Buy This Adani Group Stock For Target Price Rs 949: Ventura Securities

CMP, 52 Week Low & High, Returns

The current market price (CMP) of Adani Wilmar is Rs 749.95 on NSE. The 52-week low is Rs 227 and the 52-week high is Rs 878, respectively. 

Adani Wilmar was listed on February 2022. It has delivered 180.54% since February. It gave 4.04% negative return in the past week, while in the past 1 month, it gave 9.9% positive return. In the past 3 months, it gave 26.73% positive return. 

 

Proxy play to the high-growth packaged food segment

Since its IPO in Jan 2022 the Adani Wilmar stock price has rallied ~256% and at the CMP of INR 818, the stock is trading at FY25 P/E of 51.7X. "We continue to retain a hold on the stock given the fact that the food category is a large space that is significantly underpenetrated and has decadal growth opportunities ahead. Additionally, AWL is sacrificing immediate profitability to grow rapidly and gain market share. Further the company is scouting for acquisitions that will help it to grow faster than the industry pace," the brokerage said.

Q3FY23 could be a bumper period for Fortune oil due to revenge eating. Cooling edible oil prices to impact the revenue growth

Demand for edible oil is expected to be highest in Q3FY23 due to the upcoming festive season. The festive seasons of FY21 and FY22 were down due to the COVID led semi-lockdown and restrictions on gatherings and functions. Being a market leader, the Fortune brand is expected to gain the most from this festive demand. Besides, India's per capita edible oil consumption is only 17 litres per year, which is significantly lower than nearby countries - Sri Lanka (28 litres), China (27 litres) and Pakistan (25 litres). This represents a significant upside for edible oil consumption in India in the coming years. The management is upbeat about maintaining a volume CAGR of 8% in the coming years. Despite higher volumes, the company may not be able to sustain the revenue performance quarter-on-quarter as commodity prices have declined materially. Supply disruption due to the Russia-Ukraine war escalated the edible oil prices in Q1FY23 to a peak of INR 1.6 lacs per tonne (higher than FY22 average price of INR 1.4 lac per tonne). However, since then prices have cooled down and are expected to settle at ~INR 1.2 lacs per tonne in FY24.

Wheat shortage to impact the flour market

India is expected to witness a wheat shortage in FY23 due to blistering heat waves and soaring temperatures in wheat-growing areas. Consequently, wheat production yields are expected to slump by 10-50% in the current year. Flour-selling companies (including AWL for its Fortune Atta) are expected to stock wheat to secure their flour supplies in the market, which will increase their inventory levels. However, for AWL, the food business is less than 5% of its revenue, and thus, the rise in inventories will not impact the working capital of the company on a consolidated basis. The segment's revenue is expected to sustain organic volume growth of 30-35% in the coming years due to its low base. The company is using the same distribution network of its edible oil business to keep the distribution expenses low, which will aid the FMCG segment.

With the management focused on gaining market share, we expect price undercutting and higher promotional expenses to contain the EBIT at break-even levels. The company has started supplying food products to the HoReCa segment (Hotels, Restaurant & Cafes), which is expected to accelerate non-edible oil food volumes in the coming years.

The company is setting up a new flour plant at Bundi (Rajasthan) and it is expected to be operational by Dec 2022. Besides the integrated facility at Guna (Madhya Pradesh) for the manufacturing of both edible oil and food products should commence operations by Q3FY23. Guna has proximity to the rice belt and other key agri products and hence is the perfect location for an integrated facility. The company plans to produce edible oil (1,500 mtpa capacity), rice and soya debean oil & nuggets at the upcoming Guna facility.

Industry essentials - Accelerated revenue growth with new capacities

The company's second plant of oleochemicals has become operational in Q1FY23 and started the production with an initial capacity utilization of 30%, which will be further increased to 50-60% by the end of FY23. Oleochemicals are the natural fit for AWL, as it is extracted from palm oil. The volumes from this segment are expected to grow at a CAGR of 11-12% in the coming years.

Strong revenue growth on the cards

AWL is incurring INR 2,200 cr of capex to enhance its edible oil and FMCG production capacities, which is expected to accelerate revenue performance in the coming years. During FY22-25, the company's revenue is expected to grow at a CAGR of 12.2% to INR 76,511 cr, which will be driven by

• 7.8% CAGR growth in edible oil revenue to INR 56,927 cr by FY25.
• 37.7% CAGR growth in food & FMCG revenue to INR 6,837 cr by FY25.
• 27.2% CAGR growth in industry essentials revenue to INR 12,747 cr by FY25.

EBITDA and net profit are expected to grow at a CAGR of 18.9% to INR 2,919 cr and 36.8% to INR 2,056 cr respectively by FY25, while EBITDA and net margins are expected to improve by 61bps to 3.8% and 120bps to 2.7% respectively. Subsequently, return ratios - RoE and RoIC are expected to improve by 603bps to 16.6% and 916bps to 32.0% respectively by FY25.

Acquisitions trigger for future growth

The food segment is a large category that is primarily catered to by the unorganized sector and regional players/brands. Organized players, inclusive of AWL, are actively scouting for brands, particularly in the packaged foods segment to speed up their product offerings and grow top line. At AWL, acquisition will be one of the primary pillars for growth.

Valuation

Since its IPO in Jan 2022 the Adani Wilmar stock price has rallied ~256% and at the CMP of INR 818, the stock is trading at FY25 P/E of 51.7X. Given the growth potential in the Indian packaged food market space and the management's ambition to diversify and grow faster than the industry, we believe that Adani Wilmar is expected to remain a front-runner in the Indian packaged food market. "We recommend a BUY with a 24 months price target of INR 949 (60X FY25 P/E), representing an upside potential of 16%," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Ventura Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.