2 growth companies in blue-ocean segments
It has been a while since we wrote about something, that's because we couldn't find a business that falls under our bucket of deep value, listed startup, or special situation.
About a month back we came across two companies - an instant coffee manufacturer and an online electronic component distributor. We consider the companies and their respective segments' fast-growing growth opportunities where they are well capitalized to scale and garner quick market share.
This is also one of the rare examples where we consider the listed equivalents a much better buy than an early-stage startup. We have seen both these segments play out in the early stage ecosystem as well hence it gives us good conviction to recommend these companies.
Before talking about the individual companies - We want to talk about the larger market and opportunities in the respective segments.
Talking about the electronics manufacturing market in India - there is no domestic or localized component ecosystem in India, every component is manufactured in China no matter if it is an SoC (system on a chip), resistor, or basic micro-controllers. The demand side of the picture which consists of OEM Vendors and EMS businesses perpetually faces a supply chain risk where delays tend to cause big losses opportunity cost and otherwise as well. Quality Control also becomes a challenge because of the high amount of counterfeit components in circulation. This space is entirely un-standardized. Even a basic toaster circuit requires 30 components which have to be individually sourced from 10 different vendors which are then bolted onto the circuit board. On the supply side, we have ~3500 importers who manage 10-20K SKUs in stock and face a sub-10 % sell-through rate as they are unable to have diversified sales channels.
Due to these market dynamics - an online marketplace was imminent that could build an exhaustive catalog or a standard library for these components. This standardization will help in vendor fulfillment and better marketplace fill rates.
This is where this listed company comes in - they were incorporated in 2017, this electronic component distributor has established itself as the market leader in the category armed with a very focused GTM, sound execution, and incredible sourcing capabilities. They aim to become a comprehensive electronics hardware solution provider in India. The MOAT here is maintained through product line diversification and building supply chain efficiencies, to stay ahead in a rapidly evolving market. They predominantly run an e-commerce platform, the go-to sourcing platform for enthusiasts and professionals alike, offering over 16,000 SKUs across more than 120 brands.
This depth in the assortment is supported by over 160 domestic and international vendor partnerships. They possess a 15,000 sq. ft warehouse and a dedicated workforce of over 170 individuals to run the operations.
The company has launched its kits with an exhaustive selection of SKUs focusing on electronic boards/modules and accessories. This is predominantly focused on engineering students and hobbyists.
Financially, FY24 has been remarkable, with the company reporting revenue of more than 80 crores, marking a 60%+ increase from FY23. The EBITDA and PAT also saw significant increases, with margins of Rs. 6.09 crores (up 30%) and Rs. 3.87 crores (up 33%), respectively.
In terms of product mix, development boards led with approximately 21%, followed closely by drone parts at 15%, batteries/chargers and accessories at 13%, and electronic modules and displays also at 13%.
Looking at the clientele, the company boasts associations with ONGC, M&M, Hindustan Aeronautics, and Tata Power Solar Systems.
In the B2B segment, which contributes to 56% of the FY24 revenue, the company has secured key clients like General Aeronautics and Asteria Aerospace. This segment's growth and increased government orders highlight the company's strong market approach and diversified customer base.
Inventory management showcases a decrease in slow-moving inventory from 2.33% at the end of FY23 to 1.6% at the end of H1 FY24, reflecting efficient stock management. The company also places a strong emphasis on proprietary product development, especially in the drone segment, indicating a focus on high-growth markets and innovation.
To Summarize:
The Indian electronics manufacturing market presents both challenges (lack of domestic component ecosystem, supply chain risks) and opportunities (demand for standardized solutions).
An online marketplace for electronic components is essential due to supply chain fragmentation and the need for standardization, offering a significant market gap.
The listed electronic component distributor maintains a competitive edge through diversification, strong GTM (targetting hobbyists and companies alike), and supply chain efficiencies, positioning itself as a market leader.
Strong financial performance, with notable revenue growth and improved margins, reflects the company's effective execution and market traction.
India has largely been a tea-drinking nation since time immemorial. However, coffee has become an increasingly popular drink since the turn of the twentieth century. India accounts for 3.14% (2019-20) of global coffee production and is the third-largest producer and exporter of coffee in Asia; it is the sixth-largest producer and fifth-largest exporter of coffee in the world. However, the production is skewed to the southern states of Karnataka, Kerala, Tamil Nadu, and Andhra Pradesh contributing to 99.7% (of 2,98,000 MT production in FY20) of India’s total produce. Likewise, southern India accounts for over 60% of domestic consumption.
The per capita consumption of coffee in India stands at 0.3Kg, which is way below the Asian per capita consumption of over 2 Kg, offering immense scope for double-digit growth, going ahead. A positive change in consumer lifestyle (specifically driven by Western culture), higher disposable incomes, and the growing number of young professionals are some important factors that will push growth in coffee consumption in India. Additionally, increased access to coffee machines in offices and institutions triggered interest in coffee among consumers, which indirectly drove sales in households, as people began to acquire a taste and, in turn, consumed coffee at home as well.
The size of the global instant coffee market is approximately sized at ~9,50,000 MTPA. Nestle and Kraft Foods together account for >50% of the market. Nestle dominates the market with 30% of the world’s total instant coffee volumes. Instant coffee is becoming increasingly popular all over the world. Over the past decade, the share of instant coffee in total consumption has increased from ~25% to ~35% whereas the share of fresh coffee (ground and roasted) declined from ~75% to ~65%. The European Union is the largest consumer of instant coffee, followed by Russia, the US, the UK, Japan, etc. While consumption has increased in low single digits in developed countries, it has grown >10% CAGR in Southeast Asian countries over the past decade.
In the last few years, we have been seeing a shift from mass production of beverages to more specialty and bespoke offerings (if we can call it that). People are increasingly paying more attention and appreciation to the richer and more complex taste of perfectly roasted beans in small batches as compared to standard instant coffee made from poor-quality beans. There's also a growing culture around coffee that parallels what we see with wine, craft beer, and artisanal food. People enjoy learning about the origins of their coffee, the stories of the farmers, and the process of making coffee. Specialty coffee also offers more opportunities for customization. Consumers can choose their preferred brewing method (e.g., French press, pour-over, espresso), grind size, and even the specific origin of the bean.
Talking about our pick in this segment is a specialty instant coffee manufacturer that was established in 1980 in Hyderabad, India, they have carved a niche for themselves in the manufacturing and exporting realm of instant coffee and chicory, among other beverages. With a legacy of over four decades, they have continuously tried to evolve, keeping pace with market demands to offer custom solutions through private labeling.
Diving into its product lineup, you'll find an impressive array that includes spray-dried and agglomerated instant coffee, instant chicory, and a versatile range of packaging options catering to a wide spectrum of market segments.
In FY23, the company ventured into new territories by starting its D2C business, marking a significant milestone in its journey from a manufacturer to a brand. This expansion was further bolstered when a Myanmar-based conglomerate acquired a substantial stake in June 2021, leading to a rebranding of the entity to its current name, emphasizing its commitment to heritage and quality in every cup.
The management team is also solid with decade-long careers in other big FMCG coffee manufacturers in India. Not only do they understand the supply side of it but they possess relevant expertise and connections to open the right channels when the time arrives for the D2C brand.
Speaking of presence, Its reach spans across continents, penetrating markets in Europe, Africa, S.E. Asia, Australia, Russia, and CIS countries. Such a global footprint is supported by robust production capabilities, with an annual installed capacity of 7200 MT spread across expansive manufacturing units in Telangana.
With eyes set on future capacity utilization goals, aiming for 100% by FY 2024-25, and plans for aggressive expansion into new territories like the USA, New Zealand, and Australia, the future looks as rich and promising as a well-brewed cup of coffee.
Financially, the company is on a robust growth trajectory, evidenced by a +102% growth in revenue in Q3FY24 compared to Q4FY23, alongside significant improvements in operating profit and net profit.
Environmental and social initiatives underscore the company's commitment to sustainability and community engagement, highlighting its efforts towards zero liquid discharge, water recovery, and the utilization of clean energy sources.
The most exciting development recently due to which they came on our radar has been them raising > 100 Crores (1/5th of Market Cap) via a high-profile listed company promoter who is also a VC/PE backed startup founder and leading Family Offices.
To summarize:
India's coffee industry, dominated by southern states, offers significant growth potential fueled by changing lifestyles and rising incomes.
Global instant coffee market trends show increasing popularity, with Nestle leading the industry.
Specialty coffee culture is on the rise, paralleling trends seen in wine and craft beer consumption. Due to this shift in consumer behavior, we believe there will be a chance for new players to come in and gain market share
The company has a strong legacy with a solid management team who have made and sold coffee all their lives alongside global reach and is poised for robust growth, supported by solid financials and a strong growth orientation.
NOTE: These companies aren’t cheap but they are small (both <600 cr market cap) and have showcased strong growth in the past and continue to grow further supported by concrete plans and strong teams leading them. Respective markets also present substantial tailwinds.
We want to emphasize that this communication should not be misconstrued as a recommendation, as we are not SEBI RIAs. Readers must conduct their due diligence and exercise caution. Therefore, we urge all readers to approach this opportunity with prudence and carefully consider the potential risks involved. While the prospects appear promising, it is essential to maintain a cautious approach and stay informed of the inherent dynamics of the industry.
Happy to chat and discuss this in detail
About Us -
Govind Shorewala - Entrepreneur (Mining, Textiles) & Investor (Private & Public Markets) → Reach out at: govind.shorewala@gmail.com
Aaroah Mittal - Early Stage VC → Reach out at: aaroah.m@people-group.com