Baba Ramdev-backed stock may give 20% return in six months, says HDFC Securities

Market


Baba Ramdev-backed Patanjali Foods shares hit the headlines for breaching 50,000 crore market cap and a new 52-week high of 1,415 on BSE. However, the stock retraced from its 52-week high and it is now available at a price of 1,343 per share. HDFC Securities sees this retracement as an opportunity to buy. The brokerage believes that Baba Ramdev-backed FMCG stock may go up to 1,602 apiece levels in next two quarters. This means, HDFC Securities believes that the stock may surge around 20 per cent in next six months.

On valuations of Patanjali Foods shares, HDFC Securities says, “The powerful competitive edge which PFL gets from parentage given its strong brand equity, pan-India distribution network, its capabilities and product synergies has been further enhanced by the company’s acquisition of Patanjali’s complete foods portfolio. Over the medium term, we expect the company to witness a transformation from commodity based company to a large FMCG & Wellness company facilitated by focusing on important strategic priorities, creating seamless integrated organisation structure where all BUs and functions operate in coherent manner to achieve larger objectives, investing in talent and capacity building, focus on leveraging digital technology, putting in place stringent corporate governance framework. With these building blocks in place, we believe, PFL is well positioned for accelerated growth and consistent value creation for shareholders going forward.”

“In the near term, the company’s focus would remain on strengthening the existing business segments, increase market share and profitability, while venturing into new synergetic segments that are aligned strategically, to enhance the business profitability. Going ahead, we expect the company to achieve 22% CAGR growth in its revenues largely driven by foods business which is expected to nearly grow ~4x on the account of the recent acquisition and scaling up of the same. This shall increase the contribution of the foods business to around 20% in FY24 from 14% in FY22. Oils business is expected to grow by 14% CAGR over FY22-24E with higher realisations. The volume growth is expected to be in mid-single digits and better than industry growth as it piggybacks on Patanjali’s vast distribution network,” the brokerage said.

Since Patanjali’s takeover in FY19, the company’s margins have improved from 1% to 6.1% in FY22. Going ahead, on account of increasing contribution from foods business and with better realisation of synergies, we expect 46 bps margin expansion over FY22-24. Higher revenue growth, improving profitability and lower finance cost could drive PAT growth by 43% CAGR over FY22-24E.

On its recommendation to positional investors in regard to Patanjali Foods shares, HDFC Securities report said, “Given the predominance of oil business even after 2 years from now, the valuations of PFL may still be short of its peer FMCG companies. However, it may grow much faster than its peers over the next two years. We have taken this into account while arriving at the price targets. We think the base case fair value of the stock is 1490 (32.5x FY24E EPS) and the bull case fair value of is 1602 (35x FY24E EPS). Investors can buy the in stock 1341-1363 band (29.5x FY24E EPS) and add more on dips in 1180-1200 band (26x FY24E EPS) band.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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