Aug 6, 2012 ... Vadilal Industries is a play on India's consumption story – of a ... Vadilal
Industries is India's third largest Ice Cream manufacturer – the largest.
Ashish Chugh’s
HIDDEN
GEMS
. in search of Market Beating Stocks
August 6, 2012
Vadilal Industries Ltd.
CMP – Rs. 120.55
BSE Code –519156
NSE Symbol - VADILALIND
Vadilal Industries is a play on India’s consumption story – of a product where there is large under-penetration and huge unexplored potential. Vadilal Industries having a market share of roughly 20% in the branded category of this fast growing industry; rubs shoulders with Hindustan Unilever in this product category and is a recognisable and visible product and is available at a market cap of just Rs.87 crores. Vadilal Industries is India’s third largest Ice Cream manufacturer – the largest being Amul and Kwality Walls (Of Hindustan Unilever) occupying the No.2 position. Infact, Kwality Walls and Vadilal are neck to neck in terms of market share. The company has two manufacturing plants located at Pundhra (Gandhinagar) and Bareilley (UP). Both Pundhra and Bareilly plants are well equipped with the latest world-class manufacturing facilities. The plants have been awarded several quality benchmarks. The company also has a food processing division and currently caters to the domestic and export markets with products such as frozen vegetables and ready to eat snacks. In the last 5 years, the company’s revenues have grown at a CAGR of 18%.
Financials The latest financials of the company are given as under :QUARTERLY - LATEST RESULTS - Vadilal Industries Ltd (Curr: Rs in Cr.) Year Ended
Particulars Sales Other Income Other Operating Income PBIDT Interest PBDT Depreciation PBT Tax Deferred Tax PAT (Source : Capitaline)
Quarter Ended
Quarter Ended
Quarter Ended
(Mar 12) 59.48 3.77
(Mar 11) 48.78 4.32
11.31 9.61 1.7 1.22 0.48 0.35 0 0.13
6.5 7.14 -0.64 2.45 -3.09 -1.26 0 -1.83
Year Ended
(% Var) 21.9 -12.7
(Mar 12) (12) 279.66 2.89
(Mar 11) (12) 234.07 3.59
(%Var) 19.5 -19.5
74 34.6 LP -50.2 LP LP LP
38.82 19.89 18.93 9.32 9.61 3.36 0 6.25
27.38 12.03 15.35 7.99 7.36 2.28 0 5.08
41.8 65.3 23.3 16.6 30.6 47.4 23
SHARE PRICE - LATEST EQUITY - Vadilal Industries Ltd (Curr: Rs in Cr.) Latest Data As On 03-Aug-2012 Latest Equity(Subscribed) Latest Reserve Latest Reserve (cons.) Latest EPS -Unit Curr. Latest EPS (cons.) -Unit Curr. Latest Bookvalue -Unit Curr. Latest Bookvalue (cons.) -Unit Curr. Face Value Book Value (BS) - Unit Curr. Stock Exchange Latest Market Price--Unit Curr. Latest P/E Ratio Latest P/E Ratio -cons Latest P/BV Latest P/BV - cons 52 Week High -Unit Curr. 52 Week High-Date All Time High -Unit Curr. All Time High-Date 52 Week Low -Unit Curr. 52 Week Low-Date All Time Low -Unit Curr. All Time Low-Date
Year Ended
BSE 120.55 13.87 14.94 1.83 1.74 155 04-Aug-11 194.45 28-Apr-11 87 06-Jan-12 2.3 11-May-01
7.19 40.2 42.49 8.69 8.07 65.91 69.1 10 67.65 NSE 122.6 14.11 15.19 1.86 1.77 154.85 05-Aug-11 183.7 15-Jun-11 85.2 20-Dec-11 85.2 20-Dec-11
Market Capitalisation Dividend Yield -% Dividend Yield -% - cons Price Date
86.68 1.25 1.25 03-Aug-12
88.15
03-Aug-12
(Source : Capitaline)
Stock Price Chart
Investment Rationale There are few factors which make us bullish on the potential of Vadilal Industries :Indian Ice Cream Market – India’s Ice Cream market currently has a market size of roughly Rs.2500 crores and is growing at around 16-18%. Out of the Rs.2500 crores, organised players account for Rs.1500 crores and the balance Rs.1000 is accounted for by the small regional and unorganised players. The healthy growth rate of the market is what excites us and this growth rate may become higher in the event of power situation in the country becoming better. Per Capita Consumption of Ice Cream in India – The per capita consumption of Ice Cream in India is just 300 ml/ year. For some, it may just be a statistic – we however see this as a big opportunity in a largely unexplored market. To give you a comparison, per capita consumption of Ice Cream in countries like US and some in Europe is about 20-25 litres/ year. Even China, which is primarily a cold country, has per capita consumption of 3 litres/ year. Ok,
leave aside US, Europe and China, for Pakistan the figure is 750 ml/ year. So, we are less than half of per capita consumption of Pakistan. The reason for such low per capita consumption in India is under penetration of the product. Ice Cream is a product which requires refrigeration and with many big cities in India (leave aside villages) not get enough power, there is not enough penetration of ice creams. There is thus a huge unexplored potential. Vadilal’s Manufacturing Facilities and Supply Chain - The biggest challenge in the ice cream business is building the supply chain and distribution network. Vadilal has over the years created a strong cold chain networks of 32 C&F agents and 550 distributors. It currently distributes its products through 50000 retail outlets, which I believe is a large number for a frozen food item that needs refrigeration facilities. Vadilal also sells ice cream through 170 Ice Cream parlours under the brand Happinezz and intends to increase its network to 300 outlets. Vadilal has state of the art manufacturing facilities in Gujarat and UP and has nearly doubled capacity to 325000 litres per day in the past 2-3 years. The company is planning to add capacity in eastern India as proximity to the market is critical to improve market share. Concerns There are a few concerns though – 1. As per the family settlement agreement, Vadilal Industries is not allowed to sell Ice Cream in Maharashtra and 4 Southern States. This would limit the growth potential of Vadilal. 2. The promoters have two companies, namely Vadilal Industries and Vadilal Enterprises, involved in similar business. Vadilal Industries is the manufacturing and supply chain arm company and marketing is handled by Vadilal Enterprises. We believe it makes no sense to have two companies as this leads to a conflict of interest. 3. In future, the company could face competition from multinationals entering the Indian Market and also from Indian players like Cream Bell who have started to get aggressive. We however believe that entry of more players could be good for the industry and would lead to the expansion of the market.
Conclusion We believe that the Ice Cream industry has high growth potential in India. Despite being sweet and frozen, which gels well for the Indian taste buds, the organized ice cream industry is only worth Rs. 2500 crores. The biggest hurdle to growth is the lack of refrigeration facilities at the retail end and load shedding. Given the fact that they have to incur high losses even if there is no power for a few hours, retailers in many cities do not store ice cream, which has led to inefficient distribution. As power supply issues get resolved across the country and front-end retail infrastructure improves, we may see multifold growth of the category. The company has in the last few years launched various premium products – Gourmet, Badabite and Flingo and would also derive growth via more launches in impulse purchase segments like yogurt. While the size of Chinese Ice Cream market is Rs.20,000 crore, the size of the Indian market is just Rs.2500 crore. Vadilal Industries commands a market share of 20% of the organised Ice Cream market. Given the potential of the largely under-penetrated market, in future, we may see the entry of many Multinational players like Nestle and Haagen Dazs in the Indian market. Vadilal Industries, with the state of the art manufacturing facilities and having Supply Chain of 32 C&F Agents, 550 distributors and 50,000 retail points may be a plum target for a MNC player wanting ready infrastructure to establish a foothold in the high growth Indian Ice Cream market. If and when it happens, the valuations that this kind of a business can fetch could be very high. Whether and when that happens is anybody’s guess, we believe Vadilal Industries is placed in a sweet spot to exploit the potential that the Indian Ice Cream market offers. The company having close to a 20% share of Indian organised market, having revenues of Rs.280 crores (targeting Rs.350 cr + in FY13), small equity of Rs.7.19 crores, and high promoter’s stake of 66%, and rubs shoulders with Hindustan Unilever in the product category and is trading at a market cap of just Rs.87 crores. We believe the market is grossly ignoring the business and its potential. We believe as rationality returns, we may see markets giving substantially higher valuations to the business. The current uncertain markets provide the perfect opportunity to the long term investor to accumulate the stock at its current price and on declines.
Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at
[email protected]. This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.
