PATANJALI — earnings call
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Prepared remarks
Moderator · Conference Operator
Ladies and gentlemen, good day and welcome to the Patanjali Foods Limited’s Q1 FY2024
Thank you very much Sir.
We will now begin the question and answer session.
We will take the first question from the line of Shirish Pardeshi from Centrum Broking.
Please go ahead.
Shirish Pardeshi
Good morning.
Thanks for the opportunity.
Two questions in the beginning, what is your near-term Palm Oil outlook and do you think we will get benefited going forward because the inventory days will get depleted very soon?
Sanjeev Asthana
In terms of the outlook the markets have tended to be more aligned now and it is gaining traction in the domestic market.
We are heading into the festival season in normal times in both the demand there is an uptick as well as the demand side tends to sort of give support to the prices, so I am expecting that the prices would tend to benefit and in the Palm Oil segment we are already witnessing a surge in industrial uses because the Diwali demand typically the festival season demand tends to be advanced by nearly 45 days, so we are expecting the market to improve and so that is one part.
The second part in terms of the outlook the market tends to follow a lot with a cue from the larger edible oil complex itself, which is Soya and Sun also and we will have to wait and watch in terms of how the palm oil prices goes, but for us what is important is that the markets have to move in tandem in terms of both the futures and the physical prices in India, so it should be positive and it is gaining substantial alignment as we speak now.
Shirish Pardeshi
Just one follow-up do you mean to say that the price will remain inflationary or move from here up?
Sanjeev Asthana
That is exactly what I am saying, that the futures market in BMD as well as in the cash market the market is tending to get better with the festival and seeing festival demand.
So yes prices should start to look up.
Patanjali Foods Limited August 16, 2023
Shirish Pardeshi
So directionally it should help us in Q2 onwards to improve our scale and also the margin?
Sanjeev Asthana
Yes, the driver that I was mentioning earlier that since you asked the question the edible oil business typically has to be seen in a longer-term continue because there would be sort of windows in which or a period of instability in the global market and because of the accounting norms and the reporting that we have to do quarter-on-quarter, so many times that you have to account for both in terms of the mark-to-market that gets accounted for, but tends to even out over a period of time.
So certainly, in Q2 it should be better than Q1 and we are expecting the demand continues to work on.
I think we should do significantly better results that we should see in this quarter.
Shirish Pardeshi
My second and last question on the biscuits and confectionery and on the premium dried fruits.
So would you be able to strip out what is this specific growth you have seen on quarter-on-quarter in these two businesses and when you mean to say that the scale up of 1 million do you think these are the primarily top outlets we are covering or we are scaling up across Tier-1 and Tier-2, Tier-3 markets also?
Sanjeev Asthana
So two parts to answer this question.
We have seen a very robust growth, so compared to last year we almost saw 38% growth and the revenues this quarter as I mentioned are 381 Crores versus 276 Crores last year and they grown 14%.
So we are seeing a very strong growth across the range of biscuit offering that we have and the surge in demand for specific brands within that like Doodh biscuits and Nariyal biscuit, the new launches that we have done are also gaining traction, which is of course very early, but we are seeing the repeat orders.
It is driven by two core strategies that we have, the one is on the distribution expansion, so several sort of spaces which were almost white or less covered that coverage continues at pace.
So a lot of it in smaller terms and the focus is lot more while urban areas tend to have a very solid demand, but we want to expand that and the mix of offering that we have for the urban areas especially the larger cities is undergoing a change and which is what the core work is right now going on and the mix of, for example premium biscuits that we have offered the biscuits within our portfolio we tend to have a larger consumption pattern in the urban sort of areas, that this focus is going on in terms of expanding a distribution to urban areas.
So the idea is that our margin on the biscuits business were about 10.5%, the idea is that we move up the margin construct of the biscuit business by higher price point product and more sort of brands which are appealing to the consumers we are looking for that option so that is one part.
On the dried fruit side Patanjali is already doing the dried fruits.
We are working right now on a strategy to give a premium offering on the dried fruits as well as the mass market side and continue to evolve and develop it in a way that the offering is more like this because we are witnessing a strong growth across all the segments.
So we working on supply chains as I mentioned that we tied up with very large sort of suppliers and the US we are looking at more suppliers as they are coming on Patanjali Foods Limited August 16, 2023 stream and building up supply chain capabilities and we are offering the launch we have already done with the Nutrela MaxxNuts so that you will see on the shelves now and we are pretty confident that this category will be one of the larger categories that are going to expand the range by offering the quoted offerings and flavours we are looking at dates to be added very quickly to the portfolio.
So we are pretty confident on dried fruits as a category within the foods for a longer-term sort of growth momentum.
Shirish Pardeshi
Thank you and all the best Sir.
Moderator · Conference Operator
Thank you.
We will take the next question from the line of Akhilesh Bagri, an Individual Investor.
Please go ahead.
Akhilesh Bagri
Thanks for the opportunity.
Initially I would like to congratulate you and the team for a very healthy performance on the Foods business, but unfortunately this edible oil business seems to extend a lot of volatility in our numbers, so I wanted to get your thoughts on what synergies exist between the edible oil business and our foods business and whether these businesses could be separated going ahead because every now and then in some quarter or the other this business may take away the attention from the performance of the Foods business?
Sanjeev Asthana
That is a great question and I just want to highlight that edible oils as a business is a good business and because of the reporting the sort of timelines that the companies have to follow every quarter end, which I sort of spoke during the call also, so many times there is a lag between how the markets response and where the markets are headed.
So for example that the prices are rising, the domestic and there are three elements to the way prices operate.
One is the domestic Indian market prices that we have, second is the international market the physical market from where almost 70% of country’s requirements are imported and third is how the futures market being.
Because of the lag in the sort of timing of each of them there might be windows in which the market may give you a shock, market may sort of tend to give you a lower sort of margin or also maybe in a negative sort of performance, but it evens out over a longer-term window always.
So as I mentioned in my call that the performance of Q1 will certainly tend to even out.
We are pretty confident that we will meet the objectives that we set out for the edible oil business, but coming back to the more important question that does it fit into our food businesses strategically, it does very well because there are two parts.
There is a lot of commonality of distribution that we have in the urban areas while lot of oil sells to kirana stores and sells to B2B, but 80% business of ours is almost in the branded form and most of the brands are selling through where India consumes whether it is a modern trade, whether it is e-commerce in a smaller way or it is a kirana stores or multiple different channels through which the oils are selling.
So there is a lot of synergy that we have between the two and both in terms of the return on capital that Patanjali Foods Limited August 16, 2023 the business generates in terms of cash flow that it sort of allows us the strength company has and the way we have been growing because there is a lot of consolidation which is happening as well.
So our growth momentum in volume terms of nearly 30% plus that you have seen typically Indian market is going between 3% and 5% occasionally, which means that we are taking the share away from smaller players, so this will take some time, but this consolidation in the longer-term will be very helpful for company’s longer-term growth momentum.
So I feel that not only should we stay with the business but we should continue to expand and make it a more predictable one.
Akhilesh Bagri
Thank you for your answer.
Going on the same topic could you also elaborate between the linkage between our Oil Palm business and the Edible Oil business as follows, how much percentage of the overall edible oil business is from palm oil and as on date how much percentage of the palm required for that business are we getting from our own cities and our own palm plantations?
Sanjeev Asthana
Oil palm plantation currently if I were to do the numbers we get about 10% from our own oil palm plantation that we have in the edible oil segment and going forward in the fullness of time when we have the entire 0.5 million tonnes planted I am expecting that nearly 70% will come through our oil palm plantation business of the palm oil requirement.
Now, why is it critical that we sort of the integration of the two businesses is important that not only on a standalone basis the oil palm plantation is a consistent generator of between 16% and 18% of EBITDA, but when you look at the synergies of directly servicing our domestic requirement, there is a lot of value integrating that the refinery business, then the consumer business, the branded business or how it sells.
So the vertical integration in a lot of ways brings in added efficiency and added value for the company.
So both the things are very synergistic, standalone oil palm plantation businesses in India certainly will struggle and while they may make margin, but their ability to leverage the margin for expanded growth.
On the overall business itself will always be limited as a standalone player.
Akhilesh Bagri
Will it be fair to say that as more and more share of the palm oil business comes from our plantation, the volatility in our overall business would also reduce because you would have a certain cost ways for the Oil Palm Plantations which will not be as volatile as the Palm Oil prices are every quarter and every month?
Sanjeev Asthana
That is correct, but I just want to highlight one important point.
So to your first point whether it will reduce the volatility and otherwise absolutely, but the way business is run that the higher the oil palm prices the better of it is for the oil palm business which may or may not necessarily be very good for the edible oil segment.
So having said that, in general, I would expect that the more we have the predictable the domestically sourced palm oil it Patanjali Foods Limited August 16, 2023 will have a significant value add for the company because will be less exposed to global uncertainty and it will assure on an integrated basis much better margin construct.
Akhilesh Bagri
This 70% figure which you mentioned is that possible by FY2027 or by when are we targeting?
Sanjeev Asthana
By FY2027 this will have actually gradual increase every year, but this should take almost 7 to 8 years before we can expect 70% of Oil Palm Plantation to start coming in, it will probably be closer to 55% in year 7 it will build up, but in year 10 onwards it will be nearly 70%.
Akhilesh Bagri
Thank you.
Moderator · Conference Operator
Thank you.
We will take the next question from the line of Bharat C Shah from ASK Investment Managers Limited.
Please go ahead.
Bharat C Shah
Sir, continuing from the previous question strategically how do we say long-term the construct of the edible oil business, what kind of likely growth rate margins in a more normalized basis that should prevent, I understand that last year is being a particularly unusual period, second quarter of the last year and through that period even till last quarter the picture is being somewhat volatile, but on a more normalized basis how do we see the long-term construct of the business, what kind of margins, what kind of growth rate for the industry and what kind of the growth rate for us, and therefore what kind of return on capital employed in a more normalized basis we expect?
Sanjeev Asthana
I will start with the last question first in terms of return on capital employed.
It is a good business because they are nearly 6 to 7 tonnes we can take on the working capital deployment and the business at 3% with 7% is nearly 21% return on capital employed, but I would say that let us take it at even 3% and 6%, it is about 18% return on capital, which is a good business to be in, and that is what I repeatedly sort of said before also that edible oil business in a particular quarter on absolute terms may give a shock once in a while and may not be consistent because of the way the reporting is done, but overall from a return on capital, from the distribution structure that is in place, from the opportunity of a steady cash flow that it provides and our longstanding strength in this business for long legacy of erstwhile Ruchi Soya and now Patanjali Foods, the consolidation in the industry because of the larger working capital sort of requirement, the edible oil business has, the need for brand and distribution having large deals, etc., there is a consolidation which is being witnessed in the edible oil space that tends to help all the larger companies and we are also beneficiaries of that which is reflected in the volumes that are there.
Coming to the growth rate of the industry in general, the growth rate has been between 3% and 5%.
There have been Patanjali Foods Limited August 16, 2023 occasional windows especially during COVID times when it was flat to marginally negative, but overall I expect with the growth in country’s population, the current place at which India is placed on the average consumption per capita and the way we have got examples of US which is of course very evolved and development, but if we were to take China as well and there is a substantial sort of headroom for growth in the edible oil segment and we wish to grow and we are not growing by volumes and the cost of profits, so we want to keep the pace on the volume side and which is why you would notice that the longer-term revenue projections and all that we are neutralizing the edible oil revenues and only looking at the volumes and ensuring that our FMCG businesses are the ones which are focused in terms of the revenue growth.
The margin construct, as I repeatedly said this business is good for between 2% and 4% of margin and in a good quarter it can be 4%, we were not up to 8% and 10% also, but those are outliers consistently for two years and the markets where on a growth momentum overall worldwide we also benefitted and there have been periods when the market we lost money also, but overall basis it would be safe to assume that in a year’s time between 2% to 4% is a good number to go with and even this quarter the change that you saw and a drop in margin we are reasonably confident of covering it back during the year.
So I would only urge the way we look at businesses that we would work on the strategy not by the quarter end sort of numbers what are coming out but ensuring that the predictability of margin over a period of time has ensured that we do not have any major shocks in how we manage the business.
Bharat C Shah
I was looking it over last 11 quarters of the margins so what you are saying is right, last year second quarter was the one which was a huge shock where the margins were badly impacted in the negative and the first quarter of the current year has been a second period, so in the eleven quarters that I have seen that has been the case.
I presume this last one year probably is more unusual and on a more normalized long-term basis this kind of high frequency fluctuation probably is not a normal character of the business am I right in understanding that?
Sanjeev Asthana
Yes.
That is absolutely right.
The last year Q2 was unprecedented.
It was nearly sort of it happened after three decades this kind of volatility which was not witnessed before and all the global players, the best of companies globally, the largest company in the world, that the shock in terms of the way markets reacted and it was very little in control with the companies that have had, the actions on regulatory actions in Indonesia, the war in Russia- Ukraine, etc., it happened.
Even this quarter is a pretty exceptional because with the pace that with the future market sort of tended to move up and the domestic markets on account of supply and demand at a lag this happened, but I would say that these are more instances of certain windows in which this may occur but in normal course over three years we would have seen company’s performance like Patanjali Foods itself that we did not have any particular quarter which there was such an unprecedented change in the markets moving in Patanjali Foods Limited August 16, 2023 very divergently compared to each other.
So there tends to be some bit of correlation.
The correlation in certain windows is very strong, in other windows is less strong, but that is a part of the science of managing the business and also the art of managing the business and the experience that comes in.
So we feel pretty comfortable in where we stand right now and it is reasonably comfortable to say that by the year end we should have normalized with first quarter results and should be pretty much on pace for the growth plans that the company has.
Bharat C Shah
Which means, if we have to make a long-term kind of a model of the business then industry growth rate about 3% to 5% our records and our ambition is to do better than that, so maybe presumably 5% to 7% will that be a fair number for our growth rate?
Sanjeev Asthana
That is right.
Bharat C Shah
If it is 5% to 7% growth rate with the margins only ranging between 3% to 4% in tricking the other fiscal 2021-2022 which of the quarters that I saw the margins were in excess of 4%, so let us say we take 3% to 4% kind of a margin and with a stable over a period of time some amount of the improvement therefore return on capital employed at certain times done should be somewhere in the vicinity of 21% to 20% will that be a kind of a fair summary of long-term future plus and at the fair rate we will be integrating our own palm oil more and more into the mix and therefore even if there is some volatility at some stage will be corresponding neutralizing factor in the internal palm production.
So relative more stability going forward and margin construct in the ROCE in that range is that a kind of a picture we can kind of build into the model?
Sanjeev Asthana
You see that will be the fair reflection of the numbers and we are pretty convinced that and the much as convinced.
The business has intrinsic value for players we are large, for players we have got distribution with infrastructure that we have built over a period of time and the inherent nature of the business.
So the 21% return on capital margin construct of anywhere between 2% and 4% you are saying 3% is the midpoint that is reasonable assumption to make and the integration of the palm oil business especially with the oil palm plantation progressively as we go forward is going to benefit the company immensely and this is something that we are striving for as well to bring about that to develop predictability that you speak about in terms of the business model.
The only thing I would say here the caveat is that there might be windows in which a month or two months or three months, one quarter in a year which would give us some divergence in terms of the predictability and like an FMCG segment will give us a change and which we have to deal and manage.
I think that is the only part I would say, but overall in a year’s time that if you look at a 12 months window we should be pretty consistent with what you have just now said.
Patanjali Foods Limited August 16, 2023
Bharat C Shah
One last question.
While talking your voice was not very clear so I did not probably fully understand, but you mentioned that there were some 71 or 72 Crores of credit losses and which have been reversed in the current quarter is that what you say can you explain that little better?
Sanjeev Asthana
So what happened was that on account of the Ind AS standard that out of debtors we had to take 71 Crores of expected credit loss in the books, so our actual P&L should have been higher by 71 Crores, but because of this reason of Ind AS and the regulations we had to take that into account.
So that was just an accounting entry that had to be done in the quarter end which has been reversed in this quarter.
We are expecting the change to be nearly between 63 and 65 Crores which has already written back in the books of accounts in this quarter.
Bharat C Shah
It was ECL based on Ind AS that you written off?
Kumar Rajesh
Yes.
Just I would like to clarify it.
As per Ind AS requirement we have to define the defined credit policy for the customers and we have defined in the books a particular credit period for our customers and you can say the payment has been received slightly delayed by two or three days, not on June 30th, 2023 that is why as per Ind AS requirement we have provided the expected credit loss.
This payment has been received in the month of July itself and we are going to reverse it as per accounting standard so this is the fact.
Bharat C Shah
Thank you Rajesh.
Thank you Asthana.
Moderator · Conference Operator
Thank you Sir.
We will take the next question from the line of Kuldeep Gangwar from ASK Investment Managers.
Please go ahead.
Kuldeep Gangwar
Just regarding this credit loss, recovering that number it will part of other income or any other line item?
Kumar Rajesh
This is right now included in the other expenses and while reversing it will include in the operational income not in the part of other income.
Kuldeep Gangwar
Second part can you please provide the breakup of FMCG business sales and margin in the major subcategoriesin Q1 FY2024?
Sanjeev Asthana
In terms of breakup of the FMCG business in terms of the Nutrela which is soya proteins it is 155 Crores, there is a growth of 3%.
In the foods division we did 1,354 Crores.
Last year, of course this business was not with us, so it is against that backdrop.
The biscuits did revenue of 381 Crores this is against 276 Crores last year in the same quarter and nutraceuticals did 62 Crores in this quarter.
Patanjali Foods Limited August 16, 2023
Kuldeep Gangwar
How is the margin profile across categories?
Sanjeev Asthana
So the margin profile in each category in the soya protein business, we made 13% margin.
This was 20 Crores of EBITDA, Food division we did 266 Crores, which is 19.71%, biscuits we did 39 Crores, and nutraceuticals we did 36 Crores.
Kuldeep Gangwar
What should be the full year expectation overall from the FMCG business in revenue and the margin profile?
Sanjeev Asthana
It is pretty much on course for that.
I think our target always as we mentioned is between 16% and 18% we are doing right now better than that because there have been some positive with that we have got, but overall I think looks like that we might be closer to 18% plus than below that.
Kuldeep Gangwar
To answer Q1 FY2023 sales in FMCG business can be analyzed or is there any seasonality in that particular business?
Sanjeev Asthana
There is some seasonality.
So very clearly like for example the nutraceutical and biscuits would not have, soya protein business have marginal seasonality and the food business will have.
So for example in the festival season the sales tends to pick up and all of these products are meant for sort of winter months there are products which are meant for summer months, so there would be some bit of seasonality there, but not any dramatic seasonality.
Kuldeep Gangwar
Is there any seasonality in Oil Plantation business?
Sanjeev Asthana
There is high seasonality.
So there are periods in which in some quarters when the harvesting of the fresh fruit bunches happens so you will get in certain months much higher and that is why it automatically translates into the yield, but overall, so yes, it will happen about six months when the harvest is happening we will have pick sort of lot more revenues and the EBITDA getting generated and of the quarter the EBITDA will tend to be lower, but overall margin construct of again as I mentioned 16% to 18% is a pretty consistent margin and very safe to always take in our calculation on Oil Palm Plantation business.
Kuldeep Gangwar
Which are those quarters were higher contribution from Oil Plantation coming to the sector?
Sanjeev Asthana
This quarter will be higher contribution and as we are getting into the harvest season as well as it will just go forward into the next quarter as well.
Kuldeep Gangwar
You were mentioning about the edible oil business model so full year basis can we still assume that it is a 2% to 4% range achievable for full year basis in edible oil business?
Patanjali Foods Limited August 16, 2023
Sanjeev Asthana
We feel confident Kuldeep, as I just mentioned in quite detail that the targeted margin construct of between 2% and 4% so we are still pretty much we feel confident that the full year between 2% and 4% we should be able to generate EBITDA margin in the edible oil business.
Kuldeep Gangwar
Depreciation has increased from 43 Crores last quarter to 68 Crores in Q1 FY2024 what are the reason for the same and what should be going run rate for coming quarters?
Sanjeev Asthana
I think the run rate typically has marginally gone up on the depreciation side because we have acquired certain other assets and the depreciation has been taken in this quarter, but normally I think during the year we should have close to about 170 to 180 Crores of depreciation.
Kuldeep Gangwar
This depreciation figure increased from 43 Crores to 68 Crores in Q1 FY2024 so reason and what we should expect going forward?
Kumar Rajesh
Actually this depreciation we have made some alignment to the asset which was lying in our fixed asset register for pre-CIRP period was revalued during the pre-CIRP period and right now we have aligned this with the Companies Act.
So depreciation has been increased by 28 Crores for this quarter and near about 10 Crores of depreciation is additional in this quarter.
So going forward this will increase by 15 Crores as compared to the past quarters.
Kuldeep Gangwar
So coming quarter 15 Crores should be the run rate ballpark in next two, three quarters right?
Kumar Rajesh
Yes, approximately 15 Crores will be increased.
Kuldeep Gangwar
Last bit like distribution reach currently and what should be the target in next couple of years?
Kumar Rajesh
Broadly we had as I had mentioned that in our presentation earlier that we currently have 1.5 million retail outlets which we reach directly in all the businesses combined.
There is indirect reach that we have close to nearly a million retail outlets and the target is that we are on continuous expansion path as I mentioned in the biscuits and nutraceutical.
So we are adding distribution outlets at the rate of nearly between 10,000 and 15,000 every month and so that work is going on much larger part of the work is going on in the biscuit business.
Nutraceuticals is more special, more sort of different strategies being followed; actually our focus is lot more on the e-commerce and B2C.
So it is safe to assume that we will add every year anywhere between 1,50,000 to 2,00, 000 retail outlets in our reach.
Patanjali Foods Limited August 16, 2023
Kuldeep Gangwar
Thanks a lot.
Moderator · Conference Operator
Thank you.
We will take the next question from the line of Akhilesh Bagri, an Individual Investor.
Please go ahead.
Akhilesh Bagri
Thank you for the followup.
Sir one suggestion if you could include this category wise revenue and EBITDA margin on the food business in your result release itself that would be more helpful for everyone for comparison sake and my question is this 71 Crores credit loss which you mentioned, which will get reversed, was it for the oil segment or it is for the foods business?
Sanjeev Asthana
This was for the food business, but Rajesh Ji you can elaborate a little more.
Kumar Rajesh
Majority is from the food business.
Akhilesh Bagri
Prior to say that the EBITDA then for this quarter for the foods business would have been higher by almost 50 – 60 Crores actually?
Kumar Rajesh
Yes.
Akhilesh Bagri
So actually our EBITDA margins would be even higher than what we have reported currently on the foods business?
Kumar Rajesh
Basically you cannot say like that because this is a penal clause, which requires the treatment of expected credit loss.
So operationally, if it would not be there this has been shown into the other expenses so EBITDA margin could be higher, if you consider that up to some extent relating to the food business.
Akhilesh Bagri
Alright.
Thank you.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen that was the last question for today.
I would now like to hand the conference over to Mr. Sanjeev Asthana, CEO, Patanjali Foods Limited for closing comments.
Over to you Sir!
Sanjeev Asthana
Thank you very much for patiently listening to our sort of result for the investors.
We continue to work towards stabilizing the sort of margins in the edible oil business with the focus and target is on managing the risks to ensuring that we maintain our steady pace of the commitments that we are making.
The company continues to strive and work towards the FMCG businesses and we are quite pleased with the progress.
There are slew of launches that we have lined up we will continue to work on those and the suggestions that we give in terms of reporting and giving out better quality reporting we keep treated with Patanjali Foods Limited August 16, 2023 lot of respect and carefully we will consider and we will certainly start making it better and little more consistent with the requirement of market ahead.
Should you have any further queries please contact SGA, our Investor Relations Advisors.
Thank you.
Moderator · Conference Operator
Thank you members of the management.
Ladies and gentlemen on behalf of Antique Stock Broking Limited that concludes this conference.
We thank you for joining us.
You may now disconnect your lines.