crore, INR 600 crore annual cash flow. So we are thinking something big or something higher target of growth rate. So what has changed that management growth target and why if you can just share on that part?

So still we are maintaining 15% growth year-on-year and the margin expansion. This is -- I can't disclose it at the moment, but this is very strategic in nature. So the unfolding will happen and then it will happen.

We have our next question from the line of Resham Jain from DSP Investment Managers.

So a few questions. So first one is on organic piece. I think there has been a material dip in the revenue run rate, which we are doing since the last few quarters. So is there any issue there or there's like a one-off and will come back from next quarter onwards?

Resham, this is a one-off. It will come back, and the reason is there was a big shipment which was in spending and we can load in this quarter. So this will come up with -- it will be, again, on a full year basis, we will be in double-digit growth.

Okay. And what is that we are looking at the organic business, sir, in terms of let's say, over the next 2, 3 years? Are we going to maintain the run rate which we have shown over the last 3, 4 years? Or now -- on a higher base now, it will start moderating?

In higher base, it will moderate for sure. It will not be in the range of like 30%, 35% that we have delivered in the last 2 years. So it will be in the double digit, but we are very bullish on this business. The idea in this business is now more focused on the margin expansion in the organic business.

Okay. Understood. And also, sir, on the new product business, which Vivek has spoken about. Sir, there, a bit now, I think a few months into this new product launch, specifically Biryani Kit, Any color on what is that you are targeting? Because I think you are doing domestic as well as exports and any focused kind of market which you feel can be scaled up from the current levels? And what will be the distribution approach in this business, specifically the new product business, Biryani Kit and Kappa rice?

Right. So of course, for each, there is a different RTM that is planned. So it's talking about Biryani Kit, which will be in broader distribution. But the initial approach for these is really for us has been to test the waters and we've done that through going into e-com and then expanding into the top supermarkets. So as of now, that's really what the availability is. And it is from here that we are getting very good traction. In some of the e-coms, we've become new product top sellers in the way they measure and they record onto their own platforms. With this -- once we've got a certain amount of proof of concept, we'll start to be expanding this into the total supermarkets and the top grocery. So we will be following a top-down approach when it comes to this Biryani.

Okay. Sir, just one related question on the new product business. If you look at the gross margins of the new products, which are considered to be more value-added products. And if you compare it with the other businesses, Basmati and organic, the gross margin seems to be much lower than some of the other categories as well as if you compare it with some of the other food businesses, the gross margin seems to be much lower, 30% odd gross margin.

Right. Because I think what you're seeing here is a blended gross margin. There is a fairly large contribution in here of Daawat Sehat, which is in the health both doing -- it serves the social cause of addressing malnutrition and severe acute malnutrition in the country. But the point is that, that tends to follow more like the Basmati margin, but has a significant contribution. But the other products are all following the margins, Mr. Resham, as you talk about food, consumer branded, those -- the other product margins are in line with that.

No, actually, this is lower than Basmati as well, like 28% gross margin in this quarter. It was 33% in the last quarter. Last year, I could see this it was 36%, 37%. So constantly, this -- typically gross margin in these businesses, we have seen at around 50%, 60% and more -- but like 32% -- even 36%, 37%, which was on the higher side last year, the number seems to be too low for a consumer product like this.

I think you need to see the segmental margins. So the movement that you are seeing in the total are a function of how the contributions of the different products are moving. But individually, they are robust. So some of the newer products that you spoke of are going to be in the 40 ranges.

Okay. Because it's there in the presentation. So maybe I don't know.

It's a fair point. But I think, as I mentioned, it's a blended margin that we are seeing. So that's sort of clouding the picture, but the fundamentals which you are alluding to are all there and the segmentals will show that.

Okay. Got it, sir. Sir, the last one from my side is on number of households. I think you mentioned 37 lakhs or something. So what is the target kind of addressable market for us over here? And what is the approach we are taking here to get to that total addressable market?

See, the total addressable market, in a sense, is the total households. Now Basmati consuming households are about 1/3 of the total FMCG consuming homes, but this is growing at a double digit. So we're sort of not working on an absolute target. Our target is to grow at a rate which is faster than the growth rate of the category. And that really falls back into the fact that we want to keep growing our market share quarter-on-quarter. So our target, basically, when we measure these numbers and report these numbers, these are more evidence of the successful marketing and distribution campaigns that -- I mean, not campaigns but strategies that are in place. And these are the growth in shares, the growth in homes, the growth in outlets are numerical measures of the success of those strategies. You just run addition to the point I made earlier about this whole blended. As we bring in new products, there is a fair amount also of sampling, which is done free of cost to gain new users. And if in a quarter, that's quite heavy, that can also bring down but treated more as a marketing expense than a margin erosion.

We have a next question from the line of Amit Agarwal from Live Investments.

Sir, we made [indiscernible] leads.nu in January 2021. Right now, if you go through that website, it's just a one-page website. And now they are links are moving to Instagram...

I'm sorry to interrupt, your voice is breaking.

Hello? Is it clear now?

Yes, please go ahead.

Sir, we bought a [indiscernible] leads.nu in January 2021. Right now, if you go through the website, it's just a one page website, and all the links lead to Instagram. As far as I understand, this is that investment. Can you comment on this?

The investment is only EUR 200,000, which is equivalent to INR 250 crore. Just a minute, if I have understood it correctly. Let me understand somewhat. Yes. This is not debt investment. Also, we have done a small investment to lead as a brand is doing good in the neither line and they are adding the product also. So the investment is not that -- although it's a small investment, it's -- the business is working and doing good.

Just one thing, I thought you say e-commerce side, that is e-commerce venture.

[indiscernible] just charged me. If you have gone into the wrong website, the right website is leads.nu. Very impressive. It is -- it has opened in front of me. And if you can see the kind of the product range they have, you will be amazed.

Anyway, another question is 74% of profit comes in consolidated balance sheet, right? But if you go through the annual report, then it seems none of the subsidiaries are so much profitable. And only one of them is making INR 70 crores of profit around about. So can you elaborate on this?

What is this?

Sales from International Markets [indiscernible].

No, I think let us at understand your question right and then we will answer.