Asit C. Mehta initiates coverage of Bikaji Foods International (BIKAJI) with a BUY recommendation and a target price of Rs 775. The company is well entrenched in its core geographies and has a huge headroom to grow in its ˜focus` and ˜other` states. Focus on enhancing distribution and brand reach in ˜focus` states is leading to market share gains. The company has a high share of family pack sales, pointing to customer loyalty. The company is now also expanding its business, to include frozen foods and entering into QSR and also deepening its focus on the western snacks segment.
Headroom to expand distribution
BIKAJI has been focusing on continuous expansion of its distribution reach, which has grown by ~78% since Q1FY24. The company aspires to take the total reach to 13 lakh outlets (from 11.5 lakh) over the medium term. It will add 50,000 direct outlets each year, which will take the FY26E direct coverage to 3.5 lakh outlets. Outlet growth in Focus states will be 1.5x of Core states.
Market share gains in ˜focus` states
In terms of market share, Core states enjoy mid 40% kind of market share. Focus markets have a low market share of 1.8% (<2%) at an aggregate level, which BIKAJI aims to double in the next 3 years, taking it to 4.5%. In the next 3 years, company aims to add at least one or two states from Focus into the Core category. Growth in focus states is targeted to be 1.5x the Core states growth, and these focus states will see healthy distribution expansion and branding activities.
Capex cycle largely completed
The company has invested significantly in expanding its manufacturing footprint over the past few years, in order to cater to rising demand across core and focus states and export markets as well as to benefit from the government`s PLI scheme for the sector. The company is now operating at lower capacity utilisation of 45%, with the aim to take it close to 70% in the next 3- 4 years. This will lead to cost efficiencies, improving return ratios and strong free cash flow generation, as capex requirement going ahead will not be significant.
Improving margins and return ratios
The company has started seeing the benefit of PLI accruals in its margins since Q4FY24. Additionally, better capacity utilisation levels will lead to cost rationalisation, contributing to higher margins. EBITDA is expected to grow at a CAGR of 29.9% over FY25E-27E, with revenue growth expected at 16.6% over the same period. Improving fixed asset turnover will also aide return ratios.
Valuation and Outlook
Asit C. Mehta expects a revenue/EBITDA/ PAT CAGR of 16.6/29.9/37.4% over FY25-27E, owing to strong volume growth, judicious price hikes, operating leverage and stagnating depreciation. Asit C. Mehta believes the company will continue to see strong volume growth in the medium term due to available capacity and focus on distribution expansion. With a strong footing in 3 states in the country, it is now eyeing the 2nd line of identified states to expand its presence and market shares. Strong brand equity in core states gives confidence that there is scope of replicating the same in other states over time. The stock price is currently trading at 52.9/42.7x FY26/27E EPS. This is at a premium to other players in the food processing industry, owing to the strong growth potential coupled with brand strength and customer loyalty. Asit C. Mehta assigns a multiple of 52x to FY27E EPS of Rs 14.9 to arrive at a price target of Rs 775. With an upside potential of 22.2%, Asit C. Mehta assigned a ˜BUY` rating on the shares of Bikaji Foods International Ltd. Key risks are raw material inflation and any slowdown in distribution ramp up.