hindustan foods ltd Management discussions

ECONOMIC OVERVIEW Global Economy

The global economy continues to show signs of a steady recovery despite the profound impact of the COVID-19 pandemic and the unprovoked conflict between Russia and Ukraine. Following the gradual reopening of economies, the supply chain disruptions are diminishing, and the energy and food markets, which were previously disturbed by the war, are now stabilising. Furthermore, many central banks are implementing a significant and coordinated effort to tighten monetary policy, which is anticipated to yield positive results as inflation approaches its targets.

According to the International Monetary Fund (IMF), the global growth is expected to experience a slight downturn, dropping from 3.4% in 2022 to 2.8% in 2023. However, the outlook for 2024 is more positive, with a projected rise of 3.0%.

2.8% Growth of Global Economy in 2023

The global economic outlook for advanced economies is projected to experience a substantial deceleration in growth, from 2.7% in 2022 to 1.3% in 2023. This can be attributed to a combination of factors, including tightening policy measures to tackle inflation, the lingering impact of recent financial conditions, the ongoing Russia-Ukraine, and the growing geopolitical tensions. On the other hand, emerging

market and developing economies are generally expected to have stronger economic prospects compared to advanced economies, expecting to reach 3.9% in 2023, with a projected increase to 4.2% in 2024.

Global inflation is also anticipated to decrease from 8.7% in 2022 to 7.0% in 2023 and 4.9% in 2024. This is attributed to a combination of factors such as interest rate hikes, falling energy and food prices, and the easing of supply chain pressures. However, core inflation, which excludes volatile items, has proven to be more resistant to these factors. The robust labour markets in several advanced economies indicate a stronger aggregate demand than what was previously expected. As a result, there may be a need to tighten monetary policy further or to maintain a tighter policy stance for an extended period than initially anticipated.

The potential consequences of a sudden and substantial tightening of global financial conditions cannot be overstated. It could profoundly affect credit conditions and public finances, primarily in emerging market and developing economies. It could trigger significant capital outflows, a sudden surge in risk premiums, a rush to safety that could result in the appreciation of the dollar, and substantial declines in global economic activity. This, in turn, could result in reduced confidence, decreased household spending, and lower levels of investment.

Outlook

While some countries, regions, and territories have managed to rebound strongly from the Covid-19 pandemic, the global outlook remains uneven. For certain nations, pre-existing political and economic difficulties have impeded progress, creating a challenging path towards recovery. Despite the recovery, the global economy is preparing for another wave of obstacles and a decrease in activity due to the sluggish pace of structural reforms, rising trade tensions, declining direct investment, and slower adoption of innovation and technology in fragmented regions. However, fortunately, experts predict that this downturn will be moderate for everyone to successfully confront global issues.

INDIAN ECONOMY

India has established itself as a significant participant in the global economy, making remarkable strides over the last decade by advancing from the tenth to the fifth largest economy in the world. Its economic success is accredited to essential reforms, including liberalisation, reduction of bureaucracy and corruption, infrastructure investments, and

enhanced accessibility to financing for small and mediumsized businesses. Despite the headwinds of the global recession, inflation, and public debt, India has persevered and has held the title of the fastest-growing major economy for the past three years. This impressive feat reflects Indias resilience and determination to overcome obstacles on the path to economic prosperity.

7.2% Growth of Indian Economy in FY 2022-23

The Indian economy returned to its pre-pandemic growth trajectory in the FY 2022-23. Nonetheless, India has been grappling with the challenge of addressing inflation, which has been compounded by the Russia-Ukraine conflict. Despite the concerted efforts of the Government and the Reserve Bank of India, along with a decrease in global commodity prices, it was only in November 2022 that retail inflation finally fell below the RBIs upper tolerance target.

Despite the daunting challenges of the Covid-19 pandemic, several global agencies continue to project India as the fastest- growing major economy, with growth rates estimated at 6.57.0% in FY 2022-23. These growth predictions are a testament to the Indian economys resilience, with private consumption driving growth in place of export stimuli. This surge in private consumption also stimulated production activity, leading to greater capacity utilisation across several sectors. Besides, the Central Governments push towards infrastructure has also been remarkable. The National Infrastructure Pipeline (NIP) introduced in 2019 and the National Monetisation Pipeline (NMP) in 2021 have established a solid foundation for creating and developing infrastructure in India, opening up numerous opportunities for foreign investments and collaboration. The NIP initially featured 6,835 infrastructure projects, with an estimated investment of Rs. 111 lakh cr. It has since grown to encompass more than 9,000 projects spanning 35 sub-sectors and involving joint funding from the Central Government, State Governments, and private sector. By promoting the development of physical infrastructure with strong forward and backward linkages, it is poised to enhance the economys productivity in the medium term.

The Union Governments fiscal deficit decreased to 6.7% of GDP in FY 2021-22 and is projected to decline further to 6.4% of GDP in FY 2022-23. This steady reduction aligns with the Governments fiscal glide path and reflects prudent fiscal management, backed by robust revenue collection over the past two years. Indias Consumer Price Inflation (CPI) rate

eased to 5.7% in December 2022, a significant drop from the peak of 7.8% in April 2022. The decline in CPI can be attributed to the global economic slowdown and interest rate hikes, resulting in a substantial reduction in wholesale price inflation. However, core inflation remained persistent at around 6%, reflecting the second-round impact of the supply shocks experienced in FY 2022-23. Furthermore, as demand continues to recover, there has been a notable increase in service inflation. Wholesale Price Inflation (WPI) in India is expected to reach to 11.5% by end of FY 2022-23. This is mainly driven by the prices of petroleum, base metals, chemicals and chemical products, and edible oils, which are largely influenced by international price trends.

Core Inflation at 6% in FY 2022-23

(Source: https://www.incliabudaet.gov.in/economicsurvev/doc/ echapter.pdf)

Outlook

Indias economic prospects appear promising, despite the current global economic climate presenting a set of distinct challenges that present some risks. The multi-decadal high inflation rates experienced in various countries have necessitated central banks to tighten financial conditions globally. As a result, the effects of this monetary policy have begun to manifest in slowing economic activity, particularly in developed economies. Additionally, persistent disruptions in supply chains and increased uncertainty brought on by geopolitical tensions have compounded the already negative global economic outlook, resulting in unfavourable spill over effects.

Indias current growth trajectory will be supported by multiple structural changes that have been implemented over the past few years. The efficiency and transparency of the Indian economy have been improved by structural reforms such as the introduction of the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC). These reforms have ensured better compliance and financial discipline, while also enhancing the overall functioning of the economy.

Indias economic growth outlook is expected to see an upside due to multiple factors such as the normalisation of supply chains and the return of capital flows to India, supported by a stable domestic inflation rate that remains below 6%. This is expected to boost private sector investment and improve animal spirits. Based on these factors, the survey projects a baseline real GDP growth of 6.5% for FY 2023-24.

INDUSTRY OVERVIEW FMCG Sector

The FMCG industry in India, which is Indias fourth largest sector in terms of factory employment, is a highly fragmented industry, categorised into three segments, namely product type, distribution channel, and geography. The product type segment is further divided into: food and beverages, personal care (including skincare, cosmetics, hair care, and others), healthcare (which includes over-the-counter drugs, vitamins and dietary supplements, oral care, feminine care, and others), and home care. On the other hand, the distribution channel segment comprises e-commerce, modern trade (including departmental stores, supermarkets, hypermarkets, among others), and traditional trade (which includes wholesalers, grocery stores, specialty stores, and chemists, among others). Geographical segmentation can be based on regions, urban areas (classified based on city size, ranging from metros to small towns), and rural areas.

The ABCD framework — accelerating infrastructure, boosting innovation, curating partnerships and delighting customers — is at the intersection of Indias economic growth and is driving the growth of the FMCG. Digital transformation is enabling FMCG market players to tap into a wider consumer base by leveraging digital platforms. In fact, with household and personal care products accounting for 50% of the total FMCG sales in the country, this industry holds significant importance as a contributor to Indias GDP As per a report by Bizom, a Retail Intelligence Platform, FMCG companies witnessed a 7.4% rise in sales in 2022, primary led by price hikes.

(Source: https://www.livemint.com/industry/retail/price-hikes-help- fmcg-sales-grow-7-4-in-2022-11674227945048.html}

7.4% Rise in Sales for FMCG Companies in 2022

The Indian FMCG market continues to rise as more people start to move up the economic ladder and the benefits of economic progress become accessible to the general public. More crucially, with a median age of just 27 years, Indias populace is becoming more consumerist due to rising ambitions. This has been further aided by Government initiatives to increase financial inclusion and establish social safety nets. The sector serves as a recession-proof sector, creating vast employment opportunities in India, thus emerging as a crucial pillar of the Indian economy.

Industry analysts forecast that the Indian FMCG sector will achieve a Compounded Annual Growth Rate (CAGR) of 14.9%, crossing USD 220 Bn by 2025. The Indian Governments decision to permit 100% foreign equity in single-brand retail

has made it easier for foreign companies to enter the FMCG sector, thereby driving its growth. Other characteristics - a growing population that, coupled with rising brand awareness and consumerist trends, are also poised to propel the FMCG sector to unprecedented heights.

(Source: https://www.tecnovaglobal.com/blog/fmcg-industry- outlook-2023./)

The FMCG sector is prioritising on premiumisation of products as well as volume growth. Through premiumisation, FMCG companies focus on investing in innovation, branding, and marketing to create products that justify higher prices. However, at the same time, by prioritising on volumes, FMCG companies focus on selling a large quantity of products to consumers, even if it means selling products at a lower price point. Such a difference in approach is mainly due to the consumer differences in urban and rural market. The FMCG urban market is driven by premiumisation of products whereas the FMCG rural market is driven by volume generation of products. While both approaches have their pros and cons, a balanced approach that considers both aspects is the most effective and desirable.

Rural FMCG Sales

The FMCG market in rural India is experiencing rapid expansion and represents significant untapped potential, contributing to 37% sales to FMCG sector. Rural retailers cover 60% of total FMCG outlets in India, indicating the role they play in driving the growth of FMCG industry in India. 50% of the income of a rural household is spent on FMCG products. As per market research, the FMCG rural market size is expected to reach USD 100 Bn by 2025.

(Source: httos://www.livemint.com/Politics/

Wkw9b3VTJG2JpJQex2iFDI/Rural-FMCG-market-to-reach-100-Bn-

by-2025.html}

H 37% of FMCG Sales in India come from Rural Areas

Despite the ongoing geopolitical tensions and macroeconomic challenges, Indias rural FMCGs sector has proven to be remarkably resilient and continues to thrive. Estimates suggest that rural FMCG businesses are experiencing a steady recovery, driven by sustained consumption demand. Additionally, various categories are witnessing significant growth due to out-of-home (OOH) consumption. The increasing demand for product categories such as ice creams, pasta, noodles, soft drinks, candies, and skin creams present opportunities for rural retailers to expand their businesses.

FMCG Rural Market Size to Reach USD 100 Bn by 2025

Retailers have a crucial role as influencers in rural areas, largely due to the strong level of trust and personal relationships they establish with their customers. They are also knowledgeable about local festivals, customs, and events that can impact consumer buying behaviour. This enables them to customise product offerings to meet the specific needs and preferences of their customers.

of Income of Rural Household is Spent on FMCG

Sector

Although rural retailers have significant growth potential, they confront distinctive challenges in balancing the demand for conventional products with the necessity of introducing new and innovative products. Additionally, the limited number of product categories stocked in rural outlets, relative to their urban counterparts, pose a significant obstacle for rural retailers in competing effectively. Nevertheless, by comprehending the evolving market dynamics and consumer preferences, rural retailers can implement strategies that enable them to satisfy customer needs while expanding their businesses.

(Source: https://beatroute.io/blog/how-can-fmcg-company-chase- growth-in-rural-markets-of-india/ & https://www.indianretailer.com/ article/whats-hot/retail-trends/future-of-fmcg-sector-in-india.a7390)

Outlook

The Indian FMCG industry is experiencing rapid growth globally, despite having one of the lowest per capita consumption rates for FMCG products. This indicates a plethora of opportunities for expansion within the market. As demand for branded products surges from smaller towns and cities through online portals, the share of unorganised players is likely to dwindle. Additionally, following the pandemic, the demand for immunity-boosting and hygiene products is expected to remain high, driven by a change in consumer perception of health and hygiene. This improvement in consumer sentiment bodes well for the FMCG industrys revenue.

The increasing urbanisation, rising disposable incomes, and favourable demographics have risen the need for FMCG companies to innovate new products to adapt with the changing consumer needs. Moreover, as e-commerce and online retailing continue to grow in popularity, FMCG companies are also exploring new distribution channels to reach consumers. This includes partnering with online retailers or developing their own e-commerce platforms to sell their products directly to consumers.

Rural consumption in India has risen steadily, driven by a combination of surging income and higher aspirations among the populace. Rural India is witnessing a growing demand for branded products, while the share of unorganised market in the FMCG sector has declined. As a result, the organised sector growth is expected to surge, as consumers become more brand-conscious, bolstered by the growth of modern retail. Moreover, the burgeoning youth population in urban regions is a significant factor fuelling the demand for food services in India.

Online portals are poised to play a pivotal role in assisting companies to penetrate the hinterlands. The internet has played a significant role in facilitating a cheaper and more convenient mode to expand a companys reach. Consequently, it is expected that e-commerce will account for 11% of the total sales of FMCG sector sales by 2030.

(Source: https.V/www.ibef.org/industry/fmcg)

E-Commerce to Constitute 11% of FMCG Sales by 2030

The surging competition from Direct-to-Consumer (D2C) brands is compelling traditional brands to revamp their structures and reassess their manufacturing processes. This shift is expected to generate an upsurge in demand for Contract Manufacturers, as brands prefer to allocate their time and energy to operational and administrative aspects rather than being bogged down with manufacturing. With the Governments support, including PLI schemes and robust regulatory backing, production is expected to surge in the coming years.

Growth Drivers of FMCG Sector

Over the last few decades, the FMCG industry in India has undergone a progressive transformation. Revenue growth is projected to surge, driven by a multitude of factors such as the revival of urban demand, discretionary segments, and price hikes implemented to counter the impact of rising raw material costs.

Increasing Population

India is the second largest populated country in the world and its rising population leads to increase in consumption for F&B, home and personal care and healthcare products.

Favourable Demographics in India

Indias largest share of the population is young and working, providing a strong impetus and a positive outlook for sustainable growth in FMCG products in the country. Moreover, as per reports, India is moving towards nuclear

family structures, with many households which will prove to be a boon for the FMCG industry and ultimately the Contract Manufacturing sector.

Infrastructure development across smaller cities is ensuring that a significant share of the countrys population will be living in cities in the coming years, which will be a key driver of growth for the Contract Manufacturing segment. The rising affluence in rural areas is also expected to have a significant impact on the growth of the FMCG sector, leading to an increase in the share of FMCG consumption.

Rising Disposable Incomes

Over the years, the growth in peoples incomes has spurred a corresponding increase in their consumption of consumer goods. This surge in purchasing power, coupled with a willingness to spend, has brought about a significant shift in consumption patterns. With the rise in the number of women joining the workforce, households with dual incomes have become increasingly common, leading to increased expenditure on eating out, as well as semi-luxury and luxury home and personal care products.

Direct Doorstep Delivery

The profit margin earned through direct sales to consumers has even enticed larger brands to establish their own direct sales channels on numerous digital marketplaces, as well as create standalone websites and stores. Many brands now offer doorstep delivery, tapping into the growing trend of online marketplaces. The Direct-to-Consumer (D2C) business model has gained immense popularity and is expected to become even more relevant in the coming years. This model presents a unique opportunity for smaller companies to overcome entry barriers associated with distribution. Consequently, these trends offer significant advantages to Contract Manufacturing.

Growth of E-Commerce

The widespread adoption of smartphones and internet connectivity has made it easier for people in both rural and urban areas to access online shopping through various e-commerce websites. This has resulted in a significant surge in demand for products and services, creating an opportunity for Contract Manufacturing companies to ramp up their production capabilities to meet the ever-increasing demands.

Brand Community

Modern-day consumers easily connect and interact with others who have purchased the same product. Consequently, brands are now creating innovative marketing strategies to cultivate a brand community that specifically targets consumers who share similar social, political, and cultural factors and have a keen interest in their products. This personalised approach has proven highly effective for both emerging and established brands in the FMCG sector, and is expected to continue into the next year and beyond.

Investments

Considering the recent Government regulations which have allowed foreign direct investments in the FMCG sector, there has been a sudden inflow of funds. The Governments incentives and infusion of foreign capital have contributed towards job creation, building a robust supply chain and promoting high visibility for FMCG brands. Moreover, the Governments focus on MSMEs, agriculture, education, healthcare, infrastructure, and tax rebates has directly impacted the FMCG sector. Additionally, initiatives aimed at increasing disposable income amongst vulnerable segments of the population, particularly in rural areas, have significantly benefited the sector. Going forward, it is expected that the Government will continue to foster the growth of the FMCG sector by implementing more such appealing developments, policies, and investments.

Other Factors

The Make in India Initiative aims to attract global investments and bolster Indias manufacturing sector. As part of this policy, the Government has allowed 100% FDI through the automatic route for Contract Manufacturing. The food processing industry is one sector that has received approval for a Production Linked Incentive (PLI) scheme.

Additionally, under the China +1 strategy, leading consumer product brands are increasingly opting to substitute Chinese raw materials with indigenous alternatives. India has emerged as a highly desirable destination for such companies, thanks to its strategic location, sizable domestic market, abundant pool of skilled labor, and competitive labour costs. The PLI scheme has made India an even more attractive option for companies looking to diversify their supply chains.

FMCG CONTRACT MANUFACTURING

With its 14 Bn people and a rich culture and history of upholding strong democratic values, India has been rapidly adapting to change. It leverages its advantages such as the existing strong manufacturing base, competitive labour and taxation, investor-friendly business regulations and upgradations in infrastructure to become a competitive manufacturing hub. A strong foundation has been laid for Make in India to unleash Indias full potential to support the global economy.

India is emerging as a highly attractive destination for businesses worldwide. The Contract Manufacturing industry is experiencing unprecedented growth, spurred by factors such as the increasing prevalence of e-commerce, rapid technological advancements, and a more informed and socially-conscious consumer base in the post-pandemic era. Companies operating in this space that are agile and innovative, able to keep pace with the changing needs of their clients, are poised to reap significant benefits from this trend.

Despite being a rapidly developing economy, Indias per capita consumption of FMCG products still lags behind that of other emerging markets such as Indonesia, China, the Philippines, and Thailand. Furthermore, Indias FMCG penetration levels remain low across several product categories, including MFD, face wash, body lotions, washing liquids, dishwash liquids, hair conditioners, and body wash.

The outsourced manufacturing industry is growing at 3%-5%, providing a huge opportunity for FMCG companies to minimise risks related to operations, supply chain, financial and human management. FMCG Contract Manufacturing companies play a critical role in driving growth for major players in the industry. In addition, there are numerous smaller players in the market who rely on Contract Manufacturing firms to meet their specific needs. Over time, FMCG Contract Manufacturing has gained popularity as a means of fulfilling the diverse requirements of these players.

3%-5% Growth of Outsourcing Manufacturing

n the Contract Manufacturing industry, success will be determined by the ability of manufacturers to leverage echnology in innovative ways and make informed nvestments in new technological advancements. The rapid adoption of digital technologies such as computing, AI, ML, and 5G can significantly benefit Contract Manufacturers. With the help of these technologies, Contract Manufacturers can quickly optimise their operations, reduce production costs, and enhance the overall quality of their products. As consumers become more digitally active, Contract Manufacturers with agile technology adoption will have a distinct advantage in meeting their evolving needs and preferences.

Just like FMCG industry, the Contract Manufacturing industry has evolved multi-fold over the years:

Phase I (The 1980s)	Phase II (The 2000s)	Phase III (Present Times)	Phase IV (The Future)
• SmaiiScaieIndustry	• Area-based reservations	• GST	• Global sourcing hub like
(SSI) Reservations	• Direct tax exemption	• One Country - One	Pharma generics
• Tax Exemptions for SSI	• 1 ndirect tax exemption	Market • Changes in distribution network • E-commerce and modern trade leading to explosion of small brands, wanting to refrain from manufacturing facilities investment	• Explosion of smaii brands who do not want to invest in manufacturing facilities • Most product categories in India are duopolies or oligopolies unlike in the US/Europe which has many more brands in each category

FAVOURABLE OPPORTUNITIES FOR CONTRACT MANUFACTURERS

Reduced Cost of Production

Contract Manufacturing provides a cost-effective solution for FMCG companies, enabling them to minimise production costs. By outsourcing their manufacturing operations, companies can devote more resources to focus on their core functional areas, such as marketing, distribution, and sales, which are becoming increasingly challenging in todays hyper-competitive environment. This strategic approach allows businesses to differentiate themselves from their competitors effectively.

Skilled Labour

Indias abundant supply of skilled labour at comparatively lower costs provides a considerable advantage for global FMCG companies seeking to outsource their manufacturing

operations. Instead of establishing their own plants in India, businesses can opt for Contract Manufacturers who can ensure efficient management and sourcing of skilled labour, among other crucial aspects. The Indian Government has launched several skill development initiatives under the National Skill Development Programme (NSDP), aimed at expediting decision-making and achieving skill development at scale and speed across different sectors and states, all while maintaining high standards.

Resource Availability

Contract Manufacturers benefit from economies of scale, which allows them to reduce their variable costs when acquiring raw materials. Similarly, the volume of production across different product categories enables them to decrease their fixed costs. This, in turn, allows Contract Manufacturers to offer their products at lower prices per unit to their customers in aggregate.

Modern Trade and Easy Accessibility

Due to the greater accessibility of modern trade, FMCG companies are becoming more efficient as it involves fewer intermediaries and results in higher turnover. FMCG companies are able to reach a larger customer base by stocking their products in stores that have a wide customer base. Modern trade has helped to establish an efficient supply chain for FMCG companies, thereby increasing their brand awareness, improving their sales, streamlining their distribution processes and reducing their costs.

Technical Expertise

Contract Manufacturers possess a wealth of expertise in product design and development across various niches. Companies leverage this expertise by engaging Contract Manufacturers for skills or capabilities that they may lack. Contract Manufacturers, as experts in their field, possess relevant capabilities and efficient manufacturing processes. When sourcing for new products, a reliable Contract Manufacturer can offer valuable advice on the suitability of materials, techniques, and applications, based on their extensive knowledge and experience.

Timely Delivery

Reliability of product delivery, meeting challenging and agreed-to deadlines, managing faster time to market are the contract manufacturers expertise.

Scalability

Global FMCG companies may face rising costs, regulatory pressures, and aging manufacturing facilities in developed markets, leading them to reduce their internal capacities in product formulation and production. Outsourcing FMCG production from India can be a viable solution for these companies, as it can help them save on operational costs while accessing the countrys mass consumer population. With flexible and sophisticated business models available to customers, Contract Manufacturers are well-equipped to handle a wide range of formulations, batch sizes, and packaging for various types of products.

Quality and Innovative Products

FMCG companies focus on striking a balance between producing high-quality products and minimising costs through their stringent quality assurance processes and highly trained personnel. Valuing collaboration with clients enable creation of innovative products while introducing technical efficiency to existing product lines.

THREATS

Dependence on Government Policies

The manufacturing industry and FMCG sector rely heavily on government policies, which can have a significant impact on their operations. There is a lack of consistency in pricing across different states, which can put manufacturers under pressure, affecting their margins and consumer accessibility. Ultimately, this cost burden may be indirectly passed on to consumers, resulting in higher prices for the same product. Alterations in Government policies can potentially disrupt the cost structures of companies.

Increasing Competition

The Contract Manufacturing sector is a thriving and diverse industry that is characterised by intense competition. As FMCG companies expand their geographical footprint and diversify their product lines, they often bring their manufacturing partners along, further intensifying the competition.

Raw Material Price Fluctuation

As a consequence, companies often delay passing on the burden of price hikes to their customers, due to the fear of losing demand, resulting in a time lag for the pass-through of price inflation on raw materials. Geopolitical tensions are likely to impact the prices of raw materials for fast-moving consumer goods. This, in turn, could affect the Contract Manufacturing companies in deciding their pricing strategies.

Competition from Unorganised Space

In addition to the prominent players who dominate the Indian FMCG market, a few regional brands also hold a significant market share in their respective areas. While the larger companies have a nationwide reach, they face stiff competition from regional brands in certain states or geographies.

Inadequate Capacity Utilisation

Setting up large-scale manufacturing facilities in India is a daunting task. According to an estimate by the Reserve Bank of India, as cited in a report by McKinsey in 2021, the average capacity utilisation by Indian manufacturers is only around 60% to 70%, which is well below optimum levels. This is caused by various bottlenecks in raw material procurement and sourcing, availability of a trained and competent human workforce, and regulatory issues.

WHY HFL FOR CONTRACT MANUFACTURING?

The FMCG manufacturing sector is poised to become one of the largest contributors in terms of value addition to the

economy and employment generation. Robust growth opportunities are emerging as India is increasingly seen as a potential contender for the status of production powerhouse under the Make in India initiative.

HFL, a pioneer in the Contract Manufacturing sector, has earned the reputation of being the most diversified and versatile Contract Manufacturing company in India. To further add value, our Company plans to expand organically and inorganically through bolt-on acquisitions, which are currently the most suitable in the Contract Manufacturing space.

HFLs state-of-the-art facilities and well-integrated backend services such as processing, packaging, warehousing, and logistics provide one-stop solutions for manufacturing requirements across a wide range of products in the FMCG sector. Clients are assured of complete protection of their intellectual property while leveraging the benefits of outsourced manufacturing. This allows clients to focus more on their core competencies.

Our Companys business model is based on a 3-pronged approach that includes a dedicated facility exclusively designed to meet the requirements of the Principal company, a shared facility for anchor companies with major needs along with a few other clients with relatively smaller needs, and turnkey private label manufacturing that offers Clients every service from product development to market delivery.

Our Companys adeptness in project management enables us to enhance production capacities, revamp existing infrastructure, and establish new projects even in the face of tight deadlines, all while ensuring the efficient reduction of costs related to capital-intensive equipment. This enables brand owners to focus on market value-adding activities in a productive manner.

HFL caters to manufacturing a wide range of products, including Home Care and Personal Care, Foods & Beverages,

FINANCIAL HIGHLIGHTS

Mosquito Repellents, and Leather, amongst others. Continuously adding new capacities and product categories, our Company has a strong foundation of trust where we build relationships and maintain the secret of product and manufacturing successes. Our long-term contracts ensure stable earnings over the years, helping us establish our global footprint with strong domestic and exports relationship.

Growth Drivers for Contract Manufacturers

As has been captured in the discussions above, Contract Manufacturing is a derivative of the FMCG segment. And, therefore, no separate growth drivers have been listed here. In that case, the growth drivers for the FMCG sector can double up as the growth drivers for Contract Manufacturing as well.

COMPANY OVERVIEW

Hindustan Foods Limited (HFL or our Company or We) is Indias largest FMCG contract manufacturer with diversified and predictable business model, having an experience of 30+ years of manufacturing. Our product capabilities encompass personal care, beauty and make up, food and beverages, home care, health and wellness, leather and sports shoes and pest control.

Through strong R&D capabilities, our Company has strengthened our ability to create our formulation of any FMCG product. With 18 state-of-the-art manufacturing units with pan-India presence, our Company operates these fully integrated plants with state-of-the-art processing, packaging, warehousing, and logistics facilities. These facilities are equipped with modern laboratories to ensure quality assurance, as well as development centres dedicated to innovation. Our Company exists as a one-stop Contract Manufacturing solutions provider to a vast number of domestic and international clients.

(Rs. in cr)

Particulars	FY 2021-22	FY 2022-23	YoY Growth
Revenue from Operations	2,043.8	2,602.6	27%
EBITDA	118.6	177.7	50%
Profit after Tax	44.7	71.1	59%
Basic Earnings per Share* (Rs.)	3.96	6.31	59%

* The Shareholders of the Company, through Postal Ballot on July 1, 2022, approved the sub-division of one equity share of face value Rs 10 each (fully paid-up ) into 5 equity share of face value Rs 2 each. The record date for the said sub-division was set at July 22, 2022. The basic and diluted Earnings Per Share (EPS) numbers for the year ended 31 March 2022 have been restated to give effect of the share split.

The year ended with another landmark in the history of our Company. Revenue from Operations increased to Rs. 2,602.6 cr growing by 27% over FY 2021-22, reaching an all-time high in the history of our Company. EBITDA rose to Rs. 177.7 cr, increasing by 50% in FY 2022-23, compared to FY 2021-22. Profit after Tax surged to Rs. 71.1 cr increasing by 59% over the previous year. The basic EPS increased by 59%, this overall improvement can be credited to increasing new plant and additional capacities.

*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.

STATEMENT OF KEY RATIOS

Types of Ratios	Explanation of Ratios	FY 2022-23	FY 2021-22	% Change
Inventory Turnover Ratio (Times)	Inventory Turnover is the number of times a company sells and replaces its inventory during a period. It is calculated by dividing cost of goods sold by average inventory.	7.81	8.74	(10.64%)
Current Ratio (Times)	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.	1.18	1.17	0.85%
Net Profit Margin %	The Net Profit Margin is equal to how much net profit is generated as a percentage of revenue. It is calculated by dividing net profit by turnover.	4.02%	3.50%	14.80%
Debtors Turnover (Days)	Debtors Turnover Ratio is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts. It is calculated by dividing turnover by average trade receivables.	12.41	10.92	13.64%
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 Net profit for the year by average net worth for the year.	20.95%	15.99%	496 bps*

*Increase in Return on Net Worth is led by PAT growth.

There was no significant change (i.e. change of 25% or more as compared to the FY 2021-22) in the other key financial ratios. RISKS AND CONCERNS

As a Contract Manufacturer, our Company is exposed to various inherent risks that arise in daily business operations. However, we proactively manage these risks by reducing the likelihood of their occurrence and limiting their financial impact to an acceptable level. Risk mitigation is a standard practice at our Company and an integral part of our overall approach to managing our activities.

Risk	Impact	Mitigation Strategy	Risk Level
Raw Material	Our business is exposed to raw material	Our business model allows us to pass on any	Low
Price Risk	risks, which are subject to fluctuations driven by global and regional market data such as availability, demand, and inventories. Increases in raw material prices can have a direct impact on our operating costs.	increase in raw material costs to our principals, mitigating the financial impact on our operations. To ensure the most efficient and cost-effective procurement of raw materials, we have established a strong network of suppliers and draw on our industry experience to navigate potential risks in the market.

 

Risk	Impact	Mitigation Strategy	Risk Level
Economic Risk	Our business is subject to risks arising from various macroeconomic factors, including inflation changes, government regulations, exchange rates, interest rate hikes, and political instability. Changing consumer demand is another risk factor we face. These factors can have a significant impact on our operations.	We engage in Contract Manufacturing for a wide range of essential products, which makes us less susceptible to economic downturns. Demand for essential consumer items tends to remain relatively stable, regardless of any changes in the economy. Our diversified Contract Manufacturing model enables us to keep our facilities operational and running smoothly.	Medium
Contract Risk	We face the risk of potential losses that we face if we are unable to meet the requirements set by our clients.	We have focussed on delivering high-quality products consistently which has led to the renewal of contracts with our existing clients and the acquisition of new ones as well.	Low
Liquidity Risk	We are exposed to liquidity risk where we may not be able to raise the necessary funds to fulfil a payment obligation in time or at all.	We proactively identify and manage potential hazards arising from fluctuations in cash flow. By adopting a comprehensive approach that encompasses short, medium, and long-term perspectives, we detect and mitigate risks in their early stages.	Low
Quality and Safety Risk	The non-compliance of safety and protection protocols poses a significant risk to our standing and image within the market. Any breach of established standards could adversely impact our reputation and goodwill.	Our quality management system provides end-to-end coverage through production processes, spanning from the procurement of raw materials to the delivery of the final product.	Low
Personnel Risk	The highly competitive nature of the Contract Manufacturing industry creates a challenge for us in attracting and retaining skilled personnel. As a result, we are vulnerable to potential difficulties in filling various vacancies within the organisation.	We have a recruitment process which is methodological and helps us retain and attract right talent. Our human resources team works persistently in finding the right people for the right job at the right time	Medium

HUMAN RESOURCE MANAGEMENT

At the core of our organisation, our employees are our greatest assets. With a diverse team of over 4,600 members as on March 31, 2023, we understand that their contentment is crucial to our overall success. We have adopted a modern approach to attracting and retaining talent, creating a holistic environment that fosters growth and development. By tracking the engagement level of our staff, we can optimise their contributions and provide them with regular health, safety, and skills-based training opportunities throughout the year.

Our focus on building careers, fostering an empowering and inclusive culture, and providing a safe and healthy work

environment has helped us create meaning and value for our employees, and in turn, our Company. Our engagement with regulators remains a top priority to ensure the highest safety standards are upheld at all our operational facilities, and to prevent any such incidents from occurring.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

Our Companys CSR vision is centred around becoming a benchmark of ethical business practices in the region, while prioritising social and environmental responsibility as a core component of our strategy and activities. By synergising our regular business operations with innovative and creative approaches to CSR, we strive to make meaningful contributions to nation-building.

Our CSR initiatives span across various sectors, including education, health, sanitation, environment, sustainable development, sports, art, and culture. Through our sustained efforts, we have made a positive impact on countless lives by providing access to education and healthcare for underprivileged children, extending support to schools, and offering medical aid to those in need. Going forward, we are committed to channeling our CSR resources towards empowering the girl child, with a specific emphasis on her health, hygiene, and education. We aspire to create a better learning environment for the girl child in government schools, thereby promoting her holistic development. Additionally, we support students by providing essential resources such as laptops, books, uniforms, desks, and sports kits, while ensuring access to hygienic drinking water and streetlights. In alignment with our commitment to serving the community, we extend our support to those in need of critical healthcare services such as cancer care, eye surgeries for cataracts, and provision of prosthetic limbs and wheelchairs for the underprivileged and specially challenged.

HFL, in collaboration with BAIF Institute for Sustainable Livelihoods and Development, has identified three villages in the Mahbubnagar District of Telangana - Peddaipally, Khethireddypally, and Balanagar - to implement a Village Development Programme. The project aims to provide basic amenities in government schools, including the construction of toilets, midday meal sheds, and kitchen renovation. It also includes the installation of solar street-lights, computers, printers, projectors, and other primary infrastructure to enhance the learning environment. The project also emphasises the promotion of health and hygiene awareness. The programme was run from August 01, 2022 to March 31, 2023. We are excited to work with the local communities to implement this project and make a positive impact on the lives of the villagers.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Our Company Board [aid down Internal Financial Controls within the meaning of the explanations to Section 134(5)(e) (IFC) of the Companies Act, 2013. The Board believes that our Company has sound IFC, which is commensurate with the nature and size of our business. The industry we operate in, however, is dynamic. Therefore, our IFC cannot be static. It must evolve as the business, technology, and environment changes in response to competition, industry practices, legislation, regulation, and current economic conditions. With business evolvement, gaps in the IFC are bound to develop. We have a process in place to continuously identify these gaps. We implement newer and/or improved controls when we identify gaps that could potentially have a material effect on our operations.

CAUTIONARY STATEMENT

This document contains statements about expected future events and financials of the Company, which are forward looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. There is a significant risk that the assumptions, predictions, and other forward-looking statements may not prove to be accurate. Readers are cautioned not to place undue reliance on forward-looking statements as several factors could cause assumptions, actual future results, and events to differ materially from those expressed in the forward-looking statements. Accordingly, this document is subject to the disclaimer and qualified in its entirety by the assumptions, qualifications and risk factors referred to in this section of the Annual Report.