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Note: The artciles are not research reports but assimilation of information available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that I might have the dkiscussed companies in my portfolio and hence my point of view can be biased.Readers should consult registered consultants before making any investments
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Saturday, June 13, 2015

Vadilal Industries ltd:- Can it become a multibagger?

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Q? I bought a lot of Vadilal industries at 340 bucks merely reading your twitter updates. You disclosed you too own a few of the company and looking for a target of 1000 bucks in the next 3 years. Can you please share the reason and logic to your readers? A detailed elaborate note like your other notes would be highly appreciated.

Ans) Vadilal was suggested at around 340 bucks as management commented about the impending merger and its consequences.However,I don't appreciate your logic of resorting to opt for the company,just going through my twitter updates and nothing else. Stock market ain't that easy a place to earn. Borrowed conviction often hurts bigtime, if you don't know the actual worth of your demat possessions. Request you to relinquish such gusto and concentrate on finding the operational reasons before proceeding in owning a business.

Here's what prompted me to pick the company:-

Company:The company is the second largest ice cream player in the country. Vadilal owns the bragging rights of having the largest range of ice creams with 150 plus flavours sold in a variety of more than 300 packs and forms. The range includes cones, candies, bars, ice-lollies, small cups, big cups, family packs, and economy packs. Vadilal is one of the very very few ice-cream players in the country to have presence in all the three categories of ice creams — premium, regular and frozen dessert — which remains and will be an asset.The company also offers products for all age groups in the price range of Rs 5 to Rs 100, and above. Vadilal has very strong distribution network having 60,000 retailers and over 750 distributors.Its advantage in handling such large distribution networks, including cold chains and stock-keeping units (SKUs) of more than 300, gives it valuable experience in scaling.The company currently just gets around 5-7 per cent of its revenue from Eastern part of the country, while 50 per cent of its revenues come from Western India and the rest from North India.The company has two production facilities – Pundhra in Gandhinagar district, Gujarat, and Bareilly in Uttar Pradesh.

Industry perspective:India’s current ice-cream market is worth Rs 3,500cr, including the unorganised sector. The branded market has a host of homegrown and international players, namely, Amul, Kwality Walls, Mother Dairy, Vadilal, Cream Bell, Baskin-Robbins, etc, amongst the the prominent ones. Whilst Häagen-Dazs, Baskin-Robbins, London Dairy, New Zealand Naturals, and Hokey Pokey cater to the high-end market, the likes of Amul, Vadilal, Cream Bell and Mother Dairy are available at wide-ranging price points. Lately, the imported concepts such as frozen yogurt and gelatos are gaining popularity. The Ice-cream is one of the fastest growing food categories in India.Notably, the business is seasonal in nature with April to June being the peak season and November to January the lean months. Sales slacken during the monsoons also.

In recent years, consumption of ice-cream and other frozen novelties in winters has been on the rise. A mix of factors is responsible for lessening the seasonal impact and contributing to the overall growth of the country’s ice-cream industry such as changing consumer perception, capturing regional variations, diverse consumer segments, favourable retail location, product range and innovation, festivities, and marketing and promotions. Currently growing at 15-18 percent annually, the future prospects of India’s ice-cream market seem promising for manufacturers, suppliers and retailers. A number of regional players have also started expanding.

Processed food division:Vadilal commenced processed food division in 1991. The company is exporting to USA, Canada, the UK, Kuwait, the UAE, Singapore, New Zealand, and Australia under the brand name of Vadilal Quick Treat and are present in more than 45 countries across the world. The company’s market share stands at around 15 per cent in the organised sector. The processed food division contributed 74crs of turnover last fiscal.Company plans to bring a strategic investor for changing the fortunes of the vertical.They may also exit it fully which can be a rerating factor.On 85crs of capital employed the segment was just able to break even.

Expansions:Company over the last few years has increased its capacity from 225,000 litres per day (lpd) to 375,000 lpd. It’s impressive that the company has accomplished this mainly through internal accruals.Besides, it's the only player to have invested in the installation of extrusion technology at its Ahmedabad plant so that its ice creams improve both in taste and texture.The company enjoys a 35 per cent market share in Gujarat, which is considered to be among one of the key markets for ice cream.Vadilal also has made aggressive plans to increase its sales in Jammu & Kashmir by over four times to around Rs 10 crore in the coming year. Company is already the number one player by volumes in Uttar Pradesh and is amongst the top ice cream players in NCR, Punjab and the northern belt. Vadilal is looking to penetrate deep into J&K, including regions like Srinagar, Anantnag, Baramullah, Pattan, Baandipura, Ganderbal and Sopian. Company is also expanding its dealer network aggressively in the eastern parts of the country.

Potential:India’s per-capita consumption of ice cream is estimated to be three scoops or 300 gms a person per year, against a mammoth 24 litres a person in several developed countries like the US, Japan and Germany.Even the Chinese consume about 3 litres.Leave China,Pakistan consume 150% more ice cream than us.With time as the power situation improves in the country,penetration will increase big time.The demand potential for ice cream is huge and Vadilal so far has been able to control and manage supply costs way better and more effectively than the multinationals..

Misc points:How it fared or whatever it did operationally in the last 10 years matters little as promoters weren't ready to share their wealth with investors. Vadilal enterprises got rich assets and a very tiny equity cap to the tune of less than a crore which will result to minimal equity dilutions.Company is also looking to sell some non core assets which will help in debt reduction.Real big money in stock market is made through foresight and not hindsight.

Concerns: A two decade odd family separation restricts Vadilal from selling its ice cream products in southern Indian states, including Mumbai and Goa. This is a major handicap, considering that 25-30 per cent of the country’s total ice cream sales come from these places.Competition from other players are heating up which though remains a threat but also helps in expanding the whole sector. To give you guys a perspective,country had an ice cream consumption of just 100 milligrams during the nineties. Amul entered the segment and increased the consumption multi fold.

Outlook:No sane companies with such strong brand recall would have ROE of 1-2%.Vadilal resorted to bizarre tactics of manufacturing ice cream itself and selling the same through its separately listed marketing arm.These events definitely hints at the uncomfortable zone which you members can easily fathom.Its a good new bull market going on and promoters are changing their attitude for good.They have finally decided to merge both the arms in a single listed entity. Vadilal has seen a drastic change in working capital requirement from 61crs earlier to just 23crs in the last fiscal. Vadilal enterprises works on negative working capital of 20-25crs. The merged entity would have either negative WC or very limited WC requirements as customer advances and distributors security deposits pile up.Last year security deposits of franchises went up to 8.75cs vs just 2crs,vindicating the stand of company"s expansion through asset light aka franchise model.Company has improved its collection period to just 2 weeks from a couple of months earlier.The age old tradition of doing business through other peoples money or OPM-Taking trade credit facility and becoming stricter on collections/demanding advances etc.

Conclusion:They have sufficient capacity to meet up any upcoming demand which takes out the Capex equation.Merged entity would have over 60crs of operating cash flows which can easily service the interest costs of 22-25crs.Debt stands at around 145crs as on last balance sheet figure.Company has also guided a reduction in debt which will boost the NPM.Vadilal has recently guided a turnover of 550crs for the merged entity with around 14% Ebitda margins.Company is just trading at 3x EBITDA.The 1000 bucks target over coming 3 years is based on few factors which include-Change in market perception owing to merger as conflict of interest vanishes,fancy towards consumption stocks with ice cream sector tailwinds,a branded play with expected EBITDA of 130-140crs on most conservative estimate 3 years forward.High promoters holding,low equity and lack of floating stock would ensure it quotes at a premium valuations too.Put 6x EBITDA to reach to the assigned figure.

Btw:All this figures will only be valid if the merger happens.Though nothing has been announced by the company in public domain but such amazing stock price rally amidst market mayhem only hints towards the insider activity which speaks volumes at the upcoming inevitable happening.If the merger gets postponed,stock will take a big beating.

Quote: The above note was prepared few months ago and since then stock have had a decent rally amidst market mayhem. Story seems to play out well. If merger goes through,the four figure mark would come way before the expected duration.

Recent results and improvement further in the balance sheet is a testimony to vadilal's strategy of doing business through the asset light model. The ice cream division did a ROCE of 19% which should further improve as both the levers assimilate to boost- Higher OP and depleting WC requirements. Merger will change the whole ball game as synergy chips in and you eradicate a lot of junks. There's no Capex for coming couple of years which will reduce a hell lot of high cost debts as high OCF galores. It's not quite your "Diary Queen from the sage of Omaha's stable" but nonetheless a cool consumption play with a change in attitude from the guys at helm. Mother Earth too is now the hottest in last 11000 years,that also makes a strong case to look at Vadilal? :))))) 


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Note: The above is not a research report but assimilation of information available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that I might have vadilal in my portfolio and hence my point of view can be biased.Readers should consult registered consultants before making any investments
.

1 comment:

Arun Mukherjee said...

I am no more answering queries here and hence disabled.Kindly download my share bazaar app from playstore and get answered immediately.

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