The case study of Tasty Bite Eatables is divided into 2 parts:
1) Part 1 – 2015
2) Part 2 – 2015-2020
For this part,Lets us assume today is 30th May,2015
Screening: While going through large increases in share price over past 2-3 years, the name of Tasty Bite Eatables comes up. It has risen approximately 12 times during the past 3 years.
Tasty bite is in the business of making ready to eat, frozen food products for the US market and QSR chains in India.
Let us try to understand the features of the business from financial statements of the company.
Proportion: The income statement of the company looks like that of a Speciality chemical companies with around 50-60% raw material cost. It seems to be in middle the value chain supplying to B2B segment.
As there are two sides of spectrum of companies ones are companies in front of value chains like FMCG where major costs are other costs while others are towards back of the value chain like Textile, Steel where major costs are raw material+ manufacturing costs.
Nature of Raw Material: The company seems to be unable to pass on raw material costs to customers. As:
(I) Gross margins seem fluctuating.
(Ii) The company procures commodities from mandis and then sells the frozen foods to Retail chains in the US and QSR chains in India (2009 annual report) Most B2B Intermediaries, are unable to pass on the cost to larger customers.
Nature of Other Cost: The other cost seems to be around 20 crores. However, other cost seems most likely fixed. As it can be seen that as the company increased scale of operations over the past 5 years, other cost grew at a smaller pace. Same trend may likely continue further if the company is able to achieve scale. However, we will know this better once we do some analysis of the balance sheet.
Proportion: Around 60% of the assets are fixed. The business is not too capital intensive like hospitals where 90% of the assets are fixed, not too asset light like trading businesses where there are no fixed assets.
The Fixed asset turnover of the company is around 2.5 again signalling less capital intensity.
The business takes around 2.5 months of working capital with 1.5 months of Debtors, Payables turnover and 1 month of inventory turnover. Considering other industries, the inventory turnover of the business signals very less production/order time.
Let’s try to see the cash flow picture of the business.
Mainly the company has operating cash flows, which are reinvested into the business for expansion. The company has expanded the assets mainly through internal accruals and slight combination of external debt. As the earnings of the company is in dollars, this does not seem to be a problem.
The three year average ROCE of the business has remained in high teens except in 2013 and 2014. This is most likely due to the expansion done in 2013, can be confirmed from CWIP figures in the balance sheet. As per the annual report 2013,
“Major expansion in the TFS business in India resulted in the state-of-the-art sauce plant being commissioned earlier this year and we will continue to expand our frozen foods section as well. “
In order to gain more holistic understanding of the company, let us see how does the company perform with other stakeholders, what is its position in the industry, what are the competitive economics?
If we focus on the QSR industry, where the company is supplying, The industry seems to be in very nascent stage in India. The QSR industry is currently in growth phase in India mainly characterised by Dominos, McDonals.
The annual report of the company states of commanding more than 50% market share in the prepared Indian foods category in North America and Australia.
Let us try to assess the competitive position of the industry, on the basis of financial numbers of this company, as we do not have much knowledge about competition.
1) Threat From New Entrants – Our assumption is chances of same happening is more in case of high obsolescence industries like Technology, etc or high margin industries. In this case, it seems the buyers particularly in QSR case will not take the risk of shifting to others, as it will take years of R&D to develop taste and reputation.
2) Bargaining Power Of Suppliers – Since the suppliers are from farmers or dealers in the mandi their bargaining power is not that high, if compared to a B2B business operating in Steel industry. Since 2012, The company’s annual report mentions of having contracts with commodity suppliers. (Source Mr. Anil Tulsiram report)
3) Bargaining Power Of Customers – The bargaining power of QSR players or big retail chains particularly seem to be higher in this case. The company cannot pass on cost easily to the customers further signifies the same.
4) Threat of Substitute – This risk is almost nil
5) Existing Rivalry Among Players – This seems not that high considering the nascent stage of development of the industry.
6) Threat Of Regulation – This also seems to be low.
Currently, there are no signs of a very strong competitive position in the company. It seems like the main competitive one can develop in this kind of industry is by being a low-cost player.
Overall, the company particularly in terms of its export business, seems to be taking advantage cheap manufacturing, R&D resources (employees) in India and supplying products in the US, Australia. In case of QSR business in India, it is a different story.
The growth of the industry is heavily dependent on the QSR industry. There are two signs of significant growth in the QSR industry.
The QSR industry currently is mainly dominated by unorganised players. However, over past few years companies like McDonald’s, Jubilant Foodworks (Dominos) have been able to command significant share of growth. For example: Even if we take current sales of McDonald’s which are around 1000 crores around 45% is material cost out of which even if around 20-25% are served by companies like Tasty Bite. (One can estimate same from cost of burger and its ingredients) It may be sufficient opportunity for Tasty Bite as the revenues of QSR industry grow.
As the GDP per capita of the country rises to beyond 2000$ people typically spend more on consumption. As any MNC, which enters into India will look for local suppliers. Similar pattern was observed in the U.S.
Though the opportunity not be massive like for the QSR industry, still the fortunes of the company are very much tied with the growth of the same. Will Tasty Bite able to ride this trend?
Source: Annual Report 2015
Source: Annual Report 2015
The additional capex done in 2013 is still slowly ramping up as the company is acquiring new customers. In addition to this, even a Japanese major in tomato based products, Kagome International, has made an investment in the company.
As the company achieves further scale there seems to be chances of further slight improvements in operating margins due to economies of scale (Operating Leverage). Particularly, the other cost does not seem to scale with further increase in the size of operations. This can be consistently seen in the capex phases done by the company from 2010-2013 and 2013-2015.
Overall, the growth prospects of the company seem to be good. Mostly, the company has grown internally with very conservative financial leverage. As per our estimates, 3 years averages give pretty good approximation of the growth done by the company.
There are no significant negative years to really judge the attitude of the management. There are two concerns regarding management:
(1) The salary of the Managing Director (Mr. Ravi Nigam) exceeds legal limits – now this may be of problem generally in huge companies. In this particular case, the company is professionally managed and the salary around 60 lakhs is not that huge per se. In fact the promoter, Mr. Vasudevan, is not withdrawing any salary.
(2) Related party entities- We could not find any huge evidence of negatives in the same. Considering those are two marketing entities set up by the company. As of now, this evidence does not give any substantial negative information.
Source: Annual Report 2015
Currently, on the basis of integrity, nothing highly negative or highly positive could be found regarding the management in this regard. However, with time this opinion may change.
Source: Annual Report 2015
Though we do not have much evidence to compare from competitors overall the management seems frugal + efficient:
(I) As inferred from above numbers – Manufacturing, Employee, other cost are not substantially high
(II) A report by Mr. Anil Tulsiram (Quote the source) clearly shows how the company is environmental friendly over time and the management has consciously used resources. While expanding, always first capacity is met then only new projects are started.
Currently, not much can be said about capital allocation as there has not been a big chance to test the management on same. Overall they seem fine, considering dividend which is given opportunistically not as a predefined formula.
Overall, the company is sticking to its long term goal of being the low-cost manufacturer- more or less its seem to have walked the talk over time. As of now, there are no big negatives or something hugely positive about the management.
This year a major Japanese food brand Kagome International (Manufacturer of Sauces) has take equity stake in the company.
Our overall valuation thesis depends on the company developing economies of scale and some slight competitive advantage as a low cost manufacturer. (The signs of which are emerging)
There can be multiple valuation methods applied, however, in our particular case price to sales plays a larger role as the earnings still our minimal.
Price to Sales Method
Assumption: Though sales growth of the company over past 10 years is to double every 3-5 years. We took it as 15% considering it to double every 5 years.
Based on this we assign a future price/sales multiple of around 2, which is similar to current price to sales multiple. This is considering the company must have developed some competitive advantage with scale. It will still have some growth left, considering just 400 crore of sales turnover at the end of 5 years.
Now comparing current market cap of around 350 crore to 786 crore arrived by us. It is almost 15% return which is decent considering the current 10 year yield at 7.886%.
Though DCF is more appropriate for developed moat type companies, we have just used it here to test ourself.
We have used the current year sales as base year as there is no cyclicality and current year is not overly optimistic.
Sales growth: Same as above
EBIT Margin: Same as before around 6%, though there are high chances it may be more considering the previous 5 years and chances for future to. (The company has started having fixed contracts for commodity from 2012, to reduce volatility).
Working Capital: There does not seem to be need for additional working capital. In fact, chances our by slow improvements the company may improve it. We think more or less less maintenance capex will be offset may be by slight positive cash flow generated by working capital.
Terminal Growth Rate: 3%, however this is being over conservative not being consistent with what we did in Price to Sales method.
WACC: Though the company has debt we did not charge it much for the same considering cost is less, plus till now the company is conservative, however if the debt equity ratio raises further this may be a cause for concern.
Cost of Equity: Overall this may be similar to 10 year yield. This shows nothing but our confidence to the estimate of future cash flows.
This brings the value to be around Rs. 1000-1200. The current price is no discount to the same.
Main Critical Variable: Our valuation is mainly dependent on Future growth + Moat developed by the company.
Valuation tells nothing, but the opinion of the valuer. You may have different viewpoints and we would love to know why.
Main risk in our thesis is:
1) Sales growth falling – This captures mainly all
2) Some management issue.
As on 30th May 2015, We may have invested some portion (3%) of our portfolio though not a very large %age considering it is still an emerging moat. You may differ on this and we would love to know why?
Key Variables to Track:
1) Sales growth
2) Marginal ROCE – Mainly Operating Margins
Review: We will review it almost every year, keeping in mind the 5 year view.
The purpose of these case studies is to practice such cases and help all of us develop patterns to take similar decisions in future and avoid mistakes of both omission/comission. Its like practice before the main match. We may have made some mistakes or you may not agree with us. However, we would love to know why you think so or what you may have done differently? So that we may all learn together.
You may visit screener.in, main annual reports, valuepickr.com (Especially a report by Mr. Anil Tulsiram (tasty-bites-luck-favors-the-prepared-mind)) to see how people were thinking at that time and in.tradingview.com for prices. These resources are really helpful.
Before Going further it would be better if you Analyse the case or do the valuation or allocation according to your own Method. That way it may help you to do better with the case further and sharpen your mind for future.
Pick Parts of the case study and use it as it may be helpful to you.
May we all learn and progress together.
We would love to see the next phase that what happened after 2015-2020. Lets proceed to part 2.
(Please click on “2” at the bottom of the page)