Equity Research: Hindustan Foods

Summary

Hindustan Foods Limited is an India-based company, which is engaged in contract manufacturing of various FMCG products including food, home care, personal care, beverages etc. They also do manufacturing of leather shoes and accessories.

ABOUT

• Founded in 1988, HFL and its associated group companies are principal contract manufacturers for a range of leading FMCG products including processed foods, personal care, home care, and leather wear. It has facilities across Goa, Jammu, Coimbatore, Hyderabad, Mysuru, Mumbai, Silvassa and Puducherry.
• The company’s product portfolio is diversified across food and beverages, home and personal care, fabric care and leather products. Food and beverages contributed around 50% to the company’s total revenue in FY21, followed by home-care (about 40%), and balance from personal care and others.
• HFL is one of India’s largest fast-moving consumer goods (FMCG) contract manufacturers, with over two decades of experience in product development and manufacturing.HFL has manufacturing facilities across India - Goa (extruded foods), Coimbatore (tea), Puducherry (leather), Jammu (pest products), Mumbai (leather), Hyderabad (home and personal care), Silvassa (home care) and Mysuru (beverages). The company acts as a contract manufacturer for the top FMCG players, such as Hindustan Unilever Ltd, Reckitt Benckiser Ltd, Godrej Consumer Products Ltd, Hector Beverages Pvt Ltd, and Danone Ltd, and also for the top national and international apparel brands such as Hush Puppies, Gabor, Steve Madden, Arrow, U.S. Polo, and Louis Philippe.

SHAREHOLDING PATTER

Promoter holding has increased by 2.23% over last quarter.

PRODUCT PORTFOLIO

STRONG BUSINESS MOATS

• One of the largest formal manufacturers (over three decades’ experience. Consequently, it has strong management expertise in contract manufacturing.
• It enjoys long-term relations with leading domestic and multinational customers through a strong foundation of trust and past associations
• State-of-the-art manufacturing plants at various locations to manufacture different products. Further, it is one-stop solution for product development, testing and manufacturing FMCG, which helps it become a preferred partner 
• Ability to create its own formulation of any FMCG helps attract leading FMCG clients 
• The emphasis on self-reliance and localisation of sourcing by the government should further help generate opportunities.  

BUSINESS MODELS

MANUFACTURING PLANTS

KEY DEVELOPMENTS

• The wholly owned subsidiary, HFL Consumer Products has successfully set up the Ice Cream plant in Uttar Pradesh and commenced trial production during the quarter. The first dispatch was done in April ‘22 and the production is expected to be ramped up to 15,000 litons of Ice Cream by the end of FY23. The Board has given its accord to the Management of HFL Consumer Products for a further investment of Rs. 75 crores at this unit.
• The merger of the Beverage plant at Mysuru is completed and expansion at Mysuru has been commercialized. The Mysuru unit has achieved its highest ever turnover in Q4’22. In addition to its existing customer, Hector Beverages (Paper Boat), the company now manufactures for Tata Consumer Products Limited. The company expects to do a turnover of around INR 75 crores from this site and the Board has further approved the augmentation of the beverage capacity in Mysuru by a further investment of Rs. 35 crores.
• The merger of the malt Beverages plant at Coimbatore was also completed and the Board has sanctioned an additional investment of ~Rs. 10 crores at the Coimbatore site.
• AeroCare Personal Products acquisition has been completely integrated and the plant has achieved its highest ever turnover in the month of March’ 22. The company expects to do around Rs. 100 crores turnover from this facility in FY23.

Overview

HFL has acquired AeroCare Personal Products LLP in January 2022. The facility is situated at Silvassa and engaged in manufacturing of Color Cosmetics like lipsticks, eye make-up, pressed powders and lip gloss; And also Oral Care, After Shave lotions and Eau de Toilette. The facility was set up in February 2021 and spread over 100,000 sqf with manufacturing capacity of 3500 TPA.

Rationale

AeroCare is a dedicated manufacturer of Color Cosmetics for a leading brand in the country. With this acquisition, HFL marks its entry into color cosmetics. With the focus on ramping up the facility to its full potential in the next couple of months, HFL is expected to increase the business in this segment from this facility. The company expects to do around Rs. 100 crore turnover from this facility in the FY22-23.

Consideration

The aggregate cost of acquisition of is around Rs 30 Crores for 100% stake in AeroCare Personal Products LLP.

• Reckitt Benckiser Scholl India Limited acquisition is expected to be completed by Q1FY23. The company expects to do around Rs. 100 crores of turnover from this facility in FY23.

Overview

HFL has signed a Share Purchase Agreement with Reckitt Benckiser India Pvt Ltd. to acquire the entire issued Share Capital of Reckitt Benckiser Scholl India Private Limited (RBSIPL). RBSIPL was incorporated in 1994 and is an EOU (Export Oriented Unit) business which inter alia manufactures and supplies foot care products to more than 15 countries in Europe, Australia and Far East. The acquired factory would continue to act as a third-party manufacturer for Reckitt/Scholl and its global affiliates.

Rationale

The acquisition of RBSIPL marks HFL’s entry into fast growing OTC Healthcare and Wellness segment as a contract manufacturer. â–ª As an EOU, the facility adheres to GMP norms and is approved by The Medicines and Healthcare products Regulatory Agency (“MHRA”), UK. HFL is expected to leverage the potential by expanding site utilization and capacities and thus increase the share of business for foot care products worldwide from this site.

Consideration  

The aggregate cost of acquisition of shares is around Rs 75 Crores and subject certain completion adjustments in accordance with the terms and conditions set out in the SPA.

RBSIPL Financials

• The new Sports shoes plant in Tamil Nadu has started commercial production and the shoe-making facility in Vasai [Mumbai] has also started producing injection moulded sandals and flip-flops.
• The Hyderabad Bars & Soaps project that had been delayed is now commencing in June ’22 and expected to be completed by Q3FY23.
• The Board has approved split of the Equity shares of the company from a face value of Rs. 10/- to a face value of Rs. 2/-.

MANAGEMENT

Commenting on the Results, Mr. Sameer R. Kothari, Managing Director said,

“I am quite pleased with the performance of our business model that has been tested in this quarter, hit by high inflation and slowing demand. I am happy that in spite of the headwinds, we have achieved our revenue target of INR 2,000 crores having grown by more than 70% CAGR over the last 5 years. Looking at the future, our Ice Cream project at Uttar Pradesh has commenced commercial production. Commencement of this facility and the successful integration of the Beverages business opens doors to the multibillion-dollar+ F&B market in addition to our existing categories of Home Care, Personal Care, Healthcare & Wellness. The Ice Cream project is also a testament to our ability to diversify across product categories and bring the same emphasis on execution across geographies. Along with Ice Cream, our recent addition to the product portfolio from the entire Color Cosmetics line to Oral Care to Foot Care vindicates our ambition to be the most diversified FMCG contract manufacturer in the country. We are confident that our customers will look at our track record of executing greenfield projects flawlessly and integrating the acquisitions seamlessly and continue to propel us towards our next goal of achieving the target of INR 4,000 crores of turnover by FY25.” 

Commenting on the Results, Mr. Mayank Samdani, Group CFO said,

“Overall operational performance for the fourth quarter and full year ended FY22 has been in-line with company’s expectations and guidance. Our turnover and profitability for the financial year have increased by 44% YoY and 27% YoY respectively and are representative of the ramping up of all our facilities. This company’s continued investment in capex financed from internal accruals and debt have led to a significant gross block of Rs. 550 crores (on a consolidated basis, including Capital WiP) leading to scalable performance prompting a rating upgrade from India Ratings.” Considering the size and ambitions of the company, the Board has considered split of the Equity shares of the company from a face value of Rs. 10/- to a face value of Rs. 2/-.

FINANCIALS

• TOTAL REVENUES For FY22: Rs.2,026 crore 44% growth YoY.
• GROSS BLOCK (includes wholly owned subsidiary) as on 31st March 2022: Rs.550 crore.
• PROFIT AFTER TAX For FY22: Rs.50 crore 41% growth* YoY.

*PAT for FY21 excludes tax adjustments pertaining to previous years to the tune of 3.93cr.

• EBITDA For FY22:Rs.120 crore 30% growth YoY.

CAPEX

• Uttar Pradesh: Ice Cream Capex Rs. 125 Crores

The Uttar Pradesh Ice Cream Project has commenced commercial production. Production from the unit is expected to be ramped up to 15,000 litons of ice cream by the end of FY23. The Board has given its accord to the Management of HFL Consumer Products for a further investment of Rs. 75 crores at this unit.

• Hyderabad: Bath Soaps & Detergent Bars Capex Rs. 150 Crores

The on-going softness in the FMCG demand has led to a slowdown in the Hyderabad project and it has been delayed. It is now expected to be completed by Q3FY23.

• New Capex: Healthcare & Wellness Rs. 100 Crores

As a part of Rs 100 crores capex approval from Board for “Healthcare & Wellness” division, HFL has acquired 100% stake in Reckitt Benckiser Scholl India for about Rs 75 crores. The acquisition is expected to be completed by Q1FY23.

• New Capex: Colour Cosmetics Rs 20 Crores

AeroCare Personal Products acquisition has been completely integrated and the Rs. 30 crores capex has been commercialized. The company has invested in AeroCare Personal Products LLP. Aerocare is currently manufacturing various Color Cosmetics like lipsticks, eye make-up, pressed powders and lip gloss, and also Oral Care, After Shave lotions and Eau de Toilette.

• New Capex: Footwear Rs. 10 Crores

The 10 crores capex in the footwear division has been commercialized. The new shoe factory in Tamil Nadu has been set up and the units in Tindivanam (Tamil Nadu) and Vasai have started productionNew

• New Capex: Beverages Capex Rs. 45 Crores

The merger of the Beverage plant at Mysuru is completed and expansion at Mysuru has been commercialized. Board has further approved the augmentation of the beverage capacity in Mysuru by a further investment of Rs. 35 crores. The merger of the malt Beverages plant at Coimbatore was also completed and the Board has sanctioned an additional investment of ~Rs. 10 crores at the Coimbatore site. 

RISKS 

• Inability to add clients/orders. While India has huge potential in outsourcing FMCG manufacturing, the company’s inability to persuade or showcase its capabilities to major FMCG marketers could result in lack of clients/orders added.
• Relentless acquisitions or misplaced capital allocation, or litigation. The company’s fast-paced growth has been aided by judicious acquisitions and timely capex. However, misplaced capital allocation or acquisition, or litigation could distract management and impact growth capital.
• Delay in commissioning capacities could slow the growth momentum.  

CREDIT RATING UPDATE

The upgrade reflects the sustained growth in HFL’s scale and profitability, driven by the commencement of its liquid detergent plant in Hyderabad, a home care liquid facility in Silvassa and a capacity expansion of its tea packing unit in Coimbatore (Tamil Nadu), coupled with the proposed inorganic and organic expansions underway, providing a visibility for its near- to medium-term growth. The product diversification has increased with HFL’s entry into the healthcare and wellness and colour cosmetics segments, while its net leverage (net debt/EBITDA) has remained below 2.5x since FY20 and is likely to remain robust over the rating horizon. The ratings continue to factor in its strong executional track record and resilient business model, with around 90%of its revenue emanating from long-term contracts. This ensures a guaranteed recovery of fixed costs including capital servicing costs.

KEY RATING DRIVERS

• Robust Revenue Visibility Backed by Inorganic and Organic Growth: 

HFL’s revenue expanded at a CAGR of 146% over FY17-FY21 to INR13,863 million, driven by continued business acquisitions, diversification into new segments and the addition of new capacities and clients. Over FY19-FY22, HFL expanded its tea and coffee packing capacity in Coimbatore by 4x while HFL’s home care liquid facility in Silvassa (commissioned in 1QFY22) and liquid detergent plant at Hyderabad (commissioned in 4QFY20) have been also ramping up, aiding its growth.As a result, HFL's revenue increased 60% yoy to INR14,447 million in 9MFY22 (FY21: INR13,863 million; FY20: INR7,719 million; FY19: INR4,919 million) and EBITDA improved 43% yoy to INR815 million (INR832 million; INR557 million; INR324 million).

Ind-Ra believes HFL’s near-term growth will be driven by the first phase of its ice-cream manufacturing facility in northern India (under its subsidiary, HFL Consumer Products Private Limited) that would start its commercial production from 4QFY22, while the merger of the malted beverages packing unit of ATC Beverages Private Limited and Avalon Cosmetics Private Limited in Coimbatore with HFL will be completed by 4QFY22 (effective date: 1 April 2020), following the receipt of the final order from National Company Law Tribunal in December 2021. Moreover, HFL is setting up a new factory in Tamil Nadu for around INR100 million to make sports/knitted shoes and expects to start its commercial production from 1QFY23. The first phase of the company’s detergent bar and soap greenfield project in Hyderabad is likely to commence operations by 2QFY23 (original schedule of 4QFY22).

Furthermore, HFL entered into the fast-growing healthcare and wellness segment as a contract manufacturer in 4QFY22 and signed a share purchase agreement in January 2022 with Reckitt Benckiser India Pvt Ltd. to acquire the entire shares of its subsidiary, Reckitt Benckiser Scholl India Private Limited (RBSIPL), at around INR750 million HFL has also acquired Aero Care Personal Products LLP, a colour cosmetic manufacturing facility at Silvassa in January 2022 with a total investment of INR200 million. 

• Established Contract Manufacturing Player with Reputed Clientele: 

HFL is one of India’s largest fast-moving consumer goods (FMCG) contract manufacturers, with over two decades of experience in product development and manufacturing. HFL has manufacturing facilities across India - Goa (extruded foods), Coimbatore (tea), Puducherry (leather), Jammu (pest products), Mumbai (leather), Hyderabad (home and personal care), Silvassa (home care) and Mysuru (beverages). The company acts as a contract manufacturer for the top FMCG players, such as Hindustan Unilever Ltd, Reckitt Benckiser Ltd, Godrej Consumer Products Ltd, Hector Beverages Pvt Ltd, and Danone Ltd, and also for the top national and international apparel brands such as Hush Puppies, Gabor, Steve Madden, Arrow, U.S. Polo, and Louis Philippe. While the company has a high customer concentration, Ind-Ra draws comfort from its long-term contracts. 

• Low Risk Model with Guaranteed Returns Contracts:

HFL derives the majority of its revenue from its dedicated-unit type business model wherein the company enters into long-term contracts with guaranteed fixed returns. For such contracts, the company either sets up a greenfield facility or gets a prebuilt facility from the client. The guaranteed returns not only ensure stable profitability but also cover the debt servicing portion of the loan taken by HFL to build those facilities. At FYE21, the dedicated unit model contributed over 90% to the company's total revenue (FYE20: 88%). With the ramp-up and the commissioning of HFL’s new facilities across Silvassa, Hyderabad and North India, Ind-Ra expects the contribution from the dedicated unit model to remain healthy at 90%-95% of the revenue over the medium term. The agency believes HFL’s existing contracts for major clients under this model would be renewed over the medium term.

The company also has a shared-unit model, where it signs multiple clients for a manufacturing facility. These contracts, although not long-term, are flexible and hence, fetch more margins than the dedicated unit type of model. HFL also carries out private label manufacturing, where the client uses HFL's formulation and designing, and then adds its own name and logo to the product.

• Robust Credit Metrics: 

HFL’s credit metrics remained robust, with the net leverage (net debt/trailing 12 months EBITDA) at below 2.5x during FY20-9MFY22. Its net leverage stood at 2.3x in 1HFY22 (FY21: 2.1x; FY20: 2.4x) and its gross interest coverage (EBITDA/gross interest expense) was at 5.3x in 1HFY22 (FY21: 4.5x), despite raising additional debt of INR279 million for capex. During 1HFY22, HFL incurred the capex of INR482 million (FY21: INR781 million), mainly to fund its ongoing expansion of the food and beverage manufacturing facility for a leading FMCG brand in northern India (under its subsidiary, HFL Consumer Products Private Limited) and capacity expansion in existing detergent facility in Hyderabad.HFL plans to raise an additional debt of INR1,100 million to fund its detergent bar and soap facility in Hyderabad and the acquisition of Reckitt Benckiser Scholl India Private Limited, while its colour cosmetic facility has been funded through internal accruals. The company raises debt primarily for its dedicated unit type of projects as the debt-servicing portion is covered in cash inflows from the client. Under a dedicated unit model, its clients also ensure that the working capital requirement is kept minimal and any additional working capital requirement is funded by them. For other models, HFL funds projects primarily through equity with minimum reliance on debt. Despite the large planned capex, Ind-Ra expects HFL's net leverage to remain in the range of 2.0x-2.5x over the medium term.

• Liquidity Indicator - Adequate: 

HFL’s average utilisation of fund-based working capital limits was around 43% for the nine months ended December 2021. It had cash and cash equivalents of INR139 million at end-September 2021. The company’s cash flow from operations (post-interest payments) improved to INR563 million in FY21: (FY20: INR68 million), on account of higher profitability. Its free cash flow remained negative at INR218 million (negative INR1,213 million), due to the capex incurred and Ind-Ra expects it to continue in FY22 and FY23,  on account of the ongoing and upcoming capex. The company is likely to incur a capex of INR2,300 million over 2HFY22-FY23 for which it has an undrawn sanctioned term loan of INR405 million and it is also in talks with lenders for INR1,100 million term loan that will likely be sanctioned in 1QFY23. The company’s financial flexibility is underscored by its ability to tie-up long tenure loans (eight-to-12 years), with repayments backed by firm contracts. HFL has scheduled repayments of INR304 million and INR350 million in FY22 and FY23, respectively, which is likely to be comfortably funded by internal accruals. Ind-Ra also derives comfort from HFL long-term contracts with various clients which cover the principal and interest portion associated with the loan raised for establishing a greenfield project.

VALUATION

Growth in the scale of operations, further diversification of products and customers, coupled with bulk of the revenues continuing from the guaranteed return/dedicated unit model while maintaining or improving the net leverage below 2x on a sustained basis, could lead to a positive rating action. It has state-of-the-art manufacturing plants at various locations to manufacture different products. It generates 45% of its revenue each from Foods and HPC, with OTC and others comprising the rest. It has registered CAGRs of 61% in revenue and 55% in profits over the last three years, driven by the merger & acquisitions and aggressive capex. Management is looking at doubling revenue in the next three years to Rs40bn and has already partly invested for this. The commencement of the company’s ice-cream unit in Uttar Pradesh (with likely 2-3x asset turns on Rs2bn gross block), the Scholl acquisition from Reckitt Benckiser and the foray into colour cosmetics with the AeroCare acquisition should help achieve the Rs40bn target by FY25. The company has indicated additional capex to achieve the stated target, which will be funded through debt and internal accruals. 

Sources:

https://www.sharescart.com/company/hindustan-foods/

https://www.hindustanfoodslimited.com/

https://www.bseindia.com/xml-data/corpfiling/AttachHis/6b72fe2d-bb56-4ca0-895c-7e3ebe3dde33.pdf

https://www.indiaratings.co.in/pressrelease/58538

https://www.bseindia.com/bseplus/AnnualReport/519126/70197519126.pdf