We had invested in Tasty Bite Eatables in April 2015 when the stock price was Rs 640. In this post, we will briefly cover what attracted us to the company and how the thesis is playing out.
Tasty Bite Eatables (TBE) is a company incorporated in 1986 and is mainly into ready-to-eat food. It was promoted by Ghai Family who also used to own franchise of Kwality Ice Cream in Western India. The company went through some interesting times in its brief history; sometimes a great idea fails because it is ahead of its time. Perhaps this was true for Tasty Bite too which questioned its very survival leading it into Board for Industrial & Financial Reconstruction (BIFR). Eventually it got acquired by Hindustan Unilever which withdrew from Indian markets as Indians weren’t ready for ‘ready-to-eat’ food (I doubt we are ready even today) and later in 1995 introduced the brand in the USA.
However, it remained very small and hence a non-core asset for the FMCG giant HUL. In a drastic move, Tasty Bite went through a management buy-out where Mr. Ashok Vasudevan & Mr. Ravi Nigam convinced HUL to sell the company to the duo. Surely it wouldn’t have been an easy decision as the company had a small scale of operations and had never made any money in its 13 years of existence. However the duo were successful in turning around the company and put it on an aggressive growth path TBE 2.0.
It took them a decade to bring scale and institutionalize the processes in their Factory (management calls it their ‘Kicthen’). In case study written by Ms. Gita Bajaj of MDI, one can read the experiences and challenges management faced in scaling up this difficult business. Read this case study here.
Business Vertical I
The company has come a long way since then; today it’s brand ‘Tasty Bite’ commands a whopping 65% market share in the USA’s natural channel and 28% in conventional grocery and ranks amongst the top 3 brands among all Indian and Asian brands combined. It offers over 42 products across 4 categories: entrées, rice, noodles and meal inspirations. The products require no cooking, have no preservatives, require no refrigeration, and can be used as a main dish or a side dish. With the use of a uniquely designed multi-layer retort pouch, Tasty Bite products remain fresh for 18 months.
The Company manufactures its products in Pune, India on a 33-acre facility which has a captive organic farm, however marketing & distribution is taken care by its parent company, Preferred Brands International (PBI) based out of US.
The grocery segment pertaining to the Company’s products, namely the international/ethnic foods category is approximately $2.5 billion in size and growing at a rate of 15-20%.Ethnic food mainly consists of Mexican/Hispanic foods, Asian and Indian Foods. This is one of the fastest growing segments of supermarkets and driven by an increasingly diverse population, a growing interest in international foods driven by travel and cooking shows and the growing number of ethnic restaurants.
At 29%, Asian foods holds the second-largest share of the ethnic foods market and continues a steady growth trend. Asian foods are a much larger industry, having sales of $700 million, compared to Indian foods which is a $41 million category.
Business Vertical II
In 2006, they re-entered India but only in the institutional segment catering to the top quick-service restaurants like McDonald’s, KFC, Domino’s, SUB-WAY, Burger King, Pizza Hut etc. where they supply frozen foods and sauces. This business has been an indirect play on the fast-growing QSR industry in India. The vertical clocked a 55% CAGR in last 5 years and today constitute ~40% of the topline. Tasty Bite has been playing a crucial role for these QSR not only as a quality conscious vendor but also helping develop new products suitable to Indian palate, case in point- it was Tasty Bite’s kitchen that developed and till date exclusively make all the Pizza McPuffs we consume in any of the McDonald’s outlets across India.
QSR in India has been rapidly growing, though it hit a bump in last two years where same-store-sales-growth (SSSG) slowed down but once discretionary spends start picking up, we should see SSSG resuming growth path. Jubilant Foodworks plans to add 150 new Domino’s stores & 25 new Dunkin Donuts stores per annum over next three years. Yum! India, which operates Pizza Hut, KFC and Taco Bell aspires to have 2,000 stores in India by 2020; three times its current number of stores. Considering the growth plans of major QSR players, the industry should continue to grow at high rates.
Further, TBEL has been successful in winning new QSR chains. Their focus is more on new and budding domestic chains which are looking beyond Metros. For instance, they have signed up with Jumbo King, a Vada Pav chain which is expanding rapidly. With TBEL on the board, Jumbo King doesnt have to open commissary in every city it enters, making the business not only asset light but also helping in rapid expansion. Currently, it has100 stores in 10 cities, with plans to enter 6 more cities in next 6 months and 1000 stores by 2020. TBEL has been backing such new and innovative chains where they feel scalability can be quick.
The company has manufacturing capacity to prepare over 100,000 meals per day in addition to manufacturing prepared frozen formed products.
Sources of Moat
1). Quality Conscious Customers: We feel the service business despite being a B2B business enjoys moat as the customers (think Domino’s or McD) are extremely quality conscious. Ideally they would never compromise on quality to save few pennies. Imagine if we found a cockroach in Mc Donald’s burger, wouldn’t it do some serious damage to the brand franchise? Further, in this social media era Mc Donald’s will be unable to undo any of it. This risk of loosing brand value makes buyers extremely quality conscious. This is similar to the advantage Kitex Garments enjoy, as despite being a B2B business it caters to highly quality conscious customers.
2). Preferred Vendor: It would take significant time for any new entrant to qualify as a ‘vendor’ for QSR players. It would also imply a significant capital investment as one would have to commit a certain minimum quantity. This makes the process lengthy and expensive. Tasty Bite due to its learning curve and focus on Quality now qualifies as a ‘Preferred’ supplier to the largest QSR chains of India giving it some sort of a moat. This isn’t a very Deep moat but surely a wide moat.
3). Brand & Distribution Network: TBE has a learning curve spanning two decades which made it the largest selling prepared foods brand in USA. It took TBE 15 years to reach a distribution of 8,000 stores in USA. In last three years alone, it more than doubled this number to 18,000 stores. The supermarket universe for TBEL products is 35,000 in USA, making penetration levels for TBEL at over 50%. TBEL has the largest distribution network in Asian prepared foods segment in US.
Top Notch Management
Both Ashok & Ravi have over 30 years of experience working with global giants like Pepsi and Unilever and they left the fancy corporate job to build something big from scratch. We are impressed with the vision as well as execution capabilities showcased by these first generation entrepreneurs.
Tasty Bite 3.0
In April’15, Kagome, the $2bn Japanse FMCG giant picked up 70% stake in TBE’s holding company at six times the then market price of TBE. Founding promoters continue to hold remaining 30% and hold the same managerial positions and responsibility to run the operations.
So far, TBE has been a major player only in USA. In last couple of years, the company made serious efforts to expand into newer geographies of Australia and the UK. Though Australia is a small market, it gave them learning curve to compete in the UK which is the largest ready-to-eat market in the world.
TBE is also getting active in Japan by leveraging Kogome’s established distribution network, Kagome is market leader in fast moving categories like Tomato Ketchup. Japan is a $600mn prepared foods market.
Until 2013, the key focus was on Indian entrees like Paneer Makhani, Chana Masala etc. which has a limited appeal to only the NRI population. Over last two years, TBE launched series of offerings in Organic Rice and Noodles category which have much wider appeal to palate of not just NRIs but even the local population.
The market capitalization when we covered Tasty Bite was 165 Cr whereas FY15 net profit was Rs 11 Cr. implying a earnings multiple of ~15. In FY16, the earnings have gone up by 50% to Rs 16 Cr. and markets have re-rated the stock to an earnings multiple of ~32; currently TBE trades at a market capitalization of 520 Cr.
The two most talked about issues regarding TBE:
- Low Float– Promoters own 75% whereas bulk of the free-float has been cornered by three big shareholders who cumulatively own ~9%. For any big portfolio a stock like TBE is extremely difficult to accumulate however, that is precisely where a retail investor gets an edge. Most of the days volumes are under 1,000 shares, but then there are days with substantially higher volumes too. In our case, though we started buying the stock at ~640, we bought it all the way upto Rs 1,000.
- Corporate Governance – There has been a doubt in the minds of a lot of investors regarding the questionable corporate structure where capital heavy manufacturing is with listed entity TBE whereas asset light branding and distribution resides with parent company in the USA. We spent fair amount of time going through the history of the company, its founders and potential incentives to play around transfer pricing, to rule this out. We also met the management and interacted with some key shareholders to understand the background of this structure. It isn’t something that was intentionally designed this way, rather it just happened. The current management through PBI was handling distribution in USA for HUL before PBI bought this company (& its manufacturing facilities) and structure stayed that way ever since. Management has hinted at their willingness to simplify the structure.
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This is not a recommendation to Buy. We and our clients hold shares of TBEL. Read complete disclaimer here.