Analyst Corner: Maintain ‘buy’ on Future Consumer, target price at Rs 50

Published: February 9, 2019 4:48 AM

Owing to higher interest cost (up 42.9 percent YoY), tax rate and losses from minority interest/JV (loss of Rs 5.7 crore versus Rs 1.6 crore in base), consolidated PAT remained negative. Having said that, we still peg FY21 RoE at 6.2 percent (-5.5 percent in FY18). Hence, retain ‘buy’.

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By Analyst Corner

Future Consumer’s (FCL) Q3FY19 consolidated revenue growth of 26% YoY came in line, while 65 percent YoY EBITDA jump surpassed estimate. Fresh business, processed food and HPC grew 57 percent, 28 percent and 27 percent YoY, respectively; Centre of plate (51 percent of revenue) grew 13% YoY.
Distribution touch points across modern and general trade expanded QoQ. EBITDA margin expanded 64bps YoY driven by operating leverage benefits — staff cost and other expense down 88bps and 64bps YoY, respectively.

Owing to higher interest cost (up 42.9 percent YoY), tax rate and losses from minority interest/JV (loss of Rs 5.7 crore versus Rs 1.6 crore in base), consolidated PAT remained negative. Having said that, we still peg FY21 RoE at 6.2 percent (-5.5 percent in FY18). Hence, retain ‘buy’.

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Centre of Plate (51 percent share) grew 13 percent YoY, slower than trend owing to 16 percent YoY growth in Golden Harvest. HPC continued to grow at a healthy pace–up 27 percent YoY whereas processed foods (including Nilgiris) grew 28 percent YoY. Fruits & vegetables (lower margin business) grew 57 percent YoY with its share increasing to 23 percent (22 percent in Q2FY19). Key brands are gaining scale – revenue of Golden Harvest crossed Rs 1,000 crore, that of Nilgiris and Fresh & Pure crossed `200 crore and Karmiq and Tasty Treat revenue crossed `100 crore.

FCL is not only expanding existing categories via niche offerings, but also launching innovative products in new categories. A prudent pricing strategy — at a discount to competition in “me-too” products and at a premium in niche products—should help capture higher share of consumer wallet. Besides, the retail muscle of group company FRL—one of India’s largest retailers—provides solid anchor.

We estimate FCL to clock revenue and EBITDA CAGR of 29.2 percent and 64.2 percent YoY, respectively, aided by: i) robust innovation; ii) widening retail footprint and iii) operational efficiencies. We believe FY20 will mark the company’s transition to profitability. We maintain ‘BUY/SP’ with DCF-based revised TP of Rs 50 (earlier Rs 52).

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