We initiate coverage on Manpasand Beverages (MANB) with a BUY rating and 18-month target price of Rs1009 (26.3% upside). We estimate sales and PAT CAGR of 34% and 38.5% over FY17-20 and value the stock at 30x FY20 EPS. MANB trades at significant discount to global majors on PEG (0.7x v/s 1.5-2.7x) and EV/EBIDTA (11.3x v/s 11.6-17.3x), which should narrow down in coming years as MANB improves its ROE from 7-8% to 13% by FY20.
MANB mainly caters to the untapped growth opportunity in BHARAT (rural and small town India) led by small packs (<Rs10, 40% of Mango Sip sales) and product availability to capitalise on distribution gaps of majors like Coke, Pepsi and Frooti. MANB is likely to grow at above market rates led by 1) 1.2x capacity expansion to 370,000 cases/day 2) entry in new geographical regions in North, South and East by setting up new units in TN, Odisha and Haryana 3) allocation of 40% of incremental capacity for fruit based carbonated drinks (Fruits Up CSD) and 4) distribution expansion in modern trade and institutional segment (~25% of sales).
MANB is increasing focus on “Fruits UP” (launched in 2014) in order to grow in carbonated soft drinks segment and premium fruit based drinks. We note that these are ~25% of sales despite lack of capacity and limited distribution. Concessional GST rates for fruit based beverages (12% v/s 40% for aerated drinks) gives an advantage of Rs9.6/600ml which will enable the company to spend on advertising, distribution and marketing in Rs200bn CSD segment dominated by Coke and Pepsi. We estimate 81% sales CAGR in carbonated drinks over FY17-20. Manpasand is driven by first generation entrepreneur (Mr. Dhirendra Singh) which increases key man risk, however we expect MANB to have additional systems and processes in place as it scales up its operations to emerge as a pan India player.
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