Notes from the Q4FY21 earnings call:
- Both plants at Silvassa have commenced operations, expected to ramp up this quarter (Q1FY22).
- New projects in UP / Hyderabad hit by local lockdowns affecting completion deadlines. No effect on existing operations due to covid. (Although they later said the beverage season was a wash due to covid, so I don’t believe this claim.)
- Strong operating cash flows, up 4 times due to better working capital management.
- Will invest another 200 crores (roughly 50% of their net block after current capex) for home care / food and beverage.
- EBITDA margins will be in the range of 5.5% to 6.5% going forward.
- Merging all Vanity Case business into HFL over the next two years.
Q/A Highlights:
On Capital Allocation Framework:
- If it is a dedicated site, which has a take-or-pay contract, we have no limitation on the capital that we will allocate to such a project and that’s visible from the investments that we have done which are upwards of a couple of hundred crores in one particular site.
- If it’s a shared facility where we believe that there is a lot of potential, but there is a possibility of us going wrong like we did in the shoe factory or like we did in the Mysuru beverage factory, the Board as well as the management has decided to restrict this capital allocation to around INR10 crores to INR15 crores.
- In case of shared facilities where we believe that the operating leverage is very high, we will fund this capital using equity while in case of the dedicated site, we will be using a judicious mix of debt as well as equity because we have a take-or-pay contract.
This reads like a textbook game theory/utility maximisation framework.
Benefits from PLI scheme:
- PLI rules have come in recently. […] Making representation to the government for it, will post updates to the exchanges when outcome is known.
- As a contract manufacturer, it’s going to be an interesting tug of war between how much percentage of the benefit will be passed on to the customer versus how much will be retained by the contract manufacturer. This balance is present across the sectors. Too early to say anything right now.
Make in India:
- The government has imposed substantial import duties on import of finished goods such as finished shoes from China. So all the international brands are definitely looking at Make in India, which is an evolving phenomena. We have just gotten into the category now (knitted sports shoes).
On in-house manufacturing vs contract manufacturing
Shared facilities:
- [Big FMCG companies would use contract manufacturing when…] New product launches where they don’t want to invest money in setting up facilities. For this product, they would look at contract manufacturing.
- Due to covid, handwash, cleaning product demands went through the roof. There is a lag between market demand and generating capacity. (This is only true if in-house capacities are at 100%…)
Dedicated facilities:
- Used for more mature products with years of performance history, confident of performance over next ten years. Our facilities are for large FMCG brands, and have long term contracts in place.
On environmental sustainability:
- There is zero discharge policies in most of the states. In Hyderabad, our largest facility, we are trying to take zero water from the ground. The government is also helping and pushing in achieving this.
- Since most of our customers are multinational companies, they have their own requirement in terms of social compliances, environmental compliances which we are required to adhere to.
On ambition:
- [For example,] In the color cosmetics area the contract manufacturers (six companies in Italy) now define and decide the agenda for brands. It would be a great achievement if we can get to that kind of a level, where if a brand wanted to launch an environmently friendly home cleaner or personal wash that they would come to Hindustan Foods because we would be the technological leader in terms of providing that solution.
- Currently are product agnostic, will grow topline and later decide whether specialisation makes sense.