Tasty Bites: An Indirect play on India’s QSR industry

This is not my original idea. I liked it when Om & Kiran explained me the business model of Tasty Bites.

Disclaimer:  This is not a recommendation to Buy/Sell/Hold. I am not a SEBI registered analyst. See at the end for full disclaimer. It’s safe to assume that I have vested interest in the stock.

Tasty Bites [TB] is an indirect play on the rapidly rising QSR industry in
India, which is growing at high double digits.  As a policy Tasty Bites focuses only on vegetarian food, as it believes there is worldwide movement towards vegetarian food. It supplies frozen foods and sauces to India’s leading QSR players like Domino’s, Mc Donald’s etc.  Tasty Bites is  a market leading player of ready-to-eat foods in USA for Indian foods.

I started analyzing this stock during mid August 2014. By the time I attended AGM and got convinced of the story, price had already increased tremendously  When I analyzed it, I thought it’s a long-term story [> 5 yrs] and price will remain flat for next few years as it will take time for the company to build scale. Nevertheless I decided to recommend my close relatives to buy their target quantity at then prevailing price. I had earlier tried my skills in timing the entry with another stock and failed miserably, ultimately ended up recommending the same at higher price.

On 15th April 2015 , Kagome, a leading food company of Japan, bought majority stake in Preferred Brands International (PBI), the ultimate holding company of Tasty Bite Eatables. Founders have not diluted their stake, Kagome bought the stake held by PE players in PBI.  Kagome acquired PBI at ~ 700crs equity valuation compared to Tasty Bites current valuation 260crs [@ INR 1,000 per share]. One can argue that as PBI sources majority of its products from TB and do not have its own manufacturing facility, even TB should trade at similar valuations. I disagree with that. In my opinion TB should first demonstrate its performance by improving ROE and sales growth before it can command such valuations. Moreover, PBI business model is asset light with all the capital cost being incurred by TB.  Nevertheless, for TB its tie up with Indian QSR companies can be game changing event, if its able to scale it up over next 3-5 years.

Kagome in its filing with exchange, has given guidance of doubling the revenues and profits of PBI over next two years compared to FY 15 forecast. As majority of purchases of PBI are from Tasty Bites, it implies that even Tasty Bites sales and profits should increase at high double digits.

Given below are the links to presentation & Mind map which I shared with few of my friends with whom I work closely [prepared long back and not updated since then]

Mindmap

Industry & Peers

Extracts of last 15 years annual report

Disclaimer: This is not a recommendation to Buy/Sell/Hold.

Registration Status with SEBI:

I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Details of Financial Interest in the Subject Company:

Currently, my close relatives own stocks of Tasty Bites based on my recommendation. But their purchase price is substantially lower than current market price. Current price may or may not offer any margin of safety to fresh buyers. Please consult your financial advisors before taking any buy/sell/hold decision. I may change my opinion post publication of this note and may not be able to update because of time constraints.

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7 Responses to Tasty Bites: An Indirect play on India’s QSR industry

  1. Bala Bandla says:

    excellent article and research anil, thank you so much !!!!
    few questions
    1. kagome indicated to double the sales from PBI. that doesn’t necessarily translate to TB. they may push their own products thru PBI using their (PBI) vast distribution network. atleast they give preference to their own products than TB products

    does PBI sources any thing other than TB currently ? you mentioned ‘majority’ instead of ‘all’. that’s why this question
    kagome’s main biz is in sauces and beverages. will they push some products to TB plant in pune ? does it cost less to manufacture here compared to japan ? if so will they pump in more money in TB to expand the mfg capactites
    this is a capital intensive business. they need constant funds to grow. how would market value such businesses ? what are the key parameters to watch (I haven’t read your mind map fully) like asset turns, roce.

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  2. Thanks Bala

    I do not have answer to all the questions and we need to wait till AGM to get all the answers. Even then let me speculate

    1) Yes you are right. I know that PBI sources majority or may be all their requirements through TB, not sure.
    2) Yes its very likely that Kagome will push its own products too. But there is no overlap between the two Cos products and hence no conflict. That’s why I am suggesting growth at high double digit for next two years and not saying it will double for TB too

    3) You are again right its a capital intensive business and dilution is must if they need to grow at higher rates, given current low ROE for lack of scale…

    4) Its a emerging moat, watch more the sales growth and competition rather than ROE and other numbers for now

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  3. Akshay Nehru says:

    I have been following this company for a while and thought I had conducted a great in-depth study of its current and future growth potential including the industry’s evolving landscape.

    Reading your work on TB blew me away. Your depth in research, to my mind at least – is unparalleled.

    To add to Bala’s comment and your response on whether Kagome will push its own products through TBI – I think that’s a very strong possibility given their comments in the press release where they stated : “This transaction allows us to leverage our respective strengths including immediate access to each other’s retail and food service channels, manufacturing capabilities, R&D …….,” – Hidenori Nishi, chairman, Kagome.

    Further according to an article in the Asian Review – “Preferred Brands supplies such major U.S. retailers as Costco Wholesale and Whole Foods Market. Kagome quit selling vegetable juice in the U.S. in 2008 but hopes to re-enter the market through Preferred Brands’ sales channels……. Since Preferred Brands’ customer base includes health-conscious consumers, Kagome anticipates a synergy with its own vegetable juice business.”

    Thank you Anil for this incredibly detailed read.
    Akshay

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  4. ashish620 says:

    Hey Anil,

    Good info you have given. Some queries:

    I think we should pay attention to the relationship between PBI and tasty bites. PBI is private and sources its material from TB and markets/sells the same. As PBI is private, and TB public, do not u think that it will be always in the interest of promoter to favour PBI at the expense of TB? PAT margin of close to 5% for TB, pretty low is testimony to this, no? I mean if we compare it with its listed peers, it doesn’t make the cut. If Kagome was bullish about brands of TB, it would have bought TB and not PBI.
    I guess valuation at which Kagome bought PBI was pretty low, read this please: http://www.vccircle.com/news/food-agri/2015/04/15/japans-kagome-buys-majority-stake-ready-eat-food-company-tasty-bite
    I think QSR business comprises only 50 crores of revenues as per 13-14 annual report, so not a proxy as such for QSR play. Also, if they promote branding in QSR business, its customers might refuse to give high margins in the name of brands as value addition isn’t much for them as TB’s brands do not get reflected in front of the clients of its customers. I checked on its site, they do not reveal customers and whatever pics they have uploaded, nowhere i was able to find brand display of TB in the final product. Also, promoter would promote international business as its interest lies there, no?

    Please let me know your views.

    Thanks
    Ashish

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    • Thanks Ashish, here are my thoughts

      1) Prima facie I could not find evidence of undue favor to PBI over TB. reported margins are blended margins of RTE and QSR segment. Margins are currently lower in QSR and with scale I expect it to improve. To conclude promoters are not crooks, so I am just relying on promoters that they are taking balanced view.

      2) PE held 70% in PBI so its easy to acquire it compared to TB. Moreover to acquire TB promoters have to dilute their stake, but currently Kagome bought only PE stake and promoters hv not diluted their stake at all..

      3) Open offer price is at statutory minimum price per SEBI formula and that’s not relevant. In the write up I have attached kagome declaration where they disclosed their acquisition price at ~ INR 700crs equity valuation which is far higher than open offer price.

      4) When I say QSR proxy it means, one can ride QSR growth through TB. Agreed it is currently low but I expect it become much much larger portion and its true that Kagome is more interested in RTE distribution strength in US rather than QSR. But as old promoters continue and QSR is their baby I do not expect any dilution in vision. Having said that we need to wait for 2-3 yrs to have a clear picture.

      5) TB QSR will never become a brand business in my view. I am hoping TB will become something like what Vista food is today to Mc Donalds.

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      • ashish620 says:

        Hey Anil,

        Thanks for reply. I think i wasn’t clear enough. I am not saying promoters are crooked, but if u and i own 100% of one business that sources and markets products from a business in which we both own<100% and we do not have to declare margins etc to people in the first business, it will be always in our interest to promote that business.

        Let me give you a real life example. Maruti sources its compenents from various vendors. When Maruti starts the contract, they put a condition in the contract that going forward, margins of vendors should decrease. This is to justify promoters of Maruti that management is doing a good job. Opposite can be applied by PBI to TB. Whether they do apply or not, i am not saying, but there is a high chance of that, no?

        Do not know about Vista foods but know about Hector which supplies sauce sachets to McD. It can become big, but margins wont be huge, dependent on McD. Read last to last edition of Outlook Business. Read article about pharmaceutical businesses in Baddi. They do not have brands and hence no pricing power and hence are highly vulnerable to even a slight shift in business of their clients.

        Thanks

        Like

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