Newly-listed Bikaji Foods up 33% since debut, what should investors do?

Bikaji Foods is said to be the third-largest ethnic snacks company in India, however, analysts are divided over its expensive valuation

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The share price of ethnic snacks food company Bikaji Foods has been on a roll since its listing. The stock has gained over 33 percent after its market debut on November 16, rising from its listing price of Rs 322.80 to Rs 436.

While the stock was trading flat on November 30 morning, it was up 10 percent for two straight sessions in the week gone by. At 11.08 am, the scrip was quoting at Rs 436 apiece on the National Stock Exchange, up 0.3 percent.

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The Rs 881-crore initial public offering (IPO) was subscribed 26.67 times during November 3-7 period, backed by qualified institutional buyers. QIBs subscribed more than 80 times their quota of shares and high net-worth individuals over seven times. The portions set aside for retail investors and employees were subscribed 4.77 and 4.38 times.

Bikaji Foods is touted to be the third-largest ethnic snacks company in India with an international footprint, and the second fastest-growing company in the organised snacks market.

“The company has a strong distribution network for its products as well as a strong network of sales teams on the ground to ensure market service and business hygiene,” said Mohit Nigam, Fund Manager & Head-PMS, Hem Securities.

Analysts, however, are divided because of the expensive valuation. At the current market price, it’s trailing twelve-month (TTM) price-to-earnings ratio works out to be more than 100x. That makes it more expensive than large cap peers like Nestle India and Britannia Industries.

On the technical front, Om Mehra of Choice Broking says investors should wait for fresh entry near Rs 320-350 levels.

“Currently, the chart lacks in suggesting much information about the stock. However, the delivery quantity is reducing, while the price keeps moving higher and that is concerning. We would recommend riding investors should book profits from current levels,” he said.

In its red herring prospectus, the company had cautioned that its profit and EBITDA margins may be impacted by any delay or default in payments from super stockists.

“Most of our super stockists are required to make payments to us in advance. However, we extend credit facilities to some of them. Additionally, in most modern retail and new-age distribution channels, we provide our products on credit,” it said.

As a result, the company has faced instances of defaults in payment and may continue to have high levels of outstanding receivables. As of June 30, 2022, the company’s trade receivables were Rs 70 crore.

“We may not be able to maintain our financial parameters, such as return on capital employed (ROCE), in the future,” it added.

Its ROCE decreased to 13.89 percent in FY22 compared to 20.88 percent in FY21 as an increase in raw material prices could not be passed on entirely to customers.

“Considering the optimistic market mood, newly listed stocks are in demand but investors should look at booking partial profits. On valuations per se, Bikaji Foods is trading above 100x and thus it looks too expensive to hold,” said Prashanth Tapse, Research Analyst, Mehta Equities Ltd.

For Geojit Financial Services, a key risk is the company’s dependence on the sale of Bhujia and Namkeen products, which account for around 70 percent of sales.

“The sale of food products from three core markets of Rajasthan, Assam and Bihar amount for around 70 percent of total sales. This is also a key risk,” according to the brokerage firm.

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