Part 2- 2016-2019
2016
Let us assume the date today is 30th May, 2016. We plan to review our investment in Tasty Bite Eatables, after one year.
Results
Source: screener.in
Source: screener.in
Source: 2016 Annual Report
The sales of the company grew by 18% and the ROCE of the company too increased. This is better then expected last year. Slightly rising operating margins point to the fact of increasing Competitive advantage due to scale.
It is still to early to form such opinions however after 3 full years, we may be better off judging the same.
Growth
The plans for growth seem for the company to remain same. It seems to take advantage done two years before. Minor additions to capacity can increase the scale.
Share Price
Source: in.tradingview.com
Mr. Market seems to have rerated the earning potential of the company. The price has almost doubled (increasing by 100%) while the earnings have increased by approximately 67% resulting in increase in Price to Earnings from 32 to 44. The company seems to be in the phase of expansion of PE.
Another factor contributing to this increase is in the fall in interest rates from 7.88% to 7.2% by this year. As the value of equity is (Cash Flows)/(Interest rate – growth), A fall in interest rate will increase the values of equity.
At the current price, some increase to the initial allocation could be done. Since the company seems to have moat and runway for growth and it does not seem overly expensive from that perspective. You may think differently and we would love to know why?
…
2017
Let us assume the date today is 30th May, 2017. We plan to review our investment in Tasty Bite Eatables, after two years of holding it.
Source: screener.in
Source: screener.in
Source: 2017 Annual Report
The sales of the company have grown phenomenally by 29%. The ROCE of the company has also increased. Lets focus on ROCE first, Main change in ROCE seems from the saving in material cost.
Source: 2017 Annual Report
However, on closer look the increase in manufacturing cost seems to have offset the decrease in raw material cost. This seems most likely due to sauces and new products occupying larger share of the company’s products. Slight increases in inventory turnover further confirms the fact.
Major fact which needs to be noticed are the signs of economies of scale pushing in due to fall in Employee and other cost. This along with good R&D further strengthens the competitive ability of the company.
Source: 2017 Annual Report
Let’s focus on Growth.
Growth
Source: 2017 Annual Report
The company is slowly diversifying the product profile and also establishing itself in markets. The company seems to be doing slight capex to increase the production further. There seems to be no change in growth prospects. Though 29% growth rate was way beyond expectations.
Share Price
1 Year View Source: in.tradingview.com
2 Year View Source: in.tradingview.com
The price has risen from Rs 2,600 last year to Rs 5,200 approximately. It has doubled. While the earnings of the company have grown by 37.5%, resulting in expansion of PE from 44 to 60.
Similar to last year the 10 year government yield has dropped from 7.2% to 6.6%, further contributing to this increase.
The current market cap of the company is around 1359 crore.
Reevaluation: At this stage, as per our opinion the company should not be sold, however, in order to add more the valuation model needs to be reevaluated considering any change facts
We did a small exercise to revalue the company, considering no significant change in growth prospects, assuming raised EBITDA margins from ( 7% to 11%), with no changes in the discount rate (still 8% as before in 2015) the value of the company comes to around 2200 crore. The major danger in the valuation here is of a significant fall in sales growth rate%. We think the chances of same happening are less (as the scale is still 250 crore). This seems to be the only critical variable. We may have added here.
It is easier said in theory than practice however cases like these help us form such patterns. (f you think differently please tell us why?
…
2018
Let us assume the date today is 9th August, 2018. We plan to review our investment in Tasty Bite Eatables, after three years of holding it.
Source: www.screener.in
Source: www.screener.in
Source: 2018 Annual Report
The company’s sales has grown by 18% this year and the ROCE is almost same as last year. This ROCE is vulnerable, considering the raw material exposure. We know the company cannot pass on the increase in cost to customers.
Further, the moat of the company enhanced with new products contributing around 21% of revenue vs 10% in the last year.
Growth
Source: 2018 Annual Report
This year the company continues along its growth path with around 18% increase in both businesses. The slight addition to capex further signifies the same.
Source: 2018 Annual Report
Management Change
Source: 2018 Annual Report
Kagome sold Preferred Brands International (Parent company stake) to Mars Foods. Though as of now there seems to be no major change in the way the company is working with the same management team as before (Same Managing Director, CFO, Chairman). It seems to be few of the professionally run companies in India. Only additional board seat is taken by Mars. However, this needs to be tracked in future cautiously, to see whether the circumstances have changed.
Share Price
1 year view Source: in.tradingview.com
3 year view Source: in.tradingveiw.com
The earnings of the company have increased by 21% while the Price of the company has increased by around 50% (Rs 5000 to Rs 8500), resulting in an increase in PE from around 60 to 75.
There has been an increase in 10 year yield from 6.5% to 7.8%.
At this price, we do not think anything should be done. If you have a different opinion, we would love to know why?
…
2019
Let us assume the date today is 9th August, 2019. We plan to review our investment in Tasty Bite Eatables, after four years of holding it.
Source: www.screener.in
Source: www.screener.in
2019 Annual Report
The ROCE of the company is more or less same as before. The growth in sales has been 14%. We’ll have a look at sales growth later.
The Income statement clearly shows the company being unable to pass on the price increase to customers. This is further confirmed in the annual report.
Further, the change in product mix seems to effect the working capital of the company slightly, as inventory turnover is increasing over past 3 years.
Growth
2019 Annual Report
The trend of R&D contributing more to the turnover of the company seems to be continuing, thereby further enhancing the competitiveness of the firm.
2019 Annual Report
Both, segments still our growing fast. The increase in capex is pointing towards more chances of growth in future.
Risk- New Management
Last year, our assumption was that the new company Mars, will not result in any change in the basic management. However, that has turned out to be wrong.
Now, we need to be cautious of this in future, as new management may follow different policies and the past results may become entirely useless. We will evaluate it as the changes take place.
Share Price
1 Year View Source: in.tradingview.com
2 Year View Source: in.tradingview.com
The price is approximately the same as last year, while the EPS has increased by 15%, thereby resulting in PE contraction from around 75 to 70.
At this point of time, we nothing should be done. However, if you think differently we would love to know why?
…
2020
Let us assume the date today is 6th August, 2020. We plan to review our investment in Tasty Bite Eatables, after four years of holding it.
Source: www.screener.in
Source: www.screener.in
Source: 2020 Annual Report
This year the sales of the company grew by around 30%, while the ROCE remained almost on a similar to last year. Let’s look at ROCE first.
The company was unable to pass on the cost increase to the customers. High increases in retail inflation, may further hamper the margins of the business.
The competitive advantage of the business was further strengthened as evidenced by the increase in revenue contribution from new products from 21% last year to 48% this year.
As of now, there are no changes in the policy of the company visible from new management.
Growth
Source: 2020 Annual Report
As part of the continuing trend from previous years, the company grew by increasing the product mix and diversifying in new markets. The continual new products developed by the company ensured the food service business to grow despite degrowth in frozen product business.
Future Growth Prospects: The new capex being done by the company is significant as can be seen in the balance sheet and further confirmed in the annual report. This capex further enhances the probability of future growth for the company.
Risk: Still the new management needs to be tested in tough waters.
Share Price
1 year View Source: in.tradingview.com
3 year view Source: in.tradingview.com
The EPS of the company has increased by 35% while the price of the company has increased by 50% thereby resulting in the expansion of PE from 70 to 85 levels.
During this time, the interest rates on 10 year indian government bond have fallen fromm 6.5% to around 5.9%, thereby contributing to this PE expansion.
Reevaluation: At this point of time, the business may be reevaluated. Assumptions may be challenged and new opinions or conclusions may be derived. The most important decision needs to be taken is whether the earnings have peaked?
At this point of time, we don’t think it is wise to sell the business. However, if you think otherwise we would love to know why.
Purpose
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.
Thinking at each step in the case study may help us to make decisions in future. For example: You may stop at 2019 and imagine that you are in that year, what you would have done, given the above available information and why? Then reevaluate what happened in 2020.
Pick Parts of the case study and use it as it may be helpful to you.
May we all learn and progress together.
Argha Investment Advisers 