Mrs Bectors’ listing gains make valuation unsustainable

Mrs Bectors Food Specialities saw a bumper listing on Thursday, with the stock doubling over the IPO price band of ₹286-288.

The IPO saw a huge response, being subscribed a whopping 199 times overall. While the QIB portion was subscribed 178.08 times, the HNI segment saw massive over-subscription (625.2 times). Retail investors (29.5 times) too flocked to the IPO. The current price takes the valuation to very stiff levels. The stock now trades at 56 times its trailing 12-month earnings, against the 27 times at the IPO price band.

Also read: Mrs Bectors Foods lists at 73% premium

Peers such as Britannia currently trade at 50 times their trailing 12-month earnings. Mrs Bectors is a much smaller player in terms of market share and distribution network and faces stiff competition from Britannia, ITC ( Sunfeast) and Parle, not to mention other regional brands and the unorganised market.

Investors who were allotted shares can sell their holdings as the gains are not sustainable. Others can wait and watch for stability in financial performance over the next few quarters, before taking exposure to the stock.

Unattractive financials

The roaring subscription and listing gains are backed by unsteady financials, where growth has picked up only in the last six months. Over FY18-20, revenues grew at a CAGR of just 4.79 per cent to ₹762 crore. FY20 particularly saw a 2.7 per cent dip in revenues over the year before, due to headwinds in the company’s export markets as well as the Covid-related disruption in end-March. Profits over FY18-20 have dipped steadily, from ₹35.8 crore in FY18 to ₹30.4 crore in FY20. Based on FY20 earnings, the valuation is at a high 110 times now.

Also read: Should you subscribe to Mrs Bectors Food Specialities IPO?

Rise in in-home consumption of packaged food and snacks due to the Covid-19 outbreak as well as resolving some pain points in export markets have drummed up the numbers in the first half of this fiscal. Sustainability is key here.

Stiff competition

Factors such as paucity of time for cooking fresh meals, higher shelf life and a younger population that prefers to eat out, have been driving demand for packaged foods and QSRs (quick service restaurants). But the company is a small player. For biscuits, its presence is concentrated in North India, where it has a 4.5 per cent market share.

In branded breads, it has a market share of 5 per cent. Unlike apparel or jewellery, the share of food and grocery in the organised retail is only 4.5 per cent. Hence, a wide the distribution network becomes essential. Britannia, Parle and ITC have a presence across 17 lakh, 14 lakh and 9.9 lakh retail points in North India, respectively, while Mrs Bectors’ Cremica has about 4 lakh. Blended operating margins has hovered around 12 per cent in FY18-20, though it has spiked to 16.7 per cent in the first half of this fiscal.

Greater reach will improve volumes, bring economies of scale and also improve realisations. Mrs Bectors’ price per kg across biscuit segments such as cookies, cream biscuits and crackers is now lower than the three leading players.

Secondly, institutional sale of buns and pizza bases are low-margin segments and offer no brand visibility.

Three, with the company getting 20-25 per cent of its revenues from exports, currency fluctuations and local issues in the export markets affecting sales (as it has happened in FY20) are not one-time events.

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