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Recommendations India

Heritage Foods Initiating Coverage

April 2, 2014, Wednesday, 18:00 GMT | 13:00 EST | 21:30 IST | 00:00 SGT
Contributed by Angel Broking

Heritage Foods (India) Ltd. (HFL), based in Hyderabad, is among the leading corporates in the dairy industry. HFL has ~77% of its revenue coming in from the dairy business. The dairy industry, as per industry reports, is expected to grow at a CAGR of 13-15% till FY2020. The expected robust growth would be on the back of the urbanization trend, leading to changing consumption patterns backed by increasing disposable incomes. Being one of the leading players in south India with established brands, we expect the boom in the dairy industry to drive growth for HFL. However, we believe the company’s retail segment, which has been incurring losses since inception, will continue to be a drag on its profitability. A strong growth in the dairy industry, increasing contribution of value added dairy products (VADP), and widening geographical reach for dairy products are strong growth drivers for HFL going forward. We initiate coverage on HFL and recommend Buy with a target price of Rs.275.

Investment Rationale

Robust growth in dairy industry to be key driver: India, the largest producer and consumer of milk, considers milk as an inevitable part of the diet. Moreover increasing health consciousness and rising urbanization backed by rising disposable incomes have led to growth opportunities in the dairy industry. HFL, which is a leading brand in the dairy industry, with established brands and strong foothold in south India, is expected to benefit from this boom. Also, changing consumption pattern has led to increasing demand of VADP, which have lucrative margins. HFL has been gradually increasing its share in VADP, which is expected to boost its EBIT margins eventually.

Bottom-line to grow despite Retail losses: The company’s retail segment, which constitutes 20% of HFL’s total revenue, has been incurring losses of ~5% at the EBIT level, thereby dragging the overall performance of the company. We expect the segment to continue to post losses going forward. However, we expect the bottom-line to post a CAGR of 14.3% over FY2013-16E on the back of robust dairy industry performance.

Outlook and Valuation: Considering the growth opportunities in the dairy industry, we expect the company’s top-line and EBITDA to grow at a CAGR of 10.7% and 10.0% respectively over FY2013-16E. We expect PAT CAGR growth to be at 14.3%. Initiating the coverage on HFL, we value the company on SOTP basis. We have assigned zero value to the retail segment and a PE of 6x FY2016E earnings to the dairy business which is trading at 4.4x currently; and recommend Buy on the company with a target price of Rs.275.