Promoter feud may melt Vadilal’s turnaround plan
Just when eight-decade-old icecream maker, the Gujarat-headquartered Vadilal Industries was getting its act together by reducing debt, improving inventory planning and enhancing distribution reach, news of one of the promoters wanting to exit the company by selling his stake as a fallout of a family feud might throw a spanner in the works for the company’s future growth prospects.
The Vadilal Industries’ share price on the BSE has doubled in the past year, touching ~1,032 on Monday. News of the stake sale, however, affected the stock. It ended day’s trade at ~984.85 a share on BSE on Tuesday.
The reasons behind renewed investor confidence in the company are many. For one, Vadilal Industries has completed the expansion of its manufacturing facility from 350,000 litres per day to 460,000 litres per day in 2015-16, thereby completing its capital expenditure cycle of ~175 crore over the last three years. Second, it has reduced its debt from ~172.1 crore in 2012-13 to ~121.7 crore in 2015-16, and is now planning to restructure current debt with ~100 crore of long-term borrowings and the rest as shortterm working capital loans. Finally, Vadilal Industries now has a renewed focus on expanding distribution.
The Gandhis of Vadilal are pioneers in India’s ice-cream industry, starting with handoperated machines and home delivery in thermocol boxes. The ice-cream industry in India is now worth ~6,000 crore and is growing 10 per cent annually. Vadilal Industries is ranked second in volume terms and third in value terms, according to a report by brokerage company ICICI Direct.
However, while three generations of the family worked together since Vadilal Gandhi started his business in the early 1900s, the fourth generation had a falling out among the brothers.
In 1999 the family members signed a memorandum of understanding that stated none of the promoters could directly or indirectly increase stakes in any of the listed companies or the partnership firm without written consent.
Vadilal Gandhi’s grandson Ramchandra’s two sons Virendra and Rajesh and his brother Lakshman’s son Devanshu hold around one-third each of the total promoter stakes in all Vadilal group companies, including unlisted firms.
There are two listed entities in the group, Vadilal Enterprises, which makes icecream, and Vadilal Industries, which sells the products and owns the brand. The promoter holdings in these two companies are 51.3 per cent and 64.84 per cent, respectively.
Ramchandra Gandhi had another son Shailesh who separated from the family business in the 1990s and he owned territorial rights for the Vadilal brand in Maharashtra and the southern states. In 2014-15 Virendra Gandhi approached the Company Law Board alleging financial impropriety on part of the other two promoters, Devanshu and Rajesh Gandhi. The brother-cousin duo, in turn, moved the Company Law Board in Delhi in 2015.
The dispute has lingered. In August this year news of the promoters agreeing to settle the dispute out of court started doing the rounds and the share price of Vadilal Industries touched ~1,090. The company’s market capitalisation swelled to ~784 crore
Analysts point out that there are no major capital expenditure plans on the cards for the next three years and Vadilal Industries’ rationalisation of debt has also provided it room to raise working capital loans. ICICI Direct said in its report that Vadilal Industries was not only sharpening its focus on enhancing distribution but also on the impulse-buying segment.
“Vadilal Industries, earlier a bulk ice-cream player, has shifted its product range to the impulsebuying segment with affordable price points from ~5 to ~50. The category today contributes around 75 per cent of total icecream sales. Additionally, the company plans to achieve breakeven in its processed food division by 2017-18 and post ~100 crore revenue in the segment by 2019-20. It has started exporting ice-creams and paneer,” the ICICI Direct report said.
The report added that the company was operating at 90-95 per cent capacity in the peak summer season and 10-15 per cent in winter. The average capacity utilisation by Vadilal Industries is 40 per cent. “Rather than investing for expansion, Vadilal Industries has undertaken the strategy of producing during the off season to avoid the risk of running out of capacity during the peak season,” the report said. The company’s focus on the processed food division has begun yielding results.
Rajesh Gandhi, chairman and managing director of Vadilal Industries, said after the company declared its June quarter results: “Revenue contribution from exports, which expanded from 7.2 per cent to 9.5 per cent in 2016-17, witnessed further yearon-year growth of 56 per cent in the first quarter of 2017-18. Export growth was driven by a 308 per cent increase in the sales of the group’s US subsidiary to $1.7 million in the first quarter. We are leveraging existing ice-cream manufacturing facilities and retailer relationships, initially established for the packaged foods business, to create this growth opportunity. We see US sales making a much larger contribution to the business over the next few years.”
As news floated in that Virendra Gandhi was planning to sell his stake, speculation is rife whether Rajesh and Devanshu are likely to buy him out or will this pave the path for an outside investor to step in. Rajesh Gandhi could not be reached for comments and a mail sent to him remained unanswered.
From 1996 to 2015, Vadilal Industries’ profit after tax has remained in the single digits consistently even as net sales swelled from ~51 crore in 1995-96 to ~404 crore in 2014-15. The turnaround started from 2015-16 when profit after tax touched ~15 crore and then went even higher to ~19 crore in 2016-17.
How the feud between brothers plays out is likely to shape the prospects of one of India’s oldest ice-cream brands.