Heritage Foods - Highest EBITDA margin in past decade - ICICI Securities

Heritage reported revenue decline of 11.4% and PAT growth of 65.1% YoY. EBITDA margin expanded 270bps, YoY. We expect it to report revenue CAGR of 8.2% over FY20-22. We also model value-added products to report revenue decline in FY21-22. Post lockdown, the milk procurement prices have corrected and are expected to be lower with commencement of flush season. We expect EBITDA margins to be above 150bps higher in FY21 due to (1) price hikes of ~12% in FY20, (2) lower sales of ghee and SMP which have lower margins and (3) ~15% correction in milk procurement prices. We model Heritage to report PAT CAGR of 38.3% over FY20-FY22 with improvement in core return ratios. Maintain BUY with a target price of Rs360 (15x FY22E).

- Lower HoReCa sales: Heritage reported revenue decline of 11.4%, YoY. The liquid milk volume declined 20.8%. We believe Heritage generates ~15% revenues from HoReCa and institutions. Decline in off-take by HoReCa resulted in liquid milk revenues. The revenues of Value-added products declined 34% due to (1) decline in ice cream revenues, (2) lower HoReCa sales and (3) early monsoon.

- EBITDA margin expansion due to better realisations and lower RM prices: EBITDA margin expanded 270bps, YoY, due to (1) Carry-over of price hikes (~12%), (2) Lower procurement prices and (3) lower other expenditure (Some cost saving measures & lower ad-spend). Milk realisation increased by Rs6.6/ltr to Rs 46.4/ltr in Q1FY21 from Rs39.8/ltr in Q1FY20.

- Correction in procurement prices post lockdown: Milk procurement prices have corrected 15% QoQ post lockdown due to lower demand of milk. Lower off-take by HoReCa and lower sales of value added products has impacted milk demand. 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 continue may recover in FY21, we expect other value added products to report revenue decline in FY21.

- Recovery in H2FY21 is essential: Consensus expects there is a shift of some consumption from H1FY21 to H2FY21 with postponement of marriages and other events. Also off-take by HoReCa will commence in H2FY21. We believe improvement in demand outlook is necessary to sustain single digit revenue growth for Heritage. However, recovery may be delayed due to localised lockdowns.

- Retain BUY: We expect Heritage to report revenue and PAT CAGRs of 8.2% and 38.3%, 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 Rs360 (Implied PE 15x FY22E).

Shares of Heritage Foods Limited was last trading in BSE at Rs.281.95 as compared to the previous close of Rs. 278.85. The total number of shares traded during the day was 34063 in over 3196 trades.

The stock hit an intraday high of Rs. 292.75 and intraday low of 270. The net turnover during the day was Rs. 9657623.

Source : Equity Bulls

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