Analysis on ITC acquiring 100% equity stake in Sunrise Foods Pvt Ltd - HDFC Securities

Mr. Varun Lohchab, Head Institutional Research & Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities.

ITC acquiring Sunrise Food: "Interesting space, healthy financial track record"

ITC has entered into a Share Purchase Agreement to acquire 100% equity share capital of Sunrise Foods Pvt Ltd (Sunrise Food). Sunrise Food is primarily engaged in the business of spices under the trademark 'Sunrise'. Following are the details about Sunrise Food and Strategic Rationale for ITC.

About Sunrise Food:

- Sunrise is a clear market leader in eastern India in the fast-growing Spices category with a rich heritage and brand legacy of over 70 years. Sunrise has >50% market share in West Bengal and is also leader in East region with 15-20% market share.
- Co is promoted by Sharma family who are based in Kolkata.
- Co has product range of Whole Spices, Basic Ground Spices, Blended Spices, Instant Mix, Hing, Mustard Oil and Papad.
- Over the years, the brand has built a loyal consumer franchise, anchored on a differentiated product portfolio tailored to regional tastes and preferences, both in the basic and blended spice segments.
- Co has been growing strongly and clocked 24% and 22% CAGR over the last 9 years (FY09-18) and 3 years (FY15-18). The growth was not only strong but very steady over the years. Thereby, we believe that the company could have grown at around 20% (FY18-20) to reach to Rs 5,500-6,000mn revenue in FY20.
- Gross margin and EBITDA margin are strong for the company. It achieved 38% gross margin and 16% EBITDA margin in FY18. EBITDA CAGR for the last 9 years (FY09-18) and 3 years (FY15-18) is at 36%.
- Co's plants are in Kolkata (spice manufacturing unit) , Agra (fresh, grade 1 -quality spices), Jaipur (Multi-product unit that makes mustard oil, mustard powder, hing, whole spices etc), and Bikaner (Papad manufacturing unit).

Deal Details:

ITC has not shared deal details so far as the company has entered into an agreement with Sunrise Food. The deal is expected to be concluded in around a month.

We believe that the deal will be in the range of Rs 20-23bn (3.5x-4x of revenue of FY20P).

Strategic Rationale

We believe this proposed acquisition is aligned with ITC's strategy to rapidly scale up its FMCG Businesses. Co wants to leverage its back-end strengths which are deep consumer insights, wide distribution network, agri-commodity sourcing expertise and strong rural linkages.

ITC's Aashirvaad range of spices is already a market leader in Telangana and Andhra Pradesh and the Company is one of India's leading producers and exporters of high-quality food safe spices.

As Sunrise has presence mainly in East, ITC will be able to expand it pan-India (particular in South). The Sunrise brand will fill the gap which Aashirvaad is missing in the blended spices. Aashirvaad is stronger on the vegetarian and grain side.

Spices is a large market in India and for exports. Indian market is led by several regional brands like MTR (South), Ashok & Goldiee Masale (North), Everest (Pan India, mainly in North), MDH (Pan India, mainly in North), Aashi (TN), Shakti (TN) and Badshah (West). ITC can be opportunistic in the shift from unorganised to organised market.

Valuation and Rating on ITC

We believe ITC will continue to do such acquisitions considering many regional brands will be available at good valuation (post Covid). ITC with cash and equivalents of >Rs 300bn, inorganic growth will be healthy for FMCG business. We have BUY rating on ITC with TP of Rs 221. At CMP of Rs 186, the stock is trading at a P/E of 16x and 14x on FY21E and FY22E EPS.

Shares of ITC LTD. was last trading in BSE at Rs.191.5 as compared to the previous close of Rs. 186.35. The total number of shares traded during the day was 1667390 in over 19147 trades.

The stock hit an intraday high of Rs. 194.95 and intraday low of 188. The net turnover during the day was Rs. 318974346.

Source : Equity Bulls

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