This small-cap stock hits a new 52-week high. Should you buy more?

FMCG player Mrs. Bectors Food Specialties witnessed big buying on Wednesday that sent small-cap stocks hitting a fresh 52-week high. Overall, on the day, shares in Ms. Bectors are up around 3% on the exchanges. The stock is currently trading near its new 1-year high. The stock has the most upside potential on the back of a healthy and delicious growth trajectory.

At BSE, at the time of writing, Ms Bectors shares were trading at $432.85 each, 3.38%. The stock was near its new 52-week high $433.50 each. Its market capitalization is around $2,546.70 crores.

Due to a sharp rally on November 23, 2022, Mrs Bectors shares are up nearly 77% compared to their 52-week low of $245 each who registered on June 20 of this year. So far in 2022, the stock is up at least 12.25%.

During Q2FY23, Ms. Bectors posted a net profit of $21.93 crore rising 21.2% yoy while revenue from operations rose 41.1% yoy to $347.4 crores. EBITDA shot up 28.3% year-on-year to $44.5 crore, however, margins fell to 12.8% from 14.1% in Q2 FY2022. Biscuits segment reported 40% growth in Q2 FY22 23 compared to the second quarter of fiscal year 22, while the bakery segment grew 51% in the second quarter of fiscal year 23, including the retail bakery and institutional segment.

In its research note dated November 22, Ventura Securities said: “publishing our startup coverage on Mrs Bectors Food Specialties Ltd (MBFSL) in June 2021, the stock beat street expectations due to a decline in profitability (EBITDA margins decreased from 16.1% to 12.4% in FY22 and to 11.7% in the first half of FY23) and the delay in the commissioning of its Dhar facilities in Madhya Pradesh”.

However, Ventura believes things will change at Mrs Bectors due to two factors. These are:

Firstly, the upcoming Dhar facility will serve South and West India, which will subsequently free up MBFSL’s northern facility to focus on North India and the export market. This is expected to reduce the logistics cost and transportation time for the company. In addition, the company shifted 2 biscuit lines from Tahliwal (Himachal Pradesh) to Rajpura (Punjab), which is expected to reduce annual OPEX (labor and logistics) by $12 crores.

Second, MBFSL has seen significant demand for its Cremica brand of biscuits in Maharashtra and Karnataka, which will be largely served by the new Dhar facility. Therefore, Ventura expects higher capacity utilization at the Dhar unit.

Additionally, Ventura noted that Cremica biscuits are gaining momentum, the direct-to-retailer strategy worked well for the company in English Oven bread, which has a ~5% domestic market share and a leading position in the North from India.

Another trigger for the rise at Mrs Bectors according to Ventura would be the supply of buns to QSR, where MBFSL has strong B2B relationships with KFC, McDonald’s, Subway, Yum Brands, etc. QSR is a significantly underpenetrated format in India (less than 3 stores per million people) compared to China (8), US (200) and Europe (100).

It should be noted that the company has been investing in new capabilities and working on cost optimization to improve its profitability. Ventura’s note read: “The company is in a phase of high growth and the steep valuation discount of more than 50% to its industry peers is not justified. We believe that as this growth story emerges, the valuation discount will be substantially reduced.”

That said, over the FY22-25E period, Ventura expects Mrs Bectors revenue/EBITDA/PAT to grow at a CAGR of 23.6%/ 26.5%/ 32.5% for $1,866 crores/ $248 crores/ $133 crores respectively. Additionally, EBITDA and PAT margins are expected to improve 88bp to 13.3% and 134bp to 7.1% due to cost optimization measures taken by the company and improved asset utilization.

In addition, Ventura expects the company’s performance ratios (RoE and RoIC) to improve by 680 bps to 19.0% and 1,207 bps to 27.2% respectively for FY25E.

Therefore, Ventura has initiated a hedge on the stock with a BUY for a target price of $497 (22X FY25 P/E).

Disclaimer: The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of the Mint.

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