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Highest EBITDA margin in past 17 years

Three highlights from Q4FY21: (1) EBITDA margin expanded 350bps due to reduction in milk procurement prices. However, there is QoQ decline in EBITDA 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 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) 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- 4/Ltr in Q1FY22 is not sustainable and may benefit only in H1FY22. We model Heritage to report PAT CAGR of 8% over FY21-FY23. Maintain BUY with a target price of Rs400 (10x FY23E).

Q4FY21 results:

Heritage reported revenue decline of 5.1% but reported EBITDA and PAT growth of 74.2% and 208.6%, respectively. Gross and EBITDA margin expanded 540bps and 350bps, respectively due to lower milk procurement prices. Reduction in interest cost post sale of stake in Future Retail and lower effective tax rate resulted in PAT growth of 208.6%, YoY.

Milk prices are inching upwards:

With sequential recovery in economy, the milk procurement prices have started inching upwards. However, we note post covid wave-2 and localised lockdowns, the milk procurement prices have again contracted 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 procurement prices.

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 Rs3/Ltr. Heritage generates ~10% revenues from Tamil Nadu and the reduction in prices by state co-operative may have impact on its pricing power in Tamil Nadu.

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 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).

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