NHC FOODS LTD - Initiating Coverage - BUY - Destimoney

NHC Foods Ltd (NHC) is a ISO 22000:2005 & ISO 9001:2008 government recognized star export house engaged in the business of exporting whole and grounded spices, seeds, resins and ready-to-eat snacks (in India), food grains and animal feeds. Based in Pardi (Gujarat) the company is promoted by Mr. Apoorva Shah. The company exports to over 60 countries with over 200 international customers.

NHC operates in the highly fragmented spices market which is globally growing at 3.6%. Despite India contributing over 40% in terms of volume contribution by value is mere 25%, which indicates poor realization of Indian product.

NHC has adopted a simple strategy of expanding into newer territories by first offering 'trade' products and later converting it into 'processed' products thereby improving the margin profile.

On the domestic side, management is eyeing a space in the branded basic and blended masala category with its SAAZ brand. Currently the management is focusing in Maharashtra and Gujarat region and plans to cover MP and Rajasthan in a yrs time. On the modern retail side, NHC has tied up with Reliance Fresh, Future group, Homecare, Magnet and Dheeraj supermarkets.

Overall group revenue in the past three years has grown at ~24% CAGR, export grew by ~18% while domestic business has grown at 141% CAGR primarily due to low base. Gross margin over the past three years has improved from 14.8% in FY10 to 16.8% in FY13 and 17.8% in Q2FY14.

In Q1FY14, NHC received order from UP State Employee Welfare Nigam to supply Saaz masala. The company expects to sell around 4 mn packs worth~ Rs. 80-Rs. 90mn of basic and blended variants of Saaz masala. Management indicated to have a gross margin of 22%-25% in this order.

In India, a growing proportion of working women has led to slow but steady switching trend towards readymade blended spices from home made blends. The branded masala market in India is still at a nascent stage comprising a mere Rs. 64 bn out of the Rs. 400 bn plus spice market, and hence there is ample opportunity for each player to grow.

Additionally, management's target of achieving Rs. 180 mn in FY15 sales under Saaz masala brand will require sales of ~2 packs of 100 gram each per day by each of the 18000 kirana stores. We see the initial target set by the achievable contingent on the buzz it is able to generate in its brand promotion exercise. We initiate coverage on NHC FOODS LTD with a BUY rating and a target price of Rs. 50 per share.

Source : Equity Bulls

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