Investment rationale:
Capacity expansion to trigger growth: Currently the company has three manufacturing plants having a total capacity of around 9 lakh litres per day. The company is now setting up a new manufacturing facility in Haryana/Punjab, at a capex of around Rs152cr, which will increase the total capacity by around 50%. Going forward, we believe this new plant will drive additional growth for the company.
A strong regional brand supported by a wide distribution network: The company has a strong brand - Mango Sip, having presence in rural and semi urban regions, ie mainly in Punjab, Bihar, Maharashtra, Gujarat, and Uttar Pradesh. Also, the company has a wide distribution network including 73 consignee agents and 654 distributors spread across 24 states in India to whom it sells directly. The company’s sales and distribution network is strategically spread across different regions in India, and has an especially strong outreach in certain semi urban and rural markets.
Investment concern:
Overall slowdown in rural markets could impact discretionary spending: A major portion of the company’s revenue comes from rural markets owing to the company’s strong presence in these areas, backed by a wide distribution network. The Indian rural story is currently going through an adverse phase due to unseasonal rains in the recent past which impacted crops extensively, and due to lower hike in minimum support prices (MSPs), thus curtailing rural incomes. Thus, going forward, any further slowdown in rural markets could likely result in lower spending on discretionary products.
High dependency on a single brand: The company started operations with its flagship brand ’Mango Sip’ in the year 1997; since then, the brand has been the largest contributor to the company’s revenues. In the last three years, more than 97% of the company’s revenue has been contributed by ’Mango Sip’ alone.
Outlook and Valuation: MBL is highly dependent on a single brand (Mango Sip) which currently has rural and semi urban focus. Going forward, for penetrating the brand in urban markets, MBL would face stiff competition from strong existing brands like Frooti, Slice, Mangola, Pepsi, Coca cola etc.
On the price to earnings per share (EPS; post-IPO) front, the company is valued at 95x 9MFY2015 annualized numbers, while its close peer - Dabur is trading at 44x FY2015 numbers. Further, other FMCG companies like ITC and HUL are also trading at a lower multiple than MBL inspite of bigger brands in their portfolios, wide pan India distribution networks, and higher ROEs, coupled with their proven track records. Hence, we recommend NEUTRAL on the issue due to expensive valuation.
