While larger companies like Nestle India, Britannia and the like are often mentioned, some mid-cap companies are also expected to grow at a rapid clip.
The packaged food market in India is growing fast.
Its growth can be attributed to increasing urbanisation, higher income levels, convenience and growing penetration of modern trade.
While larger companies like Nestle India, Britannia and the like are often mentioned, some mid-cap companies are also expected to grow at a rapid clip.
Like, among others, Manpasand Beverages, DFM Foods, Agro Tech Foods and ADF Foods. These operate in varied segments of beverages, snack foods, edible oils or pickles, among others, and have good brand recall. With rising snacking habits, these companies are well-poised for growth.
Says Pramod Gubbi, equities head at Ambit Institutional Equities: “While this is a high growth potential sector, I would rather prefer brands which have withstood the change in times and are still around.”
With the rising presence of e-retailers such as Big Basket, Grofers and so on, expansion of the distribution network has become less time consuming and less costly than before. Implementation of the goods and services tax will also be a positive, as more consumers could shift to organised players.
While there are many companies in the unlisted space -- Patanjali, Mondelez, Hershey, Amul -- the few listed ones mentioned above offer good growth potential.
Like Manpasand Beverages, whose products include fruit drinks under its Mango Sip and Fruits Up brands. It recently tied up with biscuits and confectionery maker Parle Products to cross-promote its brands on the latter’s distribution network. Beside expediting the expansion of its brands beyond the rural markets, this tie-up will enable the company to save on future investment to expand its own distribution network.
In sum, a stepped-up focus on brand building, innovation and doubling of production capacity in three of its plants will drive future growth. High competitive intensity from heavyweights such as Pepsi, Coca-Cola, Dabur, ITC and Parle Agro is a key risk. Especially as most of its brands are relatively new.
While the stock trades at 40 times the FY18 estimated earnings, it has come off from the 55 times one-year forward earnings it got listed at in June last year. Overall, investors can consider the stock on dips.
DFM Foods makes corn rings and namkeen under the Crax brand. It has been struggling to grow in recent times and continues to be impacted from demonetisation blues, given its high dependence on the wholesale channel. Implementation of GST will further delay recovery. Heavy dependence on the single product of Crax corn rings (80 per cent of revenue) is a key downside risk.
The company has stepped up its focus on launching new products (Curlz, cheese balls) but it remains to be seen whether these products will meaningfully help in diversifying of revenue. While strong brand recall is a key positive, expansion of the distribution network will aid future growth. The stock's current valuation of 55 times the FY18 estimated earnings, though, is unappetising. Given the above pressures, the expectation of 54 per cent growth in FY18 earnings per share appear stretched.
Agro Tech Foods is a 52 per cent subsidiary of US food company ConAgra. It derives a little over 75 per cent of its revenue from edible oil brand Sundrop and has seen tepid revenue growth in recent quarters. Market share loss, given high competitive intensity from the likes of Marico, Patanjali and others, is a key concern.
The company has stepped up capacity and the distribution network of its food products (popcorn, tortilla chips) and in the peanut butter category. The management aims to increase the food business' share in revenues to 50 per cent from about 20 per cent currently, to offset some of the weakness in edible oils. This segment enjoys higher margins than in the latter and will aid overall profitability.
Concerns related to the edible oils business appear to be well-baked in the current valuation of 21 times the FY18 estimated earnings, even as improving traction in the foods business can be a key catalyst.
ADF Foods manufactures and exports pickles, pastes, chutneys, spices and other snacks under various brands -- Ashoka, Truly Indian, Soul, Nate’s, PJ’s Organics, Aeroplane, Camel. The company recently closed down a loss-making manufacturing outfit in the US and adopted contract manufacturing in this market. This will aid a turnaround of US operations. While it has strong brands, its margins are exposed to volatility in both input costs and exchange rates.
The company has re-entered the domestic market with the Soul brand of products in select markets and plans to soon roll out these nationally. All this will keep its margins under pressure but if successful can drive scale economies in the longer run.
Overall, the stock's high valuations of 42 times the FY18 estimated earnings lead to an unfavourable risk-reward ratio, particularly amid expectation of mid-single digit earnings growth this financial year.
