Lotus Chocolate open offer begins today: Will the confectioner bloom?

Lotus Chocolate Company’s shares have swung sharply since Reliance Retail acquired a 51 percent stake in the company in December last year. After surging from Rs 111 to a record high of Rs 480, Lotus Chocolate's shares have been hitting the lower end of the intra-day circuit breaker every day.

On February 20, trading in the stock was frozen at Rs 303.75 due to the presence of only sellers.

The low free float explains the volatility in share prices, but a price-to-earnings ratio of over 450x is making investors balk as the company has been a steady performer at best for many years.

The bet here, analysts say, is on Reliance turning around the fortunes of the company as well as a bullish outlook for the chocolate market.

Also Read: Mumbai says hello to cacao with a craft chocolate festival

For instance, Urban Ladder’s FY22 revenue has doubled to Rs 226 crore from Rs 113 crore year-on-year since being taken over by the Reliance group. Hamleys’ losses have more than halved since its acquisition by Reliance.

What does Lotus Chocolate Company do?

Set up in 1988, Lotus Chocolate is primarily a B2B player, supplying cocoa products to companies such as Cadbury, Britannia, Vadilal and Amul. The B2B business accounts for about 95 percent of the company’s top line.

The other 5 percent comes from the B2C segment, which consists of brands such as Chuckles and Milky Punch, which are available only in South India, and in some parts of Gujarat and Maharashtra.

Per the management, the company operates at 15-20 percent margin in the B2B segment and sub-10 percent in the B2C segment. In March 2022, Crisil upgraded its rating from BB/Stable to BB+/Stable on the back of nil term debt, minimal reliance on external borrowings for working capital, and support from promoters in the form of non-interest loans.

The company’s revenue has ranged between Rs 55-65 crore over the last seven financial years.

Also Read: Reliance acquires soft drink brands Campa, Sosyo from Hajoori

Lotus Chocolate is operating in a growing segment, with the Indian chocolate market estimated to have been worth $2.4 billion in 2022, according to market researcher IMARC Group. The market is expected to grow to $4.1 billion by 2028, at a CAGR of 8.8 percent, according to IMARC.

“With RIL’s capital infusion, the company can set up more manufacturing units to meet this increasing demand. This will help Lotus expand to become a comprehensive manufacturer across the industrial and consumer market spectrum,” said Dinesh Saney, research analyst, Invest4Edu.

Private labelling

A bigger catalyst is captive consumption, says Saloni Nangia, president of Technopak Advisors. Chocolate is not a staple, it is a discretionary buy, and “RIL can create high-margin products in the chocolate gifting space that can boost Lotus Chocolate Company’s financials”, she said.

The conglomerate is already aggressively expanding in the FMCG space. Aditya Shah of JST Investments cites the example of RIL’s Snactac Noodles, which is priced lower than Nestle’s Maggi.

“Building its own chocolate production line would have taken time. With Lotus’ production capabilities, RIL can simply private label the chocolates and sell them cheaper than the market leader,” he said.

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Then, there are obvious synergies when it comes to JioMart, which has a pan-India presence. “RIL can integrate all its new products under the Independence FMCG brand,” he added. In Q3 FY23, Reliance Retail’s operating margin came in at 7.9 percent, which could start trending upwards as the latest acquisitions, such as Campa Cola, Lotus and Sosyo Hajoori, start bearing fruits, said analysts.

Open Offer

RIL has announced an open offer to acquire a 26 percent additional stake in the chocolate maker, which can take its total shareholding to 77 percent. However, the offer is unlikely to go through, since the current market price is Rs 303 apiece, while the open offer price has been fixed at Rs 115.50.

The open offer starts on February 21 and closes on March 6.

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