ADF Foods Limited (ADFFOODS) Q4 FY23 Earnings Concall Transcript

ADF Foods Limited (NSE:ADFFOODS) Q4 FY23 Earnings Concall dated May. 09, 2023.

Corporate Participants:

Irfan Raeen — Investor Relations

Bimal Thakkar — Chairman & Managing Director

Shardul Doshi — Chief Financial Officer

Devang Gamdhi — Chief Operating Officer

Analysts:

Ravi Naredi. — Naredi Investment — Analyst

Rishi Maheshwari — AKSA Capital. — Analyst

Pankit Shah — Dinero Wealth — Analyst

Faisal Hawa — H.G Hawa & Co. — Analyst

Unidentified Participant — — Analyst

Hatim Broachwala — JM Financial — Analyst

Pritesh Chheda — Lucky Investment Managers — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the ADF Foods Limited Q4 and FY ’23 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Irfan Raeem from Orient Capital. Thank you and over to you, sir.

Irfan Raeen — Investor Relations

Thank you, Aman. Good evening, everyone. On behalf of ADF Foods Limited, I extend a very warm welcome to all participants on Q4 and FY ’23 financial results discussion call. Today on the call, we have Mr. Bimal Thakkar sir, Chairman and Managing Director, Mr. Shardul Doshi, CFO; Mr. Devang Gandhi, COO; Mr. Sumer Thakkar, Senior Manager, Business Development and Strategy.

I hope everyone had an opportunity to go through our investor deck and press release that we have uploaded on exchanges and on company’s website.

I would like to give a short disclaimer before we start with this call. This call contains some of the forward-looking statements, which are completely based upon our belief, opinion and expectations a of today. These statements are not a guarantee of our future performance and involve unfortunate risks and uncertainties.

With this, I hand over the call to CMD sir, over to you sir. Thank you.

Bimal Thakkar — Chairman & Managing Director

Thank you, Irfan. Good evening, everyone. I’m pleased to welcome you all to our Q4 and financial year ended March 31, ’23 earnings conference call. It gives me great pleasure to announce that FY ’23 standalone and consolidated revenue is the highest in the history of our company. Also the standalone and consolidated PAT for the year is the highest in the history of our company. This shows that the demand for our product continues to remain strong and our efforts to improve the product portfolio, introduce new innovative products and meaningful investments in marketing are giving positive results.

On a standalone basis, we recorded revenue of INR353 crores for the financial year ’23, an increase of 17% year-on-year. Standalone EBITDA and PAT for the year are INR76.8 crores and INR60 crores respectively. I’m pleased to announce that the Board has recommended a dividend of INR5 per share. Also the Board has approved a sub-division of the equity shares of the company having face value of INR10 each into shares having face value of INR2.

During the year, we’ve launched 35 new products under our flagship brand Ashoka and have forayed into two new categories, plant-based meats and frozen desserts. Our flagship brand Ashoka has now crossed INR200 crores in revenue, growing at a CAGR of 33.2% over the last two years.

We continue to strengthen the brand with meaningful advertising and marketing that will lead to an increase in shelf space. Further, the Board has approved investment in Telluric Foods India of up to INR5 crores in 50 lakhs optionally convertible redeemable preference shares having a face value of INR10 each considering the future business plans of this subsidiary. This is a strategic investment to develop the Soul brand over the coming years. The company is getting more D2C listings and is looking at extending its product offerings with an urban centric focus.

During the year and particularly in the last two quarters, we have seen softening on trade costs, which have had a positive impact on our margins, and we are monitoring these costs closely. There are a few inflationary pressures on some key raw materials in the same quarters, but we are working on mitigating them by continuing cost optimization, better product mix, and improved operational efficiency.

On the operational side, we completed debottlenecking efforts at our existing plants in Nadiad and Nashik. We had incurred a capex of INR5 crores, which will yield a potential revenue of INR30 crores. Our greenfield expansion in Surat is expected to be completed within 18 months from the time we break ground, which is anticipated in Q2 of financial year ’24. The growth will expand our frozen food capacity and unlock the next level of growth.

On overseas operations, we have made significant investments in our subsidiaries in creating infrastructure and improving supply chain, the result of which are expected to yield in the future. Also ADF USA, one of our subsidiaries, did not contribute last year due to supply chain issues, which led to an adverse effect of INR7 crores in profitability.

We are closely working on the situation to mitigate these losses. We remain focused on leveraging our expertise to drive growth and profitability in the future. That’s all from my side for the moment.

I will now hand over the call to Shardul for the financial updates. Over to you Shardul.

Shardul Doshi — Chief Financial Officer

Thank you, Bimal. Good evening, everyone. Thank you for joining us today. Let me brief you on the financial highlights for the quarter and financial year ending March 31, 2023.

Standalone Q4 FY ’23 revenues stood at INR98.2 crores, which is an increase of 19% Y-on-Y. Standalone EBITDA for the quarter is INR28.3 crores, an increase of 99.8% year-on-year with a margin of 28.8%. PAT is INR20.3 crores, an increase of 71.8% year-on-year with a margin of 20.7%.

On a full-year basis, standalone revenue is INR353.3 crores, a growth of 17% year- on-year. As Bimal mentioned, this is the highest standalone revenue in the history of the company. Also standalone EBITDA for FY ’23 is at INR76.8 crores with a margin of 21.7% and PAT is INR60 crores with a margin of 17%. It is the highest standalone PAT and PAT margin on a full year basis for the company.

In Q4 FY ’23, consolidated revenue grew by 13.8% to INR123.1 crores year-on-year, while EBITDA and PAT grew by 73.2% to INR26.5 crores and 42.6% year-on-year, INR16.1 crores respectively.

For FY ’23, consolidated revenue grew by 6.9% to INR450.3 crores year-on-year while EBITDA and PAT grew by 21.1% to INR80.6 crores and 15.1% year-on-year at INR55.9 crores respectively.

The consolidated PAT has reduced because of the following reason: one, in FY ’23 ADF Foods USA incurred a loss of INR5 crores on account of supply chain disruption. For FY ’22, this business generated a top line of INR32 crores and net profit of INR2.5 crores.

Further, in FY ’21 full year operation, revenue was INR53 crores and net profit was INR6.5 crores. So the impact from the previous year is almost INR7 crores at a profit level. In addition to this, the company is making meaningful investments in sales and marketing to create awareness for ADF’s Soul brand in India. This has resulted in a loss of INR2 crores.

This is all from my side. We can now open the floor for question-and-answer session. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] First question is from the line from Ravi Naredi from Naredi Investments. Please go ahead.

Ravi Naredi. — Naredi Investment — Analyst

Thank you, Bimal. Fantastic result you have posted so far. Sir, in USA we get loss in the state [Phonetic] that we are expanding there. So what is our main agenda for US and what things are in your mind for expanding the company [Phonetic]?

Bimal Thakkar — Chairman & Managing Director

So, thank you, Mr. Ravi. The US, we have three subsidiaries in the US. So, the subsidiary which has incurred a loss is ADF Foods USA, which is the one which is handling our PJ’s and Nates business. There we’ve had a problem with our supplier because these products are made locally in the US. And we’ve had some issues with them and we are in litigation with them in the US, which is why that business did not contribute and actually is the main reason for the losses.

The other two subsidiaries are in fact, one is our distribution business, which has grown significantly since we’ve taken over, one of our distributors in the US. And that business for us is we are moving up the value chain; we are supplying directly now to the retailers having better control of distribution of our products, which has seen growth of our Ashoka brand also in the US because of that. And the warehouses are — the investment in the warehouses is for that business.

The third subsidiary is our agency subsidiary, where we’ve got the Unilever and Ekaterra brand agency. That business because of the transition, Unilever sold this business to Ekaterra last year, and in the transition, there were certain delays in supplies, which led to a lower sale. So these two subsidiaries of ours, the ADF Holdings and the Vibrant Foods subsidiaries are very much on track and we will continue to invest and grow that business and that’s going to be apparent — you’ll see the results over the coming years.

The ADF Foods USA, we are looking for alternate suppliers and hope to get this matter resolved in this year.

Ravi Naredi. — Naredi Investment — Analyst

So this supplier is in litigation. So how much the litigation fees?

Bimal Thakkar — Chairman & Managing Director

Shardul?

Shardul Doshi — Chief Financial Officer

I think so far we’ve spent probably $60,000 on the fees, $60,000 or $75,000 on the lawyer fees so far.

Ravi Naredi. — Naredi Investment — Analyst

Okay. So by what time we will settle this case — likely to settle?

Shardul Doshi — Chief Financial Officer

So they’re hoping before September, I mean, the matter is in litigation, it’s in the courts. So we hope to have some resolution but the timing is not really in our control. But we are looking for alternatives for suppliers. So we hope to be able to close down — close out on one of them again in this year itself.

Ravi Naredi. — Naredi Investment — Analyst

So this financial year ’24 will generate any revenue — any profit for US business?

Shardul Doshi — Chief Financial Officer

Yes, that is what our endeavor is and they are pretty sure we should be able to generate profits in the US business.

Ravi Naredi. — Naredi Investment — Analyst

Okay. And sir, you have — this ADF Soul you have making big in India. So are we doing any advertisement or what strategy we are following? So there was a loss of INR2 crores [Phonetic] in this business.

Bimal Thakkar — Chairman & Managing Director

So for ADF Soul, that’s the brand for India, we are going to launch it. We did a test launch on e-commerce platform. So we were on Amazon and we had our own website through which we were selling. Now the plan is to expand our distribution on e-commerce. And the investments what we are making here on the brand building is on advertising, on digital media, and this business will be in an investment mode for the next two years.

And then after that, we expect to move into the supermarket or modern trade business. And then last would be in the general trade. So in the next 5 years, we should be across all verticals in the Indian market.

Ravi Naredi. — Naredi Investment — Analyst

So this Patanjali we have [Technical Issues] revenue, which has been generated for company in a big way.

Bimal Thakkar — Chairman & Managing Director

So you know it has, I mean, not in a big way, we’ve done about GBP1 million, I think close to GBP1 million in revenue last year. The business started off late. Our first shipments only reached in May of last year. And we are now looking at some more products within the portfolio to be added on. And we expect this to continue to grow. We are hoping for at least 100% growth this year on that business as well.

Ravi Naredi. — Naredi Investment — Analyst

So this Patanjali we are looking only for Britain, not for US.

Bimal Thakkar — Chairman & Managing Director

No, not for the US. We have for UK and we have for Europe as well. But for Europe, we are working on certain labeling requirements. So we hope to have that completed by September of this year because we have to work with the company and the EU regulators to see what products can come in and how the labeling has to be done. So that process takes a little bit of time. So we hope to start the Europe business also in the second half of this year.

Ravi Naredi. — Naredi Investment — Analyst

With such hardship in the business, you had given a very fantastic result, Bimal. You are a magician here. So at this Surat facility, how much capex will be needed and how much turnover it may generate when complete?

Bimal Thakkar — Chairman & Managing Director

So, Ravi, we are looking at breaking ground from next month. And we expect this facility to be ready where we will have commercial production within 18 months after we break ground. The investments out there are going to be done in two phases. Phase 1 will be a INR50 crores investment. Phase 2 will be another INR30 crores investment. And on the completion of Phase 2, we expect this business to contribute at least 3x, minimum 3x of what we’ve invested. So around INR250 crores is what we expect minimum that this plant will give us in capacity.

Ravi Naredi. — Naredi Investment — Analyst

Okay. Thank you very much and all the best from us.

Operator

Thank you. The next question is from the line of Rishi Maheshwari from AKSA Capital. Please go ahead.

Rishi Maheshwari — AKSA Capital. — Analyst

Hi. Thank you so much. And congratulations on a good set of results. I had two questions. The first one is on a presentation slide that you had pointed on page number — Slide 21. This is on Ashoka brand. It seems like it’s done fantastically well from INR119 crores to INR211 crores over the last two years. Context to that, if I had to take the total pre-packaged foods in FY ’21, this was about INR293 crores.

So the non-Ashoka branch in that year would have been about INR174 crores. From there, when I look at the total pre-packaged foods in the financial year 2023, that is INR362 crores. I subtract the Ashoka branch from there, about INR211 crores, that leads to me on the other brands contribution to the total revenue is about INR151 crores. It seems like all the other brands seems to have declined over the last two years from INR174 crores to INR151 crores. I’m sure there’s some context to it and you’ll be able to explain because from what I understand whether it was Camel, whether it was Truly Indian or whether it is Aeroplane, all of them had some form of growth over the last two years.

So if you can explain, how do you explain this decline in growth over the last two years on non-Ashoka brands and how do you see this pre-packaged foods growth going ahead? Thank you.

Bimal Thakkar — Chairman & Managing Director

Okay. So your assumption on the balance part after removing the Ashoka revenue is not absolutely 100% correct because we also have B2B and private label business. So if you look at our whole business of the standalone entity, 30% of our revenues comes from B2B and standalone — I’m sorry from B2B and private label and the 70% is the branded business. Okay? Within that 70%, Ashoka is the main part of our business and all the other brands have grown. Shardul, you may want to share what percentage growth has been done for the other brands.

And as far as going forward, we expect our Ashoka brand to continue growing aggressively. The Truly Indian brand also is another brand, which we are targeting towards the mainstream. So Ashoka brand caters to the South Asian diaspora worldwide. Truly Indian brand is targeted to the non-Indians or the mainstream clientele. And it’s currently launched in Germany and in the US. And now we are expanding our product portfolio pipeline in the Truly Indian brand in the US. So we expect growth in that brand as well in the years to come.

And Shardul, you want to just give a flavor of the other brands, how they’ve grown in the last year?

Shardul Doshi — Chief Financial Officer

Yes. So, Rishi, the B2B business which included the bulk as well as the private label, we used to do almost 32% of our total revenue a few years back — more than 30% and down to 25%. Of course, we want to grow this business also, but all our branded business in fact, including your Camel, Aeroplane and Truly Indian, they’ve all grown in these three years other than the Ashoka business also.

Rishi Maheshwari — AKSA Capital. — Analyst

Okay, fair enough. And so how do you see this growth going forward? What is the expectation in terms of growth for the prepackaged food? Should we assume that this will be mid-teen growth or it can be higher at 20% or so?

Bimal Thakkar — Chairman & Managing Director

So, I mean, our endeavor is this standalone business of ours, we want to double it every three years. So we should be looking at growth of about 25% year-on-year. That’s what our endeavor is. Last year, I think we’ve grown this by about 22% or 23% last year.

Rishi Maheshwari — AKSA Capital. — Analyst

Fair enough. Thank you so much. I’ll come back in the queue.

Operator

Thank you. The next question is from the line of Pankit Shah from Dinero Wealth. Please go ahead.

Pankit Shah — Dinero Wealth — Analyst

Hi, thank you for the opportunity. So actually wanted to get some clarity on the margin. So you mentioned that we’ll be at the similar levels what we did in FY ’23, right, for the consolidated business.

Bimal Thakkar — Chairman & Managing Director

Yes.

Pankit Shah — Dinero Wealth — Analyst

So that’s around 18%.

Bimal Thakkar — Chairman & Managing Director

Correct.

Pankit Shah — Dinero Wealth — Analyst

Okay. But actually, if you see the raw material cost has been cooling [Phonetic] down, and further the freight rates are also corrected. So probably the right time for our margins to shoot up.

Bimal Thakkar — Chairman & Managing Director

The freight rates have softened and that’s what has helped us in the last year. Going forward also, we feel that the rates will be stable. Some of the raw materials have still not, I mean, there has been a reduction, but it’s still not at pre-COVID level, some of the raw materials. So there will be some pressure on the raw materials. And plus, because of the reduction on freight rates, etc., we have also passed on some benefit onto the consumers as well by doing some consumer offers.

So we are going to try and, — of course our endeavor will be to improve on the margins, but we feel confident we’ll be able to at least maintain these margins.

Pankit Shah — Dinero Wealth — Analyst

Okay. And the other thing I wanted to understand is what are the PLI benefits that we have booked in FY ’23?

Bimal Thakkar — Chairman & Managing Director

Shardul, you want to get that?

Shardul Doshi — Chief Financial Officer

So as far as PLI is concerned, we have booked INR8 crores of PLI income in FY ’23. I will just — what we have also done is in FY ’22, we had booked INR7.5 crores of PLI, which government later on came up with a change in the scheme where the 5-year block of PLI which was from FY ’22 to FY ’26, they changed it to FY ’23 to FY ’27. This has happened post our declaration of results last year and hence we had to do this in the current financial year. So when you see net PLI income is only INR50 lakhs in the current financial year.

Pankit Shah — Dinero Wealth — Analyst

Okay. And this is moved under other income?

Shardul Doshi — Chief Financial Officer

No, it comes as income from operations.

Pankit Shah — Dinero Wealth — Analyst

Okay. And this will be a complete INR8 crores next year, INR8 crores or plus [Phonetic].

Shardul Doshi — Chief Financial Officer

Yes.

Pankit Shah — Dinero Wealth — Analyst

Okay. On coming back to the PLI part, so have we increased our spending into international branding and marketing?

Bimal Thakkar — Chairman & Managing Director

Yes, we have been increasing our marketing spends. So the marketing spends, what we do is we have a full 360 degree approach. So we’ve got digital, we’ve got television advertising, sampling, in-store promotions. So, yes, that is all. We buy shelf space. So all these things we have accelerated and increased our spends on this.

Pankit Shah — Dinero Wealth — Analyst

Okay. And are we yet to see the benefits coming out of it?

Bimal Thakkar — Chairman & Managing Director

Yes. This is an ongoing process in every market. As you keep launching new products, you have to promote them as well. So this will be an ongoing process and it is definitely helping the brand grow and the awareness of the products and the brand. becoming better and stronger.

Pankit Shah — Dinero Wealth — Analyst

Okay. Thank you so much.

Operator

Thank you. The next question is from the line of Faisal Hawa from H.E. Hawa & Company. Please go ahead.

Faisal Hawa — H.G Hawa & Co. — Analyst

We were in talks with two majors for a distribution agreement for US, any progress in that?

Operator

You are not very clear. Faisal, please use the handset, your voice is not clear.

Faisal Hawa — H.G Hawa & Co. — Analyst

Yes. You were in talks with two US-based companies — sorry, two companies for US distribution. Is there any progress on inking those agreements?

Bimal Thakkar — Chairman & Managing Director

So what has happened is right now in the US, we are — actually the whole Unilever business has been split into two. The new owners, Ekaterra, have signed a five-year contract — I mean, five-year agreement with us. So we continue on with the new owners, with Unilever they are continuing. And we are in conversation with one more, which we hope to complete off in the next few months. So, yes, we are very certain that we will be at least landing one more new company for distribution in the US.

Faisal Hawa — H.G Hawa & Co. — Analyst

So that is still the talks are ongoing?

Bimal Thakkar — Chairman & Managing Director

Yes, it’s right at the final stages, the agreement has to be signed. That’s — it’s more or less at that stage. There are certain FDA requirements. We want to make sure all that gets done before we sign-of. So packaging changes, certain formulation changes, all those have been underway and we now hope to get everything completed within the next month or two.

Faisal Hawa — H.G Hawa & Co. — Analyst

So like in general trade, which you said that you want to help increase the penetration in USA. What is going to be our overall strategy and how much have we penetrated so far in the US? That’s one.

And second is for modern trade like for Walmart and also, do you have any data as to how many stores you might be present in at this point of time and how many other stores which we can where there is an Indian diaspora, where we can probably aim to penetrate with our products and do you have any like schemes for universities where you know a lot of Indian students are studying? So are you trying to penetrate those areas also on an independent basis?

Bimal Thakkar — Chairman & Managing Director

Yes. So there are three verticals as you rightly mentioned. One is the — so the general trade is more what you’re referring to is, which caters to the South Asian diaspora. And our company has a very strong distribution network. We have two locations, which we are servicing directly, the retailer and the other locations that are being serviced by another 10 of our distributors in those markets. We continue to grow in that business. We continue to expand our presence on the shelves, increase the penetration and the width of our distribution in these stores.

The Ashoka brand primarily is sold through these outlets in the US. The second part is the mainstream part, which is modern trade, which you call. That is something the Truly Indian brand, as I mentioned earlier, that is the brand which we intend to grow in the US market. At the moment, it is a very negligible reach that we have there. We hope to expand that in the years to come and be a dominant player in there. So it’s not just the supermarkets. We are also targeting club stores like Costco and Sam’s Club, which also cater to the non-Indian diaspora or the mainstream diaspora. So that is still work in progress, but we see a huge runway on that in that market for us.

And the third one where you talk about the college stores and campuses, that falls under a different vertical. So the US is, — in the US market, there are different verticals for all this and different distribution channels. And this falls under the food service channel. And we have in fact just appointed a new head of food service who joins us from the middle of — in fact from May 15, which is next week. She joins in and our goal is to cater to the — get into the food service side, which means restaurants, college campuses, commissaries, and then there are convenience stores on college campuses. So that all comes under the food service side, and that will all be under the Truly Indian brand. So that’s also something which we are starting off now.

Faisal Hawa — H.G Hawa & Co. — Analyst

So would it be a good statement to make that a year from — that hereon from today when the Surat facility is on stream, we would be then safely growing like 20% year-on-year for the next 3 to 3.5 years?

Bimal Thakkar — Chairman & Managing Director

Yes, that is our plan and that’s why these investments are being made so that when we have the market ready for it, we have the back-end also available for us.

Faisal Hawa — H.G Hawa & Co. — Analyst

So we are still have even penetrated the Sam’s store — Sam’s Club or Costco as yet. So I mean, that’s like a huge opportunity which could really open up and kind of the way they promote the products so exclusively, I think that could be a big breakthrough for us.

Bimal Thakkar — Chairman & Managing Director

Absolutely right. Absolutely right. And that’s why even in the Surat facility, even though we are looking at — that’s why we are doing Phase 1, Phase 2, and then we can even do a Phase 3 there because we’ve got a large parcel of land there so we have scope to expand in that facility as and when required.

Faisal Hawa — H.G Hawa & Co. — Analyst

Thank you a lot. I think we have a long way to go ahead, but, I mean, we are doing pretty well. Thank you so much.

Operator

Thank you. The next question is from the line of [Indecipherable]. Please go ahead.

Unidentified Participant — — Analyst

Yes, thanks for the opportunity. So my question was on the PLI scheme. On Slide 20, you mentioned that the maximum incentives you can get from PLI scheme is around INR61.35 crores, out of which I think you have booked around INR8 crores. Can you give us some path of how the balance can be booked because the limit [Phonetic] is to be received between FY ’23 to ’28 or a 5-year window? Some color on how the calculation is done and what kind of centers you’ll book in the next three years year-to-year basis?

Bimal Thakkar — Chairman & Managing Director

So I’m going to let Shardul answer that. But the whole PLI scheme has been for marketing and brand promotion. So we will continue to invest on that front because that is, we have been granted the scheme under that heading and how it’s going to be broken up, Shardul will give you more details on that over the next four years, how we’ll be claiming that.

Shardul Doshi — Chief Financial Officer

Right. So the way it’s going to work is every year, the amount is going to go up because it’s based on the top line growth, which we will achieve. And that’s how the projections have been given to the government and based on that, they have given us a sanction. So INR61.35 cr for us to get this, we’ll have to say spend INR123 crores. So 50% of that will come back from the government. Now this is over a period of FY ’23 to FY ’27. So that is 5 years in which we have to spend this money and get this money. And also every year, the top line will grow, I mean, 20, 25% growth will happen. We will get this money based on the top line percentage also.

Unidentified Participant — — Analyst

So does it mean that the rate growth going up to 10% plus next year then to 12%, that’s the path one can look at?

Shardul Doshi — Chief Financial Officer

Yes, amount may differ what you just mentioned, but what you say is correct. So in the last year, it will go up to almost say INR15 crores, INR16-odd crores also.

Unidentified Participant — — Analyst

Okay. And I think you all had mentioned earlier this will open other operational income, right?

Bimal Thakkar — Chairman & Managing Director

Correct.

Unidentified Participant — — Analyst

Okay. Thanks for this clarity and best of luck.

Operator

[Operator Instructions] The next question is from the line of Hatim Broachwala from JM Financial. Please go ahead. Sorry, JM Mutual Fund.

Hatim Broachwala — JM Financial — Analyst

Hi, sir. Thank you for the opportunity. Sir, one question I have is that when we say that the margins are sustainable at current levels, so are you referring to the yearly margin or you referring to the Q4 margins?

Bimal Thakkar — Chairman & Managing Director

No, we’re referring to the yearly margins. We should be able to improve it further. Yes, if Q4 was an exceptional quarter, our endeavor will be to try and be as close to the Q4 numbers in terms of margins. But yes, on the safer side, we’re going to be looking at the annualized gross margins.

Hatim Broachwala — JM Financial — Analyst

Sir, are there any one-off levers in the Q4 margins? Because there’s a very big gap between our yearly margins and Q4 margins. Or are there any seasonal effects which has led to very high Q4 margins?

Bimal Thakkar — Chairman & Managing Director

Shardul, you want to get that? So when we are talking about the margins, I’m talking about the standalone one and not the consolidated. But Shardul, you may want to give some clarity on this then.

Shardul Doshi — Chief Financial Officer

Sure. So, Hatim, the main reason why the margins are high is the freight cost, which has come down in the beginning of the year at around 20% — 18%, 20% to now it’s around 8%. So that’s the main variation, which has happened in terms of cost structure. But I think what will happen is, some of the benefit as Bimal just mentioned, we will also pass it on to the customer by way of consumer offers and those item stuff. So though there is no exceptional item here and the margin, the cost structure will remain like Q4, we will have to pass on some of the benefits to the customer. And hence, we are sticking to the annual number.

Hatim Broachwala — JM Financial — Analyst

And are there any seasonal variations in margins in our business? Apart from the adjustment, which we will be making, but keeping aside that are there any seasonal variations in our margins?

Shardul Doshi — Chief Financial Officer

Not really, but our top line in H2 is generally stronger than H1 and within H1 also Q2 will be stronger than Q1. So what happens is your fixed cost apportionment in that quarter will show a slight decline in, say, here from Q1 and then it will start moving up in quarters to come. So there is no seasonality as such, but seasonality is in terms of the top line is what we achieve. So that’s that.

Hatim Broachwala — JM Financial — Analyst

Okay. Thank you and all the best.

Operator

The next question is from the line of Ranjeet Zaveri [Phonetic] from Zaveri Consulting [Phonetic]. Please go ahead.

Unidentified Participant — — Analyst

Hello.

Operator

Yes, please go ahead. Sorry, your voice is breaking, Ranjeet. May I request you to come in network area?

Unidentified Participant — — Analyst

Hello? Now it’s clear?

Operator

It’s clear now.

Unidentified Participant — — Analyst

Yes. Sir, congratulations on a good set of numbers and it’s still on the marching front. Sir, a question on our global clients, which are big. So I wanted to ask, what would be a reasonable timeline for resolution of US supply chain issues related to PJ’s and Nates.

Bimal Thakkar — Chairman & Managing Director

With our current co-packer, as I mentioned, we are in litigation with them. So we don’t know how long that would last. We are hoping within September, we should have some resolution on that part. And we are in discussions with another co-packer on nurturing [Phonetic] those products for us. So that also we hope to have some resolution and approvals on that facility, both commercial and technical by September of this year.

Unidentified Participant — — Analyst

Okay. And what is the margin profile for this business on gross and EBITDA? If there’s any ballpark number if you can throw.

Bimal Thakkar — Chairman & Managing Director

So, right now we need to work out the commercials with the new co-packers, so it’s going to be difficult for me to give you any margin numbers. But earlier, this business used to generate about 12% to 15% EBITDA for us.

Unidentified Participant — — Analyst

Okay. And sir one just last question. So the products of PJ’s and Nates, where they will be sold, they will be sold to big box retailers or small local stores, and revenue expectations –? Yes?

Bimal Thakkar — Chairman & Managing Director

They are typically sold in all the modern trade outlets within the supermarkets as well. So what will happen now for us is that we will need to — one, the brand has been now out of the market for about a little over a year, it would entail, again, going back to the retailers, re-listing the product, so that could take a little bit of time. That’s why I can’t give any guidance on how that will work out immediately. So we first need to have the co-packer ready and then start going out with the products into the markets. But the other business, which we are looking at on the Truly Indian side, those businesses are something which is already in the pipeline. So we should start seeing some positive results coming out of that on both the food service and the supermarket side of the business. On the Truly Indian, we expect that to happen much faster this year.

Unidentified Participant — — Analyst

Okay. And just a last, any revenue guidance once the production resumes?

Bimal Thakkar — Chairman & Managing Director

On the PJ’s and Nates, like I said, it’s going to be very difficult for me to give a guidance till we tied up all these loose ends and start approaching the retailers again.

Unidentified Participant — — Analyst

Okay. Thank you, sir. All the best.

Operator

Thank you. [Operator Instructions] The next question is from the line of Pritesh Chheda from Lucky Investment Managers. Please go ahead.

Pritesh Chheda — Lucky Investment Managers — Analyst

Sir, I joined the call a bit late. I just want to know now from the supply side how we are positioned first with respect to the lease plan that we have taken and then with respect to the greenfield that we are going to put up? So how are we stacked up on the supply side now?

Bimal Thakkar — Chairman & Managing Director

So we are in a comfortable position at the moment. Our debottlenecking has happened in the Nadiad and Nashik factories, so that has helped in increasing capacity. The lease plant, we are continuing out there as well. The greenfield project, we are going to break ground from next month. So we expect that to be ready in 18 months from the time we break ground. Hello.

Operator

It seems that we have lost the line for Pritesh. We will move to our next question. That is from the line of Anoop [Phometic] from First Impression [Phometic]. Please go ahead.

Unidentified Participant — — Analyst

Yeah, hi. I was just wanting to know about your investment in Naansense, which you had talked about last year.

Bimal Thakkar — Chairman & Managing Director

Yes, so I think you might have missed out, Anish [Phonetic]. We decided not to pursue that opportunity. And we, in fact, gave information to the stock exchange also on that, that we are not pursuing this.

Unidentified Participant — — Analyst

All right, thank you. I missed it.

Operator

Next question is from the line of Pankit Shah from Dinero Wealth. Please go ahead.

Pankit Shah — Dinero Wealth — Analyst

Actually, it has already been answered. Just wanted to understand about the US subsidiary’s loss making and contributed five-year loss. Was wanting to understand that [Technical Issues] process won’t be there and some contribution [Technical Issues] coming.

Operator

Sorry Pankit, your voice is not very clear.

Pankit Shah — Dinero Wealth — Analyst

As I said, it’s partially answered. Just wanted to clarify that the US subsidiary, which contributed five-year loss for FY ’23, the next year the output is the losses won’t be there and positive [Phonetic] contribution to revenue will also flow in. Right?

Bimal Thakkar — Chairman & Managing Director

Yes, we are hoping to have some positive contribution next year. And, of course, we are doing everything to tone down the losses which we incurred last year. So it is going to take some time for it to turn around, but it’s obviously going to be a lot better than what happened last year for us on the ADF Foods’ upside [Phonetic].

Pankit Shah — Dinero Wealth — Analyst

Okay. And if you can throw some light on the acquisition side, if you are currently actively looking for it or you are close to something, and how are you placced?

Bimal Thakkar — Chairman & Managing Director

So, you know, we constantly get proposals, we keep evaluating them. In fact, there was something which we evaluated a few months back, but decided not to pursue it because it was expensive. Currently, also, there are a couple of proposals which we are evaluating. So as and then, we have something more concrete, we will definitely make the announcement. But, yes. this is something which we are actively pursuing and we’re trying to see what we can get in our [Indecipherable].

Pankit Shah — Dinero Wealth — Analyst

And what would be the thought process behind [Technical Issues] which you called off, that was probably an indirect one [Technical Issues] or a brand or a area where we are in present as such, what is the thought process behind it?

Bimal Thakkar — Chairman & Managing Director

So the last one was more to move up the value chain and have better control over our distribution. Right? So we will — and that has helped our business this year as well, and we continue to look at that side of acquiring businesses. And plus we are also evaluating complementary products with a brand and distribution as well. So we are looking at both these. We are not looking at anything in India because the valuations in India are very high. We are getting much better value propositions from the international markets and US being one of our main markets, we are really looking at opportunities in the US.

Pankit Shah — Dinero Wealth — Analyst

Okay, great. Thank you.

Operator

Thank you. The next question is a follow up question from Pritesh Chheda from Lucky Investment Managers. Please go ahead.

Pritesh Chheda — Lucky Investment Managers — Analyst

Yes, sorry sir, that line got disconnected. So you said that debottlenecking has happened in 2 plants. The lease plant is operational and you are saying something more.

Bimal Thakkar — Chairman & Managing Director

The lease plant continues to produce and the new greenfield project, as I mentioned, we’ll be breaking ground next month and hope to have it ready, Phase 1 ready, within 18 months. We are on track as far as capacities go. At the moment, we have no problems at the moment.

Pritesh Chheda — Lucky Investment Managers — Analyst

So this debottlenecking and lease plant, which you have for, let’s say, the next 24 months, what kind of top line it can support?

Bimal Thakkar — Chairman & Managing Director

Shardul, you want to get this please?

Shardul Doshi — Chief Financial Officer

So the debottlenecking which we have done in our existing plant in Nadiad and Nashik, one is we have spent INR5 crores in the last financial year and almost INR20 crores in last two years. So we have already created — with this INR20 crores, we have created revenue potential of almost INR100 crores for debottlenecking, which we have been doing in the last couple of years. The greenfield, which we are doing, that’s going to give us, that Bimal mentioned, is INR80 crores total capex we will be spending and we are looking at 3x top line from it.

So that’s the kind of growth, which we will get from the capex which we are planning to do.

Pritesh Chheda — Lucky Investment Managers — Analyst

No, I asked you on the lease plant sir.

Shardul Doshi — Chief Financial Officer

So we have not done any debottlenecking. Lease plant is —

Pritesh Chheda — Lucky Investment Managers — Analyst

I am asking sir what is the revenue potential out of the lease plant?

Devang Gamdhi — Chief Operating Officer

Can I take that Shardul?

Shardul Doshi — Chief Financial Officer

Yes, Devang, please.

Devang Gamdhi — Chief Operating Officer

Yes, the lease plant will give us a revenue — has a full revenue potential of about INR30 crores.

Pritesh Chheda — Lucky Investment Managers — Analyst

Okay. So that explains — so basically INR130 crores of business you can do out of — obviously, out of which something would have flowed in FY ’23, right, out of the INR130 crores?

Devang Gamdhi — Chief Operating Officer

Yes.

Pritesh Chheda — Lucky Investment Managers — Analyst

Right. So let’s say a residual of INR80 crores, INR90 crores is possible?

Devang Gamdhi — Chief Operating Officer

Yes,

Pritesh Chheda — Lucky Investment Managers — Analyst

Because INR335 crores [Phonetic] went to INR360 crores [Phonetic], that’s INR30 crores, so basically let’s say about INR100 crores is possible from your existing setup over the next two years. You have that capacity whether it’s possible or not but you have that capacity.

Devang Gamdhi — Chief Operating Officer

Yes.

Pritesh Chheda — Lucky Investment Managers — Analyst

Okay. My second question is sir, on the distribution side, we were looking at slightly faster growth and some tie ups and all. What happened on the distribution side? Any progress and why is the growth not deep [Phonetic]?

Bimal Thakkar — Chairman & Managing Director

So what happened last year was, as you know, we had some of the Unilever specialty grants which we were distributing in the US and in the UK. Last year, Unilever Worldwide decided to hive off their tea business to another private equity. So during that whole transition process, there were some — the transition wasn’t as smooth as anticipated and there were certain disruptions in the supply of products, which led to a de-growth of business on the distribution side. Now things have gotten back to normal and this year we are expecting the Ekaterra side of the business, the tea side of the business, which has now been acquired by Ekaterra, we expect that to grow and we have the Patanjali business in UK/Europe, which will also grow for us. That started off late for us last year. So this year, we expect that to double up in size and we are planning to open up Europe as well with the Patanjali products.

And we are also close to tying up one more distribution agency, which hopefully within the next two months we will have that tied in. So by the time the supplies come in, it will be by September that we would have started off with the new agency as well.

Pritesh Chheda — Lucky Investment Managers — Analyst

So what kind of growth is possible here in the distribution business?

Bimal Thakkar — Chairman & Managing Director

So this year — Shardul, what is it that we have? What are the guidance on the distribution sites?

Shardul Doshi — Chief Financial Officer

So this business will give us around 10% to 15% growth.

Pritesh Chheda — Lucky Investment Managers — Analyst

With all these additions, Patanjali, you’ve —

Bimal Thakkar — Chairman & Managing Director

Not considering the new agency. So with the new agency, since we’ll only have half a year, it will probably be — I would safely say around 15% to 20% growth we should expect from this distribution business. But our core business, which is our own brand that is where we are looking at a 25% growth, around 25%.

Pritesh Chheda — Lucky Investment Managers — Analyst

Okay. And last question, I couldn’t comprehend that co-packer issue that you have which is going to resolve over 6 months. What kind of top line is it?

Bimal Thakkar — Chairman & Managing Director

So as I mentioned there is — we still have to — we are in discussions with another co-packer. There is technical and commercial arrangements, which are still being ironed out. And then after that is done, your brands have been off the shelf for over a year and a half, so getting back onto the shelves is not a very simple process. So it’s very difficult for us to give guidance on — once we’ve tied in with the co-packer, what kind of revenue group we can look at or what kind of revenue we can look at from those brands in this year. But we have the Truly Indian brand which we are promoting and expanding in the US, which has just started. So we expect this ADF Foods USA, which is the entity which does the PJ’s and Nates and will be doing the Truly Indian brand. We expect that to at least have — last year it was a huge negative contributor. This year we at least expect it to contribute positively and not have the kind of loss we had last year.

Pritesh Chheda — Lucky Investment Managers — Analyst

So this 25% growth that you mentioned is without assuming anything on that co-packer dependent branch, right? That’s —

Bimal Thakkar — Chairman & Managing Director

Yes, absolutely.

Pritesh Chheda — Lucky Investment Managers — Analyst

And this co-packer dependent branch, when they were normal, what kind of contribution to sales it had attack or what percentage of sales it had?

Bimal Thakkar — Chairman & Managing Director

So last year, Shardul, how much was considered — I think close to INR37 crores or INR40 crores?

Shardul Doshi — Chief Financial Officer

INR32 crores top line was there and INR2.5 crores of profit so they had last year.

Pritesh Chheda — Lucky Investment Managers — Analyst

Last year means ’23 or ’22?

Shardul Doshi — Chief Financial Officer

FY ’22.

Pritesh Chheda — Lucky Investment Managers — Analyst

So ’22 it was INR30 crores, which was not there in ’23.

Shardul Doshi — Chief Financial Officer

Yes.

Pritesh Chheda — Lucky Investment Managers — Analyst

So there was a INR30 crores impact on account of it. So if we adjust for that, the growth would be 20%, right, in the processed and preserved foods.

Shardul Doshi — Chief Financial Officer

Correct.

Pritesh Chheda — Lucky Investment Managers — Analyst

Okay. Thank you, sir. All the best to you.

Operator

Thank you. [Operator Instructions] Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Bimal Thakkar for closing remarks. Thank you and over to you, sir.

Bimal Thakkar — Chairman & Managing Director

Thank you very much for your participation and I look forward to connecting with you all in our next earnings call. Thanks and have a good evening.

Operator

[Operator Closing Remarks]