Adani Wilmar's India IPO could boost Wilmar's share price, earnings: analysts

Singapore

WILMAR International could enjoy a lift in terms of share price and earnings as its 50 per cent-owned joint venture Adani Wilmar heads for an initial public offering (IPO) on the Indian markets to raise money for expansion.

Adani Wilmar, which is one of the few large fast-moving consumer goods companies in India, intends to raise up to 45 billion rupees (S$821.4 million) in a dual listing on both the Bombay Stock Exchange and National Stock Exchange of India.

Of the IPO proceeds, some 19 billion rupees will be used for capital expenditure. Adani Wilmar said in its draft prospectus that it intends to expand its existing manufacturing facilities and food processing units or develop new ones by FY2025 to drive future growth.

The company sells a range of essential kitchen commodities to Indian consumers, including edible oil, wheat flour, rice, pulses and sugar under a range of brands. It also sells non-food products such as soaps and sanitisers.

Another 11.7 billion rupees is earmarked for the repayment or prepayment of borrowings. As at end-May, the company had aggregate outstanding borrowings of 82.3 billion rupees.

A further 5 billion rupees has been set aside for strategic acquisitions of manufacturing units or brands in the food staples business, such as wheat flour, rice and besan, as well as in the ready-to-cook and ready-to-eat segments, from 2022 to 2023.

Adani Wilmar said it is currently in active discussions and evaluating various acquisitions, but has not identified any potential acquisition targets yet. Some considerations the company has are the location and cost of the acquisition, and whether it will increase the company's geographical reach and manufacturing capacity.

Adani Wilmar is also seeking to launch new products to increase its market share and expand its customer base. Such products could include food items such as noodles, pasta, honey and biscuits; as well as the likes of dishwash bars and floor cleaners.

It will also boost margins by reducing costs and achieving operational efficiency through its integrated manufacturing facilities, optimising overheads and leveraging scale to procure raw materials at competitive prices.

A successful listing and the resulting funds for growth could help Wilmar's earnings, said analysts from CGS-CIMB.

Adani Wilmar reported net profit of 7.28 billion rupees for the FY2021 ended March, up 57.9 per cent from a profit of 4.61 billion rupees in FY2020. The company's topline figure, meanwhile, was up by 25 per cent to 372 billion rupees over the same period.

For FY2020 ended December, Wilmar reported an 18.6 per cent rise in net profit to US$1.53 billion. Revenue increased 18.5 per cent to US$50.5 billion, driven by growth across all segments.

Wilmar's food products segment posted an 18 per cent rise in segment profits to US$1.15 billion. Consumer products sales volume grew 22 per cent to 9.4 million metric tonnes (MT), while medium pack and bulk sales increased 7 per cent to 17.8 million MT.

Citi Research analyst Cheryl Tan noted that Adani Wilmar has contributed between 1.6 per cent and 4.3 per cent of Wilmar's earnings over the past three years, or about US$24.5 million to US$48.5 million in absolute figures.

CGS-CIMB said the listing of Adani Wilmar is also a "potential rerating catalyst" for Wilmar as it could allow Wilmar to "unlock value for shareholders".

"We gather that the timeline from draft prospectus to listing in India could take 8-12 weeks, based on the experience of other companies," said CGS-CIMB.

Wilmar had listed its China unit, Yihai Kerry Arawana, back in October 2020. The company had paid a special dividend of 6.5 Singapore cents and a final dividend of 9 cents for the half-year ended December 2020, handing out a record cash dividend of 19.5 cents for FY2020.

While Wilmar had not explicitly attributed the bumper payout to the listing, Citi Research's Ms Tan is not discounting the possibility of "another special dividend payout" following a successful listing of Adani Wilmar.

Ms Tan also noted that although India has battled a resurgence in Covid-19 cases early this year and a rally in commodity prices could possibly weigh on near-term margins, Adani Wilmar's management foresees that demand will gradually pick up as the worst is likely over.

RHB Research, meanwhile, estimated the listing could boost Wilmar's share price by S$0.20 per share, assuming Adani Wilmar trades on par with its fast-moving consumer goods (FMCG) peers in India.

In its prospectus, Adani Wilmar noted that the average price-to-earnings ratio (PER) of its peers in the industry stands at 66.5 times.

Nestle India has the highest PER of the industry at 82 times for the year ended Dec 31, 2020. The ratios of other peers provided were Tata Consumer Products (81.3 times), Britannia Industries (44.2) and Hindustan Unilever (68.6), all as at end-March.

Meanwhile, Wilmar's PER stands at 13.7 times according to Bloomberg data. Shares in Wilmar closed at S$4.45 on Friday, down 0.7 per cent or S$0.03.

DBS Group Research analyst William Simadiputra, however, cautioned that with an effective ownership of 50 per cent, Adani Wilmar's valuation would only constitute 5 to 7 per cent of Wilmar's market capitalisation, which currently hovers around the US$20 billion mark.

Mr Simadiputra added that all eyes are for now on Wilmar's financial results for the first half of the year, which are set to be released on Aug 11.