Stock Pick From The Consumer Goods Sector

HERE IS WHY:

• A net debt-free company
• Targeting pan India presence
• Expecting Rs 100 crore export revenues in the next three year

Between family-owned and professionally-run businesses, which create more value? This has long been a topic of debate among investors. Professionally-owned companies, for eg. Infosys and L&T, are usually seen as a valuation proposition by the investor community, but there is also no denying that family-owned business groups such as Reliance, Mahindra etc. dominate the business scene in India and are equally relevant in context of value creation.

Butterfly Gandhimathi Appliances, a home appliances company based in Tamil Nadu is both, a family-owned as well as a professionally-run company. The returns generated by this firm have been so humongous that an investment of Rs 1 lakh in the company in the beginning of 2009 would have yielded Rs 47 lakh by now. Now, that’s what we call value creation! Note that the company went into financial restructuring in 2003 and emerged from the debt restructuring cell in 2009. How did it manage this? Read on to find out.

To understand how the company does its business, we spoke to its Managing Director, V M Seshadri and General Manager Corporate Strategies, V M G Mayuresan. The company has two major segments – the branded and unbranded business. The branded segment contributes 55 per cent of its revenues, while the remaining comes in from the unbranded business. The branded segment has three sub-segments, i.e. retail, institutional and exports. Retail is the largest among these (contributing 75 per cent of the branded business revenues), under which it sells home appliances including mixers, grinders, cookers, pans, etc. Institutional and exports together make up 25 per cent of the segment’s revenues. Under its institutional business, the company sells LPG stoves to major oil companies such as IOCL, BPCL and HPCL.

Shareholding Pattern As On  31/03/2013
Promoter and Promoter Group	64.72
DII	15.78
Public	16.97
Bodies Corporate	2.53
GRAND TOTAL	100

The unbranded business of the company is a newer segment. Over the last two years, the company has been winning tenders of Tamil Nadu Civil Supplies Corporation to supply top wet grinders and domestic electric food mixers. It won a tender worth Rs 285 crore in 2011, and one worth Rs 460 crore in 2012. The segment, though, makes for a low margin business, and if the company fails to win tenders it would see a considerable loss of revenues. However, Sheshadri clarified that there would be a minimal impact on its profits in such a situation.

With a phenomenal 63 per cent growth in revenues as well as net profit between FY08-FY13, its financial performance has been soaring. The company is expected to sustain this growth rate, as it is betting on the retail and exports segment. In retail it is expecting to establish a pan India presence, which will add to the revenues. It also sees the export revenues touching Rs 100 crore within the next three years.

We believe that a healthy product mix would see the margins appreciating every year going ahead. To achieve this, the company is also increasing its capacity by 40 per cent, which will be funded by debt as well as its own funds. However, this will not increase its debt profile significantly.

On the valuations front, at its CMP of Rs 381, the stock is available at a price- to-earnings ratio of 20x its FY13 EPS of Rs 18.69. We advise investors to buy this scrip at the CMP with a one-year target price of Rs 460, which will mean a price appreciation of 20 per cent.

LAST FIVE QUARTERS (Rs/CR)
	Mar '13	Dec '12	Sep '12	June '12	Mar '12
Income From Operations	323.24	198.27	101.77	110.13	219.01
Other Income	0.36	0.39	0.49	0.71	0.76
Interest	7.38	6.93	3.86	4.16	3.43
Tax	7.69	3.35	2.35	2.29	14.5
Net Profit	15.38	6.99	6.29	4.77	5.27
Equity Share Capital	17.88	17.88	17.88	17.88	15.45