Expansion Into FMCG And HPC Markets Will Strengthen Future Prospects

Key Takeaways

• Expansion into high-margin FMCG and HPC segments is expected to drive revenue growth and future earnings.
  
• Investments in e-commerce, modern trade, and oil palm business are anticipated to improve margins and operational efficiency.
  
• Rising input costs and reliance on aggressive ad spend could compress margins, while volatility in staple prices and urban demand pressures hinder revenue growth for Patanjali Foods.

Catalysts

Engages in the processing of oil seeds and refining crude oil for edible use in India.

• Patanjali Foods is expanding into high-margin FMCG segments and integrating its HPC business, which is expected to drive substantial growth in revenue and EBITDA, thus boosting future earnings.
  
• The company's strategy to leverage its distribution reach and the expansion of its product portfolio in the FMCG sector aims to capture more market share and increase revenues.
  
• Patanjali Foods is investing in modern trade, quick commerce, and e-commerce channels, anticipating increased sales and improved operational efficiency, which could enhance net margins.
  
• The expansion of the oil palm plantation business and support from favorable government policies on edible oils are projected to stabilize input costs and improve profit margins.
  
• The company's strategic focus on premiumization and enhanced marketing efforts, despite short-term margin pressure, positions them to boost long-term revenue and brand loyalty.

Patanjali Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Patanjali Foods's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 6.1% in 3 years time.
• Analysts expect earnings to reach ₹27.4 billion (and earnings per share of ₹75.71) by about March 2028, up from ₹11.5 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 39.0x on those 2028 earnings, down from 55.1x today. This future PE is greater than the current PE for the IN Food industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 0.07% 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.

Patanjali Foods Future Earnings Per Share Growth

Risks

• The sharp rise in input costs, particularly in wheat and edible oils, has led to higher inflation and margin compression, which could impact net margins for Patanjali Foods.
  
• Urban demand in India remains under pressure due to high food inflation, which might dampen overall revenue growth despite optimistic long-term potential.
  
• Integration of the HPC business could take time to show full-scale operations and synergies, potentially impacting future revenue and margin targets.
  
• The recent decline in rice prices caused a significant revenue drop in the consumer staples segment, affecting net margins; such volatility in staple prices is a risk.
  
• Despite strategic marketing and distribution efforts, reliance on aggressive ad spend could impact overall profitability if increased sales don't compensate for higher marketing expenses.

Valuation

• The analysts have a consensus price target of ₹2070.0 for Patanjali 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 ₹452.4 billion, earnings will come to ₹27.4 billion, and it would be trading on a PE ratio of 39.0x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹1748.0, the analyst price target of ₹2070.0 is 15.6% 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.