Similar to two of the contract electronic manufacturing companies Dixon Technologies & Amber Enterprises, which I already have covered, Hindustan Foods Ltd is into the contract manufacturing of FMCG products. And one aspect many gets confused with the name of the company as if it manufactures only food products but it is not so, food manufacturing is only a small part of the business. They are also in the contract manufacturing of leather products, detergents, pest control products, beverages etc. In the current blog “Hindustan Foods Ltd- Analysis”, I will talk about the Industry, the Company, History of current promoters, Business model and factors driving the massive growth(20X in last 3 years)
FMCG Contract manufacturing Industry
Contract manufacturing as an industry is a high volume, low margin business. The typical profit margin in this sector ranges between 2-4%. The growth comes with the addition of new clients, new capacities, and new product categories. Because of the thin margin & lot of capital tied to working capital, in the early days these companies depends a lot on external capital.
Benefits to FMCG companies to go with such contract manufacturer:
1) Brands do not need to invest capital in setting up the plant buying equipment
2) Get access to the manufacturing expertise of the contract manufacturer
3) Can experiment with launching new products without setting up new facilities. Even international brands can test the domestic market with their products
4) Brands can focus more towards marketing & distribution
5) Specially advantageous to smaller/new FMCG companies to get their product manufactured
In order to get manufacturing orders from large companies, the companies need to have long and credible executive history as the reputation of the brand depends on the product manufactured. Usually, FMCG companies will start out by giving out contract for manufacturing a part of the product and then to small sum of product and gradually it increases. So, the long gestation period act as an entry barrier for the company. In addition, the scale required to bring in the operational efficiency act as another barrier which again takes time and lot of capital.
The management of HFL expects the market size for contract manufacturing to be in the range of ₹50000-100000 cr and is growing rapidly.
Good read on the sector : Link
Hindustan Foods Ltd- Analysis
About the company
Incorporated in 1984, Hindustan Foods Ltd(HFL) started manufacturing in the year 1988 with the launch of Joint Venture between the Dempo Group and Glaxo (now GlaxoSmithKline) India with the objective of manufacturing nutritional food product(Farex). But as the sales of the brand Farex declined, the company went into losses and continued the losses for many years. Between 1988 and 2013, Hindustan Foods Limited was dependent on one factory and a single baby food brand(Farex) with very limited product SKUs. The brand Farex changed hands five times during this period.
In order to leverage the manufacturing capacity, in 2013, Dempo Foods Pvt. Ltd., the Holding Company of Hindustan Foods Ltd got acquired by Vanity Case India Pvt. Ltd. and the later bought 74.45% of the paid-up share capital. We can say that the history of the company should start be from 2013 as there was complete change in management and business model.
In order to turnaround the loss making operations of HFL, the new management first increased the capacity utilization of the plant by diversifying the customer base, adding new products from existing clients. And later they started acquiring & adding more capacities to fuel the growth as well as maintain the first movers advantage in India.
Company is now the largest organized Player in the FMCG contract manufacturing space in India.
Dempo group: Link
Vanity Case India Pvt Ltd: It is important to understand the background of The Vanity Case group who now operate ‘Hindustan Foods Ltd’. I have provided below the timeline for the group. It basically implies that the group has a long history of manufacturing in FMCG space.
The management had set a goal to reach ₹1000 cr of sales by FY20. Although they could achieve only ₹771cr in FY20, the MD was honest to admit it and cited the delay in ramping of Hyderabad facility, acquisition of Vasal shoe going wrong and the 10 days lost to lockdown leading to them not achieving 1000cr sales. But still is quite remarkable achievement from the revenue of 37cr in 2017. This growth has been achieved in such a short period mainly by the acquisition of existing capacities under OEM Model.
The company has 9 manufacturing plants across India as of March 31st 2020.
Client List- Hindustan Foods Ltd
The Vanity Case Group-Timeline
Equity Dilution over time
In FY19, HFL raised another ₹15 Cr by issuing shares to the promoter group.
In March 2019, Sixth Sense ventures offloaded a part of its holding, which was bought by Westbridge Capital.
Because of the equity dilution, the Promoter shareholding has come down to 60% from the 74.5% in 2013 which they have increased in the last few quarters and now stands at 62.62%.
Hindustan Foods Ltd- Analysis
Business Model
Hindustan Foods Ltd segments its business into 3 divisions, OEM, Contract Manufacturing & Private Label.
1. OEM
Under the OEM model, the co. company either does a Greenfield expansion of the manufacturing facility for the client or acquires the facility from the client. HFL ensures that there are long-term contracts(5-7 years) in place before acquiring or setting up/ acquiring such manufacturing units.
OEM model can be categorized as: Entire Dedicated Model & Anchor Tenant Model.
ENTIRE DEDICATED MODEL:
In this model, the entire manufacturing facility is exclusively utilized for the client(Principal). The location, layout, design, machinery, capacity and all other parameters of the unit are finalized and executed in complete concurrence with the client.
The investment, project execution and management of the facility is done by HFL. The client guarantees the business for a minimum number of years(5-7 years minimum) and returns on investments (ROI). Jammu, Coimbatore & Hyderabad plants operate under Entire Dedicated Model.
I REALLY AM NOT ABLE TO FIGURE OUT THE RATIONALE FOR THIS MODEL SPECIALLY OF ACQUIRING THE CLIENT’S PLANT AND THEN MANUFACTURING EXCLUSIVELY FOR THEM. I THINK IT IS MORE TO SHOW GROWTH AND MAYBE TO BUILD RELATIONSHIP WITH LARGER BRANDS.
ANCHOR TENANT MODEL:
In this model, the manufacturing facility is not dedicated entirely to a single company, but the capacity is shared by various companies for a longer period of agreement. The anchor tenant enjoys all the privileges of a principal, however there will be a few minor partners sharing the facility. This helps the company to spread the overheads. The Goa unit of the company manufacture under this model various extruded food products for various companies such as Pepsico, Danone & Marico.
2. CONTRACT MANUFACTURING
Contract Manufacturing is basically a process of outsourcing a part or the whole manufacturing process of a product to a third party. These facilities are used for multiple clients. Usually these contacts are not for the long term and are flexible in nature.
3. PRIVATE LABELS
Private label is the process of taking a manufacturer’s formulation and designing and adding the brand’s name and logo to it. HFL is responsible right from the procurement of raw materials, development to the packaging of the products. Under this model, HFL owns the product formula made for these private labels and the focus is to ensure that customers are provided with complete turnkey private labeling solutions.
Hindustan Foods Ltd- Analysis
Hindustan Foods Ltd-Financial Analysis
Cash flow from operation is improving year on year and turned positive in FY20.
Hindustan Foods Ltd- Analysis
What has driven such immense growth?
It would be quite imperative to know how the company achieved such a scale in such a short time. That’s why I have listed below what all drove growth each year from the acquisition in 2014.
FY14
The year FY14 would be for less than 6 months as the merger took place only on 22nd November 2013.
But given the new promoter(Vanity Case), existing relationships with FMCG brands, they were quick to accelerate HFL on the growth path.
Commenced production of Kurkure from Feb 2014 for Pepsico India. Also, entered into manufacturing agreement for Weaning Cereals -Complementary foods with Nutricia International(Subsidiary of Danone) for a period of 5 years.
FY15
Goa Factory: In 2015, HFL increased its extrusion capacity from 3,000 tons to 6,000 tons & also added dry-mix blending capacity of 1,000 tons per annum.
The company got new product from the client for whom they were making extruded base for brand Farex for more than 2 decades. These included manufacturing of the finished products ‘Farex’, ‘Easum’ and ‘First Food’, the infant food brands of Nutricia International Pvt. Ltd.
HFL also entered into manufacturing and supply agreements with Mankind Pharma and The Himalaya Drug Company.
FY16
The Company has also successfully launched their own product under the brand “Cnergy” in the market, and also continues to manufacture and market its existing brand “Bonny Mix” in the local market. Bonny Mix is an instant porridge brand ideal for adults and children.
This year the company focused on increasing its capacity utilization.
FY17
Puducherry Factory : HFL acquired the Puducherry facility in 2017 as a going concern from Ponds Export Ltd., a subsidiary of Hindustan Unilever Ltd in FY17. This facility manufactures leather shoes, uppers, bags, belts, wallets and accessories for major international and domestic brands such as Gabor, Richter and Jomos, domestic brands like Steve Madden, Arrow and U.S. Polo. The international brand products exported. The facility is integrated into leather processing by contracted tanneries. Annual production capacity of 5 lac pairs of shoes and 7 lac pairs of uppers.
FY18
HFL launched its own premium leather brand “Unorthodox” to be manufactured at their Puducherry facility.
Maharashtra Factory:
Acquired G Shoe Export Ltd. with facilities located outskirts of Mumbai in 2018. The capacity of the unit is producing 3000 pairs of sandals and 1000 pairs of shoes per day for brands such as Esprit, Saks 5th Avenue, Dune, etc . This factory commenced commercial production from July 2018.
Jammu & Kashmir Factory: Acquired the facility from Reckitt Benckiser (India) in the end of the CY 2017 and commenced commercial production from 2nd January, 2018. Co. manufactures pest control products like coils, aerosols and vaporizers for the brand “Mortein”. Annual production capacity of 1,200 Million Coils, 43.2 Million Vaporizers and 7.2 Million Aerosols. The company is the sole manufacturer of Vaporizers and Aerosols for Mortein brand in India.
FY19
The company added new clients like Flipkart, Myntra, Dune and Lollipop for their newly acquired Mumbai shoe factory.
Started the process of acquisition through the demerger of the Hyderabad facility of Avalon Cosmetics Private Limited (a Vanity Case group company)
Coimbatore Factory: This is a Greenfield expansion undertaken by the company to cater to Hindustan Unilever Ltd.’s hot beverages need and has commenced production in December 2018. The company is involved in processing, blending and packaging tea, coffee & soups. This facility operates on Dedicated OEM model.
Acquired 44.5% stake in ATC Beverages Private Ltd., Mysuru, engaged in the business of manufacturing and distribution of soft drinks, juices, energy drinks, and other beverages for PepsiCo and O’cean Beverages.
FY20
They merged the Hyderabad facility of Avalon Cosmetics Private Limited (Vanity Case group company) with HFL. Already expanding the capacity at the Hyderadbad facility & is now HFL’s largest factory .Commenced the production of liquid detergent at a manufacturing unit in Hyderabad. Dedicated to manufacturing detergent powder for Hindustan Unilever Ltd.’s brands like Rin, Wheel and Surf.
They are also in the process of Vanity Case group’s plant at Coimbatore manufacturing malted beverages viz. Horlicks and Boost for Hindustan Unilever.
Additionally, the last year’s acquired company i.e. ATC Beverages Private Limited, will also be merged with HFL.
Invested towards setting up a Floor Cleaners and Toilet Cleaners manufacturing facility at Silvassa
Growth Drivers
Addition of new clients
Addition of new capacities either via acquisition or expansion
Addition of new product categories
Merger of Vanity Case group companies into Hindustan Foods Ltd
Own Brands
The company always has its eyes on launching their own private label brands from each of their plants. The idea is to increase the profitability of the company. Some of them are :
Bonny Mix- Porridge brand
Cnergy- Cereal Brand
Unorthodox- Shoe brand
Hindustan Foods Ltd will NOT fall in the ideal investment case as:
It needs to frequently dilute equity
No pricing power
Lot of mergers and acquisitions with very little information
Very short history of the company(Acquired by new management in 2013 only)
But one thing if for sure, the company will continue to grow like anything and market rewards growth whether it is plain vanilla acquisition of clients plant or greenfield expansion.
The way they are acquiring & expanding capacities, it looks like they want to maintain or solidify their lead in terms of contract manufacturing for FMCG companies in India. A growth of 20X in 3 years whichever way is massive, although the base was very low.
India’s lower labor cost act as a advantage but the bureaucracy continues to be a big hindrance. Indian company who already have learnt to deal with such bureaucracy maybe at a better position. Recent Govt announcement regarding the industrial policies if implemented well, can open doors for lot of international companies coming to India.
If you look at the quarterly growth numbers, the growth has been massive.
Need to keep tracking how things pan out going forward.
Quaterly Sales growth-Hindustan Foods Ltd
Further reading:
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