LKP Research has issued a “Buy” rating for Mrs. Bectors Food Specialities Limited (MBFSL) with a 12-month target price of Rs 2,000, representing a potential upside of 24% from the current market price of Rs 1,618. Despite temporary inflationary pressures impacting margins due to rising raw material costs, MBFSL’s long-term growth outlook remains solid. The company’s robust pan-India expansion, premiumization strategy, and continued growth in exports support this optimistic forecast. With plans to increase distribution reach and complete significant capacity expansions by FY25, MBFSL is well-positioned to capitalize on strong demand in the biscuit and bakery sectors.

Q2 FY25 Financial Performance: Strong Revenue Growth with Margin Pressure

Robust Revenue but Lower Margins Due to Rising Costs
MBFSL reported 19.7% year-over-year growth in revenue to Rs 4,963 million for Q2 FY25, driven by strong performances across its biscuit and bakery segments. However, EBITDA growth slowed to 9% YoY as margins faced pressure from elevated freight and raw material prices, especially palm oil. EBITDA margins declined to 14.2%, down from 15.6% in Q2 FY24, while Profit After Tax (PAT) grew modestly by 4.5% YoY to Rs 389 million, with PAT margins at 7.8%.

Inflationary Pressures Impacting Near-Term Margins
The company anticipates further inflationary pressures, particularly in edible oils and cocoa. However, it remains committed to an annual EBITDA margin target of 14-15%, expecting stabilization as price adjustments are implemented across its product portfolio.

Segment Performance: Biscuit and Bakery Segments Show Strong Growth

Biscuit Sales Driven by Export Demand
In Q2 FY25, MBFSL’s biscuit segment grew by 24% YoY to Rs 3.2 billion, with strong export performance offsetting slower domestic demand impacted by heavy monsoons and subdued modern trade.

Bakery Segment Expansion in Institutional and Retail Channels
The bakery segment saw a revenue increase of 19% YoY to Rs 1.7 billion, supported by consistent growth in retail and institutional sales. The focus on premium products and strategic partnerships within the institutional segment continues to bolster MBFSL’s growth in this category.

Capital Expenditure and Expansion Plans

Strategic Investment to Boost Production Capacity
MBFSL completed a capital raise of Rs 4 billion this quarter, which will support debt reduction and capacity expansion. An additional biscuit line was commissioned in Rajpura, with further expansions underway in Dhar, Madhya Pradesh, and a new bakery facility in Khopoli, Maharashtra. These expansions, set to commence by mid-2025, will enhance MBFSL’s production capabilities and geographic reach across India.

Distribution and Market Reach

Expanding Distribution for Wider Market Penetration
With approximately 550-600 distributors onboarded to its Distributor Management System (DMS), MBFSL’s distribution network now covers 65% of revenue. The company is piloting a “mini DMS” for smaller distributors, with a broader rollout planned for Q4 FY25. MBFSL aims to expand its direct reach to 1 million outlets from the current 700,000 by H2 FY25, increasing accessibility and brand visibility.

Outlook and Valuation: Growth Through Premiumization and Expansion

Long-Term Growth Driven by Strategic Expansion
LKP forecasts a Revenue/EBITDA/PAT CAGR of 17%/19%/21% over FY24-26 for MBFSL. The company’s focus on premiumization, particularly in the biscuit and bakery segments, along with expanding capacities and distribution reach, supports this growth outlook. LKP has maintained a “Buy” rating with a target price of Rs 2,000 at a P/E of 60x based on FY26 estimated earnings per share (EPS) of Rs 33.

Risks to Outlook

Slowing Premiumization Trends
Any deceleration in the premiumization trend within the biscuit and bakery segments could impact MBFSL’s growth projections. The company’s reliance on premium products is a key driver, making it sensitive to shifts in consumer preferences.

Inflation in Key Raw Materials
Rising costs of key raw materials like palm oil and cocoa, if sustained, could continue to pressure margins. Although MBFSL is implementing price increases, delays in price adjustment could affect short-term profitability.

Con-Call Highlights: Key Takeaways from Management

Commitment to Margin Stability
Despite rising costs, management remains focused on maintaining EBITDA margins in the 14-15% range by adjusting prices gradually across the biscuit and bakery portfolios.

Continued Focus on Export Growth
The export segment remains a high-growth area, with MBFSL gaining market share internationally through quality premium products. This focus on exports provides a valuable hedge against potential slowdowns in domestic demand.

Innovation and Product Development
MBFSL plans to launch new products in premium categories to cater to evolving consumer tastes. This innovation-driven approach is aimed at capturing market share in both the domestic and international markets, particularly within the biscuit segment.

Conclusion
LKP’s “Buy” recommendation on MBFSL reflects confidence in the company’s strategic direction, supported by premiumization trends, distribution expansion, and production capacity growth. While inflation presents near-term challenges, MBFSL’s long-term growth outlook remains robust. With targeted investments and a solid export strategy, MBFSL is positioned to capitalize on rising demand for quality, premium baked goods across both domestic and international markets.