I hate missing opportunities like these...

Back in 2007, when I started investing seriously, I began with the process of short-listing small-cap stocks - and one of the stocks I considered was Temptation Foods. However, I finally rejected this idea on liquidity and corporate governance concerns. Well, how I have rued that decision! For the last two years, the company has gone on to make significant brand acquisitions, strengthened its management and operations and the stock has made a journey from 1.5 to 80 to 320 and then down to a minimum of 20 in Mar 2009. It last closed at Rs. 33 Is it time to pick up this stock again?


THE COMPANY:
Temptation Foods is a food processing company with three main brands:

• Everfresh: Quick frozen packaged vegetables like peas, carrots, mixeg veggies, broccoli, beans etc. Temptation bought this brand from Chambal Fertilizers in Nov 2007.
• Karen's Gourmet Kitchen: Again acquired in 2007, the company sells sauces, conserves, dressings and spreads under this brand.
• Delika: This is a frozen fruit and vegetable brand for institutional customers.
• The company made an announcement in Dec 2008 that they have entered into an agreement with a South Indian company for export of marine food.

THE FINANCIALS:
Summary of financials over last 3 years in crores:



* Based on quarterly results

Roughly 8.5% EBITDA margins is not so bad nor so great in this FMCG-like sector. But then the revenue growth is impressive and most importantly, zero debt (as per Mar 2008). The market cap as of 29-Apr-2009 was INR 83 cr - a P/E of 1.5 and an EV/EBITDA of 1.1.


THE RISKS:
Like in 2007, corporate governance is still an issue. Another controversy this February - Temptation had, since late 2008, been making disclosures of its increasing stake in another food procession company - Kohinoor Foods. In Feb 2009, SEBI asked the MD to stop making false disclosures. Kohinoor's register showed Temptation as holding only 2.28% of shares. The company, it seems, had pledged 7% of Kohinoor shares with an NBFC who had gone on to sell them. To me, the disclosure is less alarming than the pledging of shares for a company with close to zero debt.

Yes, there are issues with this company - but I would still lean on the long side for this stock. Temptation Foods is an emerging player in a high-growth, nascent industry. The strengths - strong brands, growing industry and export potential - far outweigh the risks at the current price. To discuss more about this stock, goto blogs on fourstocks.com