Up 47% in 2.5 months; Bikaji Foods is MarketsMojo’s pick of the month for June

After a 47 percent return in just 2 and a half months, brokerage house MarketsMojo has picked this snack brand Bikaji Foods International as its top pick of the month for June. The brokerage believes it is a good pick for medium-risk investors expecting high returns. It also advised investors to have less than 30 percent weightage in this sector.

The brokerage pointed out that Bikaji Foods has been a pioneer in India's ethnic snacks industry, holding a 9.6 percent market share as of September 2023. Under the government's PLI scheme, the company has invested accordingly and received a benefit of ₹93.6 crore. Without further investments, Bikaji is set to receive PLI benefits for the next three years. 

Currently, only about 45 percent of its capacity is utilized, indicating the potential to double sales volume at no extra cost, it stated. With targeted volume growth of 13-15 percent and price hikes of 2-4 percent for FY2025, Bikaji Foods aims for high teen growth, expecting strong revenues and improved profitability, added the brokerage.

Read here: Stock in focus: Rajesh Palviya of Axis Securities recommends three stocks today

It further said that with expectations of a favourable monsoon and anticipated rate cuts in the second half of CY2024, the FMCG sector is expected to grow well in FY2025.

Stock Price Trend

The stock has risen 72 percent in the last 1 year and 32 percent in 2024 YTD, giving positive returns in 4 of the 6 months so far. The scrip has jumped over 21 percent in June so far, extending gains for the 3rd straight month. It advanced 11.5 percent in May and 8.6 percent in April. Meanwhile, the stock shed 6 percent in March and 11.8 percent in February. Before that the stock was positive, rising 8.3 percent in January this year.

The stock also hit its record high of ₹727.95 in the previous session. Currently trading at ₹720, it has rallied 78 percent from its 52-week low of ₹403.50, hit on July 4, 2023.

Read here: Suven Pharmaceuticals share price rises 5% on CDMO Sapala Organics acquisition

Investment Rationale

PLI schemes to boost ready-to-cook/ ready-to-eat (RTC/RTE) capacity

The Ministry of Food Processing Industry had come out with a ₹10,900 crore PLI scheme to promote the creation of global food manufacturing giants from India by enhancing capacities and creating employment in the country. Under the scheme, Bikaji Foods had committed a total investment of ₹430 crore in FY2022, which had to be incurred over the next six years till FY2027.

The company received a PLI benefit of ₹93.6 crore for their investments through the scheme. As of today, the company has completed all the necessary investments needed under the PLI scheme and are obligated to receive the PLI benefits for the next 3 years (till FY2027), stated the brokerage.

Robust Capacity Addition

The brokerage also noted that the company has been putting up capacity in order to gain incentives from the government under the PLI scheme. As of 31st March 2024, the total capacity stood at 299,820 MTPA with a capacity utilization of around 45 percent. This under utilization of capacity indicates a potential for the company to double its sales volume with no extra capital investments. 

The management has targeted to achieve 13-15 percent volume growth for FY2025. This will enable Bikaji Foods to improve revenues without any adding to the costs which could improve its margin profile in the future years. This would lead to the bottom line growing ahead of the top line, it added.

Read here: Ambuja Cements shares up 3% as Penna Cement acquisition seem value accretive

Improving Distributor Reach

Furthermore, the brokerage stated that the company has placed immense focus on the direct distribution model as compared to the traditional distributor model. This allows the company to have greater control over price and sales. The company has increased its direct reach from 71,884 outlets in FY2022 to 2,51,270 outlets in FY2024. The management is considering an inorganic growth strategy by acquiring small-scale local companies to gain access to their distribution channels.

Improving Financials

According to MarketsMojo, the company recorded its highest-ever quarterly revenues in the quarter ended December 2023 with revenues of ₹624 crore. Further, it recorded its highest-ever quarterly profits of ₹116 crore in the quarter ended March 2024. 

This marked a growth of 208 percent over the quarter ended March 2023. It included a one-time revenue of ₹93.6 crore, gained from the PLI scheme of the government accrued over the last 3 years.

Bikaji Foods recorded a growth of 18 percent in its FY2024 revenues with an underlying volume growth of 15.3 percent. Profits in the year grew by 108 percent. The company has been consistently improving its return metrics with ROE improving from 10.6 percent in FY2020 to 21.6 percent in FY2024, it said.

Read here: Stocks to buy or sell: Sumeet Bagadia recommends five breakout stocks today

Core v/s Focus Strategy

MarketsMojo further pointed out that the company has divided the country into three major segments: Core, Focus, and Others. The core markets include the states of Rajasthan, Assam and Bihar where the company has a strong presence. The focus markets include the states of UP, Punjab, Haryana, Chhattisgarh, Telangana, and Karnataka where the company is trying to establish and improve its presence. 

The company's approach when entering new markets is to focus on extensive brand advertising instead of offering discounts. This intense branding effort results in a margin deficit of approximately 1.5 percent compared to their core markets, it noted.

The core markets contribute 71.5 percent of the revenues, focus markets contribute to 14 percent of the revenues, other markets form 11 percent and exports form 3.5 percent of the revenues, added the brokerage.

For FY2024, the core market grew 11.2 percent, focus market grew 22.6 percent and exports grew 22.2 percent. Some of the focused states such as UP grew at 44 percent.

Read here: Sensex Today Live Updates: Sensex, Nifty green but muted; IT stocks top drag

Bikaji Foods v/s Prataap Snacks

As per the brokerage, Prataap Snacks is an Indian FMCG company involved in the business of selling chips, snacks and namkeens primarily under the brand “Yellow Diamond”. Bikaji Foods operated at a margin of 17 percent (incl. PLI benefits) for FY2024 with profit margins of 11.3 percent whereas Prataap Snacks operated at 8.7 percent with profit margins of 3.3 percent for FY2024.

Bikaji Foods generated an ROE of 21.6 percent in FY2024 compared to that of 7.3 percent for Prataap Snacks. Bikaji Foods trades at a P/E of 63 compared to Prataap Snacks trading at a P/E of 38. Such disparity in margin profile and return ratios has led to the market giving a premium to Bikaji Foods, it rationaled.

Concerns

The brokerage warned that the company operates in a very highly competitive industry with multiple national as well as local players operating in each region of the country. The Indian market is a price-sensitive market and therefore, fluctuations in the raw material prices cannot be easily passed through to the customers leading to pressure on profit margins.

Rising health awareness in the country may steer people away from these ethnic snacks due to their high carbohydrate and fat content and low nutritional value, it added.

Read here: ONGC shines among upstream PSUs; ₹35k cr-capex plan triggers bullish upgrade

Four Dots

Three dots of the stock are green while one is red. The quality of the company is excellent. The valuation seems expensive but given the growth prospects of the company, it seems justified. The financial trend is very positive and the technicals indicate a bullish trend. The score of the stock is 85. We recommend buying the stock at ₹677.15, said MarketsMojo.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.