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Heritage Foods 4QFY2014 performance highlights and results update

July 2, 2014, Wednesday, 09:23 GMT | 04:23 EST | 12:53 IST | 15:23 SGT
Contributed by Angel Broking

Heritage Foods Ltd (HFL) reported a disappointing operational performance for 4QFY2014, dragged by the dairy segment. Its top-line surged by 11.0% yoy to Rs.438cr, in line with our expectation. However, the EBITDA plunged by 32.3% yoy to Rs.18cr, which is way lower than our estimate of Rs.25cr. The EBITDA margin dipped by 267bp yoy to 4.2%, which is attributable mainly to a rise of 458bp yoy in the raw material cost as a percentage of sales. The interest cost increased by 7.0% yoy. The bottom-line for the quarter dipped by 53.4% yoy to Rs.7cr against our estimate of Rs.13cr.

Geographical expansion to aid dairy growth: The dairy segment, which contributes ~74% to the total revenue, has ~92.5% of its revenue sourced from Andhra Pradesh, Tamil Nadu and Karnataka. Hence, in order to increase its contribution from other geographies and further gain from the boom in the dairy industry; HFL has recently acquired a dairy plant in Haryana to source milk supply for Delhi (operational by July’14) from which it drives mere 0.4% of its revenue. Also, in efforts to have strong foothold in Mumbai, HFL has tie-ups with local dairies like “Prabhat dairy” for co-packing of milk.

Outlook and Valuation: Considering the growth opportunities in the dairy industry, we expect the top-line and EBITDA of the company to grow at a CAGR of 11.8% and 18.8% respectively over FY2014-16E while PAT is expected to grow at a CAGR of 27.8% (due to low base) over the same period. Currently the stock is trading at a PE of 9.5x for FY2016E earnings. We maintain our Buy recommendation on the company with a target price of Rs.350 based on target PE of 11x for FY2016E, considering return ratios at a stable level, ROE and ROIC of above 20%.

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