Lotus Chocolate Company: A Tasty Affair

[Mohit_baid]

About

Incorporated in 1989, Lotus Chocolates
Ltd manufactures Chocolates, Cocoa
Products and other similar products[1]

Business Overview: [1]
LCL is in the business of sourcing and processing cocoa beans to manufacture chocolates, cocoa products, and cocoa derivatives. Its products are supplied all over the world to chocolate makers and chocolate users, from local bakeries to multi-national companies, etc.

Product Profile: [1]
Chuckles, Supercar, Chco Drops, Choco Bars, Cocoa Powder, Choco Slab, Cocoa Butter, On and On, Hand filled chocolates, Chocolate liquor, also known as cocoa liquor and cocoa mass

Manufacturing Facility: [2][3]
The company has an ISO 9001-2008 and FSSC 22000:2010 (Food Safety Standard Certification by TUV NORD) certified manufacturing unit at Medak in Andhra Pradesh, where it processes cocoa beans into cocoa powder and
cocoa butter, and sells chocolates under the Lotus brand

Clientele: [3]
Amul, Mother Dairy Fruit & Vegetable Pvt Ltd, and Parle Products Pvt Ltd.

Loss: [4][5]
The company generated all its revenue from the sale of cocoa products but reported a loss in FY23

Acquisition: [3][6]
Reliance Consumer Products Ltd (a wholly owned subsidiary of Reliance Retail Ventures Ltd) acquired 51% stake and took control of the company from May 24th, 2023. RCPL made an open offer to their public shareholders, and on April 6th,2023, completed the acquisition of 130 equity shares of company under the open offer. RCPL has also acquired a 100% shareholding of Soubhagya Confectionary Pvt. Ltd for Rs. 18 crs.

Change of KMP: [7][8][9]
a) Mr. Sikander Aman Khullar resigned as Chief Executive
Officer and was replaced by Mr. Sandipan Ghosh on Jan 3rd, 2024
b) Mr. Vivekanand Narayan Prabhu resigned as Chief Financial Officer and was replaced by Mr. S Gautham on July 18, 2023

Narration	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19	Mar-20	Mar-21	Mar-22	Mar-23	Mar-24	Trailing	Best Case	Worst Case
Sales	60.78	65.40	66.47	56.92	65.69	69.89	47.87	86.97	62.72	144.06	243.76	330.89	168.59
Expenses	59.86	62.65	65.04	54.22	63.75	68.32	45.48	80.66	68.47	144.85	232.45	315.54	164.97
Operating Profit	0.92	2.75	1.43	2.70	1.94	1.57	2.39	6.31	-5.75	-0.79	11.31	15.35	3.62
Other Income	0.59	0.19	0.13	0.02	0.07	0.05	0.11	0.23	-0.69	1.08	0.99	-	-
Depreciation	0.73	0.77	0.80	0.80	0.65	0.65	0.62	0.22	0.17	0.38	0.38	0.38	0.38
Interest	0.07	0.91	1.22	0.66	0.15	0.20	0.20	0.31	0.32	0.79	1.24	1.24	1.24
Profit before tax	0.71	1.26	-0.46	1.26	1.21	0.77	1.68	6.01	-6.93	-0.88	10.68	13.73	2.00
Tax	-	-	-	0.33	-0.12	-0.11	-0.09	-	0.02	-0.46	1.03	10%	10%
Net profit	0.71	1.26	-0.46	0.93	1.33	0.88	1.77	6.01	-6.96	-0.42	9.66	12.41	1.81
EPS	0.55	0.98	-0.36	0.73	1.04	0.69	1.38	4.70	-5.44	-0.33	7.52	9.66	1.41
Price to earning	81.67	51.81	-97.11	68.68	19.97	14.69	10.63	31.18	-36.14	-1,050.36	194.99	194.99	56.69
Price	45.30	51.00	34.90	49.90	20.75	10.10	14.70	146.40	196.50	344.65	1,467.00	1,884.35	79.85
RATIOS:
Dividend Payout	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%	0.00%
OPM	1.51%	4.20%	2.15%	4.74%	2.95%	2.25%	4.99%	7.26%	0.00%	0.00%	4.64%
						TRENDS:	10 YEARS	7 YEARS	5 YEARS	3 YEARS	RECENT	BEST	WORST
						Sales Growth	10.06%	11.68%	17.01%	44.38%	129.69%	129.69%	10.06%
						OPM	2.75%	2.79%	2.50%	2.15%	4.64%	4.64%	2.15%
						Price to Earning	59.20	56.69	62.87	113.09	194.99	194.99	56.69

Risks -

• Intense Competition:
  The Indian chocolate market is dominated by global giants like Cadbury, Nestlé, and Amul, which have greater financial resources, brand recognition, and distribution networks.
• Raw Material Price Volatility:
  Fluctuations in the prices of key ingredients like cocoa, sugar, and dairy products can impact profitability. If Lotus Chocolates cannot pass these cost increases on to consumers, margins could be affected.
• Changing Consumer Preferences:
  If consumer preferences shift towards healthier snacks or low-sugar products, and Lotus Chocolates is slow to adapt, it could lose market share.
• Supply Chain Disruptions:
  Any disruptions in the supply chain due to geopolitical events, transportation issues, or other unforeseen circumstances could affect the availability of raw materials or finished products.
• Economic Slowdowns:
  Economic downturns can reduce discretionary spending, and chocolate, being a non-essential item, might see a drop in demand during such periods.

Disclosure - Invested

[Mohit_baid]

Both Topline and Bottomline growth has been phenomenal after the acquisition, as Reliance brings in all the talent, network, and expertise required to turn around such businesses in a jiffy.

Reliance completes acquisition of Lotus Chocolate

Shortage of cocoa across the globe has pushed prices to a new lifetime high and is showing no signs of slowing down anytime soon, Chocolate companies like Lotus are expected to benefit from the same as ticket size goes up, and being primarily a B2B company Lotus can forward the price increase without much hassle.

Early Signs of Growth -

Appointing Distributors - Lotus Chocolate

[HarshVijay]

How will increasing prices of chocolate benefit Lotus? Still can’t understand. Even if they are able to pass on the prices, how does that imply that Lotus will be benefitted?

[Udaibir]

Absolute margin increases with increased prices even if the %age margin remains the same.

[Mohit_baid]

I think this must help you understand how it works. Here, I have kept the volume and other raw material prices constant to simplify things for your understanding. Also, the end consumption of chocolate has always been detached from the price movements because there is no alternative to chocolate and the demand has only been growing for centuries.

I have considered that Lotus was able to pass on 100% of the price hike but realistically even if they are able to pass on 70-80% of the hike the bottom line will still grow.

[manish962]

Disclosure of your holding is missing.

[Anant.A]

Hi All, just want to clarify that all the biggies - likes of Mondelez, Nestle, Mars are able to hedge the price of cocoa given the sheer volumes they sell globally. They have a centralised source for sourcing cocoa and own acres and acres of farms in countries like Ghana. So they enjoy economies of scale and hedging benefits and even though price of cocoa has increased by 3x they are still relatively insulated which is why price of dairy milk silk has only gone up by 10% in last 6 months while that of Amul chocolates has gone up by 30%. Beyond a point domestic players like Amul will not be able to pass on the price hike to the consumer and will begin to lose market share to the global giants which will mean that either Lotus’s topline will crash or its margins. The lower the price of cocoa the better it is for smaller players to thrive or it’s the end of the road. All small chocolate D2C brands have shut shop because core ingredient - cocoa - which contributes to 50% of COGS is now unaffordable.

Disc : not invested

[Mohit_baid]

Hi Anant,
While respecting your thought process.
There are a few things I would like to point out.

@Anant.A

They have a centralised source for sourcing cocoa and own acres and acres of farms in countries like Ghana.

Doesn’t matter because the prices have gone up as crops were destroyed due to climate change in regions like Ghana and Ivory Coast, the same applies to anybody and everybody.

Chocolate: Cocoa price hits record high as El Niño hurts crops

*

@Anant.A

even though the price of cocoa has increased by 3x they are still relatively insulated which is why the price of dairy milk silk has only gone up by 10% in the last 6 months while that of Amul chocolates has gone up by 30%.

Chocolate prices to spook UK customers this Halloween | The National

Why did the prices increase in the UK by 70-80% and why so less in India ? One simple and well-known reason is ‘Cocoa content’, Indians prefer sugar and milk solids-loaded chocolate usually made in vegetable fat rather than Cocoa butter.

Comparing Dairy milk to Amul is an apple to oranges comparison. 80% of Amul Chocolates range contains 45%+ Cocoa and are purely made in Cocoa butter on the other hand Cadbury’s 80% chocolates contain less than 25% cocoa content and many are made in palm oil/vegetable fats. So, the more the cocoa content, the more the price hike but what’s the good part about dark chocolates? Consumers of dark chocolates are growing much faster than that of milk-based chocolates headed by brands like Amul who source Cocoa for its highest selling single origin dark chocolate from Karnataka’s Karavali Region.

*Major Correction - Amul has not increased their prices by 30% they have been planning a hike between 10-20% and Cadbury’s has increased Dairy milk’s prices by over 12% in most countries.

Cadbury Dairy Milk price rockets 12% as choc maker says move is a 'last resort'

Amul chocolates may get costlier as rising cocoa prices bite - Times of India

@Anant.A

Amul will not be able to pass on the price hike to the consumer

Amul sources its Cocoa domestically and is currently selling the most value for money Dark chocolate do we think a Dairy like Amul and a Management like Reliance will give up on sales due inability to pass on price hikes? People who prefer eating Dark chocolates will continue doing that because Amul gives 125gms of dark chocolate for 100-120rs. And Cadburys gives 80gms of Bournville for the same price. Both are very reasonably priced when compared to brands like Lindt or ITC’s Fabelle which cost anywhere between 3x-10x.

Just came across a decent analysis by this Youtuber -

Lotus Chocolate Company

[sasodekar]

Operators have entered and still managing seems. Sometimes if logic and research dont work, then lets go with ready to eat segment median PE or ratios. Some said stock has corrected a lot from high! Dont understand, and willing to say… Bhai aise bhi koi stock upar jaata hai? Ultimately to buy a Chocolate and cake story, we have still high PE good performers. Simply by adding a famous name also does not give it a credibility until fundamentals start reflecting well atleast QoQ basis.

[Anant.A]

Hi Mohit,

Thankyou for your builds. Few pointers-

1. Mondelez, Nestle & Mars have their own sources of cocoa because they own the farms hence they procure it a better price than the likes of Amul who rely on a third party to source the cocoa - in this case Lotus
2. Agree with you that the recipes are different across brands - Silk & Galaxy are 100% pure chocolate while Dairy Milk , Amul etc are mix recipes - chocolate + compound (dry mix). This is exactly why you can buy a chocolate for Rs 10 in India while a chocolate costs > Rs 50 in the UK. India is a value for money market.
3. Amul has increased prices by 30%. Pls don’t go by articles , pls look at the back of pack before and after.
4. To your point on why prices have gone up in UK - simply because you can afford to pass on cost escalations to the consumer in that country/region as per capita chocolate consumption is 5kgs in UK but only 450gms in India. Why? - because consumers have many alternatives in India to satiate their indulgence cravings - traditional sweets - which are not available to the British. If you increase prices in India consumers will stop eating chocolates and switch to other alternatives. Hence most companies are happier taking a hit on their margins vs losing consumers altogether.

Question to answer is how long will companies like Amul be willing to take the margin hit and how will lotus make margins given escalating costs of cocoa & customer concentration risk - majorly Amul ?

[Mohit_baid]

Well, I feel I could not convey what I wanted to. Anyways, time and the company’s performance will tell. I might be wrong or I might not be.

1.Lotus doesn’t sell Cocoa, Amul has been undercutting the competition’s pricing by a good margin for years now and it can happily continue doing so, its huge.

2.I am assuming you know that ingredients are mentioned in descending order of their weightage in a recipe. It is pretty clear that Amul’s chocolate in the same price range has Cocoa as its first ingredient and that there is no such thing as pure chocolate when it comes to Mondelez. But you do get Pure chocolate in Amul.

3.Okay, Forgetting the articles. I am attaching a price chart of Amul dark chocolate which still sells for 110, the price it was being sold at least a year ago. They are growing much faster than brands like Cadbury’s as mentioned earlier and moreover, lotus is also increasing their client list.

4. I hope you understand that the same dairy milk being sold in India contains lower quality ingredients and probably the lowest cocoa content across the globe so cocoa prices won’t do much to them because there is negligible amount of cocoa when compared to countries like the UK where cocoa contents are much much higher.

Please come to conclusions based on the data.

Healthy Bite: Dark Chocolate to be the fastest growing segment in India

https://indianexpress.com/article/india/indias-black-chocolate-market-biggest-brand-9092362/

[Anant.A]

Hi Mohit,

1. Lotus does not sell Cocoa. Cocoa is processed to make something called “crumb”. Crumb is mixed with other ingredients to make chocolate.
2. Amul chocolate is highly compound in nature and that is why they can sell it at throw away prices. Pls do try Amul Dark vs Bournville vs Galaxy Fusions Dark - you will be able to tell the difference. Only Mondelez & Mars sell pure chocolate which is not discreetly called out anywhere because that’s not how they want to market it, instead, they choose to talk about the superiority of experience that the product delivers. Cadbury Silk & Galaxy chocolates are pure chocolates.
3. Amul is not growing faster than dairy milk. Infact Amul is losing share.
4. This is the biggest myth that quality of ingredients are inferior in India - no they are not , like I said cocoa/crumb is sourced from a central location so that can’t be different. What is different is the quantum of chocolate + cocoa liquor + cocoa solids depending on price points. Rs 10 will have different recipe vs Rs 50 so that margin profile can be maintained and companies can unlock penetration at compelling price points . What is different (may not be necessarily inferior) is ofcourse the other ingredients like sugar, veg fat etc which are sourced locally. Mondelez may be procuring sugar from dhampur in India and British sugar in UK so subtle difference in taste can be attributed to this.

Hope this clarifies.

[Mohit_baid]

I can’t discuss based on assumptions. Anyway, I think the numbers of the company will do the talking.

Amul is losing market share?
https://indianexpress.com/article/india/indias-black-chocolate-market-biggest-brand-9092362/
Just in case you don’t have access to this article ^ Please read this -

India's dark chocolate market is growing. Who is taking the biggest bite?

@Anant.A

Mondelez, Nestle & Mars have their own sources of cocoa because they own the farms hence they procure it a better price than the likes of Amul who rely on a third party to source the cocoa - in this case Lotus

Seems like Mondelez is the one doing the most to survive. Price Hike + Weight reduction.

As I said I can’t discuss based on assumptions so I shall stop now and moreover, discussions based on biases always lead to wrong decisions. I love dark chocolates irrespective of the brand so yeah no matter who increases the price and who doesn’t I will still continue enjoying 2 pieces of delight every day. Kudos and Happy Investing.

Was nice knowing your perspectives.

Disclosure - Invested

[Anant.A]

Hi Mohit,

No assumptions. I work in the chocolate industry. You can check my LinkedIn profile. Mondelez has 90% share in the industry so they can afford to increase price and reduce grammage because consumer loyalty is very high for their iconic brands. Amul maybe gaining share in dark chocolate but they are losing share at an overall level ( dark + milk). Also dark is a very small segment (500crs of the total 20000cr chocolates category). Thankyou for your builds and it was nice exchanging notes.

[Ruban_Sarma]

Mohit_baid THANK YOU, with the Change in Management and auditors, the sales volumes is increasing. COCO prices is a concern which may affect margins. Went to a few reliance retail stores and lotus brand is not available. Runway for growth is available and lot of competition. the new CEO Mr. Sandipan Ghosh has lots of experience in consumer retailing. this video is before sandipan ghosh joining lotus.

Dairy Dialogue with Sandipan Ghosh

Attended AGM, management very tight-lipped, only told growth outlook is positive. No commentary on growth guidance, capex, capacity utilisation.

[Mohit_baid]

A new Independent Director is on board, but one notable factor here is her position in a few Reliance group companies. This makes me feel that Reliance is not just being a stakeholder but actively participating in the company’s day-to-day business affairs.

Her work experience -

[Prakhar11]

I think it’s all speculation cause if you remove the reliance aspect the business is not very good - high pe , low pricing power , not very well past performance, volatile raw materials , very strong competition.

But again it’s reliance and if they want to capture the market share they will.

I am still not invested but this does tempt me just cause of brand value of reliance.

[Chandragupta]

Reliance has already taken over the management, so this is nothing new. Reliance plans to feed its retail / grocery businesses with chocolates, cocoa or other such products using this and undercut the competition. But track record of Reliance to create value in their acquired companies is not great. See businesses such as Hathway, Den Networks, various media companies, Just Dial etc. They only fit in as small pegs in the larger Reliance Gameplan and may not necessarily be a priority for them. So, one must be careful, especially given that the valuation has already run up so much.

Unless there is evidence to show that this time it’s different.