Heritage Foods
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Equity Research May 19, 2021 INDIA BSE Sensex: 49903 Heritage Foods BUY ICICI Securities Limited Maintained is the author and distributor of this report Highest EBITDA margin in past 17 years Rs345 Three highlights from Q4FY21: (1) EBITDA margin expanded 350bps due to Q4FY21 result review and reduction in milk procurement prices. However, there is QoQ decline in EBITDA earnings revision margin with sequential increase in milk procurement prices, (2) Revenue decline of 5.1% was largely attributable to consumers not returning to urban regions and Dairy lower HoReCa consumption. Re-opening up of economy, vaccination drive and price hikes (after a gap of 6 quarters) will lead to higher revenues in FY22, (3) Target price: Rs400 Company has sold the stake in Future Retail which will reduce the debt and interest cost in FY22. We believe the reduction in milk procurement prices by Rs3- Earnings revision 4/Ltr in Q1FY22 is not sustainable and may benefit only in H1FY22. We model (%) FY22E FY23E Sales ↓ 1.9 ↓ 1.6 Heritage to report PAT CAGR of 8% over FY21-FY23. Maintain BUY with a target EBITDA ↓ 6.1 ↓ 8.5 price of Rs400 (10x FY23E). ↓ 7.8 ↓ 4.1 EPS Q4FY21 results: Heritage reported revenue decline of 5.1% but reported EBITDA Shareholding pattern and PAT growth of 74.2% and 208.6%, respectively. Gross and EBITDA margin Sep Dec Mar expanded 540bps and 350bps, respectively due to lower milk procurement prices. ‘20 ‘20 ‘21 Promoters 39.9 39.9 39.9 Reduction in interest cost post sale of stake in Future Retail and lower effective tax Institutional rate resulted in PAT growth of 208.6%, YoY. investors 19.1 20.0 17.3 MFs and other 14.9 15.4 13.5 Milk prices are inching upwards: With sequential recovery in economy, the milk Banks / FI’s 0.0 0.0 0.0 procurement prices have started inching upwards. However, we note post covid FIIs 4.2 4.6 3.8 Others 41.0 40.1 42.8 wave-2 and localised lockdowns, the milk procurement prices have again contracted Source: BSE by Rs3-4/Litre and is likely to benefit dairy companies in H1FY22. Structural recovery in economy post vaccination may result in steady increase in milk Price chart procurement prices. 800 600 Subsidy in Tamil Nadu and likely impact on Heritage: Tamil Nadu state government has lowered the price of milk supplied by state co-operative Aavin by 400 (Rs) Rs3/Ltr. Heritage generates ~10% revenues from Tamil Nadu and the reduction in 200 prices by state co-operative may have impact on its pricing power in Tamil Nadu. 0 Possibility of price hikes after 18 months: The price led revenue growth is likely to be higher in FY22. We model dairy companies including Heritage to raise prices in Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21 H2FY22. Last price hike by Heritage was in Q4FY20. We also expect there will be higher revenues from HoReCa sector in FY22, YoY. Retain BUY: We model Heritage to report revenue and PAT CAGRs of 15% and 8%, respectively, over FY21-FY23E. Core return ratios are expected to strong ~25% over FY21-23E. We maintain BUY and have valued the stock as per DCF methodology at Rs400 (Implied P/E 10x FY23E). Market Cap Rs16bn/US$219mn Year to March FY20 FY21P FY22E FY23E Reuters/Bloomberg HEFI.BO / HTFL IN Revenue (Rs mn) 27,259 24,731 28,564 32,831 Shares Outstanding (mn) 46.4 Adj. Net Profit (Rs mn) 582 1,598 1,568 1,856 Research Analysts: 52-week Range (Rs) 376/230 Dil. Rec. EPS (Rs) 12.5 34.4 33.8 40.0 Aniruddha Joshi Free Float (%) 60.0 % Chg YoY (31.8) 174.4 (1.9) 18.4 [email protected] FII (%) 3.8 P/E (x) 27.5 10.0 10.2 8.6 +91 22 6637 7249 Daily Volume (US$'000) 959 CEPS (Rs) 23.4 44.4 45.7 53.4 Manoj Menon [email protected] Absolute Return 3m (%) 10.6 EV/EBITDA (x) 12.6 6.0 6.3 5.7 +91 22 6637 7209 Absolute Return 12m (%) 48.3 Dividend Yield (%) 0.7 1.4 1.4 1.5 Karan Bhuwania Sensex Return 3m (%) (1.8) RoCE (%) 8.5 31.5 27.9 26.3 [email protected] +91 22 6637 7351 Sensex Return 12m (%) 67.1 RoE (%) 8.9 29.0 22.8 22.2 Please refer to important disclosures at the end of this report Heritage Foods, May 19, 2021 ICICI Securities Table 1: Q4FY21 financial performance (Rs mn, year ending March 31) Y/e March Q4FY21 Q4FY20 YoY gr. Q3FY21 QoQ gr. Revenue 6,194 6,526 (5.1) 6,049 2.4 Expenditure Raw materials 4,756 5,363 (11.3) 4,340 9.6 % of revenue 76.8 82.2 71.7 Employee cost 445 362 22.8 468 (5.0) % of revenue 7.2 5.6 7.7 Other expenditure 515 526 (2.2) 463 11.2 % of revenue 8.3 8.1 7.7 Total expenditure 5,715 6,252 (8.6) 5,271 8.4 EBITDA 478 275 74.2 778 (38.5) EBITDA margin 7.7 4.2 12.9 Other income 35 19 82.4 11 219.8 PBDIT 514 294 74.7 789 (34.9) Depreciation 120 118 1.5 113 5.7 PBIT 394 176 123.7 676 (41.7) Interest 30 65 (52.9) 51 (40.3) PBT 364 112 225.9 625 (41.8) Prov for tax 86 30 188.0 155 (45.0) % of PBT 23.5 26.6 24.9 Adjusted PAT 278 82 239.6 470 (40.8) Extra ordinary items (31) (3,351) (99.1) (274) (88.9) Reported PAT 248 (3,270) (107.6) 195 26.9 Source: Company data, I-Sec research Key performance highlights Chart 1: Revenues and revenue growth Chart 2: EBIT margin of dairy segment Dairy revenues Growth (%, RHS) 14.0 8,000 35.0 12.0 30.0 7,000 10.0 25.0 6,000 20.0 8.0 5,000 15.0 (%) 4,000 10.0 6.0 5.0 3,000 4.0 - 2,000 (5.0) 2.0 1,000 (10.0) - (15.0) - Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Mar 20 Mar 21 Mar Sep 14 Sep 15 Sep Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Mar 20 Mar 21 Mar Sep 14 Sep 15 Sep Sept 16 Sept 17 Sept 18 Sept 19 Sept 20 Sept Sept 16 Sept 17 Sept 18 Sept 19 Sept 20 Sept Source: Company data, I-Sec research Source: Company data, I-Sec research 2 Heritage Foods, May 19, 2021 ICICI Securities Chart 3: Milk prices - pan-India Chart 4: Milk prices - South India Pan India South zone 49.0 48.0 47.0 46.0 44.0 45.0 42.0 43.0 (Rs/ltr) 41.0 (Rs/ltr) 40.0 38.0 39.0 36.0 37.0 34.0 35.0 Jul-18 Jul-19 Jul-20 Jul-18 Jul-19 Jul-20 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Jan-19 Jan-20 Jan-21 Jan-19 Jan-20 Jan-21 Source: Department of consumer prices, I-Sec research Chart 5: Skimmed milk powder (SMP) prices 3,500 SMP prices (US$/MT) 3,300 3,100 2,900 2,700 2,500 2,300 2,100 1,900 1,700 1,500 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Jun-18 Jun-19 Jun-20 Feb-19 Feb-20 Feb-21 Aug-18 Dec-18 Aug-19 Dec-19 Aug-20 Dec-20 Source: Industry, I-Sec research 3 Heritage Foods, May 19, 2021 ICICI Securities Valuation and risks We model Heritage to report revenue and PAT CAGRs of 15.2% and 7.8%, respectively, over FY21-FY23E and adjusted RoE to change from 29% in FY21 to 22.2% in FY23E. We value the stock at a target price of Rs400 as per DCF methodology. At the DCF price, the implied P/E works out to 10x on FY23E EPS. Maintain BUY. Table 2: DCF valuation Particulars (Rs mn) Amt (Rs) Cost of Equity (%) 12.9 Terminal growth rate (%) 4.0 Discounted interim cash flows (Rsmn) 9,217 Discounted terminal value (Rsmn) 9,342 Total equity value (Rsmn) 18,559 Value per share (Rs) 400 Source: Company data, I-Sec research Mean P/E and standard valuation The stock has traded at an average P/E of 23x over the past three years. The stock is trading well below its Mean PE- 1 SD now. Chart 6: Mean P/E and standard deviation Heritage P/E -1 Std Dev. Mean +1 Std Dev. 60 50 40 (x) 30 20 10 0 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Source: Company data, I-Sec research Risks Sharp increase in input prices Any major increase in commodity prices will result in downside to our estimates. 4 Heritage Foods, May 19, 2021 ICICI Securities Financial summary Table 3: Profit & loss statement Table 6: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY20 FY21P FY22E FY23E FY20 FY21P FY22E FY23E Net Sales 27,259 24,731 28,564 32,831 Operating Cashflow 911 1,924 2,119 2,478 Operating Expenses 25,966 22,020 25,994 29,959 Working Capital Changes 25 (729) 761 102 EBITDA 1,293 2,712 2,571 2,873 Capital Commitments (1,084) (873) (900) (1,000) % margins 4.7 11.0 9.0 8.7 Free Cashflow (148) 322 1,979 1,581 Depreciation & Amortisation 501 462 551 623 Cashflow from Investing Gross Interest 226 192 37 22 Activities 91 1,637 (1,550) (1,450) Other Income 89 80 126 266 Issue of Share Capital - - - - Recurring PBT 654 2,138 2,109 2,494 Inc (Dec) in Borrowings 148 (2,207) (300) - Less: Taxes 153 535 532 629 Dividend paid (112) (99) (232) (244) Less: Minority Interest (82) 6 10 10 Change in Deferred Tax Net Income (Reported) 582 1,598 1,568 1,856 Liability - - - - Extraordinaries (Net) (3,897) (119) - - Chg.