LT Foods Limited (LTFOODS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the LT Foods Earnings Conference Call hosted by Motilal Oswal Financial Services. [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, sir.

Yes. Thank you. Good afternoon, everyone, and very warm welcome to LT Foods Q1 FY '22 Post Year-End Earning Call hosted by Motilal Oswal Financial Services. On the 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, VP, Financial Strategy; and Mr. Sachin Gupta, Group Finance Controller. We'll begin the call with key thoughts from the management team. Thereafter, we will open the floor for Q&A. I would now like to request the management to share their perspective on the performance of the company. Thank you, and over to you, sir.

Good evening, 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 company's website have -- 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 1 financial year '22. On sequential basis, our consolidated revenue for the quarter 1 financial year '22 was up by 5% at INR 1,223 crores versus INR 1,165 crores in the quarter 1 -- quarter 4 financial year '21 on account of the increased sales from the organic business and [indiscernible]. The other income was up by 63% on account of the exchange gain, which is otherwise our regular income, but due to the accounting norms, it has been classified as other income and onetime exceptional incentives received from the government. The gross profit was up by 4% for -- from INR 383 crores to INR 397 crores, though the margins were reduced by 45 bps to 32.5% due to increase in input cost. The other expenses were down by 62 bps versus last quarter. This led to an expansion in EBITDA margins for 28 bps to 12.2% versus 11.9% in the quarter 4 financial year '21 and was up by 7.5% from INR 138 crores to INR 149 crores. The finance cost reduced by 12% and the overall fund cost was down from 7.45% to 4%. This led to an increase in the PBT by 16% to INR 102 crores, while the margins expanded by 82 bps to 8.4%. The PAT increased by 28% to INR 76 crores, while the margins expanded by 110 bps to 6.2%. The earnings per share was also up by 29% to INR 2.27 per share versus INR 1.76. The cash profit is also up by 16% from INR 105 crores to INR 91 crores. Now I'd like to update you on all the efforts taken towards strengthening the balance sheet of the company. The debt equity ratio improved from 0.66x to 0.59x as the overall debt of the company was down by INR 95 crores to INR 1,158 crores on Q-on-Q basis. This is to reiterate that 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 1.9x versus 2.3x. Current ratio also improved significantly to 1.83 from 1.70 last year. The return on capital employed was up by 175 bps from 13.7% to 15.4%. The return on equity was up by 301 bps from 12.6% to 15.7%. On year-on-year basis, the consolidated revenue for quarter 1 financial year '22 stood at INR 1,223 crores. That was almost at par versus last year as there was significant pantry stocking last year across globe due to pandemic. The other income increase on account of the onetime exceptional incentive and the exchange profits. The gross profit was up by 2% from INR 389 crores to INR 397 crores. The margins were up by 102 bps to 32.5% due to change in production. The employment cost was up by 23% on year-on-year basis. But if you see quarter-on-quarter, it has increased only by 4%. Last year, there was a good growth in the U.S. and Europe, and we have strengthened our teams globally in the last year. The other expenses were up by 5% versus last year on account of the additional investments in the brand of approximately INR 5 crores and the digital transformation for our supply chain and HR function, also amounting to INR 5 crores. All these initiatives will help us to strengthen our business, to bring more efficiency in the working capital and improve the service level. The EBITDA margins reduced by 94 bps to 12.2% from 13.1% versus last year. The company has generated significant free cash flow amounting to INR 135 crores, driven by strong performance in quarter 1 financial year '22. That has led to a decline in overall debt by INR 1.8 crores. This further led to a reduction in the finance cost of 38% and the overall fund cost was down from 7.52% to 4%. The PBT reduced by 7% to INR 102 crores, while the margin contracted by 49 bps to 8.4%. The PAT reduced by 8% to INR 76 crores, while the margins contracted by 45 bps to 6.2%. Now I invite Mr. Ashwani Arora to give his comments on the business outlook.

Thank you, Monika. Good evening, and thank you for joining us on the call today. The company is performing well and in line with the annual operating plan. In the international market, the business has normalized, and the company is performing well and will deliver in line with our target. Now there is still some impact of the pandemic in the Indian market. We are optimistic on the outlook of the overall business as the category is growing in our core business, and we are well placed to capture the growth with the combination of our strong brands such as Daawat and Royal, global supply chain hubs and wide distribution network in India and across geographies. The organic segment is also growing in India and globally, and healthy food has been consistently capturing a significant share in this space as well. Another growth engine for the business that is new product based on health and convenience platform are also performing in line with our expectation, and we are optimistic on its growth trajectory. The company will continue its journey of creating a strong, progressive, sustainable, profitable and growing consumer business across all geographies. Thank you. Now we open the session for question and answers.

[Operator Instructions] The first question is from the line of Yash Gupta from Angel Broking.

So first question is on the volume again, sir. So this time also volume disappoints at the [ 115 ] and last time also it was down. So let's say that it's due to the Saudi-India issues and all. So what is this quarter issue? Is the same issues continue?

So as far as the branded volumes are concerned, Mr. Yash, that's growing. Only there can be impact on the private label, that may recover in the coming quarters. But as far as consumer-branded business, that is growing.

So what's -- any update on the Saudi market, whether it's back to the normal or it's still the inventory and all those issues are...

It will take another quarter to turn it back.

Okay. So next quarter also we are expecting the same line of volume?

On the branded side, we will see the growth. We are growing by 8%, and we are expecting the same kind of growth.

Okay. And second question on the China market. How the China market this quarter? How much quantity we have exported there?

So China is a little slower with speed. It's a very kind of -- it's not a regular business line of LT Foods. As you know, LT Foods is among the few registered in China to get it exported and the opportunity was good and peaceful. But that's not a kind of strategic lineup to this [indiscernible].

No, would you like to give, sir, any amount of that quantity that we exported this quarter than like last quarter? I think what I remember is that around over 20,000 we have done. So is there any amount -- quantity that you want to give?

No. So as far as the quantity growth now, in quarter 1, we have -- in this quarter, we have exported 23,000 tons of China business.

Okay. And what's the expectation as of now almost 1 month of July? So it's in the same line, going to be in the same line or is there any change into it?

It will be slow, a little slow.

Little slow this quarter?

Yes. Yes.

Okay. And sir, one more question on the domestic demand. How you are seeing the domestic demand? All those pent-up demand, everything is, I think, now normalize. So how you are looking this particular quarter, the upcoming quarter from July to...

We are very optimistic on that. And the July month has seen positive. So we are expecting better quarter as far as India is concerned this quarter, coming quarter.

Okay. So better quarter, that means that India revenue growth may be of 10% to 12% double-digit something kind of growth? Or it's just a single -- another quarter of a single growth in the Indian domestic market?

So if you compare with the quarter-on-quarter, it will be in the range of double digit.

The next question is from the line of Nilesh Doshi from Green Lantern.

You, in your opening remarks, spoke about you want to grow the business, sustainable, profitable, et cetera. But I think every entrepreneur, businessman would want to do that. So instead of that, can you take us through more granularity that how exactly you want to drive the business? Because what appears is that we were talking about 10%, 12% growth rate net of 2 years ago, but now we are coming back to 6%, 7%, 8% growth rate, a? B, EBITDA margins are not improving. It is showing that either you are not able to pass on the cost pressure or there is some resistance or reluctance on the part of management to do that. And three, that actually in terms of cost management, like your employee cost has gone up, but that is not reflecting into the revenue. So can you, sir, please help us because we really want to understand that where you want this business to be in the next 3 years' time and where you want your EBITDA to be? Because you also know that one of the large peer competitor margins are at 18%, 19%, 20%, and they have been struggling at around 12% for the last many years -- in fact, last 2 years. So I would really be thankful to you if you can help us in detail understanding of the business and the strategy.

Sure, Nilesh. Thank you for this question. If you see for the last 3 years, we have a CAGR growth of 9%, and the PAT margin has grown by 45%. And we have improved on the -- both in return on equity and ROCE. As far as we -- as I said, if you are saying this is in every businessman's vision, but on that vision, we have given the growth both, as I said, for the last 3 years in top line and in the bottom line. And as far as the expense are concerned, we have about half of the business in the Europe and America, and the people costs are high. But we are delivering on the margin expectation.

So sir, can you help us in terms of what kind of vision or a target you have in terms of reaching, let's say, over the next 3 years on the revenue side and on the EBITDA margin side? Because gross margins, are they not going through...

At this time, we're working on kind of 3 -- we call it 3 engines. One is the core business, which is the Basmati business. And so we, as a company, is very well placed across all geography. And as the category will grow with our strong brand and distribution, we will do better than the category growth, and we are delivering on that. As far as the organic business is concerned, as we have seen for the last 5 years, that's giving an excellent growth. Last year, we have grown by 50%. This quarter also, we have given a very good growth. As far as third engine is concerned, which is the new product line, which is on the base of convenience and health platform. We have launched Cuppa Rice testing. We are getting very good response on the sauté sauces. We are getting very good response. We have launched RTH in America. That's, again, giving a very good stock. So as a company and as a management, we feel that we are -- have developed a very strong business and kind of unique business which has a global platform to grow. Very optimistic ratio on the business side.

Yes. But sir, can you -- if you don't mind, can you...

Sure, sure.

Where we want to be, sir? Because one thing I'm not able to understand, maybe if you can help us understand in detail is that how the category can grow? I mean how do you induce customer to use our product versus maybe -- or I mean other East Asian product or maybe some other rice on Brazil or Mexico or versus Indonesia? So how do we induce customers in, especially in U.S. and Europe, that they consume more of our product? Or is that still a very price-sensitive market that you could drop a $0.01 or $0.10 and then only drives it? So can you please help us what kind of efforts are we taking so that we actually get a physical actual volume growth versus we have a pricing power to take higher margin?

So Nilesh, regarding we talk about U.S.A., we have 3, 4 ethnicities, which we wanted to have in our portfolio. One is Indian and kind of South Asian rice product. Now we are talking to the 2 ethnicities, which is on the East Asian, which is the [indiscernible] facility -- and they have started -- we have the data, we have started consuming Basmati. And third is Mexico, and fourth is the mainstream consumer. So our marketing programs are working to recruit all these ethnicity. And whatever the volume growth you are seeing, that is a result of that. We are already holding 50% market share in U.S.A. and still, we are growing there.

Okay. Monika, can you help in the data point that what kind of ad spend we have last year this quarter and this quarter?

Let me answer the question. In this quarter, the ad spend -- the promotion spent in this quarter was INR 22 crores, and it was INR 18 crores last year same quarter.

So other than India, how much it was?

We have increased the spend globally. So it has -- India also increased, and there was an increase in the U.S. as well of INR 2 crores.

Okay. And just last question, if I may. Sir, in the last call, you said that there was a freight cost increase because of the container cost which is going up. So is there any normalization coming back? Or you expect that to happen?

Nilesh, the freight market is very bad. That will be we may see a little impact in the coming quarters also. So almost 3x the freight cost has gone up. Yes.

So can we expect once that normalizes, there would be some improvement in the margin, right?

Yes. Yes. That will be after -- we are expecting that to be normalized, and roughly the people talking on the shipping line is, and it will take another year to do that.

One more year? Okay.

Yes.

The next question is from the line of Amitabh Sonthalia from SKS Capital & Research.

So just wanted to, again, understand in line with the previous questions as to -- has last couple of quarters been performance been sort of lower than what we had expected and what could be the reasons. And is it also because of -- do the year-on-year figures look relatively weak because of the pent-up -- not pent-up, well, panic buying by during the COVID quarter last year? Was there unusually high base that we are comparing this year's growth to? What are some factors to kind of -- for us to -- despite all the efforts that we're making in new product launches, organic business, the Cuppa Rice and all the other innovative stuff that we've taken in brand building and distribution and which -- even on the marketing side. And considering that they're a well-diversified geography, what -- the impression we got in the December and quarter onwards -- last year, first half, first 9 months, the trajectory was looking pretty good, and the management body language was also quite positive. But December seems to have lost momentum last couple of quarters. So is there something that is different? Or is it just a bit of a combination of different factors? And how can the trajectory change to a reasonable growth trajectory that we should be on?

Amitabh, if you see, [ traveling ], we are -- whatever this quarter has been delivered, we are quite satisfied with that. If you see in the same quarter last year, we are almost there. And last year, the quarter was -- there was just lot of pent-up demand. And we are able to hold that kind of consumer base and customer base. We are very happy with that kind of -- but as I said, we will keep that growth trajectory in place and...

So if you talk about the growth [indiscernible], if you have the Q1 numbers of '19, so the revenue was INR 985 crores. From that -- from there, we have increased to currently a base of INR 1,200 crores. So there is an increase of 24%. The last year, because of the pandemic and there was a stocking up of materials, the revenue grew. But if we take 2 years, 2 years growth, then also there is a growth of 24%, and that is in line with the year-on-year growth. So the company has grown.

Right. And in terms of profitability and cash flows, et cetera, a bit more on that. Is it at the desired level? Or are there any levers that would help us improve that in the remaining part of the year?

So we are generating free cash flow. And if you see quarter-on-quarter and year-on-year, we are distributing dividend and we are reducing our -- even the borrowings are all working capital borrowings. But we are reducing that, and our debt to EBITDA ratio is less than 2.

Great. But my other question...

All factors have improved. The ROCE has improved. The journey will continue. The same growth journey will continue.

And your U.S. and European business continues to be strong based on what the promise was a couple of quarters ago?

Yes, it will be.

And any sort of growth levers there for the remainder of this year?

So the growth levers are almost the same, recruiting new consumers and having more customer. So we are working on all the levers that will bring up the growth.

Okay. Right. And just -- yes, just one more question I had, which I'm just skipping off. I'll get back on the question queue.

The next question is from the line of Resham Jain from DSP Investment Managers.

So I have a couple of questions. So first is if you can just give your thoughts around the current Basmati situation as an industry in terms of the prices and the kind of inventory which your industry is carrying and possibly the situation going forward.

Resham, if your question is around the Basmati rice as an industry as a whole, we're doing good. So I always say we have divided the Basmati rice industry in two parts: one in the companies which have complete control on the value chain, [indiscernible] even they are doing good. The category is reasonably growing, except there's still question for the industry. But rest of the world, is -- that consumer business is growing. There is a little impact on the HoReCa across the world because of this. We all know that's the COVID situation. And we are quite hopeful that when the situation will be normal, then there will be -- in addition to the growth which the industry is delivering. Regarding the -- if your question is around paddy prices, paddy prices are very stable. And the crop is -- we are expecting a 10% -- 10% to 15% lower crop than the last year, but that is in certain variety and not all the variety. So next year, we may see a 4% to 5% higher prices in the paddy.

Okay. And sir...

That answer your question, Resham?

Yes. Also, if you can just highlight in terms of production and all things. [Foreign Language] it has already completed, but harvesting and all, but what is the situation compared to last year?

Last year crop, you're talking about or the current, which is...

The current which is going on. But I think harvesting is completely over, right?

[Foreign Language].

Sowing for the new year.

[Foreign Language] So sowing for the new year already started. It will end by the, say, last week of -- we are already in the first week of August. So almost done.

And also last year -- what I was asking was last year closing stock and all, how is the situation? Is it because mills must be carrying inventory with them. Is this normal or..

Normal. It's very normal. Whatever the carryover is -- will be going, it is very normal to the average years.

Okay. Sir, there was this news item, I think, a few months -- a few weeks back that there was this residue related issues in Pakistan, specifically on the Basmati rice. And this is for Europe. And because LT Foods has a slightly higher share in Europe within Indian companies, anything which you have heard from the customer on the space?

Not really, Resham. We have not heard. I have also read the newspaper and have confirmed our company, but we have not heard anything.

Okay. Okay. And lastly, sir, what is the kind of growth you're expecting this year? And what will be the FU debt level which are at the end of this year?

So full year growth, we are expecting 7% to 10%. And as far as the bottom line is concerned, or the free cash flow is concerned, we will be -- all the free cash flow we will generate -- they'll go into reducing the borrowing [ and that will create ] some opportunity come on the inorganic side.

Okay. Understood. So no major CapEx this year, right?

So normal CapEx is not even. It's a very regular CapEx in the range of INR 70 crores to INR 80 crores. And we are investing in mostly CapEx in the green energy. This year, we are putting 3.5 megawatt of solar power. We have last -- this year, we have started 3.2 megawatt in which from the husk as a fuel, we will simulate power. So we will be generating roughly around 4.5- to 5-megawatt of power through our own generation.

The next question is from the line of Amit Doshi from Care PMS.

Yes. Sir, I think in the opening remarks, it was mentioned that the other income includes onetime government incentive. So can you quantify? And what was that incentive for?

It's a government subsidy. It was in the range of INR 6 crores to INR 7 crores.

Okay. Okay. So this is for what? I think subsidy on account of -- I mean is it something that we receive annually or...

It is by the U.S. government on the COVID. They have some incentive.

Okay. So it's a pure one. Okay. Okay.

Yes, this is onetime.

Sir, in terms of our realization, of course, last time, you had mentioned last quarter that because of the non-Basmati exports and the China exports, et cetera, our realizations were down. But this quarter also the realizations are still low. So what could be the reason this quarter?

Sachin?

We could talk about the realizations. My -- the realizations are -- within the range of the realizations are, they are 105 in case of the international and that was at 106 of the June 1. So the realizations are not low this time.

Okay. I think on the presentation, I was just working on maybe I -- so I'll just prework and I'll [indiscernible] I thought...