Stock Pick from Agricultural Products Sector

HERE IS WHY

• Posted healthy growth in bottomline with a CAGR of 44 per cent from FY11 to FY14
• Turnaround in financial performance after completion of capex in Q4FY14
• Comfortable net debt to equity ratio of 0.25

Flex Foods (UFlex Group Company), is engaged in the business of agro-based value added food products catering to the international markets mainly in Europe, USA, Canada & Middle East countries. The company started its commercial operations in 1992 by establishing a 100 per cent Export Oriented Unit for vacuum freeze dried vegetables mainly mushroom and culinary herbs, spices and fruits / vegetables. The company has its own captive mushroom growing facility with fully equipped mushroom spawn and compost preparation facilities. The core strength for Flex Foods is to continuously look for new innovative ways in order to increase its sales and market share both in domestic and export markets. And for the same purpose, it is adding new products in the market.

Keeping the demand for freeze dried products, particularly for herbs, the company increased its cold storage capacity, during FY12 and FY14 with capex of Rs. 7 crore and Rs. 15 crore respectively, which will let it carry a higher level of inventory of seasonal herbs and vegetables, and thus cushion it from seasonality risks. The company is also placed comfortably on procurement front with the backward integration through contract farming. In FY14, freeze dried products contributed 51.6 per cent to the operating revenue, processed products contributed 18.25 per cent, Individually Quick Frozen (IQF) products contributed 25 per cent and Air dried products contributed 5.15 per cent.

On financial front, Flex Foods showed decent performance during last fiscal year. The company’s full year revenue stood at Rs. 69 crore in FY14 against Rs. 55.76 crore. On the EBITDA front, Flex Foods posted healthy growth at a CAGR of 26 per cent from Rs. 9.58 crore in FY11 to Rs. 19.17 crore in FY14 due to consistent improvement in the margin from 20.57 per cent to 29 per cent during the same period. Therefore, the margin growth led to a bottomline outperformance with growth at a CAGR of 44 per cent from Rs. 3.47 crore in FY11 to Rs. 10.35 crore in FY14. If we analyse on sequential basis, then we get a clear picture of the turnaround in financial performance. In the last two quarters, the company has posted resilient margin performance with EBITDA margins soaring by more than 1000 bps y-o-y to more than 33 per cent after completion of its capex in Q4FY14.

The company has maintained comfortable net debt to equity of 0.25. On the valuation front, Flex Foods is trading at a TTM PE ratio of 6.6 and on the basis of price to book, it trades at 1.32x. We believe Flex Foods has high growth visibility going forward. At the current market price of Rs. 66.4, the stock trades at a PE of 5.08x and 4.13x its FY15E and FY16E EPS of Rs. 13 and Rs. 16 respectively. We recommend a buy on the stock with a target price of Rs. 112, based on 7x FY16E EPS of Rs. 16, indicating an upside of around 70 per cent from the current levels with an investment perspective of one year. Thus, we feel that this is the right time to invest in this stock.