Melting point

Ice-cream maker Vadilal Industries stock has been under selling pressure since the start of this week. The stock fell more than 20% to Rs.550 on August 22 from Rs.723 on August 20, before recovering to Rs.614 on August 23. The drop in the stock price comes after well-known investor Ashish Kacholia sold most of his stake in the company.

Kacholia offloaded 306,045 shares for Rs 612 and 142,527 shares for Rs 548.35 on the NSE on August 20 and 21. On August 20, he sold 56,260 shares for Rs.604.05 on the BSE. Overall, the Mumbai-based investor reduced his stake to 0.21% from 7.21%. He, currently, holds 13,600 shares. Interestingly, while the ace investor exited almost completely, Porinju Veliyath-led EQ India Fund bought 48,000 shares worth Rs.28.3 million on August 20.

If we consider the average price of the stock over the four quarters during which Kacholia bought the shares, the assumed acquisition cost comes to Rs.315 million and total selling realisation just about Rs.300 million. According to BSE filings, Kacholia had bought his first tranche of 231,130 shares worth Rs.107 million, amounting to 3.22% stake in June 2015, at Rs.465 a share. By end March 2016, he had increased his stake to 3.60%, buying 29,774 shares during the quarter for Rs.15 million, assuming the average price of Rs.529 during the quarter. Then as of December 2016, his holding had risen to 5.30%, acquiring 120,279 share worth Rs.64 million, assuming average share price of Rs.533 during the quarter. And he further raised his stake to 7.21%, acquiring 137,249 shares worth Rs.128 million in September 2017, assuming the average share price of Rs.934 during the quarter.

Between FY15 and FY17, when Kacholia bought a big chunk, the company clocked decent growth with net sales rising from Rs.4.04 billion in FY15 to Rs.4.93 billion in FY17. In the same period, PAT grew from Rs.0.02 billion to Rs.0.19 billion. EBITDA margin over the same period rose from 10.49% to 12.19%. However, in its FY17 annual report, the management acknowledged that the company is facing challenges like infrastructure and rising input cost in ice-cream as well as food processing division. Vadilal Industries’ total expenditure had grown from Rs.3.66 billion to Rs.4.36 billion between FY15 and FY17.

In FY18, the company’s woes worsened as its net profit dropped by 17%. The company claimed that that gross margin was adversely impacted owing to higher raw material cost based on last season’s purchase and 18% GST on ice cream. The lacklustre performance made investors wary with the stock price dropping 45% from its record high of #1,090 in September last year.

But the management has a positive outlook for FY19 and is banking on the revival of demand in the domestic market. The company is focusing on personalised packs and procuring raw material at a lower price to improve its margins. But the management’s bullishness didn’t reflect in the June quarter results. Net sales declined by 5.51% as compared to the same period last year even as net profit increased by 30% (yoy) in Q1FY19, owing to a drop in raw material cost and operating expenses by 1.22% and 17.46%, respectively. Even the EBITDA margin improved to 25% compared with 19% in June 2017.

While the FIIs and mutual funds hold marginal stake in the company, non-institutional investors hold 34.93%. The promoters have slightly reduced their holding from 65.16% in June 2017 to 64.72% in this quarter. After the carnage, the stock seems to be in recovery mode. Kacholia is an extremely astute investor, so all eyes will be on Vadilal Industries to see if he did get this one right as well.