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Spencer acquires Nature’s Basket – Is it worth buying?
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Spencer's Board recently approved the proposal for acquisition of entire 100% stake in Nature’s Basket Limited (NBL) for cash consideration of Rs. 300 cr, subject to requisite approval of the shareholders of the company. NBL is a wholly owned subsidiary of Godrej Industries Ltd.

About NBL:

Operating since 2005, NBL is a neighborhood convenience store format grocery retailer which sells its products ranging from fresh fruits and vegetables, fish and meat, artisanal breads, FMCG and staples through its retail stores and online platform. As at March 31, 2019 the company has 35 operating stores across 3 cities viz. Mumbai, Pune and Bangalore.

About Spencer’s:

Spencer's Retail Limited (SRL), part of RP Sanjiv Goenka Group, is a multiformat retailer that provides a wide range of quality products across categories such as food, personal care, fashion, home essentials, electrical and electronics. Specialty sections such as Spencer's gourmet, patisserie, wine and liquor and the recently launched Epicuisine section are some of the key differentiators in its hypermarket stores. SRL was one of the early entrants in the Indian organized food & grocery retail market and has a strong base in India.

What’s in it for Spencer’s?

This acquisition will bring many synergies in Spencer‘s business as mentioned below:

  1. Nature’s Basket has been in operation for 14 years and would help Spencer’s in its efforts in consolidating position as a stronger retail player after the acquisition.
  2. The deal will provide Spencer’s access to NBL’s West India network of 36 stores in Mumbai, Pune & Bangalore. These stores are located in prime residential locations, have a high sales throughput per square feet and are expected add 363 crores of top line to the Spencer‘s portfolio, according to its management. Currently, Spencer’s has a strong foothold in East India with sprinkling presence in the South and North India.
  3. NBL has a strong portfolio of private label brands which has huge traction with its consumers, providing huge potential to expand Spencer’s stores. NBL had been reducing its dependence on imports by adding private labels, including L’Exclusif that offers savories, ice-creams and chocolates.
  4. NBL also has a strong ecommerce presence that fits well with Spencer’s Omni channel strategy. NBL’s online presence may be limited, but it will provide a chance for Spencer’s to leverage it in establishing its own online presence.

What do the financials say?

Nature’s Basket:

Though NBL’s turnover has grown at a CAGR of 14.22% over the last 6 years, its profit has since remained in the negative territory. NBL has store-level EBITDA margin of ~3% with over 2x productivity than Spencer’s, but at company level, it may continue to make EBITDA losses.

 

FY13-14

FY14-15

FY15-16

FY16-17

FY17-18

FY18-19

Turnover

174

209

271

303.03

291.22

338.28

Growth Rate

 

20.11%

29.67%

11.82%

-3.90%

16.16%


Spencer's Retail Limited

For Spencer’s, the CAGR growth in revenue has been 8.55% with improving EBITDA margins in the last 6 years. Company has also managed to turn its business profitable in the same period.

 

FY13-14

FY14-15

FY15-16

FY16-17

FY17-18

FY18-19

Revenue

1451.3

1665.7

1796.5

2012.4

2073

2187.2

EBITDA

-76.8

-73.3

-61.7

-26

0

8.9

EBITDA Margin

-5.29%

-4.40%

-3.43%

-1.29%

0.00%

0.41%

PAT

-145.4

-151.6

-142.5

-107.6

-29

24

PAT Margin

-10.02%

-9.10%

-7.93%

-5.35%

-1.40%

1.10%

 

Thus, cutting losses of NBL may take substantial time, which can be utilized by Spencer’s in expanding the geographical reach and increase its brand presence across North and West India.

Industry Speaks:

Food and Grocery is the largest segment (FY17) in India with one of the lowest penetration of 3%. The emergence of supermarkets and hypermarkets would enable to reduce this gap.

Modern Trade sees growth in shoppers visit driven by increased visits to hypermarkets:

 

2013

2014

2015

2016

2017

Hypermarket

14%

18%

12%

15%

31%

Supermarket

35%

40%

32%

45%

51%

Modern Trade*

44%

46%

37%

50%

63%

*(Any Hypermarket/Supermarket)

Indian Food & Grocery Market is expected to grow from US$474 bn in FY17 to US$728 by FY21. Key drivers being, rising income levels, growing aspirations, increase in urbanization and infrastructure augmentation. The top 10 states in India like Maharashtra, Tamil Nadu, Karnataka etc that contribute ~64% to India's retail, are expected to grow at 11.3% CAGR.

Conclusion

It is key to note that high-end grocery is very niche but with strong future potential. The acquisition of Natures Basket will likely improve reach and asset turns for Spencer’s, but EBITDA losses at the company level could prolong sustaining profits for the company. We feel there are better stocks available, valuation and business wise to be explored rather than being in an uncertain business.

 

Disclosure: This article is only for educational purposes and illustrated to evaluate a M&A as special situation stock. No statement in the article should be construed as an investment advice and an instruction to buy/sell. Author(s) may have positions in the stock recommended. Note that investment is a risky proposition and consult your financial advisor before taking any action. For full disclosure, click here

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