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Focus on building capabilities as opportunities beckon

The opportunity in the Indian savoury snacks segment is extremely attractive and Bikaji is capitalising on it by leveraging its brand strength and augmenting its manufacturing and distribution capabilities (Exhibit 4/5). Despite its well-entrenched presence in core markets, the company is able to drive strong growth in these markets – a function of market share gains led by initiatives around improving quality of distribution. In the focus markets, opportunity and brand presence were always there, and with new capacities in place, the priority in the regions is to drive penetration. To that extent, the company has dialled up its efforts on enhancing distribution capabilities, which, we believe, should help in accelerating growth in focus markets. Margin visibility remains healthy led by stable input cost environment, efforts around driving premiumisation, operating efficiencies with uptick in utilisation, and expected PLI benefits. Improved profitability along with receding capex intensity will help enhance cash generation and return ratios over FY23-26E. Premium valuations could sustain given superior execution demonstrated by the company.

* Core market performance resilient led by share gains in ethnic categories: Over FY19-23, Bikaji’s core market (71% of sales) has delivered a strong performance with sales CAGR of 21%. Although it has a well-established presence in these markets (numeric distribution is c.70% of the universe in Rajasthan/Assam), growth has been quite resilient led by market share gains from local/regional players, especially in core categories of Namkeen/bhujia on account of internal initiatives (for e.g., top-end store engagement, better servicing led by new capacity additions, sales automation) behind improving assortment and driving throughput per store. Scale-up in western snacks, led by addition of new lines as well as leveraging of existing distribution infrastructure is also aiding growth in core markets.

* Bolstering capabilities to drive growth in focus markets: In the focus markets (15% of sales, grew at CAGR of 22% over FY19-23), growth is expected to accelerate led by augmentation of manufacturing capabilities and initiatives around distribution expansion. Currently, the market share in these regions is sub-5% and Bikaji is also under-indexed in terms of distribution reach in these markets (c.0.2mn outlets, which is just c.4% of the overall universe in these markets) thereby providing enough headroom for expansion. Over the next 3 years, the company plans to add 0.2mn outlets, and 50% of that is expected to be in focus markets. To that extent, the company is also strengthening its infrastructure by appointing CF&A agents, adding feet on the ground, especially in Uttar Pradesh and South markets to drive penetration.

* Margin visibility still healthy: Over the last few quarters, Bikaji’s gross margin has expanded substantially led by moderation in prices of key inputs (edible oils, laminates, corrugated boxes), efficient raw material sourcing, increased focus on driving premiumisation (contribution of high-margin products in the Namkeen category rose from 11% in FY22 to 12.5%/13% in FY23/1QFY24). This apart, as utilisation levels of its manufacturing facilities rise, operational efficiencies should kick in, which should also boost overall EBITDA margin (Bikaji expects 50bps expansion YoY for the next 2 yrs).

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