Mrs. Bectors Food Specialties IPO – Should you invest?

When the burger chain charms the markets, can the supplier be far behind? Hot on the heels of the Burger King India IPO is the IPO of Mrs Bectors Food Specialties, which supplies the buns that the Burger King chain uses. Mrs Bectors supplies to other restaurant chains too, besides having its own biscuit and bakery brands and exporting biscuits.

The Mrs Bectors IPO, open now and closing on December 17^th, has a price band of Rs 286-288, and seeks to raise up to Rs 540.54 crore. Of this, Rs 40.5 crore is a fresh issue towards expanding manufacturing capacity. The remaining amount raised in the Mrs Bectors IPO goes to three selling institutional shareholders, whose average acquisition cost per share was about Rs 174-175.

With broad-based revenues, does the Mrs Bectors IPO make for a good investment? Not yet. We think it’s best to keep this company on the watchlist for now to see how its growth and expansion pan out. The performance so far is not strong enough and expansion plans not clear enough to warrant an entry now. Other established players have clocked both better growth and better profitability.

Mrs Bectors IPO – business basics

Mrs Bectors has three revenue streams from two primary product lines – biscuits and breads (includes breads, buns, frozen dough products, desserts and more).

• One, there are sales of its own brands of Cremica (biscuits) and English Oven (breads), predominantly sold in northern states. In biscuits, the company holds a 4.5% market share in the region.
• Second, the company sells bakery products to chains such as McDonald’s, Burger King, Pizza Hut and more, and supplies to the CSD and the Indian Railways.
• Third, it exports to regions such as North America, MENA, and some African nations
• Finally, it undertakes some domestic contract manufacturing for players such as Mondelez India. The table below gives the approximate revenue break up across segments.

The domestic biscuits-and-bakery market is projected to grow at 9% annually over the next five years, as per the offer document. Mrs Bectors aims at two main strategies for growth: one, expand its brands (both biscuits and bakery) to scale up to a national level domestically and step up exports and two, increase the share of higher-margin premium products.

Going national is a challenge

The first effort of expanding into new domestic markets will involve increasing distribution network besides significantly ramping up brand promotions and awareness. The company plans to leverage its network of institutional customers to sell its brands and create awareness, increase marketing and advertising efforts, use cloud kitchens and other e-commerce platforms to gain a better distribution footing and more.

What’s uncertain is how effective these strategies will be and over what period benefits can start to kick in as there has been no sustained major national expansion undertaken yet. Lifting regional brands, however strong, to a national presence is no small task requiring substantial investments in above and below-the-line activity.

The three main biscuit players – Britannia, Parle, and ITC – have a stronghold, accounting for a good 67% of the biscuit market. Breaking into this might is hardly easy; the company will most likely have to take away market share from other regional brands or the unorganized market in order to scale up.

Adpsends for Mrs Bectors are currently at less than 2% of revenues; peers such as Britannia spends double that. Adspend-to-sales ratios are even higher for companies such as Nestle India and ITC. A national presence will require Mrs Bectors’ to match if not exceed these players on adpsend to sales. The company may also have to shell out higher margins to distributors, stockists, and retailers in order to break into newer markets. This and adspends are likely to impact margins, and the company may need to make up through product mix improvements. Current EBITDA margins, at 12.5% are already lower than most FMCG players other than a few such as Prataap Snacks.

What’s uncertain is how effective expansion strategies will be and over what period benefits can start to kick in as there has been no sustained major national expansion undertaken yet.

Margin improvement may be hard

What can help sustain margins is a higher share of premium products, which is the company’s other growth strategy. Towards this end, apart from pushing its premium brands in both biscuits and breads, the company also plans to introduce new products and increase in house production of its higher margin products.

The numbers so far do not show much evidence of improving margins from product mix. Between FY-18 and FY-20, the share of premium and mid-premium biscuits rose from 81% of biscuit revenues to 87.7%. However, EBIITDA margins on biscuits has remained flat at 10.3% for FY18 and FY 19 and dropped to 8.8% in FY 20, though this may partly be attributable to the Covid-induced lockdown.

Margins on the bakery segment were similarly fluctuating. The share of institutional customers has been rising, from 13.4% in FY-18 to 16.8% in FY-20. While this offers a steady revenue stream and allows the company to ride the QSR growth wave, such sales are unlikely to carry pricing power and may cap margin improvement.

Uneven performance

With uncertainty on expansion, strong performance in existing business can provide comfort. But Mrs Bectors offers a mixed picture here too.

Revenues grew 13% in FY19, and then suffered a 3% dip in FY-20 due to exports taking a hit as the company shifted markets with the lockdown. Overall, revenues between FY18-FY20 have grown at a CAGR of 4.9%. That’s about half the pace of leader Britannia Industries which grew 8.2%. Food players such as Nestle India, Prataap Snacks, Varun Beverages and Tasty Bites clocked better revenue growth.

On the cost side, inputs obviously make up the bulk of expenses and have accounted for a steady 52-54% of sales. Staff costs form another large expenditure chunk, accounting for another 13-15% of sales, a level far higher than most FMCG companies. High depreciation costs on manufacturing capacity expansion also ate into net profit margins which came in at 4-5% in the 2018-2020 fiscal years. Net profits have clocked an annual 8% decline in this period.

The April-September 20 period is a starkly different story and one that bears watching. Revenues grew a good 18%, riding on the heightened demand for snacks and packaged foods during the lockdown. Net profits surged nearly quadrupling to Rs 38.8 crore.

This has come about from revenue growth, as well as fall in expenses such as adspends, power, maintenance, travel & some employee-related costs like allowances. But it needs to be watched if the surge in revenues and profitability sustains as consumption normalizes.

On FY-20 earnings, the PE of Mrs Bectors IPO works out to 55.6 times at the upper end of the price band. That is lower than market leader, and far bigger, Britannia’s 61 times FY-20 earnings. Annualising the half-year FY 21 earnings brings the PE down to 22 times, lower than the larger FMCG companies.

However, as said above, this hinges on the recent performance being repeated and needs to be watched given that the company has not shown any consistency in growth so far. The same holds for valuation ratios of EV to EBIDTA and market cap to sales, where the Mrs Bectors IPO is potentially priced lower but has limited growth visibility.

Smaller consumer brands companies breaking into highly competitive national market, with established players, don’t boast a high success rate. With expansion still on the anvil, with sedate revenue growth and profitability, the Mrs Bectors IPO is simply yet another FMCG option. The company needs to show better growth potential to emerge a good pick in the sector.

This review is made from a fundamental long-term view alone. It does not consider any listing gains.