Out of a handful of good businesses i have seen, Tasty Bite (TB) will most probably always remain in top 5 of my list. Before I talk about what exactly do i like about the business lets first go through the basics of this company.

TB is a company based out of Pune, India. Both the factory and corporate office are in Pune. The company was headed by FMCG veteran (formerly at Pepsico and Unilever) Ashok Vasudevan and his wife Meera Vasudevan. Both have immense expertise about consumer trends in this industry and have a sound understanding of the entire supply chain. In 2017 the company was acquired by global major Mars International. Mars has a very strong distribution network globally (particularly Europe, US and Australia) for all its products, namely, petcare, ready to eat etc. Mars owns another major ready-to-eat brand, Uncle Ben’s, which is a global leader in the category although the offering is completely different from TB. Uncle Ben’s product line includes no-frills Rice and Rice meals (both vegetarian and non-vegetarian) and are priced significantly below that of TB. While TB on the other hand is a vegetarian RTH brand and its offering is inspired by Indian or Asian flavours. The company operates in two segments:

1. Consumer Business (RTH)
2. Tasty Bite Food Services (TFS)

• Consumer Business (RTH)

The TB brand was launched in the US in 1995 with 5 all-natural, ready-to-eat Indian entrees. 20 years later, it is America’s largest brand of prepared Indian food today, with products available in US, Canada, Australia, New Zealand, Japan, UK and Germany. TB’s products include Indian meals, Asian meals & noodles and a line of organic ready-to-eat rices and whole grains. Company is the largest supplier of packaged Indian ready to eat meals in the US. 98% of the consumers of these products are native Americans, proving the global appeal of their product. The company itself is not involved in creating the distribution network in US and in other parts of the world. The company has an arrangement with its holding company, Preferred Brands International (PBI), wherein it sells all its produce to PBI (and other Mars subsidiaries in UK, Australia, Germany etc.) at a fixed price and those companies take care of distribution network. However, this is still a pure brand play as products are still marketed by the name of Tasty Bite, implying this company should trade at multiples of any branded FMCG company. PBI and Mars in turn distribute these products in retail chains like Costco, Kehe, Krogers, Woolworths etc.

As of FY17, the all commodity volume % or ACV ( distribution metric to quantify the availability of products sold through retailers, usually as a percentage of all potential outlets) was at 47% while the points of distribution were 1,25,000. The distribution network of PBI in US is already strong, as evident from the numbers from FY17, but what i believe is with Mars into the picture this is set to become even stronger. Also, ACV at 47% provides good room for distribution network expansion. PBI had initially started with a pack of 2 for selling these in the US, they then starting selling in pack of 4 followed by 6 and now they are planning to sell in pack of 8. Managements confidence in increasing pack size is most probably due to encouraging data about consumer stickiness. I believe it is the first one as their products have good reviews on Amazon. Refer to the following link to check their reviews: https://www.amazon.com/stores/page/1A2D183E-D81F-450A-A447-3282C4DB010A?ingress=2&visitId=cb0e4a2a-e46c-493d-8c55-9519b117d57f&ref_=bl_dp_s_web_2601836011

Following picture portrays some of the products of this segment:

• Tasty Bite Food Services (TFS)

In India TB launched the Tasty Bite Food Service business (TFS) in 2006. In this segment the company makes a range of sauces and formed frozen products to leaders in the food service industry. This segment offers customized food services as per requirement and the company on average keeps working on ~50 concepts at any given time. Unlike the RTE segment, which is completely international, TFS is mainly domestic business. Company makes sauces for chains like Dominos, Pizza Hut, Subway, Fasoos, McDonalds, KFC, Burger King, Hindustan Lever etc. So vendor approval is done at most of the major QSR’s in India. TB is looking to leverage on existing relations in domestic market to develop relations with the international unit of the same companies. For eg. TB is providing sauces for Dominos – Bangladesh as well. This division also makes patties for Mcdonalds, while they also experimented the rice bowl with Mcdonalds which has been discontinued most probably due to poor response. Company also makes various other food items like cheese corn pops, kebabs etc. TB is already working on expanding this business in Middle East, Asia, Russia and other geographies. Following pictures portray some of the product items in this segment.

Way Forward & Management:

In FY19, company has done a capex of ~30 cr, highest in its history. I reckon that either the company already sees big demand or it is because of Mars launching products in new markets (eg. Germany) and using its distribution chain. Recently, the company had raised ~14cr from PBI by allotment of 15,500 equity shares, implying a price of Rs 9030 per share. This capital raise was for repaying loans back to Royal Canin (subsidiary of Mars) which the company had raised during the year when it redeemed the preferrence shares held by PBI (~12 cr) and for funding working capital. Mars as a parent clears the way for significant capex in the future as Mars is well funded. Although since Tasty Bite is the only listed subsidiary of Mars globally, i am not sure for how long will they let minority shareholders be part of it.

It is good to see that Mr. Ashok Vasudevan and his wife Mrs. Meera Vasudevan continue to be involved in the company (no info on the current shareholding of PBI). Earlier 70% of PBI was held by Kagome and 30% by ASG-Omni. ASG Omni was held by Mr. Vasudevan, Sohel Shikari (former CFO of TB) and probably others. Since both the Vasudevans have the flavour expertise and were driving the development pipeline, it is a good deal to have them around even after acquisition by Mars.

The management has tremendous understanding of consumer trends in this industry. they had explained about their recent plans for expansion in the UK and Germany. UK they told is probably the biggest market for Indian food as the local food in UK has resemblance to Indian cuisine. The market for Indian foods in UK is the largest in the world, although also the most competitive. So breaking in this market and grabbing significant market share is difficult, however, here Mars has an advantage. Being a company from the UK, Mars has a established distribution network in the UK and lets hope that this works for TB as well.

The company also launched its products in Germany and has gotten good response until now. I reckon that Mars will leverage on its network in Europe to make TB a household name. Also, the sheer ease of use of their products makes it very easy to adapt. I had the chance to taste 4 of the RTH products. Out of the 4, i found one to be good, and other three were truly amazing, better than any other RTE products in India. Going forward, if these products are priced well they can do well in domestic market also.

The new MD, Mr Abhijit Updadhye, has great experience in FMCG. He had a long stint at McDonalds across Asia and then joined some subsidiary held by Flipkart before joining TB. He has extensive idea about the entire supply chain of FMCG (Mcdonalds particularly) and will look to tap this supply chain for additional business for TB.

I have attended AGM’s of a couple of companies and out of all management, i would place the management of TB in top 5 of the companies i know of. At the AGM, they make sure to answer the questions of each and every shareholder with humility and also give time to shareholders during lunch to develop a better understanding of the business.

Valuation
Yes, Tasty Bite is expensive in terms of valuation (trailing PE of ~69x). So scope for valuation rerating is limited. But strong earnings growth will drive the growth in share price growing forward. Last 10 year EPS CAGR has been ~15.5% and last 5 years EPS CAGR has been around ~47%. Stock CAGR for last 10 years has been ~42% while for last 5 years it has been ~103%. Such returns going forward are unlikely as valuation rerating also drove the returns in the past (stock use to trade at ~10x PE in FY09 and ended at ~75x in FY19, implying a CAGR of ~23%).

Strong earnings growth on the back of sales growth due to expansion of distribution network, Network effects and operating leverage will drive the stock going forward. Assuming a valuation derating, which is highly unlikely, of 50% i.e from 70x to 35x in the next 10 years, this will imply a negative return of 6.7% from the valuation component, however, the strong earnings growth should easily offset this.

Financials:

Annual Income Statement

Particulars	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Sales	167	196	252	296	337
% change	14.7%	17.5%	28.8%	17.4%	13.8%
EBITDA	15	21	43	48	46
% change	27.5%	45.7%	99.9%	10.8%	-3.7%
EBITDA Margin %	8.8%	11.0%	17.0%	16.1%	13.6%
Depreciation	7	7	9	11	13
EBIT	8	14	34	37	33
PAT	11	16	22	26	32
EPS	42	63	86	103	117
% change	149.2%	49.4%	36.4%	20.3%	13.6%

Quarterly Income Statement

Particulars	Q1FY18	Q2FY18	Q3FY18	Q4FY18	Q1FY19	Q2FY19	Q3FY19	Q4FY19	Q1FY20
Sales	59	85	73	79	75	88	88	85	91
% change					27.9%	3.9%	20.5%	7.8%	20.2%
EBITDA	7	16	10	15	8	14	11	13	8
% change					16.7%	-14.0%	11.9%	-12.8%	-7.8%
EBITDA Margin %	12.4%	18.5%	13.2%	18.8%	11.3%	15.3%	12.3%	15.3%	8.6%
Depreciation	2	3	3	3	3	3	3	3	4
EBIT	5	13	7	12	5	11	8	10	4
PAT	6	8	7	8	6	9	7	8	7
EPS	14	33	26	30	22	36	27	31	30
% change					64%	11%	3%	3%	33%

Balance Sheet

Balance Sheet	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Total Equity	45	51	74	99	132
Borrowings	38	46	60	37	32
Payables	17	20	20	26	38
Other Liabilities	13	13	15	30	23
Total Liabilities & Equity	113	131	170	192	225
Gross Block	86	93	74	96	114
Net Block	61	61	65	76	82
Debtors	18	23	33	37	38
Inventory	14	19	28	34	49
Other Assets	20	27	35	43	45
CWIP	0	0	9	2	10
Total Assets	113	131	170	192	225

Cash Flow Statement

Cash Flow	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
CFO pre WC	26	34	45	55	68
WC changes	-12	-9	-21	-18	6
CFO	10	15	12	21	56
Capex	-3	-6	-27	-11	-30
CFI	-4	-7	-24	-7	-30
CFF	-4	-6	11	-12	-23
FCF	7	8	-15	11	25

Key Metrics

Key Metrics	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Trailing P/E	19	28	57	82	75
RoE	24%	34%	35%	30%	28%
RoCE	6%	7%	20%	18%	12%
Tax Rate %	34.6%	34.4%	35.7%	35.5%	34.7%
Debtor Days	40	39	41	43	41
Inventory Days	31	31	34	38	45
Payable Days	37	34	29	28	35
WC Days	33	35	46	53	51
Cash Conversion %	96%	114%	56%	77%	164%

Finally, this is not a recommendation. Kindly do your own due diligence before making any decision.

Any views are welcome in the comment section.

Thank You.