Venturing Into Ice Creams And Footwear Will Strengthen Future Operations

Key Takeaways

• Diversification into high-growth sectors and strategic production expansion are set to drive future revenue and earnings growth.
  
• Robust, diversified business model aims to improve net margins and ensure earnings stability amid market fluctuations.
  
• Integration costs, FMCG slowdown, and inflation pressures challenge profitability, while expansions bring execution risks and new ventures strain cash flow and financial stability.

Catalysts

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

• Hindustan Foods is actively identifying new customers and diversifying into high-growth sectors like ice creams, beverages, and footwear, which are expected to help drive future revenue growth.
  
• The company is strategically expanding its production capabilities with new ice cream factories and beverage units, which should increase its operational capacity and thus potentially elevate earnings in the coming years.
  
• Integration and expansion efforts in the footwear segment, despite initial costs, are anticipated to lead to higher profitability, suggesting an eventual improvement in net margins as efficiencies are realized.
  
• The company's focus on building a robust, diversified business model resilient to market fluctuations indicates a promising potential for improved net margins and earnings stability.
  
• Increased capital expenditure with defined plans for future growth reflects a strategic move to enhance production capabilities, which could significantly boost revenues and operational scale by FY 2026.

Hindustan Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hindustan Foods's revenue will grow by 26.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 3.9% in 3 years time.
• Analysts expect earnings to reach ₹2.5 billion (and earnings per share of ₹18.19) by about January 2028, up from ₹951.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.0x on those 2028 earnings, down from 57.9x today. This future PE is greater than the current PE for the IN Food industry at 21.4x.
• Analysts expect the number of shares outstanding to grow by 6.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Hindustan Foods Future Earnings Per Share Growth

Risks

• The integration of the shoe business has resulted in additional costs, impacting overall EBITDA and profitability, which could delay expected earnings improvements. (Earnings)
  
• There is a concern regarding the demand slowdown in the overall FMCG sector, which may affect the company's ability to sustain revenue growth despite dedicated contracts. (Revenue)
  
• The new ventures and expansions, while promising long-term growth, come with higher capital expenditures and introduce execution risks, potentially straining cash flows and financial stability. (Net Margins)
  
• Inflationary pressures on commodities may lead to revenue growth from increased prices rather than actual volume growth, which could strain gross margins and impact profitability if costs are not effectively managed. (Net Margins)
  
• The success of the ice cream and beverage expansions is contingent upon the company securing new customers and effective market penetration, which could pose a risk if market conditions fluctuate unfavorably. (Revenue)

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 ₹2.5 billion, and it would be trading on a PE ratio of 54.0x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹480.5, the analyst's price target of ₹699.0 is 31.3% 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.