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Strong investments in people and products

Heritage has continued its investments in people as well as products. After appointment of Mr. Viney Vatal as CEO of Heritage Nutrivet, the company has inducted Mr. Srideep Nair Kesavan as CEO of Heritage Foods. His vast experience in Coca Cola will be crucial in driving revenue growth of Heritage. The company also continued to expand its product portfolio and has launched tikka paneer, spiced butter and yoghurts in JV with Novandie in H1CY21.

We model the benefits of these investments to accrue over next 2-3 years. While we stay positive on the company’s business model, current valuation limits the upside potential. The dairy sector is at peak profitability margins and we believe revival in economy and HoReCa consumption may increase milk demand and may pressurise margins in coming quarters. We downgrade the stock to ADD, with a DCF-based target price of Rs550 (implied P/E 14x FY23E EPS; Earlier TP: Rs400).

* Q1FY22 results: Heritage reported revenue and PAT growth of 1.4% and 0.9%, respectively YoY. While the Gross margin expanded 40bps due to correction in input prices, EBITDA margin declined 80bps due to higher employee and other expenses (higher ad-spend and freight cost in our view). Reduction in interest cost due to repayment of debt arrested decline in PAT margin to just 40bps YoY.

* Segments performance: While dairy segment reported revenue growth of 2.9%, its feed business declined 30.1%. We believe milk procurement would have declined considering lockdown during the quarter. However, we believe revenue share of value added products would have increased due to favourable base and higher revenues of ice cream.

* Focus on new product launches: The company expanded its VAP portfolio by foraying into Ready-to-eat category with Heritage Tikka Paneer. It also launched spiced butter and cup curd in Mumbai market. It had also introduced cheese in consumer packs and yoghurts in JV with Novandie in H2FY21.

* Professional CEO: Mr Srideep Nair Kesavan is appointed as the new CEO of the company with effect from 28th July,21. He has previously served in the Coca-Cola for 14 years, in business leadership roles. His experience in dairy and beverages will be crucial to drive the growth of the company.

* Downgraded to ADD: 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 are positive on the business model but current valuations limit the upside potential, we downgrade the stock to ADD rating and value the stock as per DCF methodology at Rs550 (Implied P/E 14x FY23E).

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