Palm Oil Expansion And Celebrity Endorsements Will Boost Future Market Penetration

Key Takeaways

• Strategic expansion into palm oil plantations and premium product offerings could enhance net margins and drive revenue growth.
  
• Leveraging celebrity endorsements and e-commerce channels is anticipated to boost brand recognition and market penetration.
  
• Rising raw material costs, erratic rainfall, and urban demand stress could pressure Patanjali Foods' margins, revenue growth, and financial stability.

Catalysts

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

• Patanjali Foods is expanding its palm oil plantation business significantly, aiming to increase cultivated land to 0.5 million hectares in the next five years. This is expected to cover 60% of their requirements and reduce import dependency, potentially improving net margins through cost efficiencies and increased vertical integration.
  
• The company is actively leveraging celebrity endorsements and partnerships to strengthen its brand in various segments, such as onboarding Shilpa Shetty for Nutrela and Shahid Kapoor for nutraceuticals. This focus on brand building could drive revenue growth by increasing product recognition and consumer interest.
  
• Patanjali Foods is strategically entering and expanding in e-commerce and quick commerce distribution channels, aiming for these to constitute 6% of their FMCG sales. Increased penetration in these channels is likely to boost revenues by enhancing market reach and accessibility.
  
• The anticipated integration of the HPC business following regulatory and shareholder approvals could increase revenue and operational efficiencies, positively impacting earnings and expanding the product portfolio.
  
• The company is focusing on increasing premium product offerings, like ethnic foods and nutraceuticals, where they anticipate higher margins. This premiumization strategy is expected to enhance net margins and drive revenue growth by targeting the aspirational consumer segment.

Patanjali Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Patanjali Foods's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 6.6% in 3 years time.
• Analysts expect earnings to reach ₹29.9 billion (and earnings per share of ₹67.22) by about December 2027, up from ₹9.9 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 43.7x on those 2027 earnings, down from 65.5x today. This future PE is greater than the current PE for the IN Food industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 7.14% 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.

Patanjali Foods Future Earnings Per Share Growth

Risks

• The company is facing challenges with erratic and uneven rainfall, impacting FMCG volumes and consumer demand, which could lead to fluctuations in revenue and earnings.
  
• Rising raw material prices, including wheat, pulses, and palm oil, have put pressure on the company’s margins, possibly affecting net margins in future quarters.
  
• Despite encouraging rural demand, there is noted stress in urban areas, which form 60% of their business, potentially impacting overall revenue growth.
  
• The integration of the HPC business could come with execution risks and may temporarily affect financial stability, impacting the earnings performance.
  
• The arbitration case related to share allotment could create legal and financial uncertainty, which may impact the company’s reputation and future earnings.

Valuation

• The analysts have a consensus price target of ₹2082.5 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 2027, revenues will be ₹453.5 billion, earnings will come to ₹29.9 billion, and it would be trading on a PE ratio of 43.7x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹1799.45, the analyst's price target of ₹2082.5 is 13.6% 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.