Food processing Q3: Earnings rise, but surge in raw material costs need to be monitored

Anubhav SahuMoneycontrol research

The food processing sector has come up with a mixed bag of results in Q3 FY18. While most firms exhibited an improving topline growth trend, the rising cost of raw materials has captured our attention. This sector remains vulnerable to supply side issues for processing inputs. The hike in MSP as promised by the government could be inflationary as well. However, the government’s impetus on developing food processing infrastructure can benefit them in the long run.

Manpasand – Distribution roll out on track

Manpasand Beverages posted 40 percent YoY revenue growth, in-line with estimates, aided by volume growth of 35 percent. The distribution tie-up with Parle has yielded results as in Q3 FY18 it contributed to 5 percent in overall revenue. The company has started with a distributor/outlet mix of 150/30,000 in phase 1 and expected to ramp up to 1,000/500,000 by March 2018.

EBITDA margin contracted by around 140 bps mainly due to pressure on gross margins partially offset by lower employee cost and other expenditure.

Source: Manpasand beverages

Capacity expansion bit delayed

While the company has commissioned its Vadodara plant and its benefits are expected to reflect in the current quarter, plants in Varanasi and Sri City are expected to be commissioned in early FY19. Once all plants are commissioned, the company’s capacity would be catapulted to 325k cases per day from 175k cases in FY17. Meanwhile, the company has evaluated a fourth plant for capacity expansion in Orissa, which is expected to be commissioned in FY20.

Snacks players: Mixed results

DFM Foods witnessed a pickup in sales growth (16% QoQ, 42% YoY) partially aided by new capacity (10,000 MT) in Noida which takes its total capacity to 26,500 MT. While the company’s major sales contribution is from the North (nearly 80 percent), its plan for a greenfield expansion in Pune would help it increase its reach in the Western market (around 8% sales).

At the EBITDA level, DMF witnessed a robust improvement on YoY basis (+221 bps). In fact, on QoQ basis, around 110 bps margin improvement is commendable considering the rise in raw material costs (+20% QoQ), which was managed through moderate increase in other expenditure.

Prataap Snacks, on the other hand, had a steady quarter and a modest growth in sales at 6 percent on YoY basis. However, the company witnessed an EBITDA margin contraction (-224 bps) due to supply issues with raws material (potatoes). Nonetheless, Prataap stated that supply issues have normalized and the current quarter should witness similar growth as seen in H1 FY18.

The management of the firm is hopeful of maintaining 8-10 percent EBITDA margin in the coming quarters and expects that the newly-launched Yum Pie would add Rs 40 crore to overall sales in FY19.

Prataap Snacks IPO funds utilization

The company received net IPO proceeds of Rs 236.2 crore after deducting IPO expenses. It had earlier marked Rs 50.98 crore for the repayment of borrowings, of which Rs 37 crore was utilized. Funds for capacity expansion (Rs 67 crore) would be used for over the next two years for the namkeen and extruded snacks (Rs 150 crore).

Flex Foods: A small cap food processing company

Among corporate earnings, Flex Foods (market cap: Rs 153 crore) caught our attention which is an associate company of Uflex (packaging company) and involved in processing of culinary herbs , mushrooms, fruits and vegetables. Based out of Dehradun, the company sources it raw materials via contract farming.

In quarterly results, Flex posted a sharp surge in bottomline, guided by higher sales, operating leverage and lower raw material costs. On QoQ basis, however, there was a decline in net profits mainly due to raw material cost inflation.

Major food processing company, ADF Foods (market cap: Rs 530 crore) posted a sharp jump in EBITDA (69% YoY), which was primarily due to containment in raw material costs and lower employee costs. Higher reliance on contract manufacturing seems to have helped in containing costs in certain ways. Profit before tax was up 21 percent, but net profit declined due to accounting treatment of deferred tax assets post corporate tax reforms in the US.

With 96% of revenue coming from international markets, the company is known for brands including Aeroplane, Ashoka, Soul, Camel catering to canned/frozen foods, ready to eat curries and pickles.

Tasty Bite Eatables Ltd. (market cap: Rs 2,179 crore), however, witnessed a decline in EBITDA (-7% QoQ, -39% YoY) on account of higher raw material costs, which was 64% of sales vs. 60% in Q2 FY18 and 58% in Q3 FY17.

Broadly, food and beverage industry results point towards cost inflation as a near term factor to watch out for.

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