We recently had an interaction with management of Tasty Bite Eatables (TBEL) to understand what drove such stellar performance in Q4 and if that is sustainable.
Here is what management had to say:

On 38% Sales growth in Q4FY16
Sales picked up on account of two reasons:

• Higher shipments to US amidst on-going and planned promotional campaigns
• After 18-24 months of sluggishness, finally saw some pick up in Quick Service Restaurant (QSR) business in India led by both existing accounts as well as newer accounts
• Not a good idea to read too much into quarterly numbers due to various moving parts, ideal to analyse annual financials.

Ready-to-serve (RTS) entry in UK and Japan

• TBEL had entered UK last year by tying up with Costco Retail Chain. The discussions with other large retailers is going on. Since Costco has a small presence in UK, the turnover is still negligible. UK is the largest prepared foods market in the World and is likely to be a big growth driver for TBEL.
• In Japanese market, TBEL has just tested the water. They are yet to leverage the distribution of Kagome. Japan is a $600mn prepared foods market.

New Product Launches in FY16

• TBEL launched some new spice sauces on a pilot basis. The initial response to the product has been encouraging and will now be scaled up gradually.
• Last year some Thai entrees were launched and were well accepted by the consumers. In FY16, these were scaled up through distribution expansion and promotional campaigns.
  

On Indian QSR Business
New Accounts

• TBEL had lost Domino’s account a few years ago, this was a big account for sauces due to high volumes. TBEL recently got the account back and has started supplying tomato and pizza sauces to Domino’s.
• Among the newer account, Faasos and Jumbo King are doing pretty well and rapidly expanding.

Capacity Utilisation

• RTS: ~100%
• QSR: ~50-55%
• Sauces: Close to peak

Capacity Additions / Capex

• RTS – Brownfield expansion is underway and should be completed by September 2016. At a cost of Rs 6 cr. capacity will be increased by close to 50%.
• Another Rs 2-3 Cr. will be spent on improving manufacturing facilities and maintenance capex so as to better comply with regulations and global best practices.

On 19.2% Operating Margins of Q4FY16
May not be sustainable at these levels. This was on account of multiple factors:

• Softer Raw material costs
• Favourable Exchange Rate
• Ocean Freight Cost (lowest in many decades)
• Operating Leverage

Internally management aspiration is to sustain annual operating margins in 16-18% range.

On Pricing Policy, Competitive landscape in US etc.

• TBEL enters into pricing agreement with PBI (Parent company which handles distribution in US), on an annual basis. The price stays the same throughout the year, so there were no price hikes undertaken in Q4FY16.
• US has a very competitive retail market and it is almost impossible to raise prices. Twenty years ago the RTS packet which used to cost $3 costs exactly the same even today and weighs the same too.
• Essentially that implies the only way sales can grow is by way of higher volumes.
• Earnings on the other hand can grow faster only by improving cost efficiencies.

Role of Kagome

• Kagome doesn’t play any role in managing day to day affairs of PBI/TBEL. The entire management structure is exactly the same as it was before Kagome bought majority stake in holding company PBI.
• Kagome hasn’t yet started leveraging PBI’s distribution network in US.

Overall a stellar Q4 hasn’t really changed the annual target/guidance; aim continues to grow revenues consistently at ~20% CAGR with operating margins in 16-18% range.

The current rating on TBEL is HOLD which implies continue to hold the existing position however fresh buying is not advisable at these levels.