RoCE is expected to jump 640bps in FY21e; TP raised to Rs 456; ‘Buy’ rating maintained
Heritage Foods (HFL) has doubled from its March low (down 58% from its January-2018-high). FY20 was a challenging year owing to a harsh season, which dragged down core Ebitda by 32% y-o-y. That said, we remain convinced about HFL’s prospects following: (i) Margin revival on the back of benign milk prices and pricing power to drive up Ebitda 30% in FY21 (up 25% y-o-y in Q1FY21); (ii) robust B2C milk portfolio (65% of sales) relatively insulated from Covid-19 fallout; (iii) focus on technology-enabled integrated milk procurement and a consistent scale-up (procurement up 34% in last three years).
All in all, we expect RoCE to jump 640bps in FY21 and 860bps over FY20–22 to 23%. Hence, we are revising up TP by ~15% to Rs 456 as we raise the core business’s PE by 15% to 18x FY22e (15.5x earlier). We however, are raising the discount on its stake in Future Retail from 20% to 30% (in the wake of RIL’s buyout). Maintain Buy.
Structural: Procurement scale-up on track—HFL has increased milk chilling capacity by 4.95 LLPD over the past three years. As a result, its overall handling has gone up by 34% (from 10.3 LLPD to 13.77 LLPD) over the period. Furthermore, HFL maintains its mission of doubling capacity to 2.8mn LLPD over the next four–five years.
Strong margin and RoCE improvement: Procurement was hit in FY20—down 0.3% y-o-y. However, it improved 15% q-o-q in Q1FY21 as Covid-19 catalysed a spurt in milk and powder supply. Hence, procurement prices, rising 10.8% in FY20, cooled off 9% q-o-q in Q1FY21. And they continue to fall in south. As a result, we expect Ebitda to grow 30% in FY21 (25% y-o-y in Q1FY21). We expect RoCE to expand 640bps in FY21.
Outlook: Positive—HFL is well placed, underpinned by B2C nature of its business (~90%), strong return ratios. In light of its improving procurement, we expect strong 26% Ebitda CAGR over FY20–22e. Maintain Buy with a revised SoTP-based TP of Rs 456 (18x FY22E core EPS plus 30% discount to market value of its Future Retail stake).