July 02, 2018

Meandering Thoughts On Manpasand Beverages

Now that the results of Manpasand Beverages are finally out, does it mean that the decisions of the fund managers who invested in the stock have been vindicated?

It was just over a month ago that the previous auditors of the company quit, a few days before the results were to be announced.  That triggered speculation that the company may have cooked its books, and sent its stock price tumbling by 50% in the space of just a week.  It also brought media focus on the fund houses that held its stock.  It isn’t often that something like this happens to a stock reportedly held in the portfolio of 21 actively managed mutual fund schemes, overseen by 13 different fund managers across 7 fund houses. 

Many people wondered how was it that so many fund managers held that stock in their scheme portfolios.  A number of them went further and concluded that the fund managers had screwed up.  There were also some who thought it might be better to wait until the financial results, as vetted by the replacement auditors, actually came out.  Well, last week that happened.  And contrary to what many feared/ anticipated, there was no hard evidence of anything being wrong with the company. 

So what should one make of all of this?  Were the fund managers justified in their faith in this stock?  Was this just a storm in a teacup? 

Before I say anything else, let me make this clear: I am not a stock analyst or a business analyst.  Truth be told, I couldn’t analyze a company even if my life depended on it.  Yet I believe that as a mutual fund investor, it is an ironical necessity to have an opinion of one’s fund managers, even if one is not an expert.  As countless experts say, investors should entrust their money for management only to someone whose integrity and competence they feel confident about, or at the very least, they see no reason to question.  The approach that I take to form an opinion, is on the lines of what I proposed here.  And in this instance, I find myself questioning the judgment of the fund managers.

From what I can make out, almost every analyst and portfolio manager who has praised Manpasand Beverages, has relied upon the company’s audited financials.  While that is understandable, history offers plenty of examples of companies whose numbers didn’t add up, and of fund managers who got taken in by those numbers.  Even so, I would have taken the fund managers at their word were it not for questions put forth by those on the other side of the argument: questions which, as far as I can discern, have not met with substantive answers. 

Many of us would be aware of pieces put out by 2Point2 Capital Advisors and MoneyLife Advisory Services which raised several of those questions.  More recently, I came across a thought-provoking comment on an online investment forum that, I feel, deserves close consideration.  Since it is an off-the-cuff comment, I think it would be best to take the numbers in it as approximative.  Also, bear in mind, this was posted much before the company’s results were declared last week.

I have worked in the FMCG biz for 10+ years. Manpasand never passed the sniff test.

The revenue numbers seemed unbelievable. I travel to wholesalers a lot for work and never came across the brand – in sharp contrast to Pulse candy (DS group) where wholesalers were singing paeans to the brand and it was extremely visible in market as well as consumer studies around the time the company claimed a 100 crore revenue. In contrast – this 700 crore brand was barely visible.

The fact that the Nielsen numbers never reflected the distribution is a huge red flag. I have handled a ~500 crore brand and at scale the Nielsen numbers are pretty accurate. They have a very robust sampling size. We used to see barely +/- 10% to our internal numbers annually. If the brand was so big – there is no way Nielsen would not have captured it.

The basics never stacked up. The throughput per store was way too high. For example, Maggi is ~1200 crore at 8 lac retailers. Manpasand at 700 crore for 4 lac retailers means that it would have a throughput per store higher than Maggi. Does that seem credible? To clarify – it is possible for brands to have a higher throughput per store than Maggi. But those are typically brands in high price points and more urban-focused (think Cadbury Silk) – the opposite of what Manpasand claimed.

The advertising seemed way too low. There are great regional brands (Wagh Bakri) – but all of these spend substantially on regional advertising. It is extremely possible for a DS group/Pulse candy to get to 100 crore because the candy category is extremely margin driven – almost 80% through wholesale. But beverages is much more consumer driven – only about 55% through wholesale – and is very hard to drive scale without advertising. Look at Paperboat – it hit a ceiling at ~80 crore and HAD to advertise to grow.

My point is – I can completely empathize with retail investors who were taken in. But I cannot excuse experts such as an ICICI FMCG fund having a 3.73% stake in Manpasand. Did they not validate their stock picks with even a halfway decent FMCG expert?

I wonder if any of the fund houses holding the stock might like to respond to this.

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