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Well poised to capture accelerated growth in packaged food retail; initiate with HOLD

Adani Wilmar (AWL) is a strong market leader (50:50 JV between Adani Group and Wilmar) in branded edible oil and industry essentials with aspirations to further scale-up packaged foods. Strong competitive advantages (price-laddering, oil segments, scale, market intelligence (courtesy Wilmar)) in edible oil provide AWL with an edge over competition. Further, AWL enjoys multiple synergies across all three business segments which augur well for scale up of packaged foods business – a) scale in procurement & logistics, b) brand recall of ‘Fortune’ and c) readily available distribution and mix-load supply chain benefit from edible oil. We model revenue / EBITDA / PAT CAGR of 9%/24%/35% over FY22-24E. We initiate coverage on the stock with HOLD rating and SoTP-based TP of Rs550. Key risks: 1) Higher volatility in raw material prices, 2) failure in scaling up packaged foods.

* Significant competitive advantage of presence across price points and oil segments with backend scale and market intelligence: AWL has presence across consumer price points and edible oil types, which allows it to capture various consumer segments to maintain and further consolidate its leadership in branded edible oil category. Further, scale in procurement and market intelligence (through its joint venture partner Wilmar Group) of edible oil business provides significant competitive advantage over competition and acts as an entry barrier for entrants.

* ‘Fortune’ brand to drive expansion in packaged foods business: AWL has plans to drive expansion in packaged foods business. We believe there is a possibility of a pleasant surprise in the segment (execution is the key). AWL also plans to invest incremental capex to support the high growth in packaged foods business (lower utilisation levels in edible plants which implies lower capex requirement). Besides, its recent acquisition (announced) of Kohinoor Brand (domestic) rights strengthens its position in the branded rice category.

* Synergies across business segments: AWL operates across three segments: a) edible oil, b) packaged foods and c) industrial essentials. We believe all three businesses have significant synergies (especially at the back-end) for AWL. For example, in the process of crushing and refining for edible oil business, various byproducts are sold in industrial business. Similarly, front-end distribution of edible oil provides readily available distribution for packaged foods.

* Valuations and risks: We model revenue / EBITDA / PAT CAGR of 9%/24%/35% over FY22-24E. Though we believe in the long-term opportunity of the business, higher valuation multiple restricts our ability to have a positive stance at this point. We initiate coverage on the stock with HOLD rating and SoTP-based target price of Rs550. Key risks: 1) Higher volatility in RM prices, and 2) failure in scaling up foods business. On the upside: Sharper-than-expected scale-up in operating margins.

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