I was all prepared to write to you saying that 2019-20 was a watershed year for yourCompany. That our quarterly turnover of Q4 of 2019-20 was higher than the full yearfigures of 2018-19. I would have liked to highlight that the Company posted its best everEBITDA and PAT numbers. I would have liked to discuss about how the Brawns' at yourCompany are powering the Brands to reach newer markets and in turn taking your Company tonewer heights.
But fate had other plan for us. We've spent the last few months using the same Brawnnot to pursue growth but to navigate stormy seas.
This Annual Report is dedicated not to the financial performance of your Company butto the fantastic set of people who have fought at the frontline of the nCoV 2019 battlewith scant recognition. I am humbled to be a part of the team that went to work when theentire country was too scared to step out of their homes. I am humbled to be a part of theteam that managed to get the supply chain moving at a time when the wheels of the entiretransport industry were jammed. I am humbled to be a part of the team that ensured thateven the smallest vendors were paid digitally at a time when the entire payment systembased on sending cheques through courier was broken.
My message this year is dedicated to this band of brave Argonauts and their stories.
Navigating through nCov 2019
The unanticipated outburst of the nCoV 2019 impacted us just like it did to mostindustries in the world. While many struggled to survive some fought back to achieve. AtHFL we witnessed a number of real time stories of struggle of endeavour of triumph -amidst the restricted travel and movement cancelled order books goods blocked intransit the labour migration and all the hardships that our frontline faced to circumventthe lockdown and return to the continuity of our operations.
Our factory in Goa faced resistance from the local villagers when we resumedoperations. In spite of the District Collector's permission the neighbouring villagesfeared that the movement of trucks and workers will spread infection. They demonstrated infront of the factory asking' us to stop. Arun Preenza our Factory Manager resolvedthe issue amicably convincing the villagers about our obligation to continue manufacturingInfant Food and how stopping our factory would lead to mothers' inability to purchase thenecessary nourishment for their infants.
Most footwear orders for the season were suspended by our international customers. Wetried being resourceful while in the tight spot. Skilled workers at our Puducherryfacilities were re-skilled and equipment put to good use. We soon started makingdouble-layered face masks at our Shoemaking units and shipped them to our own works and toothers who needed them.
The Coimbatore plant was in the eye of the storm as Tamil Nadu (TN) was one of thestates which saw maximum number of cases and Coimbatore was second most affected city inTN. The HR Managers had to convince the staff that it was safe to return to work and alsospend a lot of time assuring the worried family members. The plant also distributed teapackets to various migrant labourers stranded in the area through the village Tehsildarliving up to the adage - No matter what is happening in your life you always offer a cupof tea!
Shanmughan our Factory Manager at the Tea and Coffee plant drove from Hyderabad tothe border and then walked over 5 kms to the Telangana-Tamil Nadu border to reach theCoimbatore factory. Satish our Factory Manager was quarantined when he reached the Jammuplant while Ranjeet Khavre from the Projects team was stuck in Hyderabad for 10 weeksaway from his family in Mumbai.
When everything else seemed falling in place Supply Chain snags crippled us for weeks.Goods moving in and out got blocked in transit drivers abandoned vehicles importedmaterial got held up at the docks the all-important food chain came to a halt within aday of the lockdown. Hundreds of trucks carrying raw material and packing material werefrozen by the Government officials on highways and toll booths. Trucks that managed tomove had to wait outside factories as there were no permissions no loaders. Over 100loaded trucks were waiting outside only the Hyderabad plant as unloading was not allowed.Our factory provided meals and resting places for drivers who too were confined for days.The Leather Shoe-making units in Puducherry lost over 6-8 weeks as neither the finishedgoods could move nor new production was possible. Production at the Coimbatore factorybegan only in May while Jammu factory faced closedown because the Government permissiontook time.
Our Supply Chain warriors at the HO including Shyam Dongre Kalpana Salvi and VijayPansare geared up to set things right coordinating with all the factories and vendorsacross the country mapping routes persuading transport contractors paying up detentioncharges organising alternative drivers completing the mammoth paperwork ensuring thematerial moved. Our robust ERP system aided great deal. Within weeks our Hyderabadfactory was not just back into action it did a record production. We took 2 months to getback on track. But to recover completely it will take time longer than expected. Theproblems are overwhelming unending.
The Finance and Accounts Teams also had a tough time as the HO was closed and thecoordination with the commercial team at factories was a herculean task. Many smallvendors who were not comfortable with digital payments had to be handheld and walkedthrough the process. Vinayak Mhatre Sham Gunjal and Chetan Naik rose up to the occasionand along with their respective teams ensured that the already over-burdened supplychain got the requisite funds to keep it moving. Additionally our Accounts and Audit Teamheaded by Vinay Gaitonde who required triplicate copies of all documents have now movedto a completely digital process and earned the kudos of environmentalists all over theworld.
Now coming to the financial performance of your Company in the year 2019-20 we arepleased to report a record performance. This marked another pivotal year in shaping ourbusiness model for stronger profitable and sustainable growth. During the year weleveraged on our strong business model diversified Customer base and product portfolio.Moreover addition of new product categories and expansion of existing capacities barringthe last quarter was also on track. Our collective and consistent efforts towards clientacquisition product addition and capacity expansion done in the past bore its fruitsthis year. Our revenues pushed upwards this year to Rs. 773 cr increasing by 57% comparedto the last fiscal.
In our last year's report I had envisaged a leap in our performance in 2019-20 toreach an impressive Rs. 1000 cr topline milestone. This was on the back of our consistentgraph of growth so far. However I have to say that we missed the target. Though we didlose 10 days of sale in the last quarter - that is not the sole reason for missing thetarget. Our project in Hyderabad was delayed by a couple of months and the ramp up tooklonger than we expected. Additionally the acquisition of the Vasai shoe unit has been adampener and in retrospect a decision gone awry. ATC Beverages our new Associate Companyin Mysuru had signed on a bunch of new customers but was unable to convert that potentialinto business due to the wrong timing of the pandemic - the entire summer season for thebeverages was wiped out! However I am pleased to inform that we have started ramping upand I am confident that we should be able to make up for the lost time!
We posted a strong profitability during the year wherein we clocked an EBITDA of Rs.57 cr in 2019-20. Our PAT grew by 90% to Rs. 23 cr in 2019-20 compared to Rs. 12 cr inthe previous year. This result was on the back of the strategic decision includingmergers capex done in the recent years and strong operational efficiencies. All thesetogether are now starting to pay off.
The effective utilisation of the Capital resulted in a Return on Capital Employed(ROCE) of 13.41% in 2019-20 showcasing a multi-year growth trajectory. Moreover all thestrategic decisions in recent years contributed to strengthening value for ourshareholders as Earnings per Share (EPS) for 2019-20 stood at Rs. 12 an improvement of46% compared to the last fiscal. As we move forward we are keen on fulfilling thefinancial objectives not only in terms of growth but also in terms of the strength andefficiency of our balance sheet.
Our state-of-the-art manufacturing facilities at different geographical locationsfurther operated at optimum levels to meet our Client demands during the year. On theoperational front the following significant activities defined the year:
OBigned up to set up two liquid manufacturing facilities in Silvassa for a leading HomeCare liquid brand to manufacture around 20000 Kl of liquids
O Expansion of Coimbatore facility to commence coffee filling and packing
O Merger of the Hyderabad facility progressing well
Macro View on the Economic and Industrial Scenario
As we are aware the current macroeconomic indicators do not look good. Withuncertainty hovering around the lockdown extension and labour mismatches further delaysare likely to hamper the supply chain's march towards normalcy. Even the stimulusannounced by the Government and the RBI are provisioning for the credit to the stressedsectors post lockdown. However they don't absorb the losses or provide immediate relieffrom the impact of output cuts witnessed in the past 3 months and more. This has sent theeconomic growth prospects into a frenzy. From a decent mid-single digit growth projectionin 2020-21 earlier to a contraction ranging from 3% to as high as 5% - various ratingagencies and world bodies have downgraded the country's outlook on GDP - a stark contrastfor an economy which was in the recent past expected to continue its tag of the fastestgrowing major economy in the world.
This is likely to trickle down to most of the sectors in the economy not sparing theFMCG sector as well. Once considered a darling amongst sectors is now turning into whatwe could call as slow moving consumer goods' owing to its lowering demand. Theconsumption sector being an indicator of economic stability has started showing worryingsigns like slow offtake; liquidity pressures; softening of the multi-quarter volume growthearlier in the rural which not long ago was overshadowing the urban growth; a generaleconomic slowdown do not hold good signs for the longterm. Of course certainsub-segments like personal hygiene and indulgence food categories showcased a sharp spikeespecially during the first two months of the lockdowns due to the nCoV 2019. This couldjust be a near term aberration since likely cutbacks on the discretionary spending areexpected impacting the sector negatively going forward. This has even led the marketresearch agency Nielsen to slash the growth outlook for India's FMCG sector from itsearlier projection of 9-10% to 5-6% for CY 2020 owing to the impact of the deadlydisease. However our diversified Customer base across various product categories and arobust business model will only help us navigate through stormy seas like skilledsailors!
Post nCov 2019 World
At the time of writing this we are still unclear about what effects the pandemic willhave on the consumer behaviour and the manufacturing landscape of FMCG. However the onething that has clearly stood out in these months is that those brands who had a strongsupply chain were able to ensure that their product was available to the customers andwere able to gain market share at the expense of others who struggled with their supplychain.
Thus if I had to crystal gaze I would say that this should hasten the process ofdecentralisation of manufacturing that we as a Company have been talking about for thelast couple of years. Amid the nCoV 2019 lockdown wherein cross border movement of goodswas restricted our strategy of decentralisation and having multiple plants acrossmultiple states helped us tremendously.
The disruption of the supply chains has made it imperative for FMCG Companies to relookat the sustainability of their business partners and will also probably lead to someconsolidation in the contract manufacturing space. We believe your Company is wellpositioned to leverage these developments.
The emphasis of self-reliance and localisation of sourcing should further help ingenerating new opportunities for your Company. In addition any shift of the global supplychain away from China and towards India should also create further opportunities.
Your Management believes that with the tough situation forecasted as far as the GDPgrowth is concerned FMCG companies will also probably have to face some headwinds. Thiswill lead to companies taking a long and hard look at their investment plans andevaluating contract manufacturing as a preferred option to ensure that they conservecapital and deploy it for marketing their brands rather than manufacturing it themselves.We are beginning to see some effects of this and are confident that we should be able tounlock some of these opportunities in the times to come.
After the successful integration of the Hyderabad unit the Promoters of your Companyhave taken the steps to consolidate two more of the group companies. With thisconsolidation more than 90% of the business of the Promoters would be consolidated intoyour Company. We believe this is a right step and will go a long way to alleviate theissues of conflict of interest and protection of Minority Shareholder's rights.
As a responsible corporate we are working towards the upliftment of the lives that wetouch and have always believed in giving back to the society in which we operate.Continuing on this philosophy several initiatives were undertaken during the year. Theseactivities were spread primarily around education health and hygiene of the girl child.Our factories remain increasingly socially conscious and continue to involve towardscommunity engagement. During the pandemic your Company made all efforts to help thecommunity at large and around its factory locations whether by contributing towards PMCares or offering tea bags in Coimbatore and face masks in Puducherry. Going forward wewill encourage the factories to be more socially active and take initiatives that wouldlead to the creation of a better world around us.
On behalf of the Board I would sincerely like to extend my deepest gratitude to everysingle individual associated with us. I humbly thank our dedicated team of Management ledby experts for all the diligence and enthusiasm shown during the year. We look to thefuture with a gleam of confidence in our strong team to back us up. To our Shareholdersand Clients thank you for your continued trust and patronage. Your faith encourages us todo better while inching closer to the Teams' vision and goals.
Sameer R. Kothari