Hindustan Foods Ltd Management Discussions.

GLOBAL ECONOMIC OVERVIEW

The global economy is expected to grow by approximately 2.7% in 2020. As per the World Bank, growth among emerging and developing the economy is forecasted to fall to a 4 year low of 4% in 2019. The growth is constrained by sluggish investment and risks including rising trade barriers, renewed financial stress and sharper than expected slowdowns in several major economies. Current economic momentum remains weak while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential. With the growth in advanced economies projected to gradually decline to about 1.7% once economic slack is eliminated, the further pickup in global activity will entirely be driven by emerging markets and developing economies.

The ongoing US-China trade war is snowballing fears about damage to global economic growth. The repercussions can be more volatile in both commodity prices and currencies. However, India is amongst the few economies that stand to benefit from the trade tensions as it can tap export opportunities for sectors like chemicals, textiles, agriculture, and the overall manufacturing sector.

INDIAN ECONOMIC OVERVIEW

The Indian GDP has grown by 6.8% in the financial year 2019. The decline in GDP growth rate is on account of multiple factors like the fallout of NBFCs, low credit growth, tight liquidity conditions, dismal growth in wages and flat exports owing to a global slowdown. Indian manufacturing continued its downtrend growing at 3.1%.

However, the GDP growth rate is expected to bottom out in the coming quarters. RBI has cut key policy rates for the third time in a row this calendar year, for improving liquidity scenarios. With the government continuing to roll out policies focusing on the rural population, there could be some relief to the ongoing distress and signs of recovery should be visible in the second half of the financial year.

For the long-term, the government has publicly announced its ambitious plans of becoming a 5 trillion USD economy by 2025 and the 3rd largest consumer market in the World by 2025. The government plans to make this dream come true through continued infrastructure spending, job creations, a rural focused approach and greater use of technology. We believe that the long-term consumption story of the county is intact in spite of the short-term blips.

FMCG SECTOR

OVERVIEW

Indias FMCG segment, pegged at USD 53 bn in 2018, is expected to touch USD 104bn by 2020The segment is broadly segregated into urban and rural markets. Rural segment, growing at a rapid pace owing to improved distribution channels and quality products, contributes around 45% to revenues.

OUTLOOK

The signposts for consumer demand are explicit with India reporting a population growth of 1.13% and possibly the worlds most populous country by 2024. More than half of Indias population is under the age of 25 and two-thirds are less than 35.

Indias strong economic growth and rising household incomes are expected to increase consumer spending to USD 3.6 TN by 2020. The leading avenues of consumer spending would be in food, housing, consumer durables, and transport and communication sectors.

The Indian rural growth story is intact with 65% of Indias population residing in rural areas and spending mostly on daily necessities. Government initiatives of regular hikes in MSP for crops and maintaining MSPs at least 1.5x of cost of agricultural produce to achieve doubling of farm income by 2022 are momentous for growth in rural demand. Also, programmes like direct transfer of subsidies and payments into the beneficiary bank accounts, support the rural community.

Recent statistics confirm a shift in FMCG space. Even though kiranastores (general trade) continue to dominate and are the largest sales channel for overall sales, growth through modern trade especially e-commerce is gradually outpacing it.

HOMECARE AND PERSONAL CARE SECTOR

OVERVIEW

Laundry care (detergent), toilet care, surface care, air care (air purifiers and room spray), dishwashing, insecticides, polishes are products of the homecare segment. The personal care industry includes products in the skin-care, hair care and colour, oral care, sun care, make-up, and toiletries sectors.

The sector continues to record stable growth as consumers are increasingly becoming aware of the importance of hygiene and the rise in disposable income. They are searching for convenience owing to their busy lifestyles. Premiumisation and increasing product penetration are the predominant trends for home and personal care in India. With the expansion of organized retail, in recent times, consumers have added exposure to products by display thereby increasing awareness.

OUTLOOK

The Indian detergent market is expected to grow at a CAGR of ~5% during 2018-2023 due to an increase in consumer demand. Based on the type of detergents, the hand wash detergents constitutes ~82% of the market share while the machine wash detergents holds the remaining. The demand for hand wash detergents is high as only ~33% of the population uses washing machines and require the machine-wash detergents and the rest of them use handwash detergents for washing the clothes.

Demand for washing machines in India has increased considerably which in turn has increased the demand for detergent powders. Also, the purchasing power of Indians has increased, boosting many detergent manufacturers in India to expand their network and increase product penetration.

BEVERAGES SECTOR

OVERVIEW

The beverage sector mainly comprises of hot beverages such as Tea and Coffee. The revenues in the Hot Drinks segment amounts to USD 12,987 Mn in 2019 and the market is expected to grow annually by 7.1% till 2023. India has majorly been a Tea Drinking country. Revenues in the Tea segment amounts to USD 12,434 Mn in 2019 while the revenues in the Coffee segment amounts to USD 420 Mn in 2019. The Coffee market is expected to grow at a CAGR of 7.9% by the year 2023.

OUTLOOK

Indian Consumers are becoming more health conscious and are looking for health benefits such as weight loss, mental relaxation and immune boosters from the beverages they consume on a daily basis.

MOSQUITO REPELLENT SECTOR

Indian mosquito repellent market was USD 670 Mn in 2018 and is estimated to grow to USD 900 Mn by 2024.

This growth is mainly due to the rising cases of vector borne diseases in rural as well as urban areas. Some of the diseases spread by mosquitoes include malaria, dengue fever and yellow fever. Mosquito repellents sales generally take place in urban areas but due to government initiatives, awareness about mosquito repellent products is spreading and hence demand in rural areas in expected to increase over the next five years. Besides, the increase in penetration of modern mosquito repellent products such as vaporizers, sprays, creams, repellent fabrics, etc. is expected to trigger the growth in the mosquito repellent sector.

OUTLOOK

LEATHER SECTOR

OVERVIEW

Leather is one of the most common commodities traded globally. The Leather industry in India accounts for around 12.9% of the worlds leather production of hides/skins and handles a robust annual production of about 3 bn sq. ft. of leather. India accounts for 9% of the worlds footwear production and is the second

The leather industry is a labour intensive industry employing more than 4 Mn people. Women employment is prominent in the Leather products industry with about 30% share and is one of the youngest workforces with 55% of the workforce below 35 years of age.

The Indian leather industry has grown significantly, transforming from a sheer raw material supplier to a value- added product exporter.

OUTLOOK

The ongoing trade war between the U.S and China indicates a positive move for India as the U.S market has started looking for other sources to import footwear since the U.S was highly dependent on China. The production capacity in Vietnam is full and Indonesia has capacity constraints, hence the only other option for the U.S is India. A simple 5% shift to India would bring in huge volumes amounting to USD 1.5 Bn.

BABY FOOD SECTOR

OVERVIEW

Baby food and infant formula are food products specifically made for babies till the age of two years. Infant formula serves as a replacement of mothers milk as it exhibits similar nutritional attributes. Increasing awareness among people about the various health benefits of feeding baby foods to infants and young babies is fuelling the demand for baby foods across the globe.

OUTLOOK

The global baby food market is expected to register a CAGR of 6.7%, from 2018 to 2023. Health conscious parents are now preferring organic baby foods over traditional baby foods. There has been substantial growth in the baby food market over the past few years mainly due to an increase in working women, a rise in the organised retail marketing and the major focus is on nutrition for babies. Moreover, there are strict health and safety standards in manufacturing baby food which has resulted in the required nutrition for babies.

The baby food market in India is a niche as compared to other developing countries across Asia. This market is highly dominated by unorganised and non-organic baby food segments. Nestle India is the market leader in this segment operating with 6 baby food brands and there has been low penetration in the organic baby food category from other players.

GROWTH DRIVERS AND OPPORTUNITIES FOR THE COMPANY

Increased consumption: As India continues to reap the advantage of the demographic dividend, the consumption story will unfold. In spite of the short-term blips and the resultant fall in consumption, the long-term story is intact. GDP growth of around 6% should translate into a volume growth of around 7-8% for the FMCG volumes in the country. Given the supply side constraints, a 7-8% volume growth will necessitate increased capacities across the product categories. Within this, some categories will grow disproportionately and require greater capacities - like liquid detergents.

Sales from modern trade channel driven by e-commerce and digitization growing rapidly: Changes in the distribution landscape of the country is opening up new fields for existing players and also encouraging new players to launch brands in the FMCG industry. The presence of modern-trade only or digital only brands will increase in the coming years and as a result the demand for outsourced manufacturing will increase as well.

Shift in Global sourcing as a result of Trade tensions: India is well poised to leverage the on-going trade wars between China and India. Appropriate investment in infrastructure and the ability to scale up production will be the key to leveraging this windfall opportunity.

Decentralised manufacturing: India is a large country in terms of geographical area with a population spread all across. Though the investment in Roads and the doing away of Sale-tax borders has led to improved cost of transportation, FMCG companies are actively redrawing their manufacturing foot prints to set up factories closer to the centres of consumption. This will lead to a decentralization of manufacturing and demand for multiple factories across the country.

Make in India: The government continues to encourage investments in the manufacturing and has announced a slew of packages for the food processing industry. Changing labour laws will also make it easier to set up larger factories in the country.

RISKS AND CONCERNS

Legal & Regulatory Risk

The Company has to comply with extant laws and regulations prevailing in the country of its operations. These regulations can affect the development, manufacturing, approval, marketing and distribution of its products. Changes in the countrys laws or regulations also throw new challenges of vast compliance.

Mitigation: Your Company has established a strong quality assurance mechanism and compliance monitoring network to ensure compliance across all plants. It also organises regular training for its employees to update them on new developments and requirements of various statutes and Laws of our Country and train them for timely compliance of the applicable laws.

Talent & Industrial Relations risk

People continue to remain the backbone of the manufacturing industry. Obtaining and retaining a skilled workforce is essential for continued success of our business. The loss of management or other key personnel could make it difficult to manage the business and could adversely affect operations and financial results. Loss in labour productivity and labour disputes could result in strikes, work stoppages and a ff ect production. The competency development of our employees continues to be a key area of strategic focus for us.

Mitigation: We launched new programs for our employees in keeping with the changes in the use of technology in work life. Your Companys HR team identifies the young talented youth and recruit as a part of your dynamic Company. We recruit the combinations of the talented qualified Postgraduates, Management Trainees and Senior experienced personnel in various fields, who have consistently shown high levels of achievement in their expertise fields. We rely on a rigorous selection process involving aptitude tests and interviews to identify the best applicants. This selection process is continually assessed and refined based on the performance tracking of past recruits. To further augment peoples capabilities, we are imbibing industry-best HR practices to inspire our team towards excellence. As part of our teambuilding efforts, we undertake regular activities to promote their mental and physical wellness.

Quality & Safety risk

HFL manufactures products for leading FMCG brands. The company needs to adhere to strict guidelines with respect to product quality and practices. Failure to adhere to these could expose your Company to legal consequences and damage corporate reputation. The risk that raw materials may be contaminated through the supply chain or that other product defects occur due to human error, equipment failure or other factors cannot be excluded. In addition to quality, the business faces risks associated to the safety of personnel, material and equipment such as the possibility of accidents, theft, labour injuries, equipment damage, etc.

Mitigation: Your Company organises regular safety training for all the manufacturing units and ensures that safety equipment is maintained as required. It is committed to complying with all applicable external standards and safety inspection process across all manufacturing and warehousing locations. All materials used in the production process go through Quality Control before use. The processes are reviewed annually and controls regularly monitored through performance indicators that drive improvement activities.

Competition risk

Increased competition from peers in the industry can drag down profit margins

Mitigation: Your Company invested in robust research and development to innovate around the existing product portfolio and offer something new. It has systems in place to ensure that production costs are in control to provide better prices to our customers.

Inability to procure raw materials on time may disrupt the manufacturing process

Mitigation: Your Company enjoys longstanding sectoral experience and has established a strong network with the suppliers that ensure all raw material reach the Company when required. It procures major raw materials from states which offer the maximum cost advantage.

Policy risk

Any sudden change in food security policy and other regulations may hit the profit margins badly

Mitigation: Your Company abides by food security policies published by the government to ensure safety was per food quality standards. The products are moved through adequate quality checking procedures.

Operational risk

Inconsistency in operational efficiency may affect revenues.

Mitigation: Your Company has a strong internal control system in place that ensures the business complies with consistent processes and standards. The human resources of the company were also dedicated to improving performance and remaining competitive.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Board has laid down Internal Financial Controls within the meaning of the explanation to section 134 (5) (e) ("IFC") of the Companies Act, 2013. The Board believes that your Company has sound IFC, commensurate with the nature and size of its business. Business is however dynamic. Your Board is seized of the fact that IFC is not static and is in fact a fluid set of tools, which evolves over time as the business, technology and fraud environment changes in response to competition, industry practices, legislation, regulation and current economic conditions. Therefore, there will be gaps in the IFC as the business evolves. Your Company has a process in place to continuously identify such gaps and implement newer and/or improved controls wherever the effect of such gaps would have a material effect on the Companys operations.

HUMAN RESOURCE INITIATIVES

Companies with an engaged workforce can successfully surpass companies that are without. The company believes in two-way communication, to ensure that employees have all the resources they need to complete their work successfully, give appropriate training to increase their knowledge and skill and build a distinctive corporate culture that encourages hard work. Your Company believes in the potential of young professionals and challenges them to accept and deliver additional responsibilities. Your Company reinforces the capabilities of its workforce with numerous in-house training programmes and job-specific training drills. As of 31st March 2019, the Company had over 281 employees on its payroll.

FINANCIAL REVIEW

Results

(INR Lakhs
Particulars For the year ended 31st March, 2019 For the year ended 31st March, 2018
Revenue from Operations 23,660.12 13,885.50
EBITDA 2,036.64 1,005.48
Profit Before Tax 1,391.00 865.33
Profit for the Year 1,020.03 627.53

Summarised Profit and Loss Account

(INR Lakhs)
Particulars For the year ended 31st March, 2019 For the year ended 31st March, 2018
Revenue from contracts with customers 23,132.69 13,074.36
Other operational income 52743 811.14
REVENUE FROM OPERATIONS 23,660.12 13,885.50
Operating Costs 21,62348 12,880.02
Profit Before Depreciation, Interest, Tax (PBDIT) 2,036.64 1,005.48
Depreciation 313.24 121.68
Profit Before Interest & Tax (PBIT) 1,723.40 883.80
Other Income (net of Finance Costs) -33240 -1847
Profit Before Tax (PBT) 1,391.00 865.33
Taxation 370.97 237.80
Profit for the Year 1,020.03 627.53
Basic EPS (INR) 7.65 4.81

 

Particulars Units 2018-19 2017-2018 % Change
Return on Net Worth % 20.03% 17.79% 12.60%
Return on Capital Employed % 19.31% 16.82% 14.78%
Basic EPS INR 7.65 4.81 59.08%
Debtors Turnover times 7.17 6.54 9.63%
Inventory Turnover times 7.82 8.64 -9.50%
Interest Coverage ratio times 4.37 6.73 -35.17%
Current ratio times 1.39 1.46 -5.07%
Debt Equity ratio times 1.91 2.06 -7.47%
Operating Profit margin % 7.28% 6.36% 1444%
Net Profit margin % 4.31% 4.52% -4.60%

Detailed Explanation for Ratios

Particulars Explanation
Return on Net Worth Return on Net Worth (RONW) is a measure of profitability of a Company expressed in percentage. It is calculated by dividing Total Comprehensive Income for the year by average Net Worth for the year.
Return on Capital Employed Return on Capital Employed (ROCE) is a financial ratio that measures a Companys profitability and the efficiency with which its capital is used. It is calculated by dividing Profit Before Interest and Tax (PBIT) by average Capital Employed during the year.
Basic EPS Earnings Per Share (EPS) is the portion of a Companys profit allocated to each share. It serves as an indicator of a Companys profitability. It is calculated by dividing Profit for the Year by weighted average number of shares outstanding during the year.
Debtors Turnover Debtors Turnover ratio is used to quantify a Companys effectiveness in collecting its receivables or money owed by customers. The ratio shows how well a Company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. It is calculated by dividing Revenue from Contracts with Customers by average Trade Receivables.
Inventory Turnover Inventory Turnover is the number of times a Company sells and replaces its inventory during a period. It is calculated by dividing Revenue from Contracts with Customers by average Inventory.
Interest Coverage ratio The Interest Coverage Ratio measures how many times a Company can cover its current interest payment with its available earnings. It is calculated by dividing PBIT by Finance Costs.
Current ratio The Current Ratio is a liquidity ratio that measures a Companys ability to pay short-term obligations or those due within one year. It is calculated by dividing the Current Assets by Current Liabilities.
Debt Equity ratio The ratio is used to evaluate a Companys financial leverage. It is a measure of the degree to which a Company is financing its operations through debt versus wholly owned funds. It is calculated by dividing a Companys Total Liabilities by its Shareholders Equity.
Operating Profit margin Operating Profit margin is a profitability or performance ratio used to calculate the percentage of profit a Company produces from its operations. It is calculated by dividing the PBIT by Revenue from Operations.
Net Profit margin Net Profit margin is equal to how much net income or profit is generated as a percentage of revenue. It is calculated by dividing the Profit for the Year by Revenue from Operations.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

In this annual document, we have disclosed forwardlooking information to allow traders to be aware of our potentialities and take informed investment decisions. This document and different statements - written and oral- that we periodically make comprise forward-looking statements that set out anticipated effects based totally on the managements plans and assumptions. We have tried any place viable to perceive such statements by way of using words such as anticipate, estimate, expect, project, intend, plan, believe and words of comparable substance in connection with any discussion of future performance. We cannot assure that these forward-looking statements will be realized; though we agree with we have been prudent in our assumptions. The achievement of consequences is subject to risks, uncertainties and even inaccurate assumptions. Should regarded or unknown dangers or uncertainties materialize, or should underlying assumptions prove inaccurate, authentic outcomes should range materially from those anticipated, estimated or projected. We undertake no responsibility to publicly replace any forward looking statements, whether as a result of new information, future activities or otherwise.