This Reliance Group-backed stock plunges 37% in 9 sessions; here’s why

Just a few weeks ago, shares of Lotus Chocolate were riding high, hitting a record high of ₹480.45 on February 9, from ₹96 level on December 23, 2022, after Reliance Retail announced to buy a majority stake in the company. However, the microcap stock has witnessed a sharp sell-off in the recent past, hitting its lower circuit limit in nine straight sessions. The volatility in Lotus Chocolate shares can be attributed to profit booking and weak financial performance as investors preferred to exit the stock ahead of the open offer by Reliance Group, which starts today and closes on March 6.

The Mukesh Ambani-led conglomerate, which acquired 51% stake in Lotus Chocolate Company last December, has launched an open offer to acquire an additional 26% stake in the chocolate maker at a fixed price of ₹115.50 per share. This is a 62% discount to Monday's closing price of Lotus Chocolate shares. Given the 60% discounted rate, shareholders are unlikely to tender shares to Reliance at this rate.

Continuing its losing streak, Lotus Chocolate shares opened lower on Tuesday and locked in a 5% lower circuit at ₹288.60 against the previous closing price of ₹303.75 on the BSE. The market capitalisation stood at ₹370 crore.

The stock has been hitting circuit breakers every day since February 9, falling 37% in the last nine sessions. Despite the recent fall, the share price of the chocolate maker has zoomed 200% in the last two months, from ₹96.4 on December 23 to ₹288.6 intraday today. The stock touched an all-time high of ₹480.45 on February 9, 2023, while it slipped to a 52-week low of ₹81.90 on March 9, 2022. The stock has risen 214% in a year and 93% in a six month period. On a year-to-date basis, the counter has jumped 124%, while it climbed 8% in a month.

In December last year, Reliance Consumer Products Ltd (RCPL), the fast moving consumer goods arm of Reliance Industries, acquired a 51% stake in Lotus Chocolate Company for ₹74 crore. Besides, two Reliance group firms - Reliance Consumer Products Limited (RCPL) and Reliance Retail Ventures Limited (RRVL) will together acquire additional 33.38 lakh shares of Lotus Chocolate from the open market, according to DAM Capital, which is managing the offer. RCPL is the FMCG arm and a wholly-owned subsidiary of RRVL. The capital infused by RCPL will help drive the growth and expansion of Lotus into a comprehensive confectionery, cocoa, chocolate derivatives and related products manufacturer across industrial and consumer market spectrum.

Established in 1988, Lotus Chocolate is primarily a B2B packaged foods company that supplies cocoa products to companies such as Cadbury, Britannia, Vadilal, and Amul. The B2B business accounts for nearly 95% of the company’s revenue, while it generates the remaining 5% from the B2C segment, which consists of brands such as Chuckles and Milky Punch, sold only in South India, and in some regions of Gujarat and Maharashtra. For the December quarter of the current fiscal (Q3 FY23), Lotus Chocolate reported a net loss of ₹0.73 crore, while net sales dropped 41% year-on-year to ₹13.27 crore. On the operating front, EBITDA stands negative at ₹0.69 crore in December 2022.

Reliance recently forayed into the FMCG business through its arm, RCPL, by launching a brand 'Independence' for staples, processed foods, beverages, and other daily essentials in Gujarat. The brand will be rolled out across India in a few months. The brand, which will compete with the likes of Tata Consumer Products, Hindustan Unilever, Nestle India, Britannia Industries, and ITC, amongst others, will sell made-in-India consumer products ranging from processed foods to daily products. 

Besides, RCPL parent Reliance Retail Ventures acquired a 100% stake in METRO Cash & Carry India, a wholly owned subsidiary of German wholesaler METRO AG, for ₹2,850 crore.

Reliance has been on an acquisition spree after Isha Ambani, during the company’s 45th AGM in August 2022, announced that Reliance Retail will enter the FMCG space. In September, the company acquired the homegrown soft drink brand Campa from Delhi-based Pure Drinks Group for around ₹22 crore. RIL also acquired another soft drink brand Sosyo from Surat-based Hajoori. Over the last three years, Reliance Retail has acquired brands like Hamleys, Just Dial, Milkbasket, Zivame, Clovia, Portico, Netmeds, and Urban Ladder among others. It has also partnered with 7-Eleven, the iconic global retail chain, to start its operations in India.