Wednesday, May 5, 2010


Key Investment Rationale
We believe Farmax’s new product pipeline, increased contribution from branded products, strong distribution reach and growth from urban and semi-urban domestic markets would be key growth drivers going forward. We expect 122% and 296% compounded growth in revenue and net profit, respectively over next three years. EBIDTA margin is likely to improve to 22.5% in FY12 versus 10.3% in FY09 led by improved product flow, high revenue growth and higher assets utilization. We
recommend BUY.

Strong Pipeline of new businesses: FIL has been very careful in selecting its new focus areas and has, over the years, created a very strong pipeline of new products. The Company intends to roll-out these new products in a steady fashion over the next few years. Given the high demand and added production capacity of the new products, FIL is expected to enjoy high prices and better margins in the long term.

Improving Operating Margins: FIL has now shifted its focus on businesses in which it has a clear competitive advantage in the form of product technology and/or easier access to raw materials. The company intends to launch high margin branded products which are on the anvil. EBIDTA margin is likely to improve to 22.5% in FY12 versus 10.3% in FY09 led by improved product flow, high revenue growth, cost efficiencies and higher assets utilization.

Huge capacity expansion in place: FIL has constantly expanded its production capacity, which is planned to continue in the coming years. FIL’s current production capacity has the potential to address a market of Rs. 3.5 billion in value.

Strong Distribution Reach: FIL has superior distribution reach which can propel a company to a leadership position. It marketing network provides the company with a strong head start and makes the products available to larger sections of a target population. Further, its distribution reach is backed by innovation to keep a brand relevant over time.

Valuations: FIL is all set to move into an orbit of high growth, which is sustainable for atleast another 4-5 years. The margins are expected improve consistently led by strong sales growth, introduction of new and higher margin innovative products and higher assets utilization. We believe the company will continue to enjoy high earning multiple given its high growth potential. We are, therefore, setting the 12 month target price at Rs 215 / share based on DCF valuation method. At our target price, the stock will be valued at 17.8x of its FY12 EPS.

To read the full report: FARMEX INDIA