Buy Heritage Foods Ltd For Target Rs. 290 - ICICI Securities
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Muted volumes; margin expands with correction in input prices
While Heritage reported YoY EBITDA margin expansion of 145bps, we note its EBITDA margin contracted sequentially. It indicates the impact of inflation in milk prices continued to impact Q1FY24 QoQ. However, we model milk prices to deflate in rest of FY24 with normal monsoon and commencement of flush season in Q3FY24. Improvement in profitability of cattle feed segment will also likely lead to better margins ahead. The company has continued to invest in expanding its competitive advantages with (1) distribution expansion of 20,000 outlets and (2) steady launches of 10 differentiated products. Factoring in weaker-than-expected Q1FY24, we cut FY24E earnings by 9.2% but maintain BUY rating with DCF-based revised TP of INR 290 (implied P/E of 13.5x FY25E; Earlier TP: INR235).
Q1FY24 results
Heritage reported revenue growth of 12.5% YoY. Milk procurement was up 9% YoY. Milk and Value added products revenues were up 9.8% and 13.5%, respectively YoY. With correction in input prices and price hikes, the gross and EBITDA margin expanded 166bps and 145bps, respectively YoY.
Muted volume growth
We note the aggressive price hikes (11% YoY) impacted the milk volumes and it reported 1% volume decline YoY. Average milk procurement price was up INR 3.78/Ltr whereas selling price was up INR 5.43/Ltr. Steep price hikes led to volume decline YoY. Revenue contribution of value-added products was 38.7% in Q1FY24 compared to 38% in Q1FY23.
Distribution expansion efforts and new launches
Heritage continued to expand its distribution reach via (1) addition of 20,000 retail outlets in general trade and (2) 1,000+ outlets to sell ice cream and value-added products. It also introduced almost 10 new products in Q1FY24
Valuation and risks
We model Heritage to report revenue CAGR of 15.7% over FY23-25E as we model carry over benefit of price hikes and revival in volume growth in H2FY24. We maintain BUY with DCF-based revised TP of INR 290 (implied P/E of 13.5x FY25E). Key risks are higher competitive pressures and raw material prices..
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