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Unity Foods Limited has big aspirations for growth

UNITY is expected to profit from (1) aggressive development plans in the oil market, (2) gradual move to high margin retail segment, and (3) inclusion of new product lines, according to experts.

UNITY has ambitious aspirations to expand its impact in the edible oil industry. The projects include the construction of a new 200-tonne-per-day chemical refinery, a new 150-tonne-per-day hydrogenation plant, and a 40-tonne-per-day margarine factory. This is predicted to enable UNITY achieve a 49 percent sales CAGR over the next three years (FY20-23)

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Gradual Shift towards high margin segment: With the introduction of oil brands and aggressive advertisement campaigns along with increasing its geographic footprints; unity is set to increase its market share in retail market segment. We expect branded sales ratio of the company to improve to 30-35% in FY23 from 20-25% in FY21, which shall help in improving overall margins.

Addition of new products: After the success in edible oil and flour business, UNITY is considering to enter into the rice business through acquisition or by setting up rice mill in Pakistan. The company also intends to diversify its product portfolio further by setting up soap factory and starting of pulses or other food related products. That said, we believe the diversification will increase earnings outlook of the company and upside trigger for the company.

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Valuation: We have arrived at DCF based target price of Rs41 per share, offering a potential upside of 42%. We have taken Risk free rate of 10.5%, and risk premium of 6% which makes the cost of equity to 16.5%. The stock is currently trading at a FY22E and FY23F P/E of 10.1x and 8.1x, respectively.

Key Risks: (1) lower than expected volumetric growth, (2) lower than expected gross margins, (3) delay in materialization of new projects, (4) volatility in palm oil prices, (5) higher than expected exchange gain/loss.

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