Q4FY23 Review: Heritage Foods: Early indications of a normal flush season

30 May 2023 , 10:50 AM

Heritage Foods reported a broadly in-line sales and a betterthan-expected Ebitda margin at 5.2%, driven by higher gross margin and lower other expenses. While the major flush season in FY23 was impacted by multiple factors, resulting in a weak margin performance, there are early signs of a normal flush season this year. This would facilitate a sharp margin recovery in FY24.

Slight beat at Ebitda level: 

Heritage Foods reported a better-thanexpected margin performance in Q4FY23. Net sales were up 17.5% (inline) driven by a 24% growth in VAP portfolio and pricing actions in liquid milk. Ebitda grew 32% with margin expanding by 55bps YoY (100bps QoQ) to 5.2%. Ebitda was 8% above IIFL Capital Services estimates, driven by higher-than-expected gross margin and lower other expenses.

Reiterate Ebitda margin target of 7-8% in steady state: 

Mini flush season pertaining to cow milk in Maharashtra and Tamil Nadu has started on a normal note, resulting in moderation of procurement prices in these states. With expectations of normal flush season in Oct/Nov, milk procurement prices would drop further in H2FY24. Further, the company has been working on several cost-efficiency initiatives pertaining to power, fuel and people. Management reiterated its Ebitda margin guidance of 7-8% in a steady state.

EPS upgrade of 4% in FY25: 

Major flush season in FY23 was impacted by multiple factors such as lumpy skin disease, unseasonal rainfall, inflation in cattle feed, cereal prices, etc. With early signs of a normal flush season in FY24, analysts of IIFL Capital Services build in a steady Ebitda margin recovery from 4.3% in FY23 to 6.3% in FY24. The stock is trading at 16x FY24 EPS; analysts of IIFL Capital Services find the risk-reward favourable at this level. They value the stock at 15x FY25 EPS to yield a target price of Rs250 and maintain BUY rating on the stock.