Patanjali Foods Limited analyst Q&A

Thank you very much. The first question is from the line of Dhiraj Mistry from Antique Stock Broking. Please go ahead.

Congrats on a good set of numbers. Sir, my first question is on what would be the volume growth in our oil business and realization because given the inflation which we have witnessed in the oil business, would you split your revenue growth in volume and pricing?

So Dhiraj, that's a great question. There's a certain degree of volume compression which has happened across the board. And so for example, that in palm oil, we had a volume compression of close to about -- between quarter 2 and quarter 3, I'm talking of this year, we had about 40,000 tons of reduction. In soybean, it was very marginal. It was just about 5,000 tons. In sunflower, it was about 7,000 tons. So broadly, two trends have defined the compression in the volumes in Edible Oils side, which was more than made up by the price rise which happened, which occurred both in the international markets and as well as the price increase that we took domestically, partially on account of the duty increase and partially on account of the consumer requirements. So broadly, the sudden increase in the international prices prompted consumers to cut down on certain consumption that was clearly witnessed. The second big trigger which drove the change was that, as I mentioned in my call, in the presentation is the palm oil prices for a change went significantly higher than Soybean and Sunflower oil prices. And palm being the biggest driver of the volume, that change -- that the industry in terms of the HoReCa segment, the institutional segment, et cetera, they started cutting down on the palm oil consumption, which was the biggest driver and which is where we witnessed the largest change, which occurred. But broadly, this trend should tend to stabilize as we see the -- going forward in this quarter. So already, the volumes are tending to pick up. But broadly, overall, I must say that the oil consumption has slightly flattened in last two months in a very distinct way. And certainly, going forward, we are seeing a muted volume growth overall. So -- and this is also witnessed incidentally, not just in our volumes, but across the board. Even the country's imports of palm oil have gone down s ubstantially. So broadly, this is reflective of the supply -side challenges and the price spread, which has suddenly occurred between palm and soy, this preference has started falling on both on soy a and sun. And that's why this change has occurred.

Got it. Got it. Just can you help me with the absolute total oil volume in metric tons for the quarter?

Yes. So absolute volume for the quarter, we have is 5.8 lakh tons is what we did. Last quarter, it was 6.07 lakh tons. So there's about a drop of 27,000 tons.

Got it. Got it. And second is for the margin for the oil business, we have seen good improvement in our oil business. So I would like to know, is there any one-off in this where you have realized some inventory gain or anything like that? Or this kind of m argin is quite sustainable going ahead?

So broadly, the margin we made was about INR 364 crores, which is 5.42% compared to the previous quarter, which was 4.04%. And last year, just for a comparison perspective, it was 1.96%. So we've always maintained that the margin construct is between 2% and 4%, which is a standard one. 4% is a good margin and 2% is a fairly standard margin. Below that, I think it's a cause for alarm. So part of this gain of INR 364 crores came through the one-off price inventory gain that we got. But most of the part has been a very natural phenomenon of pass -through of the prices that we maintain. So basically, since we are largely a long-only position business, we buy ahead of time and then we process, refine and package and sell it in the marketplace. So there's a natural gain that we got. And -- but yes, part of that, I would say, about INR 60 crores, INR 65 crores would typically would have come as a one -off inventory gain. So broadly, 5.42% is largely an outlier, and we will go back between 4% and 5% range overall. But just to give another perspective that in the nine month period, for example, we have done better than our trend rate. We've done about 4.65% in the margin construct, and which is a fairly positive trend that we are following. And I'm reasonably hopeful that over the next couple of quarters, this trajectory will be maintained.

Got it. Got it. Thank you. And second question is for the food business that we have. some part of the stress is also because of the urban slowdown, which has been there. But my question is on margins. Like margin has constantly seen downward pressure. From 18% margin at the start of the last year financial year, now it has gone down to 7.5% margin. When we can start seeing improvement in this business? And can you help me with the revenue for the staples business also and segment-wise EBITDA margins in Foods business?

Yes. So I can -- for the foods part, let me -- overall basis, I think I can give you that number. So broadly, what we have is that INR 2,038 crores was the revenue. We made 7.53% margin in this quarter. This is versus 10.19% in the previous quarter and 10.85% in the last year quarter -- same quarter last year. So broadly, two trends have defined. We have always maintained that the margin profile and incidentally, on the nine-month basis, our margin is 9.09%. We have consistently maintained that Food business overall will give between 8% to 10% margin in our business. And we still maintain that, and we are pretty much on course to achieve that. The second point is that what exactly was the defining part, which has actually changed the margin construct. Three things broadly. One is that in the staple foods, so there are two categories within the Foods category. One is staple and Indian ethnic foods. Within the staples category, what has happened is that there's a sales loss of almost about IN R250 crores, which was largely on account of the rice prices, which collapsed by nearly 10% and which was a major significant change which occurred. The second change which occurred was the increase in the wheat prices and palm oil prices, which has impacted the biscuits margin because these are the core raw material which goes into that. So palm, for example, increased by nearly 30% to 40% in the prev ious quarter. And likewise, the wheat prices, as I mentioned, went up by almost 12%. So these two things. Third thing is that we increased our ad spend by nearly INR 20 crores. The additional amount that we spent in this quarter was INR 20 crores on the ad spend. So they all combined basis typically tended to put pressure on the margins, and you saw 7.12%. This, we are going to -- will change in this quarter. So we should pretty much be in the same ballpark range of 8% to 10%, which we are pretty confident about.

Got it. Got it. And sir, now the HPC integration is complete, is there any operational synergies still to be done or whether we are done with the operational synergy and we can expect full performance from 4Q onwards and the margin profile for the same as well?

So this quarter, in the Q4 of this quarter (this was said erroneously. It should be read as “Q4 of this year”) now, I'm expecting that we should be -- so initial two months have been spent. The larger part of the integration broadly is over. And minor matters are being sorted out right now. But broadly, I would expect that this quarter 4 should be in a fully operational status. So we did have some initial 15, 20 days of changeover, et cetera, happened. But I think this quarter, I'm expecting that we should get on to the similar healthy trend rate of the HPC business and pretty much we should start integrating that into our revenues and margins.

The next question is from the line of Yug Modi from AP Capital.

Sir, any update on the ghee as last quarter, you had said that we are restrategizing ghee. So what is happening on that right now?

So the two parts to ghee. One is, we are seeing that there is a stress, as I mentioned, in the urban segments. So the ghee growth overall has been flat. And in the Q3 versus Q2, so pretty much standard. We haven't seen any -- typically in the winter season, the ghee sales tend to increase always. And normally, we see an uptick of between 8% to 10%. We haven't witnessed that. But that I would imagine is more a problem that I was mentioning about the urban demand, where it is slightly muted a nd ghee being an expensive product typically tends to get sold more in the urban areas than the rural areas. So that part we're witnessing. But that we are seeing more as a temporary blip. I think we should get back to post the budget, post the overall buo yancy that we're seeing now. Hopefully, that will start to kick in, in this quarter. So we should be in a better state. In terms of the strategy part of ghee, I mean, the idea was that the uncovered territories on the distribution side that we would tend to cover more. The territories, for example, in terms of the mix of the SKUs, that has started sort of working in. So I would say that this quarter's flat sales on the ghee side should not be a dampener. We should pick it back in the Q4. And I think already we are seeing the change in that on the sales side.

Okay. Sir, just one follow-up to that. Sir, what was the revenue for the Ghee for this quarter and for the previous quarter?

So ghee, for example, we sold INR 356 crores in this quarter and the previous quarter was marginally INR 1 crore less, INR 355 crores.

The next question is from the line of Kunal Shah from Anova Capital.

Yes. Sir, my question was on HPC business. Like I want to know how the integration process has been for us? And also want to know who is heading it? Like how have the synergies been with us so far? And what does the future hold for us for that?

So HPC business integration has gone on very well. And that part is going on very well. We have already integrated the teams. We have already integrated all the IT systems, and we have also already done in the process of distribution part is already done for the business. So overall, in terms of the change part of it , the overall HPC business side ,the team integration, the IT integration, the business of -- the working through in terms of the distribution side. The synergies, as I mentioned, it will take 15 to 18 months for that to happen that we have started already working on. So in terms of distribution at the ground level, how do we synergize, how do we consolidate in terms of the manpower synergies at the ground level. So that will take time. But otherwise, the integration has worked out fairly smooth. All the systems and everything is aligned. And now in this quarter, we should be tending to stabilize and move it forward.

The next question is from the line of Raj Jain from Crystal Capital.

Can you give guidance on distribution, how it's working for us with the modern trade and general trade? How are the margins here, inventory days and demand from this channel?

So as of now, the split is as following. We are about 8% is what we do through the e-commerce and the modern trade. So 2% is through e-commerce and quick commerce and about 6% is what we're targeting to -- we are doing through the modern trade system. With in that, there are two parts that we're working on. We would like this ideally to be closer to 12%. And there is a lot of work that is happening on the emerging channels like quick commerce. Likewise, a lot of work that is happening on the e-commerce side, including listing, working on certain product listings on Amazon U.S. website, working through that process. So this effort is going on constantly. In terms of the split of certain , just to give you some ballpark numbers, broadly in Edible Oils, we do about 5% contribution comes through the modern trade. Typically, about biscuits, we do about 3% through the channel. Food and non - food, we're doing about 13%. And Nutrela Soya food, we do about 9%, which comes through modern trade and e-commerce. All these numbers are set to change. We want nearly from current 8% to taking it to 12%. That process is on. We are investing quite heavily on social media. We are working on listing and bringing our products on all the emerging quick commerce channels. We are available across the spectrum on all channels. So that is a work in progress, and we are reasonably confident that we should be hitting that target of 12% at least of the overall sales coming through e-commerce and modern trade. That work is going on.

The next question is from the line of Rahul Desai from RB Securities.

Sir, my question was, we are aware that how the demand is panning out in urban areas has been very sluggish. So when do you see that improving? And on coming to the rural demand, do you think that's sustainable?

So both sides. One is that in terms of precise prediction as to when the urban demand is going to come back, I think it's difficult to mention. But having said that, the budget has been very promising on account of the income tax rule change. There is -- the repo rate from the RBI has gone down. We are hoping that the overall environment will become more benign. Inflationary pressures will tend to decline. And the possibility of the urban demand coming back and especially in the consumer go ods side, I think we're reasonably hopeful. But having said that, we should be patient about it because that is not something which is guaranteed and can be taken as a given. The second question about the rural demand, I'm very optimistic because the budgetary provisions, we are seeing already the momentum picking up on the rural demand side. So I'm reasonably hopeful that the rural demand should continue to sustain itself. Government has been very supportive on the MSP prices what they've given, the number of social programs, which have been announced. So there's a lot more money which is being injected in the rural areas into the overall agriculture ecosystem. So hopefully, it should be sustained momentum on the rural demand side.

That was great. But I have one more follow-up question. How has the January been with respect to demand? And how is it looking for rural and urban both?

Slow. Itis straight answer. The urban has been slow. And the rural has been pretty much on the same trajectory. There is no significant uptick or downside on the rural side. But overall, urban areas have been very sluggish. So that's -- there's a lot of hope, which is banking on the budget being a big trigger for the urban demand to come back, and we're waiting for that.

The next question is from the line of Dhruv Modi from DSM Securities. Due to no response from the current participant, we will move on to the next participant. The next question is from the line of Kuldeep Gangwar from ASK Investment Managers.

Sir, can you please provide the split of food between, say, specialty food and staples? And second point like in the press release, you have mentioned that 2.5% was the A&P expenditure. So it is proportion to overall company sales, how we should read it?

Kuldeep, your voice is very muffled. I think you're on speaker phone, if you can just...

So I'm saying the split of food business between specialty food and the staples. And second part, you have mentioned about, say, 2.5% of sales in the A&P. So it is overall company sales like INR 9,000 crores, 2.5%, how we should read it?

So yes. So first of all, let me just give you the split of Indian ethnic foods and consumer staples. So we did some INR 744 crores of Indian ethnic foods in this quarter. And we did identical amount in consumer staples, almost INR744 crores. So there is some points. The margin that we made on ethnic foods was INR141 crores, which is at 19%. This is versus 23% in the previous quarter and 17% last year same quarter. On the consumer staples side, we had a negative margin of INR35 crores. Primarily, the largest contributor to this was the rice price increase and the ad spend that I spoke about. So broadly, that contributed to the change in the foods category. And the 2.5% of the advertising and sales promotion was on the overall basis, like including edible oils and everything.

So the number is close to INR 225 crores, right?

INR 226 crores to be exact.

Q3 was one-off, consumer staples because this rise suddenly, there was a collapse on account of the lot of actions which happened in the marketplace. So broadly, that was the impact factor. This is more one-off. I'm expecting this to stabilize in this quarter.

Okay. So the way it appears like in the specialty food, the margin is largely stable. The volatility is coming from the staple part of it. And going forward, probably it should stabilize.

Yes. So Staples and ad spend both, I mean, I'm not just adding because that's become a critical component of our overall strategy of marketing that we need to sort of crank up on our advertising and promotion. So we'll continue aggressively pushing for this. But this rice bit was a one more one-off. I'm not expecting this to sustain itself in this quarter. So we should be surging that trough.

The next question is from the line of Abhijeet Kundu from Antique Stock Broking.

So one question was on Home and Personal Care business, where you have specified that...

Abhijeet, a little louder, please. Your voice is a little muffled.

Yes. So in the HPC business, dental care was about INR 223.47 crores of sales. How should we see it? at what rate it would have grown? How has been the performance in terms of market share? Some color on that, first question.

Yes. So dental business, we did INR 223 crores of revenue in the two months that we had, which is nearly half of what overall sort of revenue that we do. So fairly good. I think post the launch of the range of new sort of products that we had, the response has been very good, supported by ad spend that we did and on the promotion side. So it's picking up. Now having said that, the thing is that it has moved into a new entity, while we expect everything to stabilize in this quarter, but we are reasonably hopeful of maintaining 10% to 12% of growth in this category. And we should do better than the marketplace because a lot of areas which were uncovered by us, we've launched products to fill in those gaps, in those product categories, and there is confidence that we should be able to maintain that growth rate. This quarter, I think by end of this quarter, by end of March, we should get a reasonably good idea as to where the gaps are that we need to work on and how the growth trend has been. But broadly, I would say it's positive to good.

Okay. Great. And sir, on the Biscuits division, INR 395.37 crores of sales and 1.64% year -on- year growth. The largest player in this category, they have grown by about 6% and primarily driven by volume growth. So one, have you taken any price hikes during the quarter which would reflect in the next call in Q4 in case of Biscuits. And why this muted growth? I mean, biscuits is primarily majorly sold in the rural markets and rural markets relatively have done better than the urban markets. So just some color on the price hike and why the muted growth? Any recovery in growth you would see in the coming quarters?

Sure. So I think we had a scorching growth in the last two years on the Biscuits side. So almost from INR 950 crores, we grew to INR 1,650 crores. So it's a huge spike that we had. There's a bit of tempering in this quarter. So one is on the growth part of it, like our -- this year's growth overall has tended to be just about 6%. We had targeted to keep it at 15%. So overall, we have seen that there is some bit of slowdown in the Biscuits overall demand. But -- and we've taken no price increase. So in terms of this entirely, all this growth has been largely on the volume side. And the business segments where we are in, the price increase is not possible. So even passing it on is a tougher call. That's one. Second is that as a guidance perspective as to what we expect to end the year with, I would imagine that the yearly growth would be anywhere between 6% to 7%. This is slightly -- this particular quarter has been off-season also. So biscuits incidentally also have a certain degree of seasonality to them. And so this particular quarter is this one, but I'm not anticipating that -- any significant drop to be there. I think, we should get back to -- in the next fiscal, we should get back to the targeted range of 15%. There's a lot of work which is continuing that we want to reduce our dependence on doodh biscuit. We want to continue focusing on the premium categories, which are showing a very healthy uptick. We want to focus on newer variations that need to be launched. And I think that both these efforts will work in parallel. So reasonably good. I think volume growth will maintain. And that is obviously impacting the margin. The palm and the prices that we saw in wheat side, I think has impacted the margin a bit. But overall, if I were to tell you, in the biscuits category, our EBITDA margin is still at about 11.51%. We still would like to continue this trend and we should end the year with pretty much a similar margin construct.

Understood, sir. And in terms of distribution, any distribution increase you have done any numbers on that? And what's the plan ahead? Because your FMCG , Home and Personal Care business and the Foods business would strongly benefit from that. So overall FMCG business would strongly benefit from that. So any expansion plans there right now?

So overall from the tracked numbers, 1.5 million is our direct retail outreach. We are expanding in certain categories. For example, in nutraceuticals, we have expanded substantially our reach of GT, though the focus and the drive is much more towards e -commerce side. Biscuits, we continue to expand. And the indirect reach, we estimate is almost nearly 1.25 times of that. So broadly on the distribution side, and there are regions where a serious amount of work is happening, including the -- reconfiguring the teams and working through that. So for example, in South and East of India, we need to do a lot more work and in the North-eastern part. And so this will continue to keep a pace. The positive with us is that there's a lot of headroom for growth on the distribution side with us compared to a lot of our eminent industry peers who almost have reached a saturation level. So we are reasonably confident that this growth expansion will continue to happen. And the target is that we should cross 2 million retail outlets as a direct reach and that we'll continue to expand and build on. So that effort is month-on-month that is getting tracked and that is getting worked out.

As there are no further questions from the participants, I would now like to hand the conference over to Mr. Sanjeev Asthana, CEO, for closing comments.

So this overall, thank you very much for all the questions that we had today. And with this, we'll conclude the call. If you have any further sort of queries, you may contact SGA, our I nvestor Relations advisors, and we look forward to connecting with you in the next quarter after the quarterly results. Thank you.

On behalf of Patanjali Foods Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.