Premium Specialty Fats Demand And Backward Integration Are Expected To Drive Long-Term Upside

Catalysts

About Manorama Industries

Manorama Industries manufactures and supplies specialty fats and butters, including cocoa butter equivalents and stearins, to global chocolate, confectionery and cosmetic companies.

What are the underlying business or industry changes driving this perspective?

• Rising global demand for premium chocolates, confectionery and cosmetics that use high performance specialty fats, where Manorama is already a key supplier to multinationals, supports sustained volume growth and drives higher, more stable revenues and EBITDA.
• Capacity expansion of fractionation from 40,000 tonnes to 52,000 tonnes, along with new greenfield projects on recently acquired land, enables operating leverage on a high margin product mix, supporting faster earnings growth than topline growth.
• Backward integration in West Africa via local extraction facilities for shea and other raw materials is expected to lower logistics and procurement costs and shorten working capital cycles, directly enhancing net margins and free cash flow generation.
• Asset light entry into Latin America through tolling arrangements in Brazil allows rapid access to a fast growing regional market with limited upfront CapEx, which can accelerate export revenues and improve return on capital employed.
• Manorama’s Waste to Wealth sourcing model and deep rural supply chain relationships position it strongly as global brands increase their focus on ethical and traceable ingredients, supporting pricing power, long term contracts and resilient earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Manorama Industries's revenue will grow by 28.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.2% today to 14.7% in 3 years time.
• Analysts expect earnings to reach ₹3.3 billion (and earnings per share of ₹49.97) by about December 2028, up from ₹1.7 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 46.7x on those 2028 earnings, down from 47.3x today. This future PE is greater than the current PE for the IN Food industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The sector’s current high growth and premiumization trend in chocolates and cosmetics could slow if global consumer spending weakens or shifts away from indulgence products. This would pressure volume growth and reduce revenue and EBITDA expansion.
• Planned capacity additions in India and backward integration in West Africa and Latin America involve total capital expenditure of about INR 450 crores and significant execution and funding risk. Delays, cost overruns or an unfavorable mix of debt and equity could dilute returns and compress earnings and return ratios.
• Manorama is heavily exposed to a concentrated base of large multinational customers such as Mondelez, Nestle and Mars. Any loss of key contracts, stricter procurement policies or pricing pushback as the global CBE market matures would erode pricing power and lower net margins and revenue visibility.
• The model depends on complex rural and cross border supply chains for sal, mango and shea based inputs. Any long term disruption from climate change, regulatory changes, geopolitical issues in West Africa or ESG non compliance could raise raw material and logistics costs and weaken net margins and free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹1774.0 for Manorama Industries based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹22.3 billion, earnings will come to ₹3.3 billion, and it would be trading on a PE ratio of 46.7x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₹1350.95, the analyst price target of ₹1774.0 is 23.8% 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.