Heritage Foods - Milk procurement prices likely to remain low - ICICI Securities

Highlights from Q2FY21 concall: (1) management expects milk prices to remain stable due to commencement of flush season and good monsoon; (2) cashflow generated in H1FY21 will be utilised towards repayment of high-cost debt; (3) the costs are expected to revert to pre-covid levels once demand recovers fully; and (4) yogurt plant in Mumbai is almost ready and Heritage is expected to launch the product by Dec'20. We model Heritage to report PAT CAGR of 63% over FY20- FY22E with improvement in return ratios. Maintain BUY with a TP of Rs400.

- Decline in dairy and liquid milk sales: Unprecedented rains in the core markets (Andhra Pradesh and Telangana) led to supply chain disruption in Sept'20. This along with subdued demand from HoReCa channel led to higher decline in revenues in Q2FY21. Further, sales in Oct'20 were also affected due to rains leading to disruption for 7-8 days. However, the management expects consumer off-take in Q3FY21 to be better as demand from HoReCa channel is likely to recover.

- Decline in milk procurement: Heritage Foods has continued to support farmers by procuring whatever milk they were able to supply and has converted excess milk procured into SMP and butter for future consumption leading to a significant increase in inventory of SMP (3,900 MT in Sep'20 vs 700 MT in Sep'19). However, there has been a decline in overall milk procurement due to reduced operations in Punjab and Rajasthan (impact of ~40,000 litres per day).

- Milk procurement price to remain stable: Management expects milk procurement prices to remain stable with the commencement of flush season, normal monsoon and availability of green fodder. Heritage has also not cut milk price as the unorganised sector is still struggling and consumers still prefer branded products.

- Margins expected to normalise once demand recovers: Management said the current levels of margins are not sustainable and will normalise once demand recovers fully and milk procurement prices normalise. Further, they also said there have not been any structural savings and costs may revert to previous levels.

- Strong cashflow to be utilised in reducing high-cost debt and capex: Management plans to retire high-cost debt by utilising the strong cashflow of H1FY21. Project activities had reduced during the first half as capacity utilisation declined due to lower demand. However, capex will be required for some projects, which will be commissioned later. Target IRR for any new product / plant is >20%.

- Update on yogurt plant: The plant at Navi Mumbai is in its final stage of completion as international technicians were able to travel to India. Management expects to launch yogurt in Dec'20.

- Update on cheese business: Management is considering various options available to launch cheese, as it believes it is necessary to sell a basket of dairy products for its e-commerce channels. It is also considering leaner options for production such as a co-packaging facility as a lot of idle capacity is available in the market (Heritage may even consider its own facility in future). Inclusion of cheese in the portfolio is not going to increase working capital requirements as per management.

- Sales of shares in Future Retail: Heritage sold 0.5mn shares of Future Retail at Rs100.5/share in Q2FY21.

- Retain BUY: We model Heritage to report revenue and PAT CAGRs of 4.8% and 63% respectively, over FY20-FY22E. 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.306.9 as compared to the previous close of Rs. 306.45. The total number of shares traded during the day was 7695 in over 1255 trades.

The stock hit an intraday high of Rs. 310.7 and intraday low of 298.65. The net turnover during the day was Rs. 2336573.

Source : Equity Bulls

Keywords