adf foods ltd Management discussions

Global economy

Overview: e global economy was estimated to have grown at a slower rate of 3.2% in 2022, compared to 6% in 2021 (which was on a smaller base of 2020 on account of the pandemic effect). e relatively slow global growth of 2022 was marked by the Russian invasion of Ukraine, unprecedented inflation, pandemic-induced slowdown in China, higher interest rates, global liquidity squeeze and quantitative tightening by the US Federal Reserve.

e challenges of 2022 translated into moderated spending, disrupted trade and increased energy costs. Global inflation was 8.8% in 2022, among the highest in decades. US consumer prices increased about 6.5% in 2022, the highest in four decades. e Federal Reserve raised its benchmark interest rate to its highest in 15 years.

Regional growth (%)	2022	2021
World output	3.2	6.1
Advanced economies	2.5	5.0
Emerging and developing economies	3.8	6.3

Performance of major economies

United States: Reported GDP growth of 2.1% in 2022 compared to 5.9% in 2021 China: GDP growth is expected to contract from 8% in 2021 to 3% in 2022 United Kingdom: GDP is expected to grow 4.1% in 2022 compared to 7.6% in 2021 Japan: Reported growth of 1.7% in 2022 compared to 1.6% in 2021 Germany: Reported GDP growth of 1.8 % in 2022 compared to 2.6% in 2021

[Source: PWC report, EY report, IMF data, OECD data]

Outlook: e global economy is projected to grow at 2.8% in 2023, marked by sustained Russia-Ukraine conflict and higher interest rates. Global inflation is projected to fall marginally to 7% in 2023 (Source: IMF). On the positive side, the reopening of Chinas economy after the waning of the pandemic, the decline in the European energy crisis and robust US consumption outlook (despite high inflation) remain positives. Interestingly, even as the global economy is projected to grow less than 3% for five years, India and China are likely to account for half the global growth in 2023 (IMF).

Indian economy

Overview: Even as the global conflict remained geographically distant from India, ripples comprised increased oil import bills, inflation, cautious government and a sluggish equity market. India reported an economic growth of 7.2% in FY 2022-23. India emerged as the second fastest-growing G20 economy in FY 2022-23. India overtook UK to become the __h-largest global economy. Growth of the Indian economy

	FY 20	FY 21	FY 22	FY23
Real GDP growth (%)	3.7	-6.6	8.7	7.2

Growth of the Indian economy quarter by quarter, FY 2022-23

	Q1FY23	Q2FY23	Q3FY23	Q4FY23
Real GDP growth (%)	13.1	6.3	4.4	6.1

(Source: Budget FY24; Economy Projections, RBI projections)

A_er three consecutive years of rise, Indias foreign exchange reserves declined by around $ 70 billion in 2022 coupled with rising inflation and interest rates. e countrys forex reserves, which stood at $606.47 billion on 1^st April, 2022, declined to $578.44 billion on 31^st March, 2023. Indias currency weakened from Rs. 75.91 to a US dollar to Rs. 82.34 as on 31^st March, 2023 due to a stronger dollar and weaker current account deficit.

ere were positive features of the Indian economy during the year under review which are as under: o India moved up in the Ease of Doing Business (EoDB) rankings from 100^th in 2017 to 63^rd in 2022. o Per capita income almost doubled in nine years to Rs 172,000 during the year under review, a rise of 15.8 percent over the previous year. Outlook: India is expected to grow 6.8% in FY2024, catalysed in no small measure by 35% capital expenditure growth by the government. e growth could also be driven by broad-based credit expansion, better capacity utilisation and improving trade deficit.

Union Budget FY 2023-24 provisions

An outlay of Rs. 1.97 lakh crore was announced for Production Linked Incentive schemes across 13 sectors.

Industry developments

Global ethnic food market

e size of the global ethnic food market stood at USD 38,731.43 million in 2021, expected to reach USD 62,179.99 million by 2027, growing at a CAGR of 8.33% over 2022-2027. (Source: Mordor Intelligence, Fortune Business Insights).

e driving force behind the expansion of the ethnic food market is a rise in cross-border immigration: for job opportunities, environment concerns, educational opportunities and family reuni_cation. India has the worlds largest emigrant population; 4.7 crore Indians live overseas.

Global ready-to-eat food market

Ready-to-eat food has evolved to be among the most dynamic components of the global food market in recent years. An upsurge in convenience trends, combined with a rise in demand for specific meal solutions, has contributed to high demand for ready-to-eat food. e ready-to-eat industry is perceived as a one-stop shop for on-the-go customers, providing almost everything from sweets to snacks and meals. e global ready-to-eat market is predicted to grow from $107.87 billion in 2022 to $1471.94 billion in 2028. (Source: globenewswire. com, businesswire.com)

Packaged e-commerce foods sector

E-commerce accounts for less than 5% of total retail sales in Indias packaged foods industry, which is likely to change. e Indian online grocery market stood at USD 3.95 billion in FY 2021 and expected to grow at a CAGR of around 33% to USD 26.63 billion by FY 2027, influenced by consumer preferences, increasing disposable incomes, new market entrants and attractive marketing strategies (Source: Statista, Livemint)

Growth drivers

Demand for nutritious and high-quality food continues to rise as people adopt healthier lifestyles and eating habits.

Nuclear families: Nuclear families are the norm, accounting for a majority of households. Nuclear families make up 58.2% of households. Working professionals, in particular, do not have adequate time to prepare meals. As a result, on-the-go meals (that demand minimal to no time) and related ingredients have become popular.

(Source: business-standard.com, newsroomodisha.com)

Food safety: e global market for Health and Wellness Foods, pegged at US$733.1 billion in 2020, is predicted to reach US$1 trillion by 2026, at a CAGR of 6% over the forecasted period. A growing emphasis on healthy eating, the popularity of organic foods and increasing food preferences are influencing the growth of the global health and wellness foods market.

(Source: globenewswire.com)

Ready to eat food: Millennials and Gen Z now account for approximately 1.8 billion people, or more than 23% of the global population. e ready-to-eat meals market is expanding as a result of busier lifestyles, rising incomes, an increase in nuclear families and an absence of cooking skills.

(Source: punemirror.com)

Healthy diet: Consumer preference for plant-based foods is catalysing the demand for safe and environment-friendly food.

Working women: e proportion of employable women has increased from 41.25% in 2021 to 53.28% presently. It is anticipated to remain steady at 52.80% in 2023. (Source: fortuneindia.com, yourstory.com)

Government initiatives

e Indian government supported private sector investment in agricultural and allied sectors to enhance value-addition. Processed food exports increased from $8.56 billion in 2020-21 to $10.42 billion in 2021-22.

e implementation of the PLI scheme is expected to facilitate the expansion of food processing capacity by nearly Rs. 30,000 crore. PLI beneficiaries investments are likely to increase food sales and exports. e scheme requires that the entire chain of manufacturing processes, including primary processing of food products, take place in India in order to qualify for the incentive. e scheme will also aid in the promotion of Indian brands abroad.

According to data reported by PLI beneficiaries, approximately Rs. 4900 crores have been invested under the scheme. (Source: pib.gov.in)

Company overview

ADF Foods is premier player in the prepared ethnic food segment with products stretching over a range of brackets from ready-to-eat to frozen foods and meal accompaniments. ADF Foods launched eight brands viz. Ashoka, Truly Indian, Camel, Aeroplane, ADF Soul and Khansaama, with a footprint across more than 55 countries. More than 99% of the companys revenues are derived from exports to North America, Europe, Asia Pacific and Gulf Cooperation Council (GCC) markets. e Company developed new products across categories to address consumer preferences. During the year under review, the Company launched 35 new product variants across categories comprising frozen kulchas, frozen snacks, ready-to-eat curry and chutneys (Ashoka brand) in ADFs product portfolio.

Ashoka	Truly Indian	Camel	Aeroplane	Nates	PJs	ADF Soul	Khansaama
Ready to eat food	Ready to eat food	Meal accompaniments	Meal accompaniments			Meal accompaniments	Cooking Pastes
Frozen Vegetables/ snacks/ breads	Papad (poppadum)	Cooking pastes	Cooking pastes	Meatless Meatballs	Burritos	Cooking pastes	Rose water and Kewra water
Meal accompaniments	Meal accompaniments		Curry powders			International gourmet category products featuring Dips, Italian Sauces & ai Curry and other continental products	d>
Flavoured drink milk Cooking pastes Mango pulp and mango slices plant-based curries	Cooking pastes Cooking sauces Organic ready-to- eat and organic cooking sauces		Cooking sauces

e Companys processed food business generated a revenue of Rs. 353.34 crore in FY 2022-23.

ADF has production plants in Nasik, Nadiad and Surat. Hazard Analysis and Critical Control Point, British Retail Consortium and ISO 22000:2005 certifications have been granted to the Nasik and Nadiad plants (both plants invested with automation).

e Companys distribution network includes more than 180 distributors.

In addition to our processed food business, the company has ‘distribution business including three FMCG companies i.e. Unilever, Patanjali

Financial highlights

Particulars	Standalone		Consolidated
	FY22-23	FY21-22	FY22-23	FY21-22
Total Income	363.45	311.12	461.50	430.69
EBITDA	86.89	62.41	91.85	76.03
EBITDA margin	23.91%	17.17%	19.90%	16.47%
Interest	0.61	0.78	2.65	1.81
PAT	60.00	41.49	55.85	48.53
PAT margin	16.51%	11.42%	12.10%	10.51%
Working capital	246.68	183.25	286.85	243.59
ROE	15.49%	13.03%	17.66%	14.04%
RoCE	20.52%	17.44%	18.12%	18.13%
Basic EPS (Rs.)	27.41	20.68	25.62	23.97
Diluted EPS (Rs.)	27.41	20.13	25.62	23.33

Details of significant changes in key financial ratios

Particulars	March 2023	March 2022
Debtors turnover	78 days	73 days
Inventory turnover	4.19 times	3.81 times
Interest Coverage Ratio	133 times	73.23 times
Current Ratio	9.77 times	6.59 times
Debt-Equity Ratio	-	-
Operating profit margin (%)	23.43%	19.86%
Net profit margin (%)	17.28%	14.48%

Debtors turnover ratio: e ratio is more in line with the previous year and the company is in process of improving collection.

Inventory turnover ratio: e ratio has improved because of better inventory management.

Interest coverage ratio: During the year, cash flow from operations improved and interest cost declined due to limited usage of lease/bank facility. Hence, the ratio improved.

Current ratio: Current ratio improved on account of better working capital management.

Debt-equity ratio: Not applicable to the Company.

Operating profit margin: e ratio improved on account of a better operational efficiency and product mix.

Net profit margin: e ratio improved due to a better operational efficiency and reduction in other costs.

Risk and mitigation

e Company is engaged in de-risking its business through a steady Business Risk Management System, which examines risks. e industry risks are as follows: Foreign exchange rate fluctuation risk: e Company derives most of its revenues from exports and though depreciation in the Rupee helps exporters like us, an appreciation of the Indian Rupee can affect global competitiveness.

Mitigation: e company mitigates this risk by constant monitoring and adopting a structured forward contracts booking. Furthermore, the Company relies on value addition, developing internal shock absorbers to reduce the repercussions of a stronger rupee.

Raw material inflation risk: Any rise in raw material costs could affect competitiveness and margins.

Mitigation: e Company keeps track of decisive and bulk purchases and its reliable distribution network has enabled it to maintain uninterrupted availability of raw materials at predetermined costs. Further, the Company implemented price hikes during FY 2022-23 to combat inflation. ese price adjustments were carefully implemented, taking into account market dynamics and competitive positioning, allowing the Company to improve its pricing power.

Competition risk: Growing competition (existing and new) and unorganised companies could affect market share.

Mitigation: ADFs long-standing funding in a brand recognition portfolio ensured consumer popularity and market share security. Further, the Company emphasizes on R&D and consequentially delivers new, innovative and healthy products every year.

Logistics and supply chain challenges

Mitigation: Multiple logistic partners and increase in number of distributors, own distribution company and warehousing space.

Internal control systems and adequacy

Recognizing and tracking the internal control systems is a critical part in an organization. e company has a secured system of internal controls which works together with internal financial controls that are repeatedly administered by the management. e internal control system of ADF shows pro_ciency in operations; make the best use of resources and adhere with all applicable laws and regulations. Key controls are examined during the year and restorative and precautionary actions are taken for any fault. Internal audits are organized systematically by designated audit teams. e Audit Committee sanctions the risk based internal audit plan which also reviews worth and efficacy of the Companys internal financial controls.

Human resources

e Company provides employees with a conducive workplace, marked by knowledge accretion, respect for dignity, teamwork and career growth. e Companys permanent workforce strength was 347 as on 31^st March, 2023.

Opportunities and outlook

e Company is building its business through the following initiatives:

Increasing capacities: e Company commenced its greenfield project in Surat, Gujarat, with a budgeted capital outlay of Rs 60 crore in Phase I.

Widening distribution: e Companys objective is to enlarge its distribution network in the major markets by engaging directly with retailers by servicing product needs from depots, warehouses and channel distribution, moderating intermediary costs. e Companys two warehouses in the US provide a combined leasehold area of 1 lac square feet. e Companys step-down subsidiary, Vibrant Foods New Jersey LLC that was set up in September, 2021 which acts as a distribution entity in the USA, performed well during FY 2022-23 and fetched a revenue of Rs. 67.06 crore.

Strengthening distribution business: e Companys distribution segment saw good o ake during the FY 2022-23 and supplemented the overall business, contributing Rs. 88 crores revenue. e Company added new products of its principals: Patanjali and Unilever in our product basket.

Further, the Company entered into an agency distribution contract with Ekaterra, a Netherlands - based company as Unilever divested a majority of its tea making business. e said agency distribution contract entails distribution of tea under Lipton, Brooke Bond Red Label and Taj Mahal brands across major markets in the U.S.A.

Brand strengthening: e Companys flagship brand Ashoka, crossed Rs. 200 crores in revenue in FY 2022-23 , growing at a CAGR of 33.2% over the last two years. To support the brand growth, the Company increased marketing spend significantly. is includes various channels such as digital, television advertising, sampling, in-store promotions and securing shelf space. ese efforts helped the Company raise brand awareness and capture a larger market share. e Companys brand spending is supported by the maximum incentive of Rs. 61.35 crores (during the schemes tenure from FY 2023 to FY 2027) received by the Company under Category III of the Production Linked Incentive Scheme of the Government of India.

Operational processes: On the operational side, the Company completed debottlenecking at its existing plants in Nadiad and Nashik during FY 22-23. e Company incurred a capex of Rs. 5 crores, which could fetch a potential revenue of Rs. 30 crores. e Companys greenfield expansion in Surat is expected to be completed within 18 months from breaking ground, which is anticipated in Q2 of FY 23-24. e growth will expand the Companys frozen food capacity and unlock the next level of growth.

Cautionary statement

Statements in this Management Discussion and Analysis Report describing the Companys objectives, expectations or predictions may be forward looking within the meaning of applicable laws and regulations. Actual results could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operations include raw material availability and prices, cyclical demand and pricing in the Companys principal markets, competitive actions, changes in Government regulations, tax regimes, economic developments in India and in countries in which the Company conducts business and other incidental factors.