After declining for all 3 months of the current calendar year so far, domestic brokerage house B&K Securities sees a 40 percent upside in the FMCG stock in the next 12 months. “Hindustan Foods Limited (HFL), the largest consumer contract manufacturer in India, has built durable moats by scaling up its manufacturing base, building strong clientele, constructing the widest array of product portfolio and creating operational efficiencies. Over the last four years (FY19-23), HFL has scaled up its sales and EBITDA five-fold, while profitability six-fold. 80-85 percent of the current business model works on a steady state RoE (18-22 percent),” said the brokerage. Stock price trend
The stock has experienced a downturn, witnessing a decline of over 9 percent over the past year and a further drop of 13.5 percent year-to-date in 2024. Notably, it has yielded negative returns in each of the three months of the current calendar year thus far.

It has shed 6 percent in March so far after a 4.8 percent and 3.4 percent decline in February and January 2024, respectively.

The stock is currently almost 28 percent away from its 52-week high of ₹669.00, hit on April 12, 2023. Meanwhile, it is trading just over 3 percent higher than its 52-week low of ₹468.05, hit last week on March 14, 2024. Why is B&K Securities bullish on Hindustan Foods?
Industry tailwinds: As per the brokerage, the Indian FMCG (Fast-Moving Consumer Goods) industry boasts a substantial valuation of approximately $104 billion as of FY23. Personal care products hold the lion’s share, contributing 50 percent, closely followed by Home/Healthcare at 31 percent, with Food & Beverages accounting for the remaining 19 percent of total industry sales.

According to company estimates, the outsourcing opportunity in these three key segments collectively amounts to approximately ₹1 lakh crore. HFL maintains a presence across all three segments, positioning itself to capitalize on this vast market opportunity. Notably, HFL has recently ventured into the lucrative category of sports shoe manufacturing, expanding its portfolio. Despite the considerable potential, the FMCG contract manufacturing landscape remains fragmented, with HFL emerging as the largest player in this space, rationale the brokerage. Business Strategy: The brokerage house also noted that HFL has adopted an organic/inorganic route to scale up its business. Its consolidated gross block has expanded by 5x over FY19-23 to ₹840 crore. The company has diversified across various FMCG categories with manufacturing competencies in food and non-food, extending to Personal Care, Home Care, Food & Beverages, Health & Wellness, Leather Shoes and Accessories, it added.

Strong earnings visibility: The brokerage noted that since the dedicated manufacturing has got strong earnings visibility, HFL remains more aggressive in terms of allocating capital for the new dedicated units. It usually prefers 75:25 in terms of debt:equity for any new dedicated unit. The size of capital allocation for the project (in case of greenfield/brownfield plant expansion) or acquisition (in case of inorganic growth) can range between ₹100-500 crore for the dedicated unit. Next three years plans: In the past two years, HFL has done multiple expansion projects. Many have started commercial production while few are yet to. The company is ramping up its projects to help it achieve its near-term sales target of ₹4000 crore in FY25. It believes that with ₹1800 crore of gross block, HFL can clock sales of ₹7000 crore. Estimates
With strong industry tailwinds in place, B&K expects HFL to grow its sales/EBITDA/PAT at a CAGR of 23 percent/28 percent/37 percent, respectively, over FY23-26E. Despite the strong growth it anticipates net debt/equity decline from 1.2x to 0.4x and average RoEs to remain at 18 percent over FY23-26E. Valuation
It has initiated coverage with a Buy rating on the stock with 45x FY26E EPS with a target price of ₹678, an upside of 40 percent. B&K’s target multiple anticipates that the current 1-year forward multiple of 45x will be sustained given the strong project pipeline and healthy sales growth trajectory over the medium term.