Adani Wilmar’s IPO Valuation Looks Good, But Is It Enough?

In this messy environment, the initial share sale of Adani Wilmar Limited is starting on Thursday. the size of the problem is 3,600 crore and the company has allocated Rs 940 crore to anchor investors as on January 25. It helps that the valuation of this fast-moving consumer goods (FMCG) company appears moderately priced. According to Ventura Securities Ltd., at the upper end of the Rs 230 price band, Adani Wilmar’s price-to-earnings ratio multiple is 33.7 times estimated earnings for FY22. This is lower than many other large listed FMCG counterparts, though may not be completely comparable. In a report on January 22, Ventura reported, shares of Hindustan Unilever Ltd, Britannia Industries Ltd and Dabur India Ltd were trading at 63 times, 54.3 times and 55.4 times their respective FY22 earnings estimates.

‘Fortune’ is the flagship brand of Adani Wilmar. The company is present in three segments: Edible Oils, Food & FMCG, and Industry Essentials, which contributed 82.8%, 4.6% and 12.6% respectively to H1FY22 revenue. While the edible oil segment has matured and generates healthy cash flow, the food and FMCG segment is at an early stage. Adani Wilmar’s Chief Financial Officer Shrikant Kanhere, refers to the edible oil segment as a cash cow which contributes to 65% of the total volume.

Note that the food and FMCG segment is a relatively new vertical and EBITDA (earnings before interest, taxes, depreciation and amortization) is neutral. The company expects this segment to contribute zero to EBITDA over the next two years. As such, the food and FMCG segment may not be able to generate significant growth in overall margins immediately.

A major portion of the proceeds from the IPO will go towards growing the food and FMCG segment, where the company aims to launch new products and improve its distribution network. In addition, acquisitions expected to be funded through IPO proceeds will also be in place. Part of the proceeds will be used to pay off long-term debt.

The two largest segments in terms of volume – edible oils and industry essentials – contribute to the company’s EBITDA margin, which stood at 3.6% in the first half of FY22, down from 4.6% a year ago because of higher commodity prices. The cost was weighed. Over FY19-FY21, the revenue and EBITDA CAGR (Compound Annual Growth Rate) are 14% and 7% respectively.

In general, India has low penetration of the packaged food market, offering significant potential growth, which means the long-term prospects are bright. Vineet Bolinjkar, Head of Research at Ventura said, “Having established itself in the edible oil market, there is immense growth potential for other products like wheat, rice, pulses etc., which have a market size of 300 million tonnes per annum (MTPA). With only 5-6 major brand players in the 60-70 lakh crore under-penetrated food sector, Adani Wilmar can lead the segment.” In FY 2011-24, Ventura expects Adani Wilmar to grow its revenue at a CAGR of 16.7%. 58,959 crore led by the FMCG vertical which is set to grow at a CAGR of 31.5%.

Nevertheless, as mentioned earlier, the situation in the broader stock market remains worrying. The benchmark Nifty 50 index was down over 1% in morning trade on Thursday. However, market experts seem quite confident about this issue. Of the anchor allocation, 39.2% and 8.7% are allocated to the Government of Singapore and the Monetary Authority of Singapore, respectively. Arun Kejriwal, Founder, Kejriwal Research and Investment Services Pvt Ltd said, “The fact that these officials have shown confidence in the issue is a good sign for the issue and even a short listing may pop up. might.”

However, the recent market correction has weighed on the premium. According to market experts, the gray market premium (GMP) of Adani Wilmar has come down from Rs 100 to Rs 45-50. After listing, in the near future, investors will also have to closely follow how rural demand shapes up, given that several FMCG companies have noted a slowdown in the rural market in recent months. In the medium term, Ebitda margins will require more focus as a material growth will be seen only after the growth of the food and FMCG segments.