Company Overview

HFL was established in 1988 as a result of Dempo Group’s foray into the FMCG segment through a joint venture with Glaxo India Limited, with the objective of manufacturing nutritional food products. In 2013, Vanity Case Group bought a controlling stake in Hindustan Foods Ltd. from Dempo Group of Goa and since then the company has diversified across various FMCG categories with manufacturing competencies in food and non-food, extending to cosmetics, personal care and home care products. It intends to continue leveraging the India’s consumption story through organic and inorganic expansion.

 

Time Line

 

Industry Overview

• The Fast-Moving Consumer Goods (FMCG) sector is the fourth largest sector in India.
• As per the Boston Consulting Group (BCG), the Indian FMCG market is estimated at about US$ 185 billion or about Rs 12.6 trillion. It has grown annually at about 12% per annum over the last decade. The key segments within this sector are staples, packaged food, beverages, consumer health, and home & personal care. The staples segment has a share of about 70% of the total market, with it being fairly divided between its sub-segments namely pulses & cereals, edible oils & fats and dairy. The share of the branded players in these set of products is fairly low. However, when it comes to segments such as packaged foods, beverages, consumer health and home & personal care (all of which have a combined size of 30% of the market), the branded players have majority share. On an overall basis, the share of the branded segment stands at about a third.
• The fastest growing segments in recent times include packaged foods, edible oils and home & personal care products.
• A large population to be fed means that India has increased its farm productivity and production over the years. White revolution has resulted in abundance of milk and milk products. Armed with a huge agriculture sector, abundant livestock and cost competitiveness, India is fast emerging as the sourcing hub of processed food.
• The organised space is no more as urban-centric as it used to be. While metropolitan and tier-I cities have been driving FMCG consumption over the past decade or so. It is the tier-II, tier-III and tier–IV cities that are expected to drive the sector growth over the next decade.
• While consumer goods are largely retailed through two primary sales channels - general trade and modern trade, present times are quite interesting as new channels such as e-commerce have emerged quickly to become forces to reckon with; but this space is yet to provide a profitable and sustainable model as things stand today. General trade comprising of the ubiquitous kirana stores is the largest sales channel forming the majority of overall retail sales.
• However, growth of consumer goods retailed through the newer channels is now outpacing the growth of FMCG products in general trade. Tier II and Tier III are witnessing a fast growth in the modern trade segment.
• According to a BCG report, India’s consumer spending could go up to US$ 3.6 trillion by 2020 and India’s contribution to global consumption is expected to more than double to 5.8% by 2020. Factors such as a comfort, convenience, rising trust factor, modern store experience, access to a wide variety of categories & brands under a single roof and compelling value-for-money deals are attracting consumers to the newer channels in a big way.
• The implementation of the Goods and Services Tax (GST) from 1 July 2017 is seen to be positive for the sector. Over time, the implementation of a single tax regime is expected to benefit the FMCG sector immensely by reducing the overall incidence of taxation. GST has already reduced the cascading effect by replacing a multitude of indirect taxes. Moreover, FMCG companies are now able optimize logistics and distribution costs in the GST era. The resulting cost savings by the companies is seen to be passed on to the final consumer thereby boosting demand.

• Despite a slump at the beginning of the year, consumer products manufacturers ITC, Godrej Consumer Products Limited (GCPL) and HUL reported healthy net sales in FY17.
• Aggregate financial performance of the leading 10 FMCG companies over the past 8 quarters displays that the industry has grown at an average 16-21% in the past 2 years.
• On the policy front, the government gave Investment approval of up to 100% foreign equity in single brand retail and 51% in multi-brand retail.

• India's organised FMCG space is expected to grow at a pace of 14-15% YoY per annum for the next decade to the size of US$ 220 billion-US$ 240 billion. Consumption is expected to be driven by factors such as increasing income, rising urbanisation, nuclearisation, as well as growing work force. As per BCG, incomes are likely to rise by 70% by 2025; more than a third of the population is likely to reside in urban parts of the country; reducing household sizes due to nuclearisation is likely to add about 10 million households by 2020; about a 100 million of youth are expected to join the work force by 2020.
• Notwithstanding the slump caused due to macro factors like demonetisation and hiccups in the GST implementation - falling inflation and interest rate levels along with seventh pay commission hikes will continue to be positive for the sector over the long run. While traditionally, rural demand has outpaced urban demand, the same has not been the case in recent times as growth in both the markets has been similar. In fact, a good number of companies have begun refocusing on the urban markets.
• Going forward, GST will be beneficial for the FMCG industry as many important raw materials required in the food processing industry will be exempted from GST. Moreover, major FMCG products will have lower GST rates compared to their current tax rates.
• With the rise in disposable incomes, mid and high-income consumers in urban areas have shifted their purchase trend from essential to premium products. This could spell an opportunity for established FMCG firms to build on their existing brands and add value in return for higher margins.
• While crude prices have been down, companies have been passing on costs to customers, and utilising the savings to focus on boosting volumes - in the form of aggressive advertising and promotion expenses - to keep the momentum going in an otherwise disinflationary environment. It is unlikely that trend will play out in the coming year. With crude prices on an uptrend, companies could face pricing pressures, and would have to be careful in taking price hikes to match the rising oil prices in the coming years.

Financial Analysis

(Absolute Values - Rs. in Crores)

Years	2018	2017	2016
Net Profit Margin	4.52	1.75	6.04
EBITDA Margin	8.61	2.42	4.53
ROCE	14.50	4.72	10.90
ROE	16.40	2.08	-3.6
Interest		9.38	9.81
Current Ratio	1.46	2.57	1.05
Debt to Equity	0.85	0.15	6:4
Receivables to Revenue Ratio	139..8	38.1	23.9
Cash from Operating Activity	-5.00	-5.32	-1.03
Cash from Investing Activity	-19.25	-14.30	-4.66
Inventory Turnover	5.69	6.40	15.89
Fixed Assets Sold	0.00	0.00	0.00
Cash from Financing Activity	26.03	24.33	5.72
Operating Cash Flow to Sales	6.50	4.72	0.06

2015-2016

The company recovered losses of 2005 and made profits of 14.93lacs, also their finance cost decreased from 98.12Lacs to 14.93Lacs. They booked a profit of 172.92 Lacs. It had an inventory of 15.89% and the debt to equity was 6:4.

Sales to revenue were 23.9% only and the figures jumped eventually.

2016-2017

Net worth: The Company’s net worth stood at Rs. 347.84 million as on 31st March, 2017, increasing by 891%, compared with Rs.14.71 million as on 31st March, 2016. The net worth comprised paid-up equity share capital amounting to Rs.129.93 million as on March 31, 2017 (12992500 equity shares of H10 each (fully paid up).

The Company’s reserves and surplus stood at Rs. 201.92 million.

Non-current liabilities: The Company’s non-current assets decreased to Rs. 49.42 million in 2016-17 from Rs. 117.36 million in 2015-16 largely due to the repayment of long term borrowings Current Liabilities: The current assets Inventories increased to H116.84 million during the year under review from Rs. 61.30 million.

 The increase was primarily due to an increase in the creditors of newly acquired leather business Fixed assets and CWIP: The balance under this head increased to RS.127 million in FY 17 from 108 million in FY 16. This was primarily due to the addition of assets of the leather business.

Current assets: Total current assets increased to Rs.154 million in FY 17 as compared to RS.63 million in FY 16. This was primarily due to an increase in debtors and inventories of the leather business.

Cash and cash equivalents: The Company had on its books cash and cash equivalents worth Rs. 164.77 million as on 31st March 2017 compared to Rs. 1.35 million as on 31st March 2016.

2017-2018

Net Sales at Rs 52.74 crore in September 2018 up 122% from Rs. 23.76 crore in September 2017.Quarterly Net Profit at Rs. 2.54 crore in September 2018 up 173.53% from Rs. 0.93 crore in September 2017.EBITDA stands at Rs. 5.06 crore in September 2018 up 182.68% from Rs. 1.79 crore in September 2017.Hindustan Foods EPS has increased to Rs. 1.93 in September 2018 from Rs. 0.67 in September 2017.Hindustan Foods shares closed at 301.05 on November 13, 2018 (BSE) and has given -5.95% returns over the last 6 months and -11.46% over the last 12 months.

Over All View

To address emerging opportunities including inorganic growth, Hindustan Foods closed a round of funding through a preferential allotment and raised H31.97 Crores from various investors in December 2016.

The company moderated its interest outflow with the objective to enhance profitability.

• The company negotiated with vendors for a more efficient sourcing of capital assets, strengthening overall profitability.

• The company strengthened its frugal engineering practices, enhancing cost competitiveness.

 • The acquisition of the leather business led to a substantial increase in turnover and EBIDTA, leading to a better absorption of overheads.

Positive:

1. 1. They have their long standing partners like HUL, Danone, U.S. Polo, Hush Puppies, Steve Maden, hence the growth will increase keeping in mind such huge companies are backing up Hindustan Foods.
   2. Hyderabad- The company acquired a factory in Hyderabad manufacturing 70,000 tons of detergent powder (Rin, Wheel & Surf) for Hindustan Unilever Limited.
   3. Tamil Nadu – Beverages. The company started construction of a large facility in Coimbatore, TN to blend and pack tea, coffee and other beverages for Hindustan Unilever Limited.In the process of signing a long term supply agreement with a leading FMCG MNC player. Production is expected to start by September 2018.
   4. New Ventures- The company took over G Shoes Exports, a 40 year old company manufacturing shoes for High Street brands like Dune, Saks 5th Avenue, Office, etc.
   5. The company set up a shoe manufacturing facility in Vasai, Maharashtra.
   6. The above ventures look promising and the company’s current valuation is 150Cr but they are expecting it to reach 1500Cr by 2019. There is major growth opportunity if this holds true.

Negative:

1. 1. 1. The future projections are unrealistic and not very easy to achieve.
      2. There is a risk with new ventures blooming in such short time of a year.
      3. The products already have pending buy orders of about 1,828 shares without any sellers in the market. 
      4. Competition risk: Increased competition from peers in the industry can drag down profit margins.

Mitigation: The Company has exposure to cut-throat competition from peers in the food sector. To mitigate this risk, the Company invested in robust research and development to innovate around the existing product portfolio and offer something new.

1. 1. 5. Product-specific risk: Reduced variations in flavor stagnates the profitability of the business

Mitigation: The Company has leveraged on its experience in the food industry and added to the usual flavours available in the market for infant food products and instant food mixes. The Company is committed towards providing consumers tastier and healthier food products.

Conclusion

Overall, the company has exhibited good financial performance in the past three years, and the industry prospects in the near future are looking good. The company is planning to increase its offerings in existing product as well as diversify into new verticals. It is an solid investment if the company lives up to the growth rates and the sales hike as promised. Also, Company’s new ventures looks promising.

CA.BinoyJ.Kattadiyil