Hindustan Foods: The preferred partner of choice

To start off today's article can you guess what Hindustan Unilever, Bata, and Bombay Shaving Company have in common? Well, Hindustan Foods, the unsung hero of the FMCG industry, is the contract manufacturer shared by all three businesses and many others. But what exactly is a contract manufacturer, and how does it cater to so many well-known names in the industry? Let’s understand.

A contract manufacturer is similar to a unique factory that produces goods for other businesses. They use their machinery and trained personnel to transform ideas into tangible goods. They take care of the tedious task so that businesses may concentrate on other matters. It's comparable to having a supportive friend who can make your ideas come to reality.

Speaking about the contract manufacturing industry, as seen in the graph below, it was valued at $246.51 billion in the year 2022 and is expected to grow to $512.74 billion by 2030, a CAGR of 9.6%.

Let's learn more about this silent participant in depth, but first, let's examine the possibilities for the sector.

Overview of the FMCG industry

The Fast-Moving Consumer Goods (FMCG) market, which includes a wide range of everyday products, is a dynamic and highly competitive sector. FMCG goods are known for their quick turnover, low margins of profit, and high-volume sales. Products from this sector include food and drink, toiletries, home goods, and personal care items. 

The FMCG industry, which focuses on satisfying consumers' daily needs and wants, serves both urban and rural markets. To ensure that products are delivered to customers on schedule, it significantly relies on effective distribution networks. Constant innovation, aggressive marketing tactics, and a strong focus on brand awareness are the industry's driving forces and as a result of which the total revenue of the FMCG market is expected to grow at a CAGR of 27.9% through 2021 to 2027, reaching nearly US$ 615.87 billion as seen in the graph below.

FMCG companies constantly adapt to changing trends and demands. Additionally, factors like globalisation, urbanisation, and digitalization have significantly influenced the industry's landscape, prompting companies to adopt new technologies and explore e-commerce platforms. Overall, the FMCG industry is characterised by its fast-paced nature, consumer-centric approach, and relentless pursuit of customer satisfaction. 

On a positive note, India has a huge headroom for FMCG’s growth as the country has low FMCG per capita consumption even when compared to other emerging nations like Indonesia, China, the Philippines and Thailand. This low penetration manifests across many FMCG categories like Milk Food Drinks, Face Wash, Body Lotions, Washing Liquids, Dishwash Liquids, Hair Conditioners, and Body Wash among others, leaving enough room for growth. Time to bring the “unsung hero” to the centre stage. Let's narrow down the image and know more

About the company

Hindustan Foods is one of the largest, diversified and organised contract manufacturing companies in India. When I say “Diversified” they have taken it quite literally, from breakfast cereals to toilet cleaner to footwear to mosquito mats, they have a facility for the production of all these products.

This company quickly became a pioneer in contract manufacturing for the FMCG industry. They started small by initially producing baby foods, but with the acquisition and their expertise in contract manufacturing, they have grown into a significant player in the industry with multiple plants and a remarkable journey. 

In a nutshell, let's go through their accomplishments:

1983-84: Established as a joint venture between Glaxo India Ltd. and the Dempo Group, with a manufacturing facility in Goa dedicated to producing Farex products.
2012-13: Entered into a strategic partnership with the Vanity Case Group of Companies. 
2013-14: Signed agreements with Danone and PepsiCo to manufacture and supply food products from their Goa facility. 
2015-16: Raised capital and received investments from Sixth Sense Ventures and other stakeholders. 
2016-2017: Acquired Hindustan Unilever Ltd.'s shoe manufacturing unit, expanding its client portfolio to include brands like TBS, Gabor, and Richter, and later adding Steve Madden, US Polo, Hush Puppies, and Arrow. 
2017-18: Acquired Reckitt's plant in Jammu and entered a manufacturing agreement for the brand 'Mortein' for 7 years. 
2018-19: Merged its Hyderabad detergent powder manufacturing unit into the company, acquired a shoe manufacturing unit in Mumbai, acquired a significant stake in ATC Beverages Private Ltd., and started production at its Coimbatore plant for tea, coffee, and soups blending and packaging.
2019-20: Raised equity, began producing liquid detergent, and invested in manufacturing facilities for floor and toilet cleaners. 
2020-21: Established a plant for Reckitt to manufacture disinfectant toilet cleaner and surface cleaner, started projects for bath soaps and detergent bars, and initiated work on an F&B plant. 
2021-22: Began production of floor and surface cleaner, continued projects for bath soaps and detergent bars, initiated projects for sports and knitted shoes, acquired a colour cosmetics plant, and received approvals for mergers and arrangements. 
2022-23: Acquired Reckitt Benckiser Scholl India, set up a new shoe factory, and commenced commercial production of an ice cream plant.

Let me tell you that Contract manufacturing works on high volume and low margin. They have three different types of business models, including dedicated manufacturing, shared manufacturing, and label private label marketing. Let's quickly understand each one.

1. Dedicated manufacturing: In this model, HFL takes full responsibility for the manufacturing process from start to finish based on the specific needs of the Principal Company. HFL handles all the expenses and investments, allowing the customers to focus on their core operations. This model involves a long-term agreement between HFL and the Principal Company.

2. Shared Manufacturing: In this model, multiple companies share the same manufacturing facility for an extended period. The facility does not belong to just one Principal Company. Companies might lower prices and overhead expenses by sharing the facilities. Strict confidentiality laws are put in place to safeguard exclusivity and guarantee that rival items created in the same factory don't leak information.

3. Private Label Manufacturing: Under this model, HFL develops and owns the product formula specifically designed for Private Labels. They offer customised alternatives at affordable pricing and comprehensive turnkey solutions for private labelling. With the help of their skilled team of designers, HFL creates unique brand identities for the products.

Product Portfolio

The company's manufacturing portfolio encompasses a wide range of products, showcasing their diversity and breadth. They cater to various industries, including:

1. Food and Beverages: Their offerings include popular breakfast cereals, nutritional drinks, and other food and beverage products. Notable examples are Horlicks and Boost, which are well-known brands under Hindustan Unilever (HUL).
2. Home Care: The company provides a range of household cleaning and maintenance products.
Beauty and Make-up: They specialise in creating beauty and makeup products, offering a wide array of cosmetics, skincare, and personal care items. 
3. Personal Care: With a focus on personal well-being, the company manufactures an extensive range of personal care products. These include items like shampoo, shaving cream, and other grooming essentials, catering to various needs and preferences.
4. Health & Wellness: This category includes nutritional supplements, wellness drinks, and other health-focused offerings.
5. Leather and Sports Shoes: The company manufactures high-quality leather goods and sports shoes, catering to the fashion and sports industries. 
6. Pest Control

Their strong client base includes renowned companies such as Reckitt, Danone, Bata, Emami, GlaxoSmith, Himalaya, Gabor, Godrej, Tata Consumer, Scholl, Arvind Fashion, Zydus Wellness, Wipro, PepsiCo, Marico, ITC, and Bombay Shaving Company. These partnerships demonstrate their reputation and trust within the industry.
Overall, the company's wide range of products serves diverse industries, aiming to meet the needs of consumers in various aspects of their lives, be it nutrition, personal care, home care, or pest control.

Shareholding Pattern

Let's look at the company's ownership structure.

Financial Metrics

The company set a revenue target of ₹2000 crore for the year 2022 and was successful in achieving so. And similarly now they aim to reach a revenue of ₹4000 crore by 2025.

The revenue increased to ₹2603 crore in FY 23 from ₹2026 in FY 22. And the PAT increased by nearly 59% to ₹71 crore in FY 23 from ₹45 crore in FY 22. 

Below is the graph representing the past five year’s Revenue and PAT. Clearly it is following an uptrend and is increasing organically.

The graph below shows the Earning per Share for the past 5 years:

Company’s Capital Expenditure and Strategic Acquisitions

Other key highlights and the investments made by the company are stated below:

• By purchasing ATC Beverages in 2019, the company entered the beverage market. They showed great confidence in this sector. In a recent conference call, they announced their plans to establish a juice factory in Guwahati for a prominent national player. Although the client's name is usually kept confidential, it was revealed that they were setting up this factory for Dabur. The investment for this project amounted to approximately ₹25 crore.
• Additionally, they joined forces with major multinational companies in the industry to manufacture two of their brands at a facility located in Mysuru. 
• In May, the company's soap and bars facility in Hyderabad commenced commercial production marking the beginning of their soap manufacturing operations.
• They invested around ₹30 crore in AeroCare Personal Products LLP, a company specialising in the production of various colour cosmetics, including lipsticks, eye makeup, face powder, lip gloss, oral care, and aftershaves.
• The company then merged Coimbatore's Malted Beverages packing unit with ATC Beverages Private Limited. The merger required an investment of ₹45 crore.
• Expanding their product range, the company ventured into the production of injection-moulded sandals and flip-flops with an investment of approximately ₹10 crore.
• In terms of infrastructure, notable investments were made in an ice cream plant in Uttar Pradesh (₹125 crore), a soap plant in Hyderabad (₹150 crore), and a plant dedicated to healthcare and wellness products (₹100 crore).

Through these strategic moves and investments, it can be interpreted that the company is committed to diversifying its portfolio and strengthening its presence in various sectors. 

What Sets Them Apart?

1. Flexible and Cost-Effective Operations: Due to its flexible and economical operations, Hindustan Foods differentiates itself from its rivals. This implies that they manage the complex and pricey machinery required for manufacturing on behalf of their clients. Customers may concentrate on their main businesses as a result, saving money on equipment purchases and overhead expenses. The large-scale manufacturing capabilities of Hindustan Foods enable customers to reduce capital expenditures and associated costs.

2. Consistently Delivering Top-Quality Products: Hindustan Foods is renowned for its constant commitment to providing high-quality goods. They accomplish this by consistently evaluating their procedures and carrying out rigorous internal quality audits. To ensure that their products fulfil the appropriate quality requirements, they also follow external standards and laws. Hindustan Foods establishes long-term relationships with its clients by continually providing high-quality goods.

3.Comprehensive Range of Services: Hindustan Foods sets itself apart by providing a wide variety of services. For the needs of their clients seeking contract manufacturing, they provide a one-stop shop. As a result, they offer assistance with a range of tasks, such as product creation, testing, production, and distribution. Hindustan Foods can provide a variety of solutions to assist customers achieve their goals while also reducing costs thanks to their wide manufacturing facilities and capabilities.

4. Meeting Licensing and Import-Export Needs: An experienced team at Hindustan Foods is dedicated to handling the company's licensing and import-export needs. This guarantees that all necessary laws and regulations are followed when creating new products. Hindustan Foods enhances the value of their service offerings by efficiently managing licensing and import-export procedures. Because of their knowledge, they can guarantee compliance and quality assurance while giving clients a seamless experience.

The Bottom Line

The expenditure and the acquisition are crucial for a sustainable business for Hindustan Foods. As the preferred partner for renowned brands, they generate maximum revenue through dedicated manufacturing. Investing in Hindustan Foods is like adding a secret ingredient to your portfolio for guaranteed success and a sprinkle of FMCG magic! Choose wisely and Happy Investing!

*Disclaimer: The stock discussed above isn't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.