Q1FY24 Review: Heritage Foods: Well poised for margin recovery

3 Aug 2023 , 01:38 AM

Heritage Foods reported Q1FY24 results below analysts of IIFL Capital Services estimates, with demand impacted by unfavourable weather and margin impacted by a one-off inventory loss on fat products. Milk prices have softened in June and are likely to soften further with the flush season likely to begin from October onwards – a factor that would drive sharp margin expansion (from a subpar level). Analysts of IIFL Capital Services broadly maintain their estimates and reiterate BUY rating on the stock, with a target price of Rs300. 

Below estimates: 

Heritage Foods’ Q1FY24 sales grew 12.5% YoY and were 3% below analysts of IIFL Capital Services estimates, with liquid milk volumes declining by 1% and VAP products growing by 12.5%. Sales were impacted by unseasonal rains and lower average temperature YoY in key markets. At 4.4%, Ebitda margin was below their estimate of 6% — largely due to one time inventory loss of Rs105mn on fat products, adjusted for which, Ebitda margin would be 5.5%. Milk procurement prices have been flattish QoQ, although prices have softened in June across states. 

Milk procurement prices expected to soften further: 

Management expects milk procurement prices to soften further from hereon till Dec, contingent on the arrival of a timely flush season (expected from Oct). However, weather patterns have been erratic and there has been volatility in terms of flush arrival in recent years. The company is likely to retain a large part of the benefits of lower procurement pricing, which should aid Ebitda margin expansion. 

Broadly maintain analysts of IIFL Capital Services estimates: 

In the previous year, milk production was impacted by multiple factors – lumpy skin disease, inflation in cattle feed & cereal prices, unseasonal rains, etc.; just a normal milk production this year would result in a sharp margin expansion YoY for Heritage Foods. Analysts of IIFL Capital Services downgrade their FY24 EPS estimates by 3%, but broadly maintain their EPS estimates for FY25/26. They forecast Ebitda margin of 6.1% in FY24 (vs 5.5% ex one-off this quarter) and a steady improvement to 6.8%/7.2% in FY25/26, driven by higher growth in value added products. The stock trades at 15x FY25 EPS, and with margins well poised for a sharp recovery, they find the risk-reward favourable. They maintain BUY rating with a target price of Rs300.