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Leveraging Patanjali brand, reach for growth

About the stock: Patanjali Foods (PFL) is one of the largest edible oil companies in India with oilseed extraction (mustard, soybean & others) & refining capacity of 3.9 million tonnes per annum (MTPA). This includes seven standalone coastal refineries for processing imported crude palm oil (CPO). PFL also has a sizable food business, which includes soya chunks & soya flour under ‘Nutrela’ brand. It acquired the biscuits, noodles and breakfast cereals business from Patanjali Ayurveda (PAL) in May-June 2021 and remaining foods business portfolio of PAL in July 2022, which includes | 4173 crore of sales through products under categories like cow ghee, edible oil, honey, Chyawanprash, atta, pickles, juices, jams & ketchup. The company also forayed into nutraceutical and wellness products in FY22.

* Revenue, earnings grew at CAGR of 35.8%, 89.6%, respectively, in FY20-22

* PFL repaid entire debt in April 2022 from the proceeds of FPO in March 2022

Key triggers for future price performance:

* PFL has 3.9 million tonnes (MT) of oilseed crushing & refining capacity with current utilisation of 40%. The company would be able to increase capacity utilisation by leveraging its existing & Patanjali brand to drive volumes

* Acquired foods business of PAL commands 16% operating margins with high sales contribution of ghee, juices, atta and honey. With consolidation of foods business, overall margins of the company to see an uptick

* Backward integration in palm plantation is likely to reduce its dependency on imported CPO. Moreover, expansion in palm extraction capacities by the company would help in improving margin in the edible oil business in the next three to five years

* The combined distribution network of PAL & PFL has expanded the company’s reach to 1 million retail touch points. Further, its products can be promoted & advocated through more than 3000 Patanjali health centres

What should investors do: PFL’s share price has gone up 34% in last one year.

* We initiate coverage on PFL under Stock Tales format with a BUY rating and a target price of | 1750/share

Target Price & Valuation: We value PFL at 40x FY24 earnings to arrive at a target price of | 1750/share.

Alternate Stock Idea: We also like TCPL in our FMCG coverage.

* Strong innovation & premiumisation strategy in salt, tea, Sampann & Soulful in India market expected to drive sales & margins

* We value the stock at | 950 on ascribing 55x FY24 earnings multiple

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