Verdict: Tasty for a quick (short-term) bite

IPO Snapshot:

Mrs. Bectors Food is launching a Rs. 541 crore IPO between Tue 15^th Dec to Thur 17^th Dec 2020, 93% of which is OFS by PE investors and small portion of Rs. 41 crore is fresh issue, both in the price band of Rs. 286-288 per share. Issue represents 32% dilution and is expected to list by 28^th Dec. Company had SEBI approval in Nov 2018 for a Rs. 800 crore IPO, but did not launch it then.

North Indian Biscuit-cum-Bakery Company

Undertakes packet food business under 4 key verticals:

1. Mrs Bectors Cremica branded biscuits sold in domestic market: 37% of FY20 Rs. 760 crore revenue
2. Bakery products retailed under ‘English Oven’ brand: 17% of revenue, growing at 30%, 53% gross margin higher than biscuits’ 44%
3. Biscuit exports (Cremica + private label): 22% of revenue, but suffered huge loss in some geographies, entailing Rs. 7 crore bad debts provision in FY20
4. Unbranded sales to QSR restaurants (institutional bakery) and contract manufacturing for Mondelez: 25% of topline, fetching lower margin vs branded business.

As per a 2013 brand separation MoU within promoter’s brother, company’s ownership of brand ‘Mrs. Bectors Cremica’ is limited to biscuits, restraining extension of its flagship brand to other high-growth food categories like snacks, sauces, condiments etc. Thus, company founded by promoter’s mother Mrs. Rajni Bector, remains a biscuit and bakery player with regional focus in North India.

Grey Shades of Corporate Governance?

Company pays Rs. 1 crore annual salary to promoter’s spouse Mrs. Rashmi Bector for which no executive role is stated in the RHP (role and responsibilities for other promoter group members clearly detailed). On Rs. 30 crore net profit for FY20, this is a material amount under the corporate governance lens. On this subject, last week UPL share corrected 15% intra-day on an old whistle blower case regarding 0.1% of profit paid as rent for promoter. Interestingly, Mrs Bectors’ employee cost to sales at 15% is the highest across packaged food industry, way above 4% for Britannia, Prataap Snacks, as well as 10% for Nestle and DFM Foods, irrespective of their revenue.  

Covid improves H1FY21 Financials

Between FY15-FY20, revenue CAGR was 5%, when biscuit and bakery industry clocked 11% CAGR, as per RHP’s Technopak report. Net profit remained flat at Rs. 30 crore in 5 years, implying margin contraction. Covid-induced rising in-home consumption and pantry stocking in H1FY21 grew revenue 9% YoY to Rs. 431 crore and PAT to Rs. 40 crore, margin improving to 9%, albeit on a smaller base, from 4% in FY20. 38-50% growth in B2C biscuits/bakery business compensated the adversely impacted institutional bakery and canteen stores department (CSD), propelling FY20 EPS of Rs. 5.3 to Rs. 6.8 in H1FY21.

Object of Issue: Exit Route for 5 year old PE investors

OFS facilitates PE investors CX Partners and Gateway Fund to trim 47% combined holding to 16%, earning a sub-optimal 10% IRR on their 5 year old investment. Fresh issue proceeds will fund brownfield expansion at Punjab, increasing FY23E biscuit capacity by 20%.

Valuation:

Company’s Rs. 1,700 crore asking market cap discounts FY21E revenue and earnings by 2x and 21x times, which are at steep discount to average food FMCG multiples of 6x and 45x respectively. Industry leader Britannia is a national brand with deeper market reach while small cap peers Prataap Snacks and DFM Foods have similar revenue run-rate and market cap, despite lower gross margins of 30-40% vis-à-vis 45-48% for Mrs Bectors. But both the latter have failed to reward shareholders over the long run.

Conclusion:

Despite presence in multiple verticals displaying lack of focus and unbranded business fetching lower multiples, pricing has left money on the table with a short term view.

Over the medium term though, performance remains to be monitored post normalization of covid-tailwinds.  

Grey Market Premium (GMP) of Mrs. Bectors Food: Grey Market Premium of Mrs. Bectors Food is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.