Butterfly Gandhimathi- from Ashes to Glory?

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Dear Friends, I could not find any thread on this company in the forum.I find this company to be one of the most exciting investment ideas currently and would like to present it to the wider investment community. However, if there is any existing thread on this company, then the moderators may close this.

At the outset I would like to apologise as I have been wanting to initiate a thread on this company since the market cap of Rs.600 Crores. However, my perennial laziness has prevented me from doing so till now (It has also prevented me from initiating any thread till now for that matter). In the meanwhile, the company has runaway to a market cap of Rs.1,100 Crores.

Most of the investment Hypothesis can be read through from the attached report where the analyst has articulate the key drivers very well. To save time, effort and space I would like to run you through the key drivers of this story. Although a bit dated, it captures most of the points well.
Research Report Dimension Securities.pdf (528.0 KB)

I have highlighted the key Hypothesis Below:

Change in Business Model: I have been observing this company since 2014 and have also interacted with the management team as a financial sector participant during my previous assignments. However, I never found it to be investment worthy till as late as June 2017 because of the following reasons:

  1. High dependence on Government Business:The company used to derive almost 50% its turnover from the Government business which was low margin, working capital intensive and Low ROCE business. This business pulled down their overall RoCE. However, since this was a substantial annuity business of around Rs. 400-500 crores, the company got the requisite scale and their resources were fully utilized. This also meant that their bandwidth was fully utilized and they never had the aspirations to go beyond Tamil Nadu (and South India) in a meaningful way.

Now the twist in the tale was that they had received this order from the AIADMK government and this contract was not renewed after 2016.This literally meant that their turnover halved in 2017 and 2018. A company which can do Rs.900-1000 Crs at full utilization of its capacity was forced to decrease it to about Rs. 400-500 Crores. This also sort of shook up the management and there was a conscious decision taken at the board level to change the business model and compete in the open market. Also, more importantly geographic diversification was taken up seriously.

  1. High Geographic Concentration: The company used to derive almost 85% of the business from the South India market till as late as 2016. As I write this, they are aggressively diversifying their operations across South India and ramping up their plans to increase their presence in North and West India. To the best of my knowledge, they have set up internal targets to decrease the contribution from South India to about 60% of their turnover by 2021.

What I like about the company…

  1. Secular Growth Story- Kitchen appliances sector has always been a darling of the Stock Market and we all know the stratospheric valuations commanded by companies who have exhibited profitable growth strategies in this segment. Specifically, the sub-segments in which the company operates, there is a large segment of unorganized market (in some case, as high as 50%) which is expected to be consolidated rapidly post introduction of GST. Hence, I expect the company to exhibit impressive market share gains in its key markets and segments. Would advise you to go through the latest investor presentation as attached to understand their key sub-segments among other things. Most of it is pretty self explanatory.
    Investor Presentation Butterfly Gandhimati.pdf (1.5 MB)

  2. Large Delta in Financials expected over the next 2 years: The company came out with stunning Q2 results post which there has been a frenetic rally. I expect the company to close FY18 with Turnover of around Rs.500-550 Crores and PAT of around 20-25 Crores. There is a large scope for operating leverage to kick in over the next two years since the company can report upto Rs.1000 Crores with minimal maintenance capex. I expect the company to grow its turnover at 30% CAGR over the next couple of years as it coming of a low base and has all the backend infrastructure in place. FY20 PAT is expected to be around Rs.70-80 Crores on a turnover of around Rs. 900-1000 Crores. With much improved working capital cycle, the RoE is expected to shoot upto 30-35 percent. In fact, the continuous improvement in its leverage over the next 18 months is expected to provide a big kicker to earnings also.

  3. Change in Management Structure and Attitude: One more reason that I never invested in the company was the laid back management culture and a satisfied promoter family with limited hunger in their belly. That is also the reason they never expanded beyond South India aggressively. However, all this changed with the appointment of Mr. Prakash Iyer as the CEO, who represents the PE firm in 2016. Multiple senior level hirings have ensured that the strategic roadmap is set for the next 3 years and they are showing the right intent to convert it into a serious player in the next couple of years. From what I know, they would be looking at aggressively introducing new models and segments in the next 18 months.

Valuations: Since beauty lies in the eyes of the beholder I leave it to you to consider the valuation aspects. However, I have made enough mistakes in the market to not be fooled by Rs.1000 Crores valuation for such a beautiful consumer story. For a company with a very strong brand positioning (folks in Tamil Nadu can substantiate my claims here) and potential to grow its topline at around 30% CAGR over the next two years, I would give this company a valuation of around Rs.4,000 Crores (40x on FY20 PAT of Rs.80 Crores and 4-4.5x on FY20 Sales of around Rs.900 Crores). It is rising from the ashes and the earnings are expected to accelerate substantially over the next couple of years and the key in this story is going to be operating leverage. I am personally betting on the fact that it is headed to glory and may reach its full potential by 2020 by following the footsteps of TTK Prestige and Hawkins.

Risks:

  1. If the geographic diversification is not executed carefully, then it has the potential to stretch the financial resources of the company and the promised earnings growth may be delayed.
  2. The improvement in margins while chasing growth will require focused efforts from the management. Any churn in the current management team which is performing very well needs to be tracked.

P.S.: I would like to make a strict disclosure that I have my positions at an average price of around Rs.420 and hence my opinions may be extremely biased. Hence, whatever I post here, please take it with a pinch (rather a bowl) of salt. This is not an investment recommendation and should not be construed as one.

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This company is worth to watch.

Value investor Ashish Kacholia start buying.

On 12-Jan-2018, BOUGHT 1.0 Lac shares at the average price Rs. 580.0 worth of 8.84 Cr
On 19-Dec-2017, BOUGHT 2.0 Lac shares at the average price Rs. 525.0 worth of 10.5 Cr

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Has the promoter categorically stated anywhere that they are through with the Govt business? Major part of the investment thesis hinges on this, could not see this captured explicitly in the investor presentation or in the annual report

Advertising expenses of more than 55 Cr for FY2017 and 65 Cr for FY2016 on this revenue base! This looks like a story that can be turned around in 2-3 years by a smart management who are willing to take a fresh look at the way things have traditionally been done over the years.

Appears to be worth a detailed look. Operating cash flow for H1FY18 was in excess of 65 Cr, most of it from working capital optimization, at this rate they should be able to knock off a majority of the debt within 2 years. Possibilities looks interesting

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One of the concern I foresee is the impact on financial performance due to raw material prices(59% of cost) as metal prices have firming up in past few months. Any thoughts?

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Dear @maverickroger,
Many thanks for initiating the thread.
Per my limited understanding, Butterfly derives around 86% of its turnover from LPG stoves, mixer grinder, table top wet grinder and pressure cookers. A couple of weeks ago I had visited a kitchen appliances store to purchase some kitchenware. I did come across some product catalogues of Butterfly. I realized that this space is brutally competitive. Various brands offering decent quality at affordable prices. It could eventually lead to price wars. And, there’s the unorganised sector to compete with as well. In my opinion, customers have little brand loyalty. They’d be willing to switch the brand if it’s cheaper provided the quality is not too bad. So, it’s tough to possess pricing power in this industry. Their actions to increase sales from branded products are worth admiration but I see an uphill task.
Also, another factor that worried me was the big management. 5 brothers at the helm of the business and eventually their children would join the business. It could lead to several power centres developing in the company which could be detrimental to the company’s interest. Just my thoughts. I may be totally wrong.

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Hi,
Though there are a plethora of brands/products available in the segment per se and is seemingly commoditized consumers are still choosy of the brands they buy ( and is a result of the advertising and brand salience ). And, in this Butterfly does fairly well in segments such as Stoves and Wet grinders. With regard to the family intervention in the business, this needs further investigation, as there were rumours an year or two ago about internal power struggle.

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Hi. Well, you’re right. There’s a category of people that’s loyal to the brand. Butterfly has a firm grip on South India. But, that said, Prestige and Hawkins have tremendous presence along with Nirlon, Nirlep and Vinod kitchen appliances in West India. I believe it’s extremely difficult to penetrate this market. Customers, from regions other than South India,who are brand loyal wouldn’t switch to Butterfly. And, those who aren’t brand loyal would switch only if Butterfly resorts to predatory pricing which would hurt it’s margins. And, it could lead to a price war. And, price wars are always ugly. So, they might have to adopt the strategy adopted by ecommerce companies. I’m sure Butterfly has great quality products. But, it’s going to be one tough journey to acquire customers in geographies other than South India. Hence, with a lack of visibility, it may not be correct to assign it the multiple accorded to Hawkins or Prestige. Yet again, just my thoughts. Excuse if there’s any error.
Also, the grinder patent infringement litigation worries me. If I’m not mistaken it’s against the Elgi group founder/family. Not sure though.

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Thanks to all the forum members who have taken time out to read through and share your views here.

@sathishtherich: Yes, Mr. Ashish Kacholia has been buying aggressively and I am pretty sure that this is not the last that we have seen of him in this counter. Besides him, Dolly Khanna also has a significant chunk of it and he came in before Ashish Kacholia. There has been been some frenetic institutional action also in last 15 days with Sundaram Mutual Fund, IDFC Mutual Fund and Standard Chartered taking significant positions.

While we should not concern ourselves or base our investment decisions on what these superstar investors are doing, it certainly gives some assurance that they would have done the requisite due diligence (specially on the management part) before aggressively increasing their stake. The point is that it is rare to get attractively priced consumer stories with super long runways in this market and hence I except some more fund action over the next 30 days before the results start to become evident.

@zygo23554: Yes, Advertising expense as a percentage of Revenue is very high (relatively) and this will continue to remain so as they keep penetrating the Western and Northern regions. I am quite happy to see this continue as the valuation of a consumer story is often proportionate to the strength of your brand, assuming off course that you are growing in a capital efficient way and not going bonkers with your advertising to kill your your balance sheet. Yes, the long term debt will be completely wiped off in the next 18 months. The effect of rapidly shrinking working capital cycle will be offset by the fact that they will need to give higher credit periods in the new geographies till they establish themselves and hence I expect the WC debt to remain at these levels.
Also, regarding the certainty of government business being reduced to zero, would request you to refer to Slide 10 of the Investor Presentation as attached in my opening post. The government order contract was till 2016 and then it was discontinued. FY17 and FY18 are purely branded sales in their terminology (which means free market sales). You can trust me here buddy. I have interacted with the management and I know their bankers. I would not have put a single penny if they had even 1 percent government sales.

@manoopatil: Sir, I believe this will be passed on and won’t be an issue as such as this call will taken at an industry level and the players will increase their prices.

@asvasanra and @shreys: Theirs is large family, but is a very closely knit family and the role of each one is demarcated. Moreover, after the appointment of Mr. Iyer as CEO, he has been given a free hand. I have enough comfort with the management team now and as I write, there are multiple hirings happening at multiple levels to increase their management bandwidth for the PAN India growth. Earlier also, my problem with the management team was not that they were unethical or there will be infighting or anything like that. My only issue was that they did not have enough fire in the belly to take the attack to their rivals in their home turf and fight it out. They were blissfully comfortable in Tamil Nadu where they are literally the Emperors (with more than 50% market share) in their key segments.

Regarding the key question of whether they can meaningfully penetrate the western and Southern markets, well that’s open to debate. We can actually keep debating this for the next 20 days and both pros and cons will sound convincing and we will still not come to a conclusion. It’s a call that an individual investor has to take. I have taken a bet that they have the financial resources, operational bandwidth and the willingness to be among the top 2 players PAN India in their key segments and hence I have put my money where my mouth is. The second question is, If they are able to pull this off over the next 2 years, what should be their valuation? Also, can TTK or Hawkins grow their turnover at 25-30% CAGR for the next 2 years. Is that Plausible? In Indian markets, I have learnt that highest valuation multiple is given to growth stories once the quality of business is established.

For all you know, I may be completely wrong and they may not be able to achieve what they have set out to do. But that’s just a bet we take from time to time on every investment, isn’t it?
As the founders of this great forum often say, we can use this opportunity to do some serious collaborative scuttlebutt work. I am based at Hyderabad and I can clearly see the increasing shelf space being occupied being occupied by them (relatively speaking, Hyderabadis mere upar chad jao nakko !! :grinning:) If our friends from North, West and East India can update us once in a quarter regarding what they see in the shelf spaces in their cities or talk to distributors and give us a sense of where the company is moving, then it will help us to increasing our conviction. I am always a great believer in going out and talking to folks on the ground rather than do excel sheet analysis.

P.S: I would urge all investors who are thinking about a potential investment to again re-look at their investor presentation very closely. The key segments in which they are market leaders has a large segment of unorganized segment. Post GST, there is rapid trade adjustment happening underground and you may be in a for a few surprises in their Q3 and Q4 results. The market share gains may be higher than imagined.

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Dear @maverickroger,
Many thanks for replying. If family infighting isn’t going to be a problem this definitely is an opportunity worth exploring.
I’m from West India. I’ll visit some kitchen appliances stores and try to get reviews from shop owners on sales and customer satisfaction.

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I am from Chennai and have known this brand from my childhood days. It is indeed a very strong brand name.
Looks to be a turnaround and interesting story to watch out for.

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Yes it has strong brand value. But on selected products only. They are very strong in Stainless steel stoves (SS Stoves). If you take mixer grinder, preethi is dominating, hawkins/prestige are dominating the cookers. SS stoves are middle class consumers focused, but they are moving to the glass top stoves, which are already being ruled by some of the famous brands(Glen, HSIL, Sunflame etc.,).

In the TTWG space, they have a “little” damage to their value due to the cheap Free grinders from the Govt.(Not every consumer knows this fact, but only to the knowledgable crowd). The TTWG space is being occupied by butterfly, sowbhagya, prestige and premier (AFAIK).

So the key is, though Butterfly is late to the party, but how fast they can grab the market share ?

The numbers speaks about the turnaround, but i would like to know more about the growth in % of each segment. As the other members rightly pointed kitchen appliance is a crowded and brutally competitive space.

Disclosure: Not invested, looking for more clarity.

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At present the PE appears to be more than 100. While the company may be very good, is there any margin of safety at this lofty valuation? Do have any projected valuation based upon estimated EPS for next two years.

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Thx all for information, i was holding few @175 since around 5years, in 2014/15 it rose upto 311 or so but i clinched tightly looking @ TTK graphs. It was nightmare afterwards as the stock bobbled around my purchase price levels only. Recent jumps did give me chance to off load and could get out around 524 average-not bad holding like hind. Copper or RILs. So currently i am out without regrets for this National gem but have no intent to pick it up again. The reason i rate it bit overpriced @590-600 is 1) middle class reach and little margins of profit(unlike TTK) heavy discounts offered 2)VERY VERY BRUTAL Competition FROM PRC in the segment- seen their mfg. Capacities cost cuttings and sturdy productions as well as R&D new products/designs copying launching etc. 3) i have suffered/suffocated for five six years in scrip which remained stagnant for longer periods and personally will not go nearer. 4)election fever is over and ppl/homes have had the product range which will last for fifteen years. So i if ever bestowed with forgettable wealth would wish entry at half these rates only.

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You cannot look at PE if you cannot accurately predict the EPS in near future. Past PE does not matter for a turnaround or high growth stock. If you feel EPS will be 5 to 6 for the foreseeable future, then you are right.

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I am from Tamil Nadu and we don’t have any Butterlfy product. Although Butterfly is a known name, it is not the first name that comes to mind when I think of kitchen appliances. For me the following brands have better brand recall.
Mixer Grinder - Preethi
Table top wet grinder - Premier
Pressure cooker and cookwares- Prestige

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Does Butterfly have a lot of potential to create mindspace/mindshare in the minds of the consumer? Can the lack of sufficient brand recall (as mentioned by a few members in the discussion) be attributed to either halfhearted advertising in the past due to complacency owing to government contracts? Could it perhaps also be due to misdirected advertising aimed at the wrong target audience or not differentiating itself enough in its ad campaigns? Will the shifting of focus of the management help in capturing a sizable chunk from the existing players? These questions are topmost in my mind right now.

By the way, after some research I found that Dolly Khanna had this stock in her portfolio long back in 2010 along with Heritage, Emkay, aditya birla chemicals, and surprise surprise Hawkins cooker and TTK prestige. Wonder if Dolly Khanna was waiting for the company to re-think and re-strategize and found the new strategies working before picking it up again. This stock has already been a multibagger this past year. The future of this company looks interesting, although the past is ridden with doubts and discomforting uncertainty. Companies such as these will give a wild ride in the long term for sure. Peter Lynch once famously quoted " Perhaps there’s some poetic justice in the fact that the stocks that take you the farthest in the long run give you the most bumps and bruises along the way." I just hope as an interested party that what he said pans out true in case of Butterfly.

Would greatly appreciate views/opinions from other members. Thanks in advance.

DISC: Invested and hoping.

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I came across the below and though of adding this to the discussion.

I think the buzz around Butterfly and the turn around is due to the appointment of Mr.Prakash Iyer as CEO in Aug 2016.

I think Mr.Ashish kacholia is betting on,Mr.Prakash iyer’s leadrship to turn around the company. Please also read the report below.

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My two cents:
Apart from competitive pricing, the millennials / new buyers / current generation are also looking at good aesthetics while purchasing home appliances. For the same price offering, a better looking product will be chosen. Thankfully Apple has poured in good sense of aesthetics in Indian population.
Butterfly first came to my notice in 2012 when I saw its mixer grinder (harmony) winning an idesign Award, currently sold as product name Matchless.

http://www.designamid.com/magazine.php?pageno=133

https://www.behance.net/gallery/6114863/BUTTERFLY-Mixer-Grinder-Range

I was pleasantly surprised and happy to see a gas stove company (perceived it so, back then) investing in industrial design of a mixer grinder. India is still maturing on aesthetics and design and lot of companies prefer to fight on pricing than commanding price with good design.
Also on the specs it has a very good offering. Most of its mixer grinder are 750W unlike 500W / 600W which other companies offer. This is mostly due to their focus on South India market which uses this for chutney / cococut grinding.

Happy to see their expanding product portfolio. Air coolers, Geysers, Kitchen utensils also interest me.

Disclosure: Invested. My views might be biased. These are my personal views and not any recommendations.

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I read all posts here but could not find the reason for this quarter high sales!
Sales and Profit are both high this quarter. Any special reason for good margin in Sept Quarter?

Disc: Not invested.

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I hail from Tamil nadu. Couple of days back ,I Happen to visit an appliance store in my city.
The gas stove section was loaded with Preeti and Prestige products.Sadly Butterfly is not the first choice for the store keepers either.
There is one more brand called vidiem from Maya appliances.The sales team in the store was highlighting the offers that vidiem is offering.
Looks wise Vidiem looked good honestly.
Looked like a highly competitive space
Butterfly was the 4th or 5th brand that any prospect can think of
Business wise,I didn’t analyse the company but as brand ,I should say Butterfly is lagging behind peers.

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