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We are enthused by EBITDA margin expansion posted by Hatsun in Q1FY24 YoY. Correction in milk procurement price has resulted in gross margin expansion of 110bps QoQ. We model the full benefits of lower input prices to be visible in Q2FY24. The sale of windmill assets is likely to be value accretive in our view as the RoCE on windmill operations was lower than cost of capital. We remain positive on Hatsun structurally due to competitive advantages such as brands, distribution and milk procurement. We also believe it is likely to benefit from favourable milk cycle for dairy companies. However, we need more safety on valuations and retain HOLD rating. We value the stock at target price of INR 1,000 (implied 50x FY25E; prior TP: INR 880) as per DCF methodology

Q1FY24 results

Hatsun reported revenue, EBITDA and PAT growth of 6.8%, 33.5% and 54.3% respectively, YoY. The key reasons for muted revenues were (1) flat milk procurement, (2) weak sales of value-added products such as butter and ghee and (3) strong base of Q1FY23. EBITDA margin expanded 222bps YoY due to reduction in milk procurement prices and lower ad-spend (our view).

Model EBITDA margin recovery in FY24

We model EBITDA margin to recover in FY24 to 10.9% (FY23: 9.7%) due to (1) ~40% decline in global SMP prices, (2) stability in cattle feed prices and (3) normal monsoon. We also model EBITDA margin to benefit due to better revenue mix (higher revenues of ice cream) and operating leverage.

Debt repayment post sale of windmill assets

The company has decided to sell its windmill assets for consideration of INR1.35bn on a slump sale basis. We expect the proceeds to be used for debt repayment. While power cost may inch up in short term, there will be savings in interest cost and depreciation

Retain HOLD:

We model Hatsun to report EBITDA CAGR of 24.1% over FY23-FY25E. We revise DCF-based TP to INR 1,000 (implied P/E 50x FY25E). Maintain HOLD

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