Thread by @ValueEducator

Detailed analysis on #Foods&inns ltd

A proxy FMCG Business

CMP: ₹ 139

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1- ABOUT THE COMPANY:

The company was first incorporated in 1967 and in 1970, they commissioned their first production line of spray dried egg powder. In almost 5 decades of operations, the company now manufactures and sells a wide range of tropical fruit and vegetable pulps,

purees, spices, spray dried powders, frozen food products and others to some of the best food brands across the world. The company has been at the forefront of the food processing industry and is one of the largest producers and exporters of mango pulp.

2- BUSINESS AND PRODUCT DIVISIONS:

As seen in the image below, the company has 4 main business divisions:

1)Fruits and vegetables
2)Spray dried powders
3)Frozen foods
4)Spices and Masala

-Under Fruits and vegetables division, the company manufactures pulps and purees, Pastes and concentrates, Chutneys and pickles from a wide variety of fruits and vegetables such as mango, guava, papaya, tomato, beetroot, grapes and others

-Under Spray dried powders,

the company makes a wide variety of powders from fruits, vegetables, dairy products and others

-Under Frozen foods division, the company makes a wide variety of frozen foods based on fruits and vegetables, snacks, naan, flatbreads and parathas

-Under Spices and Masala

business, the company makes a wide variety of spices and masala based on red chilli, cumin, turmeric, coriander and others which are sold in grounded, blended and whole form.
The chart in the image below shows the revenue split of the business segments for FY22:

-The fruits and vegetables business of the company has been the major source of revenue for the company historically and in this business, mango pulp has been the major contributor to the revenues. In FY22, mango pulp contributed almost 77% to the total sales of the company while

guava pulp contributed 5% and tomato pulp contributed around 3% to the total sales of the company. Though, the company has diversified into products other than mango, mango pulp still is the major bread and butter for the business of the company.

-The company’s products can be divided into the following categories:

1)Aseptic
2)Canned Food
3)Frozen
4)Non-Aseptic
5)Powder
6)Others

The table in the image below summarises the products which are sold in each of these product categories:

-The main export markets for the company are the US, UK, Europe, Australia and New Zealand, Asia and Africa. The region wise split of revenues for FY21 and FY22 is as shown in the image below:

-As you can see from the chart, in FY21, the major revenues came from exports while in FY22, the major revenues came from the domestic market. The dip in exports was due to unavailability of shipping containers and high freight and shipping costs which led to subdued exports.

There was an increase in revenues of the company from Rs 371 crore in FY21 to Rs 632 crore in FY22 due to increase in tonnage and the opening up of the domestic market which helped them capture market share in the domestic market in spite of the subdued exports.

3. CLIENTELE:
The key clients of the company are FMCG players like Unilever, PepsiCo, Coca-Cola, Nestle, Kraft Heinz, Paper Boat, Lacnor, Agrana and others. PepsiCo and Coca-Cola have been the company’s clients for more than 15 years accounting for a combined 28% of

the company’s sales in FY22.

4. JV, ASSOCIATES AND SUBSIDIARIES

A) SUBSIDIARIES

On 2 October 2019, the company completed the acquisition of Kusum Spices with a consideration of around Rs 14 crore and a 99.99% stake in this firm. As of now, this is the only subsidiary of the company.

B) JV AND ASSOCIATES

-JV

The company on 13 April 2021 entered into a joint venture agreement with D Technology Pvt Ltd which resulted into incorporation of a new company Beyond Mango Pvt Ltd on 9 July 2021. The company invested almost ₹96 lakhs for 50% stake in this company.

-ASSOCIATES

The company had an associate by the name of Finns Frozen Foods India Ltd in which they had a 48% stake initially which they increased to 51.40% by investing around Rs 35 lakhs to get the additional stake. This company was amalgamated into Foods and Inns as per the

approval of the NCLT Mumbai Bench on 15 November 2018 and filing of the final certified order with the Registrar of Companies on 1 March 2019.

The company invested almost Rs 49,000 to acquire a 49% stake in Tri Global Foods Pvt Ltd. The plan of the company is to sell their

frozen food products under the brand name Tri Global Frozen Snacks with the help of this associate company.

5. FUTURE OUTLOOK:
A) B2C

The company’s business was earlier a B2B business model. The company has taken the following steps to transition into a B2C model:

-The company acquired Kusum Spices and it became a part of the company with effect from 2 October 2019. The acquisition was done at a consideration of almost Rs 14 crores. The company sells a variety of spices in whole, grounded and blended form under their Kusum spices brand.

The Kusum spice business did a sale of almost Rs 16 crore in FY22 and as of Q2FY23 they have done a sale of Rs 4.48 crore.
-The company has consolidated its strategy and plans to market its products under brands such as Madhu, Greentop, Kusum and Tri Global Frozen Snacks.

The company will sell its mango pulps under the brand name Madhu, IQF vegetables under the brand name Greentop, spices and masala under the brand name Kusum and its frozen snacks under the brand name Tri Global Frozen Snacks.

-The company has also tested the concept of mini

QSRs in high footfall areas across India and is planning to open QSR chains at some of the spots in Mumbai.The brand name for this QSR would be Zatpat Zaldee.

B) PLI SCHEME

-The company got selected under the Production Linked Incentive (PLI) scheme launched by the Government of India under the fruits and vegetables category. This would enable the company to develop innovative products using state of the art technology and help them

in creating sustainable value chains

-The selection of the company has been done under both the Component 1 and Component 3 of the PLI Scheme. As per Component 1, the company has to grow their sales at a minimum of 10% CAGR for the period of FY22 - FY27 with the cap being 15%

to receive the benefits which are part of the PLI Scheme under this Component. Under Component 3, the company is expected to get an incentive of around 50% on its Branding and Marketing expenditure which will be incurred abroad by the company over the period of FY22 to FY26.

The company can expect to receive incentives up to Rs 148 crores on a best-case basis based on future sales growth and the committed capex over the period of FY22 to FY27.
The capex towards tetra recart,pectin, spray dried powder capacity expansion and other capacity expansion

projects of the company are covered under the PLI scheme.
C)TETRA RECART

-In many industries packing materials have been made from glass and metals traditionally which has now shifted to plastic in recent years. Though the packaging made from these materials can be adequate for

storage, it is heavy, cumbersome to transport, occupies more shelf space and may not be conducive to the environment. The Tetra Recart packaging method was first developed by Pawel Marciniak along with his wife Iwona Marciniak in 2007. The benefits of using the tetra recart

packaging method was 30% less space occupancy as compared to cans and jars, 10-20% more units can be filled in the same space as compared to cans and jars due to the lighter weight of the packaging material. For retailers, this meant more product per pallet, faster shelf

replenishment, reduced waste handling and efficient use of shelf space. Almost 67% of the Tetra Recart production is done by paperboard which is a renewable material which means the material can be recycled without causing much harm to the environment as against plastics which

may or may not be recyclable.
-The company earlier was using packing materials such as Aseptic bags, Empty Cans, MS Drums, Cartons and LDPE bags and others for the packaging of their products. The company has done a capex of Rs 18 crore for Tetra Recart at Vankal in Gujarat.

-The capex is a greenfield project which comes under the committed capex for the PLI scheme.

The company has an exclusivity arrangement for running their -Tetra Recart facility where for the first couple of years of operation, they would have the right to refusal for future

expansions done by any other player going forward. They are also working to associate themselves with prominent brands for fulfilling their packaging requirements in the recart form. The company is currently having test runs and the plant is expected to come online in

February 2023. The company hopes to increase the use cases for their products with the help of this packaging method going forward.
D)PECTIN

Pectin is a natural compound extracted from different sources of vegetative origin. Pectin is used as a gelling and thickening agent

where it gives jelly like consistency to jams and marmalades which would otherwise have been sweet juices, In medicinal use, it is one of the key ingredients used in Kaopectate along with kaolinite which is a medication used to combat diarrhoea.The amount of pectin which is

generally present in fruits and vegetables is as follows:
1)Apples - 1-1.5%
2)Apricots - 1%
3)Cherries - 0.4%
4)Oranges - 0.5 - 3.5%
5)Carrots - 1.4%
6)Citrus peels - 30%
7)Rose hips - 15%

-The main raw materials which are generally used for pectin production are dried citrus peels or apple pomace, both of which are by-products of juice production. Pomace from sugar beets is also used to a small extent.

-In India, almost 95% of the pectin requirement is met by imports, the regions being the US, Brazil and China out of which China is the major region. The landed cost of imported pectin from China is Rs 1200-1400/kg while the company can get it at Rs 750-900/kg.

When mango is pulped, almost 50% of mango is wasted and has to be disposed off in the form of skins and kernels. This waste disposal comes at a cost.

-Taking this point into consideration,the company had incorporated a JV by the name of Beyond Mango Pvt Ltd in 2021 through

which they plan to manufacture pectin using the mango waste which is generated in their production process. The company has planned to put up the pectin manufacturing facility at Chittoor in Andhra Pradesh which is one of the largest mango pulping belts in India. Some large MNCs

and a few companies in India have approved the lab test results of the company. The whole idea of this capex project is to enter into a value-added segment and mitigate the challenge of managing waste and ensuring future sustainability.

E) GENERAL BUSINESS OUTLOOK

There have been new entrants in the beverage market with Reliance Retail acquiring the Campa brand, Tata Consumer Products going aggressive with Fruski and ITC planning to gain market share with B natural. Several other companies have planned to

launch their own branded beverages. Pepsi and Coca-Cola who are beverage giants are planning to expand their capacities in India and abroad. These are favourable tailwinds for the fruits and pulp sector. As a result of these tailwinds, existing branded beverage players would want

to enter into long-term supply contracts to ensure a continued supply for their growth. The company is expecting a rise in demand in other processed fruits and vegetables such as guava, tomato, chilli etc. Tomato pulp demand is expected to increase going forward as a lot of

business is shifting from China to India.
-The company has planned to double its spray dried powders plant capacity from 550 MTPA to 1100 MTPA with the capacity expected to come online in February 2023.

-The company has seen a significant rise in demand for their spray dried powder products and with the incremental capex coming online in February 2023 they plan to cater to this significant rise in demand. People right now have started shifting from sugar substitutes to other

healthier options such as honey and other fruit powders in the beverage and allied industries which is a positive trend for the company

-The company is expecting a shift in demand for B2B frozen foods from China to India. The company has just commissioned its new cold storage

facility which is expected to be more efficient than the ones based on older technologies.With the help of this new cold storage facility, the plan of the company would be to make high quality frozen food products which will help them to cater to this increase in demand

due to the demand shifting from China to India.

6- RISKS
The key risks faced by the business of the company are:
A- The major raw materials for the company are mango and tomato and any price fluctuations in these products will affect the margins of the company.

B- As majority of the company’s products are exported and the company exports to a wide variety of regions, It faces the risk of fluctuations in exchange rates which may decrease the value of the exported goods of the company.
C- The company has a high customer dependence as

PepsiCo and Coca-Cola which are 2 of the oldest clients of the company together contributed 28% to the company’s sales in FY22. The company may face some problems if these 2 clients face a downturn in their business.

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