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Company report: Temptation Foods

Keynote Capitals presents report on Temptation Foods Ltd., Indian fruits and vegetables (F&V) processing company.

Highlights

Huge potential of the Indian food processing sector
The Indian processed food business was estimated at Rs49bn in FY05. In India, less than 2% of the produced food is processed. Processing for fruits and vegetables is likely to increase to 10% and 15% in FY10 and FY15 respectively. This will drive market size to Rs290bn in FY10 and Rs546bn in FY15.

Government measures to encourage investments in the food processing sector
Various organizations such as APEDA, Ministry of Food Processing, National Horticulture Board and State Governments have launched schemes to incentivise investments in the food processing sector, particularly for setting up new processing facilities, creating backward linkages with farmers, infrastructure development, etc.

TFL is a leading player in the processed fruits and vegetables segment
TFL is largely a fruits and vegetables (F&V) processing company. Marine products bring in considerable revenues, as a result of the recent acquisition.

Experienced management
TFL is run by a team of professionals led by Mr. Vinit Kumar, who has over 16 years of experience. It is professionally managed, with both Board members and managers from reputed global consumer companies. It has set up an M&A team which constantly works on creating and executing deals.

Track record of aggressive inorganic growth
TFL was earlier largely in private label processed fruits and vegetables space. It entered new verticals and new product segments through the inorganic route.

Good client portfolio
It has a portfolio of well established domestic and international customers, viz., Pizza Hut, ITC, Al Kabeer, Taj, Mc Donalds etc.

Entry into new product segments, again via acquisitions
It plans to introduce new products under the Ever Fresh brand and also enter new value-added product segments, such as ready-to-eat and snacks, through the inorganic route. It expects substantial cost savings to kick in, as a result of the higher size and economies of scale.

Some concerns...
We view the increasing contribution from the marine segment as a concern, given the slim margins in that segment. For FY08, marine comprised 52.3% of aggregate revenues, impacting margins. However, we expect contribution of marine segment to decline to 39.6% in FY09 and 33.1% in FY10, as TfL plans acquisition in other segments.
TFL is clearly focused on inorganic growth, with limited contribution of organic growth, going forward. There are always possibilities of some acquisition deals not taking place at all. An acquisition also takes a while to commence full contribution.

Further acquisitions, if any, will help reach critical mass
We believe the right acquisitions will help TFL quickly gain critical mass and expand presence across food product categories.

Valuations more attractive in the “with further acquisitions” scenario
We consider valuations on two bases (i) on an “as is” basis (based on historical acquisitions and organic growth), and (ii) factoring in some contribution of future acquisitions. On an “as is” basis, the valuations work out to 19.9x FY09E and 17.1x FY10E. With further acquisitions, the valuations look more attractive at 19.1x FY09E and 12.7x FY10E.

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