Q2FY24 Review: Heritage Foods: Increased indications of a normal flush

23 Oct 2023 , 11:42 AM

Heritage Foods reported a sub-par Q2FY24, largely impacted by the sale of bulk fat during the quarter. Adjusted for this, we estimate that the sales grew 10% (broadly in-line) and Ebitda margin came in at ~6%. With the issue of high bulk fat inventory largely behind and indications of a normal flush season, Ebitda margin is poised for a sharp recovery in the medium term. Analysts of IIFL Capital Services downgrade their EPS estimates by 12%/5%/4% for FY24/25/26, to factor in the Q2 miss and reiterate BUY with a TP of Rs300. 

Below estimates: 

While there was a large miss on reported Ebitda vs analysts of IIFL Capital Services0’stimate, Q2FY24 performance was impacted by one-off sale of bulk fat. Adjusted for this, the overall sales growth at ~10% was broadly in-line, while Ebitda was ~10% below analysts of IIFL Capital Services estimate. At 1%, liquid milk volume growth continued to be impacted by inflationary pressures, while growth in value-added products remained healthy at 18%. 

Expectations of a normal flush: 

Average milk procurement prices in Q2FY24 at Rs43.2/litre have corrected 3% QoQ, with a steady MoM decline during the quarter. The current trends on milk procurement indicate a normal flush season this year; management sounded confident of an improved margin trajectory in the near term. While the tailwinds in value-added products will continue, moderation in inflation and distribution expansion will drive a recovery in volume growth of liquid milk. 

EPS cut of 4-12%:

Analysts of IIFL Capital Services downgrade their EPS estimates for FY24/25/26 by 12.5%/5%/4% to factor in the Q2 miss. In H1, Ebitda margin has been impacted by a high bulk fat inventory and downward price revisions — an issue largely behind now. With increased signs of a normal flush, analysts of IIFL Capital Services forecast steady improvement in Ebitda margin trajectory to ~6.5% in H2FY24 and to ~6.5%/7% in FY25/26. Trading at 15x FY25 EPS, valuation is attractive and with margins poised for a sharp recovery in the near term, analysts of IIFL Capital Services find the risk-reward favourable. Analysts of IIFL Capital Services maintain BUY rating with a price target of Rs300.