Q3FY24 Review: Heritage Foods: Steady margin recovery amid a normal flush

2 Feb 2024 , 11:59 AM

Heritage Foods posted a reasonable Q3FY24 performance, albeit below analysts of IIFL Capital Services estimates due to higher employee and other expenses. With a normal flush season playing out during the quarter, Ebitda margin has steadily improved from 4.4% in Q1FY24 to ~5.8% in Q3FY24 (adjusted for bulk fat sales). However, analysts of IIFL Capital Services believe that the low hanging fruits on margin improvement may have been largely plucked and growth from here on would be driven more by organic efforts of the company. Maintain BUY 

Below estimates, but steady margin recovery: 

Heritage Foods posted a good Q3FY24 performance, albeit below analysts of IIFL Capital Services estimates due to higher employee costs and other expenses. Sales grew 19.7% (8% above their estimate), propelled by bulk fat sales of ~Rs520mn during the quarter (adjusted for which sales growth would be 13%). Ebitda margin expanded 138bps to 5.5% (analysts of IIFL Capital Services estimate Ebitda margin at 5.8% adj for bulk fat sales). 

A normal flush this year: 

Milk availability across the industry improved with a normal flush season aiding a 14% increase in the company’s daily milk procurement during the quarter. This also resulted in higher bulk fat accumulation which was liquidated at spot prices in Q3. Value added products grew 23% YoY contributing 26% to overall sales with a broader consumer base, higher consumer retention and frequency of purchase. 

Broadly maintain analysts of IIFL Capital Services estimates: 

Analysts of IIFL Capital Services downgrade their FY24 EPS estimate by 6% to factor in higher employee costs and other expenses, but broadly maintain their FY25/26 EPS estimate. With a normal flush season ensuing, avg milk procurement price has corrected 3% vs. Q1FY24. Consequently, Ebitda margin has improved from 4.4% in Q1FY24 to ~5.8% in Q3. However, analysts of IIFL Capital Services believe that the low hanging fruits related to margin recovery may have been largely picked and growth from here on would be driven by expansion into new markets, steady increase in value added products and cost control.