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Strong growth in ice-cream business

Three pointers from Q4FY21: (1) The company reported revenue growth of 23.9% YoY, highest in past 16 quarters, (2) higher revenues of ice-cream along with favorable base of Q4FY20 resulted in higher revenue growth and (3) The company has accumulated large SMP inventory which will arrest decline in EBITDA margin in case of steep inflation in milk procurement prices.

We model Hatsun to report an earnings CAGR of 20.7% over FY21-FY23E with: (1) high single-digit growth in milk procurement, (2) commencement of three plants and (3) lower effective tax rate in FY22E. We remain structurally positive on the company due to its competitive advantages and strong growth opportunity in South India. Maintain ADD with a DCF-based revised target price of Rs860 implying target P/E of 52x FY23E (Earlier TP: Rs800).

* Q4FY21 performance:

Hatsun reported revenue growth of 23.9% YoY. We believe increase in ice cream sales, healthy growth in milk sales and favorable base of Q4FY20 led to strong revenue growth. The EBITDA margin expanded 270bps due to lower milk procurement prices and cost saving initiatives. With higher effective tax rate, the PAT grew 331.5% YoY.

* Increase in milk procurement prices in FY22E:

We note milk procurement prices increased QoQ in Q4FY21. There will be some reduction in milk procurement prices due to ongoing localized lockdowns. Anticipating likely increase in milk procurement prices, Hatsun has accumulated large SMP inventory at end of Mar’21. We believe low priced SMP inventory will help to arrest EBITDA margin decline in FY22E.

* 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%.

* Update on new production units:

(1) Solapur, Maharashtra plant commenced production during Jan’21, (2) Dharapuram, Tamil Nadu plant also commenced production in Jan’21. The company plans to invest in milk processing unit too which will commence production in June’21 and (3) Sangareddy district, Telangana plant will commence production of Ice cream in Sept’21. The capex guidance is Rs3.11bn.

* Maintain ADD:

We model Hatsun to report PAT CAGR of 20.7% over FY21-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 maintain ADD rating with a DCF-based revised target price of Rs860 (implied P/E 52x FY23E; Earlier TP: Rs800).

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