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Heritage Foods - Lower procurement prices leading to highest EBITDA margin in past decade - ICICI Securities

Posted On: 2020-10-29 05:46:18

Three highlights from Q2FY21: (1) EBITDA margin expanded 1110bps due to reduction in milk procurement prices. We expect milk procurement prices to be lower even in H2FY21 due to commencement of flush season, (2) The revenue decline of 10.2% was largely attributable to reduction in HoReCa sales and lower out-of-home consumption. Gradual re-opening up of economy will steadily lead to higher revenues, (3) The company has initiated some cost saving measures which has also helped to improve margins. We believe some cost saving measures are structural in nature. We model Heritage to report PAT CAGR of 63% over FY20-FY22 with improvement in core return ratios. Maintain BUY with a target price of Rs400 (12x FY22E; Earlier TP-Rs360).

- Revenue impacted due to decline in HoReCa sales: Heritage reported revenue decline of 10.2%, YoY. The liquid milk volume declined 20.3%. We believe Heritage generates ~15% revenues from HoReCa and institutions. Decline in off-take by HoReCa resulted in lower liquid milk revenues. The revenues of Value-added products declined 21% due to (1) decline in ice cream revenues, (2) lower HoReCa sales and (3) reduction in out-of-home consumption.

- EBITDA margin expansion due to better realisations and lower RM prices: EBITDA margin expanded 1110bps, YoY, due to (1) Carry-over of price hikes (~13%), (2) lower procurement prices and (3) lower other expenditure (Some cost saving measures & likely lower ad-spend). Milk realisation increased by Rs5.4/ltr to Rs 46.4/ltr in Q2FY21 from Rs41/ltr in Q2FY20. PAT was up 395.6% YoY.

- Correction in milk procurement prices: Milk procurement prices started correcting post lockdown due to lower demand of milk. Lower off-take by HoReCa and lower sales of value added products further has impacted milk demand. The milk prices are expected to be lower in H2FY21 due to (1) commencement of flush season and (2) high SMP inventory in India. The correction in milk procurement price will lead to better margins for rest of FY21.

- Decline in revenues of value added products to continue: While revenues of liquid milk may recover in H2FY21, value added products are likely to report revenue decline even in H2FY21. We believe there is likely impact on milk consumption/ supply chain due to floods in Hyderabad in Q3FY21. With gradual re-opening of economy, we expect the demand for milk and milk products to recover.

- Retain BUY: We model Heritage to report revenue and PAT CAGRs of 4.8% and 63%, respectively, over FY20-FY22. Core return ratios are expected to improve over the same timeframe. We have valued the stock as per DCF methodology at Rs400 (Implied P/E 12x FY22E).

Shares of Heritage Foods Limited was last trading in BSE at Rs.304.75 as compared to the previous close of Rs. 304.9. The total number of shares traded during the day was 1671 in over 233 trades.

The stock hit an intraday high of Rs. 313.05 and intraday low of 300.5. The net turnover during the day was Rs. 512995.

Source: Equity Bulls

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