Contract manufacturing firm Hindustan Foods Ltd (HFL), whose business spans personal care, food and beverages, home care and leather, is leveraging the India consumption story by expanding through mergers and acquisitions (M&A) and quick capacity expansion.

It serves some of India’s most prominent FMCG brands such as Hindustan Unilever’s Surf Excel, Lakme, and Brooke Bond Taj Mahal, Reckitt’s Benckiser India’s Dettol, and Mortein, and Wipro Consumers’ Yardley London. Its products are not just limited to FMCG though. The company also serves Hush Puppies, Power and Arrow, and is looking at other areas as well.

In April-December FY22, the company’s revenue jumped 60% to ₹1,448.44 crore from ₹905.77 crore a year ago. Profit after tax increased 40% to ₹35.34 crore from ₹25.20 crore in April-December FY21. The company, ranked 127 on Fortune India’s Next 500 list, plans to more than double its turnover to ₹4,000 crore by 2024-25 on the back of a strong Q3 FY22 show.

“We are working towards our turnover target of ₹4,000 crore till 2025. We have clear visibility of doing ₹3,000 crore next year,” says Sameer Kothari, MD, Hindustan Foods.

On A Buying Spree

In line with the plan, the company is in the process of acquisitions in healthcare and wellness and personal care segments, and has lined up capital expenditure at its existing facilities.

Marking its foray into the OTC healthcare and wellness segment as a contract manufacturer, HFL acquired a 100% stake in Reckitt Benckiser Scholl India (RBSIL) for ₹75 crore in January. The facility, registered as an export-oriented unit, has been approved by the Medicines and Healthcare Regulatory Agency (MHRA), U.K. It currently exports to more than 20 countries. “HFL is expected to leverage the potential by expanding site utilisation and capacities and thus increase the share of business for its products worldwide from this site,” according to HFL’s investor presentation for Q3 FY22.

The company has also invested ₹30 crore in AeroCare Personal Products LLP. “Aerocare is currently manufacturing various colour cosmetics like lipsticks, eye make-up, pressed powders and lip gloss, and also oral care, after shave lotions and eau de toilette,” its investor presentation says. The management is confident of generating cash flow from the deals, which are likely to be finalised in the ongoing quarter of the current fiscal, in FY23. According to executive director Ganesh Argekar, the company is looking at a turnover of ₹100 crore each from the facilities in FY22-23. “With these acquisitions and the organic growth from our existing factories, we are confident about achieving the target of ₹4,000 crore of turnover by FY25,” the presentation adds. Kothari, meanwhile, is hopeful that the pharma business will add more value to the topline than personal care, and the current return on capital employed (ROCE) will be slightly higher because of the former’s market prospects. “Secondly, based on the consolidation exercise we see some benefit flowing to us in terms of becoming a global supplier to Scholl/Dr Scholl. Then the ROCE will get very interesting.”

Capex Calculations

The company has lined up an investment of ₹125 crore in its ice cream facility in Uttar Pradesh, and ₹10 crore in a shoe factory in Tamil Nadu, along with some investments in Mumbai. It also plans to put in ₹150 crore in home and personal care project in Hyderabad.

Sharing an update on the investments, Argekar says, “The Uttar Pradesh ice cream project is progressing well, and installation of machines has commenced. The company remains confident to start commercial production in the current quarter. However, the Hyderabad project has been delayed and it is now expected to be completed only by Q2 FY23.”

The delay in the Hyderabad unit is on account of a slowdown in the FMCG sector. Claiming that there will be no cost overruns in the project owing to the delay, Kothari says, “All our projects are earmarked and budgeted with our principals. Right from Day One, the entire timeline and the budget for the project are approved by our principals. Any cost overrun is passed on to our principals unless it is due to our inefficiencies. In case of inflationary concerns or any change in the macroeconomic scenario, it is passed on to the customer.”

The company is fully funded for the current acquisitions and capital expenditure. “We do not need to raise money for assets. If we get to a situation where new projects, new acquisitions come on line, we would definitely optimise the capital structure in terms of debt and equity before we hit the equity market,” says Kothari.

HFL plans to deploy the excess land bank and the unused land at its facilities to expand its existing contract manufacturing business for fast moving consumer goods. “At some point of time, we may look at other ways of monetising excess towards warehousing or other available options,” clarifies Kothari.

Going forward, the company believes consolidation will be the buzzword in the FMCG contract manufacturing space, and more M&A opportunities will come up within the next couple of years.

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