Mrs. Bectors IPO is all set to open on December 15th, 2020. The timing is quite coincidental as its customer (to whom they supply buns) Burger King just closed its IPO with heavy oversubscription.

Issue Details

Ipo Date – Dec 15 to Dec 17, 2020

Issue Size – 540.5 Cr (40.5 Cr Fresh issue (To finance the cost of Rajpura Expansion Project and to meet general corporate purposes.) + 500 Cr OFS)

IPO Price – Rs 286 to Rs 288

Lot – 50 shares (Rs 14,400 at upper price)

About the Company

Incorporated in 1995, Mrs. Bectors Food Specialities Ltd is one of the leading companies in the premium bakery segment and premium and mid-premium biscuit segment in North India. The company’s product portfolio mainly consists of two categories of products; Biscuits (cookies, creams, crackers, digestive, etc.) and Bakery products (bread, buns, pizza bases, cakes, etc.).

Mrs. Bectors manufactures and sells biscuits under its brand name “Mrs. Bector’s Cremica” whereas bakery products are manufactured under the brand name of “English Oven” and offered in the premium market segments such as Delhi NCR, Mumbai, and Bengaluru. As of June 30, 2020, its bakery segment has a total of 96 products and the Biscuits segment has a total of 384 items.

All of its products are manufactured in-house across 6 strategically located manufacturing units in 5 different cities i.e. Maharashtra, Karnataka, UP, Himachal Pradesh, and Punjab. The company has a very strong distribution network of 154 super-stockists and 644 distributors supplying products through 458,000 retail outlets and 3,594 preferred outlets. It sells its products to 23 states in India and also exports its products under its own brand name and third-party private labels to 64 countries all over the world.

They typically maintain an inventory of raw materials for a period of 15-20 days due to which they have not faced any disruption in theirr manufacturing process during this period.

Quick Facts

  • Supplies buns and other bakery frozen products to institutional customers
  • They are the largest supplier of buns to reputed multinational QSR chains according to the Technopak Report
  • Customers include Burger King India Private Limited, Connaught Plaza Restaurants Private Limited, Hardcastle Restaurants Private Limited, and Yum! Restaurants (India) Private Limited.

Realizations | Revenue Mix

Risks

They do not have any long-term supply agreements with any of their QSR customers. Further, the absence of any contractual exclusivity with respect to business arrangements with such QSR customers poses a threat to their ability to be able to continue to supply products to these QSR customers in the future.

Contingent Liability of Rs 7 Cr (small amount) as of 30th Sept 2020

The promoter, owns 1.12% of the shareholding in CAFL, one of Group Companies engaged in the business of selling biscuits, bakery products, confectionery products, chocolates, and breakfast product, and 99.76% shareholding in MBCDPL, one of its Group Companies engaged in the business of manufacture and sale of milk, milk powder, milk products, processed milk, ice cream, butter, ghee, and other dairy products. They cannot assure that the interests of CAFL and MBCDPL will align with their business interests.

They currently avail benefits under certain export promotion schemes, including Duty-Free Import Authorisation scheme (“DFIA Scheme”), Merchandise Exports from India scheme (“MEIS”), and Export Promotion Capital Goods (“EPCG”) license. As per the licensing requirement under the said schemes, they are bound by certain export obligations which require them to export goods of a defined amount, failing which, they may have to pay the Government, a sum equivalent to the duty benefit enjoyed by the company under the said schemes along with interest.

In the past, their controls and compliances for managing its secretarial records have been inadequate as a result of which there have been non-compliances with certain provisions of the Companies Act, 1956, and failure in maintaining certain corporate and regulatory records by the Company.

They have received three notices from certain food safety officers under the FSS Act which is in relation to the misbranding of samples of certain products that belong to their erstwhile customers for whom they undertake contract manufacturing of biscuits.

Naresh Kumar, an ex-workman of Company, in the Court of Civil Judge, Senior Division, Himachal Pradesh, is exercising powers under the Employees’ Compensation Act, 1923 seeking compensation of ₹ 1.00 million with an interest of 12% per annum for termination of employment and non-payment of compensation for the injuries sustained during the course of employment at their Tahliwal Manufacturing Facility.

Financials and Observations on the same–

Balance Sheet

P&L

Cash Flows

Peer Comparison

We can see that there is not a perfect competitor to Mrs Bectors.

But we have compared some of their products to its competitors in that category to gauge its efficiency or leadership –

The above comparisons don’t point towards any sort of leadership that they hold.

Valuations

Rs 62.47 BV as of Sept 30, 2020, EPS as of Sept 30, 2020 (6.78) – annualized to 13.56. But since there was pantry stocking also during lockdown, will take EPS lower to 11 (just margin of safety)

At EPS of Rs 11, the P/E commanded is 26.18x and P/BV is 4.61x

Overall Indian retail basket

Indian Packaged Food Market

India’s packaged food business is currently valued at ₹ 1,636.00 billion. It has grown significantly in the last five years on account of rising incomes, urbanization, favorable demographics, and changing lifestyles.

The sector’s retail revenue size was worth ₹ 984.00 billion in Financial Year 2015, about half of its current size, and has registered a CAGR of ~10.70% from Financial Year 2015 to Financial Year 2020. It is estimated to grow at a CAGR of 10.40% in the next five years to reach ₹ 2,687.00 billion.

Biscuits and Bakery Market Construct

  • The Indian biscuits and bakery retail market is valued at ₹ 450.00 billion and is expected to grow at a CAGR of approximately 9% over the next five years.
  • Biscuits and other snacking bakery products such as rusks, wafers and tea cakes contribute almost ₹ 400.00 billion or 89% to the total market share.
  • The balance 11% is contributed by breads including loaves, buns, pizza bases which together account for ₹ 50.00 billion.
  • The biscuit industry is characterized by a few large players, regional brands as well as small scale industries.
  • In the unbranded sector, over 30,000 small, very small, and tiny units spread all over the country.
  • The biscuit industry was also reserved for small-scale earlier but it was de-reserved in 1997-98.
  • In the unbranded bread sector, there are about 75,000 bread manufacturers spread all over including some of those operating even residential premises.

Indian food services market overview

A noticeable shift began in 1996 with the opening up of QSR such as McDonald’s, Pizza Hut and Domino’s Pizza, followed by Subway, KFC, Burger King, Haldiram’s, Moti Mahal and Taco Bell, among others.

Structure –

The Indian food services market is classified into two segments, organized and unorganized, based on three key characteristics:

Accounting transparency, organized operations with quality control and sourcing norms, and outlet penetration. Any food services outlet that does not conform to these parameters is considered to fall within the unorganized segment, which primarily includes dhabas, roadside small eateries, hawkers, and street stalls.

By contrast, food services outlets that conform to these parameters fall within the organized segment and can be subcategorized as chains (domestic or international outlets that have more than three restaurant outlets across the country) or standalone outlets.

Chains are further subdivided into six sub-segments based on average price charged per person, service quality and speed, and product offering:

  • Fine dining (FDR): full service restaurants with high quality interiors, specific cuisine specialty, high standard of service translating to high average per cover. Fine dining targets rich and upper middle class consumer segments as it offers unique ambience and upscale service with highly trained staff;
  • Casual dining (CDR): a restaurant serving moderately priced food in an ambiance oriented towards affordable dining with table services. The offering bridges the gap between fast food establishments and fine dining restaurants;
  • pub, bar, club and lounge (PBCL): outlets that mainly serve alcohol and related beverages and include night clubs and sports bars;
  • quick service restaurants (QSR): these are focused on speed of service, affordability and convenience and include the dine-in/takeaway/delivery sub-formats;
  • Cafes: these include coffee bars and parlours, and chai bars. They are mostly casual restaurants that emphasize on serving beverages and food incidental to those beverages; and
  • Frozen desserts (FD/IC): small kiosk outlets of ice cream brands which have been extended to dine-in concept of frozen yogurt and ice cream brands.

Chain Market –

The chain market in India has evolved and witnessed a majority of changeover during the last three decades. The transition phase of the chain market can be divided into 3 stages as set out in the table below:

The chain market in India was estimated at ₹398 billion in Fiscal 2020 and is projected to grow at a CAGR of 19% to ₹965 billion by Fiscal 2025.

Chain QSR market

In order to remain competitive in a growing market, achieve scale and increase consumer acceptance, most of the QSR companies are adjusting their offerings (including flavours, pricing and services) to meet the demands of the Indian market. Amongst the initiatives to achieve these goals are the opening of vegetarian restaurants in certain parts of the country, the creation of non-beef and non-pork based menus, the separation of vegetarian and non-vegetarian cooking areas, the introduction of local flavors to the menu, the roll-out of home delivery services and the setting of India-centric pricing with affordable entry level products in the menu.

Where is the customer spending?

During Fiscal 2020, the split of expenditure by sub-segment on eating out was 38% in QSR, 31% in CDR and 14% in Café. Easy access, competitive pricing, availability of combos and meal packages drive QSR’s preference between the younger population and professionals working in office environments. The table below shows the average monthly spend on eating out per household during Fiscal 2016 and Fiscal 2020, as well as the CAGR between those periods:

Food Trends –

  • Demographic change is powering a rise in domestic demand
  • The gradual expansion of modern retail including e-commerce
  • Government policies favoring the growth of packaged food
  • Consumers shifting towards packaged and branded products
  • Convenience and healthy eating trends continue to drive sales
  • Consumers across the spectrum are moving towards premium products
  • Growing necessity, convenience, and availability to drive future growth
  • Increasing participation of women in the workforce
  • Experimentation with New Brands & Taste:
  • Influence of organized food chains:
  • Regional companies gaining sales share and competing strongly with Leading Players:
  • A larger focus on value meals
  • Contemporization of Indian cuisine
  • Cloud-based kitchens

Conclusion –

It functions in the biscuit category (major revenue earner in the whole mix) and the buns business that caters to QSR. At the same time, the business financials have been flat for the past 3 years, and only in 6M FY20, it has shown improvement in all financial metrics. But we feel that is attributable due to heavy pantry stocking and panic buying (the management said in its export segment it was both volume + value improvement). But we would like to monitor the business fundamentals for a few more quarters before putting out any view on the business.

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