Tasty Bites: A proxy play to India’s QSR industry


(ANANT JAIN) #1

History:
Tasty Bite Eatables Ltd. (TBEL) was incorporated in 1986, as a wholly-owned subsidiary of Grand Foods. In 1988-89, it set up a state-of-the-art Ready-toServe (RTS) food and frozen vegetables production facility in India. Its sales failed to pick up. In 1992, Pepsi, owing to its export obligation (due to a Government of India’s regulation for foreign multinationals), collaborated with TBEL for exports of TBEL products. At that time, Preferred Brands International (PBI), a US-based natural food marketing and distribution company, was given the charge of marketing TBEL products internationally. TBEL committed resources to the joint efforts. In 1994, the reforms in the Government of India regulations released Pepsi of its export obligations. Pepsi decided to stay with its core business and exited the collaboration with TBEL. In 1995, PBI was given exclusive brand rights in key global markets of TBEL and Tasty Bite products were launched in the US. In 1996, Hindustan Lever Ltd. (HLL) acquired Grand Foods. At that time, TBEL had accumulated losses to the tune of Indian Rupee (INR) 112 mn. It was declared a sick unit and referred to BIFR. In 1997. However, HLL had decided against venturing into frozen foods business. Therefore, except for representation on the Board, HLL withdrew from all the other activities. Ashok Vasudevan and Kartik Kilachand of PBI who had been responsible for marketing TBEL products in the foreign markets along with three more members took charge as members of the Board of Directors of TBEL with Ashok Vasudevan as the Chairman. Ravi Nigam from Britannia Industries was appointed as the CEO.

Transformative Years:

Some of the major problems that the management had to face during these years were:
a) Changing the employee culture (multiple meanings). Since the company was in food processing business it had to ask the female employees to re-consider the usage of vermilion/Bindi/Mangalsutra etc to ensure none of these causes any contamination. It also had to deal with employee unions and their concerns about an American management. The problem was further accentuated due to delays in salary payouts.
b) Establishing presence across food chains: Product placement in US food chains is very costly ranging between 5000$ to 10000$. Placing products across two hundred stores of each chain was a financially daunting task.
c) Quality issues. Someone in USA found a worm in their packets and they had to pay US$ 160000 to settle the claims. Also a deviation in color of food led to settlement of insurance claims.

The management successfully faced these issues and have stuck to the company throughout these years.

Current Scenario:

The company has two business segments
a) RTE segment: Exports to US and other countries
It is a well known brand and is available across multiple channels and almost all mainstream food chains (Walmart, Costco, Safeway etc.). Revenue from this business has grown from 56.56 crore in FY11 to 86.34 crore in FY14.

b) Supply to QSR and HORECA: Company manufactures products like Patties, Sauces and other Veg products. This business has grown at 55% CAGR in last four years from 15.89 crores to 5.59 crores. The list of clients include Domino’s, McDonald’s Pizza Hut, Subway, HUL, Burger King.

Industry:

a) RTE Segment: The RTE segment of international/ethnic foods is approximately $ 2.5 billion and growing at a rate of 15%. The company has constantly introduced newer varieties in this segment including thai foods.

b) QSR segment: According to multiple research reports the QSR segment is going to grow between 20% to 25% on account of increase in QSR penetration and increased disposable income.

Financials (https://www.screener.in/company/?q=519091)

Important Points:

Sales/RM: There is a constant reduction in RM/Sales ratio. It has moved from .65 to .59 last quarter.
WC: Strong WC management as the company follows a very strict debtor day period.
Asset Turns: Current assets turns are low but the management has indicated that the asset turns can go as high as 3.5 to 4 times (from research report below not first hand)
Management: Excellent mgmt. which has stayed with the company for last 15 years.

Joker in the pack:
Recently 120 year old Japanese company Kagome has acquired majority stack in PFI the promoter company of TBEL. By virtue of this TBEL’s majority (nearly 51%) is Kagome now.

Disclosure: Invested at an average price of 600 with greater than 10% allocation. No purchase in last 3 months. This is not a buy or sell recommendation.

References:
The following is a management case study done by Dr. Gita Bajaj, Currently Professor at MDI Gurgaon on TBEL in 2008.
http://www.vikalpa.com/pdf/articles/2008/vol333-07-99-109.pdf

Research report by Stalwart Advisors:
http://rakesh-jhunjhunwala.in/wp-content/uploads/SA_TastyBites_April2015.pdf

Anil Tulsiram (a fellow VPian’s blog)


I have also attached the BQ template that Akshay Nehru and I have worked upon. This should take care of BQ related questions that you might have

And ofcourse a big thank you to Screener.in


(ANANT JAIN) #2

Attaching the BQ templateTasty Bites - BQ V(1).xlsx (17.7 KB)


(manish dwivedi) #3

I had a quick check on Screener www.screener.in/company/?q=519091. Promoters have pledged 100% of their shares. Isn’t it s a big red flag?


(ANANT JAIN) #4

The pledging is to the parent company PBI for historical reasons and hence no cause of concern.


(Donald Francis) #5

Anant Jain - thanks a lot. Finally the much promised thread :smile:

Could you please edit your initial post and improve the data presentation. Cut paste data tables from Excel directly - that gets converted to nice images automatically (don’t forget to clean up after)


(ANANT JAIN) #6

Done Donald. It looks lot better now.


(anil) #7

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/Tasty_Bite_Eatables_Ltd_140415_SAST2.pdf

Pledged shares were released after parent’s acquisition. Since they were relesed in April, the last published results still show them pledged (as on March 2015).


(Chintan) #8

Yes, this is also mentioned on slide 29 of the SA research report.

Being a vegetarian in Europe, I can attest to the potential for RTE food export market. However my main experience has been with MTR RTE which gives the taste but doesn’t at all seem nutritious. Anyone who has tried Tasty Bites RTE?

Also, the SA report mentioned that TB is a preferred supplier for sauces and frozen food. This would mean there are other suppliers as well; who must have very good quality. Margins would hence always remain under pressure.

If there is one batch of poor quality, they could be blacklisted by the particular brand?


(ANANT JAIN) #9

Yes there are but very few. Dr. Bektor’s is another in which Motilal Oswal PE guys have invested. There is a difference between other Indian brands and TB in the demographies they cater too. TB’s focus is only the native white population and not expats whereas MTR and others focus on expats. It also become clear when you look at labelling Kosher, Vegan etc.

Yes quality is a double edged sword it acts both as a strategic asset and a possible cause of concern (look at Maggi). In my finding there are strong procedures to gate quality at every stage from procurement to manufacturing to supplying.


(ANANT JAIN) #10

I have captured these aspects in BQ template you should take a look into it.


(Raj Panda) #11

Hi Anant, Anil, can you please help me to understand, come 2018, how are these shares going to be treated ?

59,530 1% Non-Cumulative, Non Convertible Redeemable Preference shares of
Rs. 100/- each


(sri krishna bhutra) #12

Went through a few reviews and feedbacks of Tasty Bites products on Amazon.com. Reviews look good and customers seem positive towards the products. A few cooking blogs have also written positive reviews about Tasty Bites products.


(Niraj Kumar) #13

Anybody has take on open offer Tasty Bite Open Offer Document?. Can it be not a precursor to delisting. If enough share tendered by public what is possibility of delisting?


(ANANT JAIN) #14

Hi Raj,

These were issued to the parent company in 1st Sept 1998 to the parent company PBIL, I think the financial position of TBEL was precarious and the promoters had put up their own money. These will mature in 2018. There is already a reserve created for payment of these look at AR

Reserve for Premium of Preference Share Capital 116,083,000. From an accounting perspective I guess Anil would be in a better position to explain.


(ANANT JAIN) #15

Since Kagome acquired majority stake in TBEL (via PBIL) it is a regulatory requirement to put up an open offer. I will not read much into it.


(Rupesh Tatiya) #16

I have come across following red flags.
Anant, other fellow members, can you please address them?

  • For FY15, Other Operating Income was 10 Cr and NP was 10 Cr. Numbers for FY14 were 7.98 Cr and 4.32 Cr. If you remove it NP is 0 for FY15.
    What is this other operating income? Is it going to continue for coming years? If yes, Why is it accounted as “other”?
  • Why pay dividend when you have non-current liabilities of ~26 Cr?
  • All of their debt is ECB. How will rupee movements affect them? How are they hedged?
  • Other expenses are 27Cr for FY15, ~16% of topline. What are these expenses?

Thanks,
Rupesh

Disc: Have taken small position for tracking


(NMB) #17

Looks like a good company but looks seriously expensive at 27x. Yeah, could be a de listing candidate some day and upcoming growth should be good.

Just think we have missed the bus on this one.

Need something new and undiscovered.


(valuequest) #18

Other operating income is export incentives,in absence of which the company isn’t making any profits !!


(ANANT JAIN) #19

Don’t worry about these. These are duty refunds, since duties and taxes cannot be exported a company is entitled for duty waiver/remission. Almost all exporters depend on them and will always be a significant part of their calculations. For reference you should check with exporters like Kitex, Frestrop etc.

I did not willingly respond to your previous questions since nearly everything is available in the AR. Just dig a little deeper.


(Hrishikesh Kale) #20

Hi,

Sorry started a new thread without checking on the previous . Anyways am reposting the same message here. Any idea how to delete a thread?

This is a pune based company into two businesses : Consumer business and Food service business.

Food service business TBE is a preferred vendor for leading qsr and HORECA brands in the food servicing industry. Products include patties, appetizers and ready meals. QSR means quick service restaurants and HORECA means hotels restaurant and cafes. Major customer includes jubilant foodworks.

In the consumer business they manufacture ready to cook meals which is then exported to primarily the USA and marketed by preferred brands their erstwhile promoters.

Preferred brands owned 74 percent of Tastybite eatables. However Kogome a roughly 2 billion us dollar Japanese major acquired 70 percent of tastybite eatables.

As per the acquisition document (http://www.kagome.co.jp/company/news/n_pdf/140415002.pdf
), the acquisition cost was US$80.2 million. So that means roughly 500 crore rupees.

So in effect Kogome now owns (70 X 74 percent) or 50 percent of tastybite eatables.

So they have paid 500 crores for

a. The brand
b. The 20 employee preferred brands ltd.
c. 50 percent of Tastybite eatables.

For calculation purpose if i give zero value to the a and b, they are valuing tastybite eatables at Rs. 1000 crores or 3897 rs per share.
1.
Now even assuming that they paid 50 percent of the valuation for the brand and for entry in the US markets that means roughly they have valued TBE at around 2000 rs per share.

The capital base is 25.66 lakh shares. Out of that 74 percent is owned by the two promoters or roughly 19 lakh shares. The top three individual investors hold another 2.17 lakh shares. So harldy 4.5 lakh floating shares.

The entire promoter holding was pledged but as per latest SHP all the pledge is now removed.

This is what they have mentioned in their acquisition document

The Company believes PBI can, on the medium-term, make JP¥10 billion sales and JP¥1.5 billion operating
income (both sales and operating profit are approximately 2 times against FY2015 forecast).
1.
Over last 5 years TBE has grown by around 21 percent and operating margins have improved from 5 percent to 14.11 percent and npm has improved from .5 to 5.39 percent. ROE has improved from 6 percent to 24 percent.

They are done with a 2 year capex program and debt is around 30 crores.

Current EPS is Rs. 42 and it is quoting at a PE of around 30.

There was an open offer in the Rs. 600 range but with price at around 1300 no chance of any takers