Even as the eight-decade-old Gujarat-headquartered ice-cream maker Vadilal Industries Ltd (VIL) was getting its act together, the fallout of an old family feud threatens to throw a spanner in the company’s future growth plans.
With the company’s efforts in recent times – reduction in debt, better inventory planning and enhanced distribution reach – Vadilal Industries shares doubled over the past one year on the BSE, touching Rs 1,032 apiece on Monday. However, the news of one of the promoters planning to sell stake and exit the company caused the stock to slide to Rs 991.9 at noon on Tuesday (12:10 pm).
The reasons for investors’ renewed confidence in the stock in recent times are many – for one, Vadilal completed the expansion of its manufacturing facility from 350,000 litres per day (lpd) to 460,000 lpd in 2015-16, thereby completing its capex cycle (Rs 175 crore over the last three years). Second, it also reduced its debt levels from Rs 172.1 crore in 2012-13 to Rs 121.7 crore in 2015-16; it is now planning to restructure its current debt with Rs 100 crore as long-term debt and the rest as short-term working capital debt. And third, the company has renewed its focus on expanding distribution.
The Gandhis of Vadilal are understood to be the pioneers in India’s ice-cream space. They started with hand-operated machines and home-delivered in thermocol boxes at a time when ice-creams were not even a recognised market in the country. At present, ice-creams are a Rs 6,000-crore industry in India and growing at 10 percent annually. Vadilal is ranked second in volume terms and third in value terms (according to an ICICI Direct report on Vadilal Industries).
However, while three generations of the family had stayed and worked together since Vadilal Gandhi started the business in the early 1900s, the fourth-generation brothers had a fallout.
In 1999 the family members signed a memorandum of understanding (MoU) that none of the promoters could directly or indirectly increase stake in any of the listed companies or partnership firms without a written concept.
The sons of founder Vadilal Gandhi’s grandson Ramchandra (Virendra and Rajesh) and the son of his brother Lakshman (Devanshu) had an equal share or around a third of the total promoter stake in all Vadilal Group companies, including the unlisted ones.
There are two listed entities – Vadilal Enterprises Ltd (which makes ice-cream) and Vadilal Industries (which sells the products and owns the brand). The promoter holding in these two firms are 51.3 percent and 64.84 percent respectively.
Ramchandra Gandhi had another son, Shailesh, who had separated from the family business in the 1990s and owned the territorial rights for the Vadilal brand in Maharashtra and South Indian states. Around 2014-15, Virendra approached the Company Law Board (CLB) alleging financial impropriety on the part of the other two promoters, Devanshu and Rajesh Gandhi. The brother-cousin duo, in turn, moved the CLB in Delhi in 2015.
The dispute has since lingered. It was only around August this year that the news of the promoters agreeing to settle the dispute out of court started doing the rounds. After that, the shares of Vadilal Industries touched Rs 1,090 apiece in August end, while the market cap swelled to Rs 784 crore.
Analysts point out that there are no major capex plans on the cards for the next three years and its recent rationalisation of debt has also provided room to raise working capital debt on a need basis. ICICI Direct said in its report that Vadilal was not only increasing its focus on enhancing distribution but also focusing on the impulse category products.
“VIL, earlier a bulk ice-cream player, has shifted its product range to the impulse category with affordable price points, starting from Rs 5 to Rs 50. Impulse category today contributes to around 75 percent of total ice-cream sales. Additionally, the company aims to achieve breakeven in processed food division by FY18 and clock Rs100 crore revenue from the segment by FY20. For that, it has started exporting ice-creams and paneer,” the ICICI Direct report said.
The report further added that the company was operating at 90-95 percent capacity utilisation in the peak summer season and 10-15 percent in winters. The average utilisation of the company is at 40 percent. “Rather than investing in capex for further expansion, VIL has undertaken the strategy of producing during the off-season to evade the risk of running out of capacity during peak season,” the report said.
The company is indeed focusing on the processed food division and it has started showing results.
Rajesh Gandhi, chairman and managing director of VIL, said after the company’s Q1FY18 results: “Revenue contribution from exports – that expanded from 7.2 percent to 9.5 percent in 2016-17 – further witnessed y-on-y growth of 56 percent in Q1. Exports growth was driven by 308 percent increase in US subsidiary sales to $1.7 million in Q1. We are leveraging existing ice cream manufacturing facilities and retailer relationships, initially established for packaged foods business, to create this growth opportunity. We see US sales make a much larger contribution to the business over the next few years.”
With the news of Virendra looking to sell his stake and exit Vadilal, there is an uncertainty over whether Rajesh or Devanshu will buy him out, or an outside investor will step in. Rajesh Gandhi could not be reached for a comment and a mail sent remained unanswered.
From 1996 to 2015, VIL’s profit after tax has been in single digits consistently even as net sales swelled from Rs 51 crore in FY1995-96 to Rs 404 crore in FY15. The turnaround started from FY16 when PAT touched Rs 15 crore, and went even higher at Rs 19 crore in FY17.
How the feud among brothers takes shape is likely to shape the future prospects of one of India’s oldest ice-cream brands.
Source: Business-Standard 