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Commencement of three plants and lower tax rate to boost return ratios in FY22 and beyond

Three pointers from Q3FY21: (1) dairy business reported 3.4% revenue growth with almost flat volumes, (2) lower milk procurement prices led to 450bps higher gross margin, and (3) Hatsun managed to stabilize volumes despite multiple challenges such as lockdown, extreme weather conditions and volatile procurement prices. We model Hatsun to report an earnings CAGR of 49.8% over FY20-FY23E with: (1) high single-digit growth in milk procurement, (2) lower milk procurement prices, (3) commencement of three plants in FY21E and (4) lower effective tax rate in FY22E. We remain structurally positive on the company. Upgrade to ADD (from HOLD) with a DCF-based revised target price of Rs800 implying P/E of 46x FY23E (Earlier TP: Rs623).

* Dairy business reports low single-digit growth: Hatsun reported 4.2% revenue growth in Q3FY21. Milk and milk product revenues grew 3.4% while other businesses (cattle feed, Oyalo pizza etc.) grew 11.2%. Considering the carryover effect of price hikes in FY20, we believe volumes were flattish during the quarter.

* Expect EBITDA margin to remain elevated in H1CY21E: Selective price hikes, lower input prices and some cost-saving measures will lead to higher EBITDA margins in H1CY21E. We model Hatsun’s EBITDA margin at 14.3% for FY21E vis-àvis 10.4% in FY20.

* Update on new production units: (1) Solapur, Maharashtra plant is expected to commence commercial production during Jan’21, (2) Dharapuram, Tamil Nadu plant will commence commercial production of paneer in Jan’21. The company plans to invest in milk processing unit too which will commence production in Mar’21, and (3) Sangareddy district, Telangana plant will commence production of Ice cream in Mar’21. The capex guidance has increased to Rs3.11bn from Rs2.45bn.

* FY22 earnings drivers: (1) Ice cream business is expected to return to normalcy and report strong growth in FY22E on favorable base of FY21, (2) the three production units are likely to report revenues of more than Rs4bn in our view, and (3) the migration to new tax regime will result in reduction of effective tax rate to 25.5%.

* Upgrade to ADD: We model Hatsun to report PAT CAGR of 49.8% over FY20- FY23E with RoE higher than the cost of capital. We remain positive on the company’s business model due to the established moats and growth opportunities. We upgrade rating to ADD (from Hold) with a DCF-based revised target price of Rs800 (implied P/E 46x FY22E; Earlier TP: Rs623).

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