Unity Foods Limited has aggressive expansion plans

Experts believe UNITY is set to reap the benefits of (1) aggressive expansion plans in oil segment, (2) gradual shift towards high margin retail segment, and (3) addition of new product lines.

Aggressive expansion: UNITY has aggressive plans to increase its footprint in edible oil segment. The announced projects includes (1) setting up new chemical refinery of 200MT/day, (2) new hydrogenation facility of 150MT/day, and (3) margarine facility of 40MT/day. This is expected to help UNITY post 3-year (FY20-23) sales CAGR of 49%

Gradual Shift towards high margin segment: With the introduction of oil brands and aggressive advertisement campaigns along with increasing its geographic footprints; unity is set to increase its market share in retail market segment. We expect branded sales ratio of the company to improve to 30-35% in FY23 from 20-25% in FY21, which shall help in improving overall margins.

Addition of new products: After the success in edible oil and flour business, UNITY is considering to enter into the rice business through acquisition or by setting up rice mill in Pakistan. The company also intends to diversify its product portfolio further by setting up soap factory and starting of pulses or other food related products. That said, we believe the diversification will increase earnings outlook of the company and upside trigger for the company.

Valuation: We have arrived at DCF based target price of Rs41 per share, offering a potential upside of 42%. We have taken Risk free rate of 10.5%, and risk premium of 6% which makes the cost of equity to 16.5%. The stock is currently trading at a FY22E and FY23F P/E of 10.1x and 8.1x, respectively.

Key Risks: (1) lower than expected volumetric growth, (2) lower than expected gross margins, (3) delay in materialization of new projects, (4) volatility in palm oil prices, (5) higher than expected exchange gain/loss.

Courtesy – AL Habib Capital Markets Pvt Ltd

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