Empire Spices & Foods Ltd. Financial Analysis 2023

18 March 2024

The Indian spice market is characterized as a fragmented market where more than 70% of the market share is consolidated by TOP 15-20 players. However, with the government’s focus on making an export market for spices, the expansion of the e-commerce industry in India has propelled the growth of the Indian Spice market and opened multiple avenues for the companies.

Empire Spices has consistently maintained an upward trajectory of revenue growth. In FY23, the company’s y-o-y total revenue growth stood at 20% while the 5-year CAGR stands at 12.5%. Despite of increase in revenue, the company sector has witnessed a notable decline in printability primarily on account of a significant rise in the cost of raw materials.

Wholesale prices of spices have surged by approximately 40% within the domestic market. Spices such as cumin (jeera), cardamom (both small and big varieties), dry turmeric, and cloves (laung) have witnessed significant price spikes. Jeera reached a record high of Rs.62,000 per quintal, price for ginger exceeded Rs.40,000 per 100 kg in August before easing. Black pepper prices broke the ₹60,000 per 100 kg mark and hit a five-year high, while small cardamom prices increased to a three-year high, with average auction prices approaching ₹2,000 per kg. Turmeric prices have increased to Rs 12,600 per quintal in FY23 from Rs 7,000 per quintal in FY22. Both turmeric and dry chillies recorded a 10.6% inflation in November.

The reason behind the rise in the prices of these spices was a reduction in sowing for several crops, such as turmeric due to unseasonal rains. The coriander belt in Rajasthan has been decimated by the cyclonic storm Biparjoy. Dry chilli production has dwindled due to deficient rainfall in Andhra Pradesh and Telangana. Due to erratic weather patterns and increasing plant disease farmers in key spice-producing regions have shifted their focus to cultivating alternative crops like cotton, mustard seed, groundnut, and soybean. The ongoing tension in the Red Sea is also seen impacting the spices market as it could lead to supply chain disruptions and increased costs.

During a meeting, Mr. Ramkumar Menon, Chairman of World Spice Organisation, discussed the anticipated decline in prices of several spices, notably cumin (jeera), starting from January 2024. This drop is expected with the arrival of new crops from the kharif season entering the market.

Despite the challenges mentioned above, there has been a growing demand for organic and sustainably sourced spices due to increasing health consciousness and ethical consumer preferences. Additionally, there is a rising interest in spice blends and exotic flavours in the food and beverage industry, leading to product innovation and market expansion.

To meet the increasing market demand, the company is establishing a new manufacturing unit in Malegaon to expand its production capacity. In terms of stock valuation, the company's stock appears undervalued, trading at a price-to-earnings (P/E) ratio of 19x, lower than the industry median P/E of 25x. At the current trading price of Rs.540 per share, we recommend buying the stock due to its growth potential in the export market. We have set a reasonable target price of Rs.800 per share.