Detailed Narrative
Robust Top-line Growth Despite FMCG Headwinds
Hindustan Foods delivered strong top-line performance in H1 FY25, with total income growing 35.4% YoY to ₹1,757 crores. Q2 FY25 also saw a 31% YoY increase in total income to ₹886 crores. This growth was primarily fueled by the expansion of the shoe business and the operational scaling of the OTC Health and Wellness factory in Baddi. Despite a subdued consumer demand environment in the broader FMCG sector, the company's dedicated business model provided financial stability.
Profitability Impacted by Shoe Business Integration Costs
While revenue growth was strong, overall profitability remained relatively flat. H1 FY25 EBITDA increased 36.6% YoY to ₹148 crores, and Q2 FY25 EBITDA rose 30.7% YoY to ₹72.6 crores. However, PBT growth was more modest, up 12% YoY to ₹68 crores for H1 and only 2% YoY to ₹31.8 crores for Q2. This was attributed to additional costs of ₹6-7 crores incurred in H1 FY25 for the integration of the newly acquired shoe business, as the company focuses on aligning new operations and achieving synergy.
Aggressive Expansion in Ice Cream Manufacturing
HFL is making significant strides in the ice cream segment, with plans for substantial investments. The Nashik plant's total capex is estimated at ₹185 crores, with commercialization expected by April 2025 and an initial capacity of 12,500 liters per day. An additional ₹20 crores is being invested in Lucknow for capacity expansion, to be completed by February 2025. Furthermore, a new greenfield plant in North India is sanctioned with an investment of ₹225 crores in phases, targeting commercial production by the ice cream season of 2026, bringing total ice cream investment to over ₹600 crores.
Diversification into Footwear and Other Categories
The entry into the footwear segment is a key diversification strategy. The acquired shoe business, already serving major multinational brands, is expected to ramp up its South capacity by Q4 FY25. While integration costs have impacted short-term profitability, management is bullish on the sector's long-term growth, expecting profitability similar to its contract manufacturing business. Other strategic moves include a ₹15 crore capex to expand beverage capacity at the Mysuru plant by over 30%, completion of land acquisition for a ₹40 crore colour cosmetics facility in Silvassa, and an investment of up to ₹35 crores to acquire a mineral water bottling company in Orissa.
Capital Allocation and Funding Strategy
The company aims to increase its gross block to ₹1,800-2,000 crores by FY26, with equity expected to be around ₹1,000 crores. The new capex of approximately ₹550 crores will be funded through a mix of debt and equity, maintaining a 1:1 debt-to-equity ratio. This includes utilizing the remaining ₹250 crores from warrants money. As of September 30, 2024, the company's net worth stood at ₹705 crores, gross block at ₹1,238 crores, and debt-to-equity ratio at 1.03%.
Outlook on Margins and Operational Efficiencies
Management clarified that gross margins for dedicated manufacturing sites are stable due to a pass-through model for commodity price inflation. However, the margin profile for the shoe business is still being assessed, with initial integration costs impacting overall EBITDA. The focus remains on driving efficiencies and ramping up capacities in the shoe business, particularly in the South, to improve profitability. The company expects to start disclosing more granular data on the shoe business's top-line and margins in future calls.