Vadilal Ice Cream

Wrote a twitter thread on Vadilal Industries this morning. Pasting the contents below:

I was very excited when I found a fast growing FMCG business trading at commodity valuations. Recently, it has also become a potential special situation. But even though it seems a no-brainer on first principles, there are many blind spots. The curious case of Vadilal Industries.

1. Vadilal is one of India’s oldest and largest ice-cream brands, with over 10% market share. The market is projected to grow at 15% CAGR and the share of organized players will increase. As India gets richer, ice cream will move from an indulgent dessert to a snacking essential.
2. They have the highest range of flavours among Indian ice-cream, catering to premium and mass market segments. Marketing expense to sales is the lowest in the category, showing the strength of the brand. They have also forayed into flavoured milk, frozen foods and Indian sweets
3. The most exciting part though is their international business which has grown at well over 25% every year for the last five years. Vadilal is the biggest Indian ice-cream brand in the US which has a large Indian diaspora. Other categories are fast gaining traction too.
4. They have a huge distribution moat in the US. They are one of only four national distributors of Indian ethnic products. This gives them better margins and bargaining power for shelf space, reinforcing the brand strength, and allows launch new products easily and efficiently.
5. They have also opened to their distribution to other Indian brands in non-competing categories. As more brands get added, Vadilal gains distribution revenue with minimal additional costs, leading to further margin expansion through operating leverage – large growth runway.
6. Total sales in the first two quarters of FY23 are almost equal to total sales for FY 22. Profits are already higher. Such a business trades at 18.5 times trailing earnings.
   Why? Promotor disputes – family has 4 brothers. But this overhang may be going away soon.
7. One brother runs the Bombay Division (holds IP for Maharashtra and south states). Rest form the Ahmedabad Division and control Vadilal International (promotor of Vadilal Industries) which owns Vadilal IP and licenses it to Vadilal Industries for rest of India and international
8. Ahmedabad division brothers have been fighting from time to time, lodging cases on each other (no impact on business). This has been an impediment to Vadilal Industries (and Vadilal Enterprises – the distribution arm for rest of India) getting sold to a PE – tried and failed.
9. Last week Vadilal Industries announced its intention to buy out the Vadilal IP from Vadilal International at maximum consideration of 676cr. This may pave the way for a potential PE buyout of Vadilal Industries and (maybe) Enterprises. There are unanswered questions though.
10. How has the value of 676cr been arrived at? Is this too much, as the company itself trades at 1800cr? Or is this reasonable as the company is growing rapidly and the operating cash flow for first half FY23 are already 130cr? How will this be funded? Is a buyer identified?
11. Upside potential: if there is indeed a PE buyout, the promotor overhang will be gone and we can be sitting on a massive rerating to normal FMCG multiples. US and international business should continue to grow at 20-25% and the India ice-cream market is also picking up steam.
12. Risks, uncertainties, unknowns:

• All points listed in 10
• No PE buyout at all
• No regular information flow from the company – no concalls, no ppts, very few interviews
• Seasonality
• Slowdown in the US impacting demand
• India business not gaining share

In spite of the risks, I personally find the risk-reward favorable. I have taken a small position (4% of PF) and will add if a buyout goes through – remember there is no announcement, this is just me speculating. This is risky and not investment advice. I may sell anytime.