Baked to perfection or set to crumble? This small-to-blockbuster-IPO company is upping the ante

About 15 years ago, a mediocre thriller movie called Hide and Seek was released. It had Robert De Niro in the lead and he gave a great performance, as expected, but someone else stole the show. It was nine-year-old Dakota Fanning. Even in an easily forgettable movie, she was memorable, more so because she had to share the screen with De Niro and make her presence felt. When newbies are up against titans and they perform exceptionally well, it becomes the stuff of fables. Another such story is that of Mrs Bectors.

When this company was founded in 1978 as a small backyard ice-cream business, it was entering a space that had players such as Britannia with its legacy of nearly a century, Parle with a brand almost synonymous with the most popular category of biscuits, and a relatively younger Modern with its claim of having created the bread category in India. It was like sending a kitten into a den of lions. Since then, the kitten has earned its place in the pride (See: Proof of the pudding).

Today, the business, started by a Ludhiana-based homemaker Rajni Bector, has a multiproduct portfolio — from sauces, spreads and salad dressings to biscuits, breads and cakes. Its spin-off, Mrs Bectors Food and Specialities (MBFS), is one of the leading names in the premium and mid-premium biscuit segments and bakery products in North India. In 2013, the business, handled by Rajni Bector’s three sons, was split into two – Cremica Food Industries and Mrs Bectors Food and Specialities.

In December 2020, like every small enterprise that has outgrown its stable, Bectors had an IPO and got a roaring response. The stock was oversubscribed 198x.  It became the second-largest IPO in 2020 with the stock closing at Rs 594 (106% over its issue price of Rs 288). And that’s how far the inspiring story held (See: How the cookie crumbles).

Less than a month later, in January 2021, the stock declined 32% to Rs 400 and it currently trades at around Rs 420.

Meet Jain, research analyst, LKP Securities, says that the correction was expected as, during the time of listing, FMCG and consumer stocks were in favour. At the current market price, he says that the company is fairly valued. Another consumer and FMCG stock which listed during that time and saw a similar correction was that of Burger King India.

Buttered side

Bectors has chosen to stay at the high-margin end of the business with its premium and mid-premium categories of biscuits, which are also exported (See: Biscuit de la crème). “Their business model has always been focused on these categories because a mass market product business gives low margins and is highly competitive with regional and national players,” says Jain.

Biscuits, which give gross margins of 45%, bring in 66% of their revenue — 42% from the domestic market and 21% from exports. Their branded breads and bakery products, sold under the name ‘English Oven’, generate 53% margin and make 21% of their topline. Their institutional bakery vertical has been supplying to QSR restaurants such as Hardcastle Restaurants (McDonald’s India - Southern and Western India), Burger King India and Rebel Foods (Faasos) for over a decade. By opting to keep their manufacturing in-house and keeping a lid on costs by sourcing locally, Bectors has managed to beat even the legendary Britannia in gross margin, say analysts. The young company’s gross margin has improved from 47% to 49% over nine months and is expected to remain in the same range.

But, in operating margin, the veterans have the upper hand. Bectors’ operating margin was 12.63% for March 2020 and ROCE was 12.09%, while competitor Britannia’s numbers were far superior at 18.30% and 37.12%, respectively. Manoj Menon, head of research and consumer analyst, ICICI Securities, says this is really because most challenger brands like Mrs Bectors, which have aspirations to grow fast, sometimes have to part with higher trade margins and larger companies also have operating leverage. Jain, too, says that operating leverage gain for the smaller company will take a while to come through. “They are a regional company with good market share in North India. Now, they are growing, adding employees and expanding to new regions. They will need more capex which will either be funded by internal accruals or borrowing, leading to higher depreciation and finance cost, which will have implications on their bottomline. However, once they move towards Central and South India, their operating leverage will kick in and operating margin will also improve,” he says and expects the trend in return ratios and operating margin to improve from FY22.

Meanwhile, Bectors is working on its core muscle and improving its premium product portfolio. Its new products include a nutritive range covering digestive biscuits, honey oatmeal biscuits, rich cookies, and flaky and soda crackers. During an earnings call, CEO Anup Bector said, “We have also installed dedicated lines at our Rajpura facility in 2018 to cater to production of high-margin premium products.”

In Q3FY21, its Ebitda grew by over 40% to Rs 400 million as compared to Rs 280 million a year ago, and Ebitda margin improved to 17.6% from 14% over the same period. “We have seen an improvement of 360 basis points in our Ebitda margin due to change in our product mix, improved operating efficiencies and cost reduction activities,” explained Deepak Jain, head of finance and corporate strategy, during the quarterly earnings call. Overall revenue stood at Rs 2.26 billion, up by 11% from a year ago.

There is still a long way to go, especially in the largest biscuit markets in India — Uttar Pradesh and Delhi. Here, in the premium and mid-premium categories, Cremica has only 2% share (See: Only the crumbs). An ICICI Securities report sees this as an opportunity though. The report notes: “We believe that the company is focusing on expanding its market share in these two states. In Delhi (NCR), Cremica is present in only 50-60% of the relevant outlets that sell premium and mid-premium biscuits. This gives a huge opportunity for Cremica to expand its distribution reach and grow revenues. Similarly, we note the potential to expand reach in Uttar Pradesh, which is the largest biscuits market in North India (40% of the region’s biscuit consumption and around 10% India’s consumption)”.

Amnish Aggarwal, head of research, Prabhudas Lilladher, too, agrees that the company has to work on expanding its reach and not just in the premium or mid-premium biscuits’ segment. The main thing, he says, is scaling up their QSR and bread verticals. “QSR offers significant scope for growth of their buns business. Even with their biscuits business, they have to scale up faster as it is a huge Rs 350-400 billion market and they have to penetrate beyond the major cities and into the western and central part of India, in addition to increasing share in their home territory,” says Aggarwal. Bectors’ pizza bases and burger buns have to find their way into the hearts and ovens of smaller towns.

While the QSR segment is a small contributor, analysts feel the opportunity for the company in the segment is immense. ICICI Securities’ Menon says, “There is opportunity for the QSR industry to grow, especially for the branded outlets, and if you are a trusted supplier, you will benefit from that growth.” While he agrees that in this B2B business, the value resides with the brand and not with the supplier, the business provides growth and stable cash flows. “To me, this is a good thing. As you get the growth, your cash flows will improve and that you can use for further expansion in that business or can redirect towards your B2C and so on,” Menon adds.

The company knows that it has to travel beyond urban centres and is already on the road to reach pan India across verticals. “We are focusing on expanding our distribution networks for increased penetration in metro and moving into semi-urban and rural markets,” Bector said during the concall. Over the last year (Q3FY20- Q3FY21), their retail touchpoints increased from 437,000 outlets to 557,000. The company recently launched an in-house automation tool ‘Peri’ which helps track coverage, sales and so on in real-time. Analysts say this tool will help them detect the gaps in distribution.

While this expansion means battling larger and even smaller, regional brands, Jain says Bectors’ approach has been right. It has not being aggressive like its competitors who want to see quick growth and is expanding gradually, which could be an advantage. “They are focusing on advertisement but not at a national scale. Their advertisement and publicity is more region-specific as they have a customer base in North India. Going forward as well, they will focus on region-based publicity until they cater to the whole country,” he says. According to Jain, the expansion will not weigh on their gross margins as they have been judicious with their spending.

Flat exports

While the company has been meeting domestic challenges ably, the international market has been hard to crack. In FY20, its exports suffered. The decline in exports, according to an ICICI Securities report, impacted ROCE that fiscal: “Mrs. Bectors Food had historically healthy ROCE till FY2019 (See: Settling down). Return ratios were impacted in FY20 due to the company exiting some of the export countries leading to decline in revenue and in turn profitability.” In FY20, the company reported ROCE of 10.7%.

In the earnings call, Bector said that political unrest, worsening socioeconomic conditions and foreign currency shortage in certain countries had led to the company’s exit from some countries. To counter that, Bectors has shifted focus to markets such as Asia, Australasia, Europe, the MENA region and North America. With this streamlining of exports and higher-margin products, ICICI Securities expects the return ratio to improve to 18% in FY23.

To up their export game, they have also been investing in technology. Anyone who has had a relative in the US or the UK would have got a tin of Danish cookies, especially around Christmas. Well, Bectors is now exporting them for Rs 200 a kilo. “This is something that I do not think any biscuit company in India has done,” said Bector’s Jain. This is an innovation they came up with after the Rs 2.58 billion investment made between FY18 and September 2020 to import equipment from Denmark, Germany, the US and Italy. Bectors has invested Rs 1 billion in the bakery vertical alone, sourcing technology from Germany. The company, added Bector’s Jain, has now evolved to making cookies and biscuits for the Indian as well as the international markets.

Bectors seems robust but it has never really been tested by fire. ICICI’s Menon says, “Since 2012-2013, we have not seen any material inflation in commodities, including in agri commodities. That means that the business model has yet to be stress tested for any significant inflation which may happen.”

There is also the risk of having a finger in too many pies. Bectors manages a large product portfolio. “The businesses are diverse. Selling biscuits is fairly different from selling bread and baked goods. Exports are also completely different, then there is QSR and contract manufacturing. Although there are different teams handling this, it adds to complexity in operations,” says Menon.  He values the company at Rs 400 based on DCF and estimates earnings at Rs 12.2 (FY22) and Rs 14.8 (FY23). Based on the current price of Rs 420, the stock trades at 34.4x (FY22) and 28.4x (FY23). LKP’s Jain, however, has a more optimistic view given the huge runway for growth. He estimates earnings at Rs 13.9 (FY22), Rs 17 (FY23) and Rs 19 (FY24), which translate into P/E of 30.2x, 24.7x and 22.1x respectively.

The last few years have been busy for the company — with putting the house in order after the split and making space for outside capital. In 2016, a consortium of investors led by CX Partners and Gateway Partners bought into Bectors. Going forward, the valuation will depend on how it can alter its margin profile. It is already changing the mix—with premium products, and new technology and new export markets — to get the ‘dough’ to rise to perfection. The financials are showing an upward trend, too. All that it needs is action to follow intent because this is a market of biggies and hungry newbies.