Butterfly Gandhimati Appliances CMP 158- A Potential Multibagger

August 25, 2019

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Strategic Alpha

butterfly

Butterfly Gandhimathi Appliances (BGAL) is a leading manufacturer of domestic kitchen and domestic electrical appliances. The company’s leading products, sold under the Butterfly brand, are LPG stoves, mixer grinders, tabletops, wet grinders, pressure cookers, among others. It is a market leader in Stainless Steel (SS) LPG gas stoves with a 25% share(approx) in South India and 10% pan-India. It was Established in 1986 by Shri V. Murugesa Chettiar – currently helmed by the 2nd and 3rd generation of the promoter family.

     For more info click: https://www.butterflyindia.com/

 

PRODUCTS:-

butterfly

 

NUMBERS THE LATEST:-

Market Cap:  339 Cr         Book Value:  111 Apx          Promoter holding: 64.96 %

Sales FY19 650 Cr             FY19 Net Profit 9.57 Cr.      CMP on 25 AUG 2019: 158

POSITIVES 

  1. Rich experience of over three decades in the Kitchen Appliances Industry.
  2. Simple and sound business model and Trustworthy Promotors.
  3. Market leader in Stainless Steel (SS) LPG gas stoves with 22-23% share in South India and 10% pan-India share.
  4. A network of 500+ exclusive distributors.
  5. Butterfly has 20 Product Categories now in 2019 compared to just 6 in 2013, this will help to upsell and cross-sell under the butterfly brand umbrella.
  6. Long Term Rating CRISIL BBB/Positive, Short Term Rating CRISIL A3+
  7.  Debt is well under control with Debt/ Equity at 0.8 times and is serviceable.
  8. The company has been able to grow its branded sales at a rate of 13% CAGR for the past 1 decade.

butterfly branded sales

INTERESTING INFO

  1. The current capacity utilization of the company is just 65%, so without much spending, on CAPEX they can do more sales in the coming years and operating margins will thus increase.
  2. Many Notable funds have acquired stake in this undervalued, High operating leverage opportunity- 1) Reliance AIF- Private Equity 5.60%, 2) IDFC Sterling Equity Fund- 1.68%, 3) Sundaram Smallcap Fund- 1.91%, 4) Sundaram AIF – Nano cap Series I- 1.89%, 5) Dolly Khanna- 1.04%, 6) Sundaram AIF – Nano cap Series II- 0.59%
  3. Butterfly Gandhimati Appliances has become multi-bagger twice in the last 15years.
    First a 43 bagger from 2008 to 2012, second time near 4 baggers from 2017 to 2018. This stock has been a heaven for stock pickers. Price was just 3.72 Rs in 2005 and in 2012 it became a 100 bagger quoting at Rs. 390. The below chart shows its multi-bagger Tale.
  4. butterfly heavenIn 2005 it was just like a startup company with just 7 Crore Marketcap, as the company grew it became a 15 Crore Marketcap Company in 2009, but 2009 onwards it was a game-changer period for the company, it received the govt orders from Tamilnadu govt for the supply of kitchen appliances and gas stoves to its citizens. Revenues shot up from a mere 90-100Cr in 2008 to 500+Cr in 2012 and profits from 3 Cr Apx in 2008 to 30+ Cr in 2012, thus making stock to soar high from 8 Rs to 390 Rs in just 3 Years, a 43 bagger returns for investors who spot the story right.
  5. From 2013 as the stock ran up so fast stock, it started to consolidate, and 2016 was the year when the company did not get any govt order, so profitability took a dent, so is the stock price. The stock came down from highs of 390 to 150 in 2017-2018.

Butterfly Revenue Breakup

       The company soon realized that brand enhancement is the only profitable way which can give them valuation on streets and they started to focus more on brand development/ dealer development and distribution channel development, increase advertisement spends, started expanding the distributor base, increase manpower, increase the number of product categories for the future leg of growth.

Butterfly’s brand strategy-

Focus more on ad spends and increase in sales team from 2017

butterfly change in strategy

Butterfly has been a south focused brand with 80% of its sales coming from kitchen appliances.butterfly south focused

PEER COMPARISON

butterfly

TTK Prestige undoubtedly is a market leader in this sector, it enjoys the debt-free status, and thus market values it accordingly. Hawkins comes in at 2nd. However, Butterfly which does more sales than Hawkins, Mr. Market is valuing butterfly at half times sales compared to 3 times sales for Hawkins and 4 times sales for TTK, the reason being low operating margins of Butterfly Gandhimati appliances. But as the capacity utilization increases in the future from 65% currently to 90-95%, OPM will be on similar lines to TTK Prestige and Hawkins and thus the valuation of the company.

NEGATIVES/POSSIBLE RISKS

  1. Competition is severe in this sector from organized and unorganized players and the market is fragmented, If the company is unable to maintain its brand value it can lose market share to companies having short term agendas.
  2. Though debt is serviceable and within the control, the company can face its heat during bad times.

MY TAKE

Butterfly Gandhimati Appliances has been able to gain market share in south markets over the past 1 decade and it is gaining traction since the past few years due to its focus on branded sales by dealer development, enhancing its distribution network, and creating brand awareness through advertisements. After its tough times during the absence of govt orders, profitability took a hit, which got compensated by an increase in branded sales over the years. Currently, Mr.Market is very pessimistic about its debt levels and OPM thus trading at a pessimistic valuation, however, my assessment says that it will change in the coming future as their capacity utilization will head north towards 90-95% from 65% currently. Management has taken every step in the right direction for brand development.

With Debt to Equity at 0.80 and rising capacity utilization, this company is poised for free cash generation in the coming years. This company can aim at going debt free once the free cash generation starts. Mr. Market will soon realize it and give a big thumbs up as the story unfolds.

Butterfly for me is such a turnaround consumption story which is giving a nice entry at this pessimistic valuation which can create humungous wealth for patient investors over the next 3-5 Years.
Butterfly Gandhimati has become multi-bagger twice in its lifetime, a 43 bagger in 3 Years from 2009 to 2012, and a 4 bagger from 150 Rs in 2017 to 600+ in 2018. Now around 160, it is placed nicely to become multi-bagger once again.

    Butterfly Gandhimati is thus an obvious multi-bagger, provided management continues its steps in the right direction, with patience we will be able to see the levels of 300,500,600, 1000. Only time will tell how much money we have made here.

Disclosure: We hold Butterfly as a satellite allocation in our investment basket

Butterfly Gandhimati ads on TV

 

 

Important NotePotential multi-baggers are those stocks that have the potential to give 100 – 500% profits. Obviously, such returns take time. Probably 3 – 4 years or more. Short-term volatility is the reality of the stock market and that will always happen. Short-term movements(upside and downside) are impossible to predict. Only invest funds that you will not need for the next 3 – 4 years. As long as you buy a stock for the right reason and are convinced about the future prospects of the company, there is no need to worry if the share price goes down and stays down for a period of time after you buy; provided you have followed the cardinal stock market mantra BUY LOW.

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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