Should you subscribe to Mrs Bectors Food Specialities IPO?

Investors can avoid subscribing to the initial public offer (IPO) of Mrs Bectors Food Specialities (Mrs. Bectors), open from December 15-17. The company manufactures biscuits under ‘Cremica’ brand and bakery products under ‘English Oven’ brand. In a raging bull market, its valuation at 27 times trailing 12 month earnings seems reasonable compared to that of established larger FMCG players in the food segment such as Britannia ( 50 times ) and Nestle ( 85 times).

But this valuation is backed by unsteady financials, where growth has picked up only in the last six months. Over FY18-20, revenues have grown 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 54 times.

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. Annualising FY21 earnings based on this performance or projecting for the next 1-2 years does not seem prudent at this juncture, given the unsteady track record.

Besides, the company is not a unique play, facing stiff competition from well-entrenched players such as Britannia, Parle and ITC, regional brands and a large unorganised segment.

At ₹286-288, the company will raise about ₹540.5 crore from the IPO, of which only ₹40.5 crore is fresh issue.This will be used to set up another product line for biscuits at one of the company’s facilities in Rajpura, Punjab. Mrs. Bectors will have a market capitalisation of just ₹1,680 –₹1,692 crore at the IPO price band.

Business and Challenges

Mrs Bectors derives about 60 per cent of its total revenues from biscuits ( domestic 37 percent and exports 22 per cent) , about 34 per cent from bakery ( 17 per cent each from branded bakery products and from supply of buns, pizza bases etc. to quick service restaurants such as Mc Donalds , Burger King, KFC ) and remaining from contract manufacturing of biscuits for Mondolez.

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. Branded bakery products are among the more profitable segments for the company, followed by biscuits (both domestic and exports).

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. 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 presence across 17 lakh, 14 lakh and 9.9 lakh retail points in North India, while Cremica has about 4 lakh.

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 are now lower than the three leading players.

Secondly, with the company getting 20-25 per cent of its revenues from exports, currency fluctuations and local issues in the export markets affecting sales are not one-time events.

Godrej Consumer and Bajaj Auto, which have reasonable exposure to international markets, face this challenge time and again. Institutional sale of buns and pizza bases are low margin segments and offer no brand visibility.

Investors can wait and watch for sustainability in earnings before the plunge. Prataap Snacks, a similar sized player which came out with its IPO in the bull market of 2017, has seen return ratios deteriorate and is trading 30 per cent below its offer price.