Is the ‘Vadilal’ brand worth ₹1,000 crore? Its minority shareholders don’t think so.

Insisting that the valuation for the ‘Vadilal‘ trademark is unrealistically high, some shareholders have written to the Securities and Exchange Board of India, the ministry of corporate affairs, and India’s two leading bourses requesting intervention, said two people in the know.

They have also written to Vadilal’s newly appointed independent directors to oppose the transaction. Mint has reviewed a copy of this letter.

The ‘Vadilal’ brand is a strategic element of the group’s restructuring plan that was arrived at after the fourth generation of the promoter family reached a truce in March. Three promoter entities, including Vadilal International Pvt. Ltd that owns the trademark, are to be merged under Vadilal Industries and the brand brought under its direct ownership.

The flagship company Vadilal Industries and fellow group company Vadilal Enterprises Ltd have a 15-year non-exclusive agreement with Vadilal International for brand usage, which expires in 2028.

Vadilal Industries manufactures ice cream and other frozen food products while Vadilal Enterprises markets and distributes them. Both the companies are publicly listed.

The valuation math

As part of the restructuring plan, audit firm Grant Thornton assessed the ‘Vadilal’ trademark to be worth ₹990 crore based on royalty payment projections. Separately, PricewaterhouseCoopers valued the brand at ₹974 crore.

In their reports, filed independently, both the audit firms have stated that Vadilal International’s income from royalty is projected to surge to ₹251.2 crore in 2033-34 from ₹7.8 crore this financial year, with royalty charges set to increase from 0.5% of Vadilal Group operating companies’ revenues currently to 5% starting 2028-29.

According to the audit firms’ reports, Vadilal Industries’ royalty payments to Vadilal International would jump from ₹1.8 crore in FY28 to ₹50 crore the following year, and Vadilal Enterprises’ from ₹9.1 crore in FY28 to ₹107.4 crore in FY29.

“VEL’s (Vadilal Enterprises) total turnover in the past 10 years has been about ₹7,500 crore, on which it has made about ₹25-30 crore profits. How will it possibly pay ₹107 crore royalty? It makes 2% margins, which is projected suddenly to become 15%," said Kush Katakia, a Mumbai-based investor. “VEL shareholders are getting shortchanged," he said.

Jagdish Hiroo, a shareholder in the two listed Vadilal companies since 2013, questioned the rationale behind valuing the ‘Vadilal’ trademark based on the projected royalty payments when the projections hadn’t been ratified by the shareholders.

A spokesperson for Vadilal Industries said PwC and Grant Thornton prepared their reports independent of each other, and that the valuations were supported by a fairness opinion from ICICI Securities. 

The share exchange ratio was determined using multiple standard valuation methodologies, the spokesperson said in an email reply to Mint.

“Considering that VIL (Vadilal Industries) owns, maintains and develops the recipes for the products that are sold currently under this license, owning a brand for those products is not just important for business continuity but is also value accretive for the shareholders," the spokesperson said. “The calculations for this strategic decision are confidential and right now in regulatory purview and cannot be disclosed."

As for Vadilal Enterprises, the spokesperson said the company benefited from a favourable royalty arrangement of just 0.5% for 15 years. “This allowed the company to reinvest substantial portions of its revenue back into operations during development and acceleration phase. As the company has now matured and strengthened its market position, a transition to a standard industry royalty rate, potentially of 5%, is proposed," the spokesperson said.

Grant Thornton and PwC declined to comment on client specific queries.

Also read | Could Vadilal’s big family truce be a gamechanger for shareholders?

Truce among warring promoters

In late March, the three Gandhi families who are promoters of the Vadilal Group buried the hatchet after a decade-long feud. As part of a family agreement, the families decided to merge three promoter-owned companies—Vadilal International, Vadilal Finance Co. Pvt. Ltd, and Veronica Constructions Pvt. Ltd—into Vadilal Industries.

As per the merger terms, the promoters will be awarded shares of Vadilal Industries in lieu of their stake in the three privately held companies. Promoter shareholding in Vadilal Industries will increase to 72.34% post amalgamation from 64.73% at present, regulatory disclosures show.

Vadilal Industries said in a stock exchange disclosure on 9 April that direct ownership of the ‘Vadilal’ brand by the company would eliminate the need for royalty payments, thereby improving profitability and supporting its growth. Further, the merger of the three companies with Vadilal Industries would simplify and streamline the promoter holding of the group, the company said in the same disclosure.

The merger is subject to approval from shareholders and creditors of the respective companies and from statutory and regulatory authorities, including stock exchanges, Sebi, and the National Company Law Tribunal.

Also read | Shield minority shareholders from business family feuds

The promoter families have agreed to appoint a professional chief executive officer for Vadilal Industries and induct new independent directors. The agreement stipulates that the company will have at least seven directors, three of whom will be independent and three will be nominees of each of the three branches of the family.

Similar professional management will also be brought in at Vadilal Enterprises.

“While there is some positive for the minority shareholders that the brothers have settled their dispute, the shareholders have a valid reason to feel aggrieved. The valuation seems to be on the richer side," said Shriram Subramanian, managing director of proxy advisory firm InGovern and a corporate governance expert.

“This is not a sprawling conglomerate with multiple businesses leveraging a common brand. This is a single business which has invested in the brand over the years," he said.

Shares of Vadilal Industries have gained about 47% and that of Vadilal Enterprises about 32% since 29 March, when the promoters made public their truce. On Wednesday afternoon, both the stocks were trading nearly unchanged from the previous day's close, with Vadilal Industries at ₹6,749.70 and Vadilal Enterprises at ₹13,350.00 on BSE.