Diversification Into Ice Cream, OTC Pharmaceuticals, And Footwear Will Transform Business Profile Over The Next Few Years

Key Takeaways

• Diversification into ice cream, pharmaceuticals, and footwear could boost revenue and earnings significantly in the next 2 to 3 years.
  
• Strengthening leadership and strategic expansions in ice cream and footwear are expected to improve margins and bolster revenue growth.
  
• The company's expansion into new projects and segments introduces execution and geopolitical risks that may impact profitability and revenue growth amidst FMCG sector challenges.

Catalysts

Engages in the business of contract manufacturing of fast moving consumer goods in India and internationally.

• Hindustan Foods' diversification into new product categories such as ice cream, OTC pharmaceuticals, and footwear is expected to significantly alter the company's business profile, providing potential growth in revenue and improved earnings over the next 2 to 3 years.
  
• The initiation of greenfield projects in Nashik and the North, coupled with the backward integration strategy for ice cream sticks manufacturing, is anticipated to bolster the ice cream division's growth, potentially enhancing revenue by FY '27.
  
• Strengthening the leadership team, particularly in the Ice Cream Division, aims to drive operational efficiency and business growth, which can lead to improved net margins.
  
• Strategic expansions in the footwear sector, supported by industry tailwinds and government priority, are projected to contribute to 15%-20% of the company's turnover by FY '27, thus bolstering revenue and potentially increasing net margins.
  
• Scaling up in the beverage segment and successful integration of new capabilities are likely to enhance the company's market position and profitability, positively impacting revenue and earnings in the coming years.

Hindustan Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hindustan Foods's revenue will grow by 24.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 4.2% in 3 years time.
• Analysts expect earnings to reach ₹2.7 billion (and earnings per share of ₹22.7) by about April 2028, up from ₹1.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.2x on those 2028 earnings, down from 65.3x today. This future PE is greater than the current PE for the IN Food industry at 21.3x.
• Analysts expect the number of shares outstanding to grow by 2.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.53%, as per the Simply Wall St company report.

Hindustan Foods Future Earnings Per Share Growth

Risks

• The potential for persistent slowdown in the FMCG sector represents a risk that may affect revenue and profit growth.
  
• The heavy investment in new greenfield projects like the one in Nashik for ice cream poses a risk in terms of high capital expenditure, which may impact net margins if these projects do not deliver expected returns.
  
• The reliance on seasonal businesses such as ice cream means that adverse weather conditions could negatively impact earnings.
  
• The expansion into diversified segments like footwear and beverages increases execution risk, which could affect profitability if these segments do not stabilize and perform as expected.
  
• Uncertainty in international business, such as resuming dispatches to Russia, presents geopolitical risks that could affect revenue streams.

Valuation

• The analysts have a consensus price target of ₹699.0 for Hindustan Foods based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹65.0 billion, earnings will come to ₹2.7 billion, and it would be trading on a PE ratio of 46.2x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹566.05, the analyst price target of ₹699.0 is 19.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.