Vadilal Industries Ltd is an Indian ice cream manufacturer. The company is also one of the largest processed food manufacturers in Indiawith significant exports of frozen vegetables and ready to eat snacks, curries, and breads. Vadilal Gandhi started a soda fountain in 1926 He passed on the business to his son, Ranchod Lal, who ran a one-man operation. Eventually, Ranchod Lal's sons, Ramchandra and Lakshman, inherited the business and they were instrumental in giving a new direction to the company. By the 1970s, the Vadilal Company had evolved into a modern corporate entity.

Vadilal offers a range of ice creams in the country with multiple flavors and packs, across forms (cones, candies, bars, ice-lollies, small cups, big cups, family packs, and economy packs). In addition to a supermarket presence, Vadilal also has a retail presence through itsHappinnezz ice-cream parlors, which are run through a franchise model.

Vadilal entered the processed foods industry to optimise utilisation of its extensive cold chain network in the 1990s. It caters to the domestic and export markets with products such as frozen vegetables and ready to eat snacks, curries and breads, in addition to the traditional core ice cream business.

Vadilal Industries has two ice cream production facilities – one at Pundhra in Gandhinagar district, Gujarat and the other one at Bareilly in Uttar Pradesh. It has a very strong distribution network of 50,000 retailers, 250 SKUs (stock keeping units), 550 distributors, 32 CNF and 250 vehicles for delivery of goods.

Industry Overview

Ice Cream

India is the fastest growing ice-cream consumption market in the world followed by Vietnam and Indonesia. According to a report released by market research agency Mintel, India's ice-cream market has registered a compounded annual growth rate of 13 per cent in the last five years. The ice cream industry in India generated revenue of more than USD 1.5 billion in 2016 and is projected to generate revenue of approximately USD 3.4 billion by 2021. Lately, frozen desserts which are made out of vegetable oils have been eating into the market share of ice cream. Key players offering frozen desserts in India are Kwality Walls, Vadilal, and Cream Bell.

In India, the ice cream industry is mostly regional and there is a multitude of brands focusing on only one or two districts or in some case only one state. There are very few national brands and the major reason behind slow growth of the smaller players is the high perishability of ice cream products.

The Rs 9,000-crore ice cream market (including unorganised players) is in for an overhaul. As regional labels such as Arun, Cream Bell, Vadilal Dairy International and Heritage take on the might of Kwality Walls, Amul and such others, the industry expects to grow at close to 10 per cent for the next few years and the brand map for the sector to change forever.

Food Processing

India's food and retail market is expected to touch USD 482 billion by 2020, up from USD 258 billion in 2015, with recent reforms making the sector more competitive and market- oriented. Under the ‘Make in India’ initiative, the food processing sector has been identified as a priority sector and has immensely boosted the investment opportunities which is expected to have double digit growth in the near future. Mega Food Parks that have common utilities like road, electricity, water supply, sewage facility and common processing facilities for pulping, packaging, cold storage, dry storage and logistics are being promoted in a big way. 

The Food Processing sector in India received FDI worth around $6.82 billion during April 2000 – March 2016 and the Confederation of Indian Industry (CII) estimates the industry to attract up to $33 billion of investment over the next 10 years. The Government of India allows 100% FDI under the automatic route in the Food Processing sector, in agri-products, milk and milk products, and marine and meat products. Automatic approvals are provided for foreign investment and technology transfer in most cases. Units based on agri-products that are 100% export-oriented are allowed to sell up to 50% in the domestic market. There is no import duty on capital goods and raw material for 100% export-oriented units. Earnings from export activities are exempt from corporate tax.

India frozen food market is expected to be valued at $1,322.3 million by 2024. India is the second largest food producer in the world straight after China.

Up until now, despite strong agriculture production base, a noteworthy amount of food produced gets wasted owing to poor storage and inadequate infrastructure in country. Hence, frozen processed food products with longer shelf life and easy preparation than traditional food products, are expected to be booming.

Financial Analysis

Years	2018	2017	2016	2015	2014
Net Profit Margin	2.82%	3.86%	3.28%	0.60%	0.62%
EBITDA Margin	9.79%	12.19%	13.22%	10.50%	11.57%
ROCE	13.86%	20.38%	21.81%	15.36%	13.66%
ROE	8.94%	11.85%	10.31%	2.15%	2.01%
Current Ratio	0.99	0.78	0.74	0.72	0.78
Interest Coverage	2.50	2.83	2.14	1.15	1.14
Debt to Equity	0.71	0.62	0.70	1.11	1.26

 

1. The company has seen good revenue growth in the past few years, with sales increasing about 11% CAGR over the past five years.
2. However, most of this increase is contributed by other income, and not operating income. The CAGR of the operating income and EBITDA is around 7%.
3. At the same time, the actual profit margin of around 3% is also low for such an established company with so much experience.
4. The company’s EBITDA margins have fallen from almost 12% in 2014 to less than 10% in 2018, which shows that the company is not managing is its costs well.
5. The company has a healthy interest coverage ratio and even the debt-to-equity ratio is at a comfortable level.
6. The company’s cash flow also seems to be healthy as the Cash from Operations has remained well above the PAT for the past five years:

(Rs. in Crores)                              

Years	2018	2017	2016	2015	2014
Cash from Operations	16.60	45.51	63.56	49.93	54.85
Net Profit	15.66	19.06	14.76	2.44	2.27

 

 

 

7. The company has 64.72% promoter shareholding.
8. The company has paid managerial remuneration of 2.87 crore, which is 18.3% of the PAT.

 

Future Prospects

Positive

1. According to Harvard Business Review, food demand is expected to increase anywhere between 59% and 98% by 2050 out of which a major chunk will be of the packaged and processed foods. This can be a boost to the processed foods segment.
2. The company has decided to undertake the strategy of producing during the off season to avoid the risk of running out of capacity during the peak season, which will help it avoid the expense of increasing capacity.

Negative

1. The company’s processed food segments has had a decline in revenue over the past five years, from 73.92 crore in 2014 to 45.5 crore in 2017, and the value for 2018 was not provided in the annual report.
2. The company has had 0.3% growth in inventory over the past 5 years, which raises concerns over whether the company has enough inventory to keep up with the demand.
3. At the same time, the trade receivables have grown by almost 30%, which may indicate that the company is not realising its sales in cash.
4. There is currently talks of one of the three main promoters pulling out and selling off his approximately 20% stake in the company, which can adversely affect the chances of the company to grow.
5. The company has a small business of being an Authorized Dealer, whose sales have been declining since it was introduced, the only year the sales increased even marginally was in FY17, and the FY18 values are again not provided. Also this is a completely unrelated sector that the promoters don’t have prior experience in, so the decision to enter this segment seems suspicious.
6. The company also gets a lot of its revenue from exports and the fluctuation of the exchange rates can cause issues.

Conclusion

Overall, the current landscape does not seem conducive to investing in this company, the company has had moderate growth with mediocre to bad margins, and the management currently seems to be more focused on resolving their own disputes rather than working on promoting the company’s growth.

CA.BinoyJ.Kattadiyil