Heritage Foods Ltd - Research Report

 
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Private Client Research

Rating

Buy

Sector

Consumer Food

Company

Heritage Foods Ltd

Reco Price
Rs. 344
Price Target (12 Months)
Rs. 700
Upside
103.49%

Date

March 04, 2015
Sensex
29380.73
CNX Nifty
8922.65

Exchange

Code

NSE
HERITGFOOD
BSE
519552

Turn around in retail business can be big trigger for stock.

Diversified Business:
Heritage Foods, based in Hyderabad, is a leading corporate in the food and retail business. The company operates through four divisions- A) Dairy B) Retail C) Agri and D) Bakery. During FY2013, the company commissioned 21 units (including bulk coolers, chilling units and franchise units) in the dairy segment to increase milk procurement, which has resulted in the current capacity standing at 72,000 LPD. Heritage Foods being in the highest milk producing state (AP), has 55% of its milk consumption from AP. Hence company has strong diversified product portfolio across the regions.

Increment in margins:
Of the total milk supply jointly by the organized and the unorganized sector, about 45% is consumed in fluid form, while the rest (55%) is streamed towards production of value added dairy products (VADP) like yogurt, butter, milk powder etc. Besides, with rising urbanization, introduction of pro-biotic and other fortified products, growth in the VADP industry is expected to be at 20-25%. Also, the margins in the liquid milk business are at 5-6% while in VADP segment they elevate to 15-16%.Both these segments enjoy a negative working capital cycle and end up with substantial free cash. Heritage Foods Ltd (HFL) is gradually increasing its contribution from VADP from 15.3% of total dairy sales in FY2013 to a targeted 20% in FY2015, sales from VADP alone would 15%-16% would be approximately Rs 500 crores in 3 years. Increasing contribution is expected to lead to expansion in the overall margins of the company, gradually.

Capacity expansion to lead topline growth:
Heritage Foods has two major drivers for top line growth‐ Dairy and Retail and the company has been constantly investing money to enhance the capacity in both these lines of business. To keep the growth momentum going, company is in the process of investing approx Rs 50‐52 crores over next 2 years. The capital expenditure should help Dairy division and retail division to grow substantially by FY16. This is expected to boost top line growth in next three years.

Turnaround in Retail business will provide trigger for Re ‐Rating:
Heritage Fresh, the Retail Division of the company has been in bad shape for last 5 years. Loss in the Retail division has affected the profit of the Dairy division. The scenario is expected to change with Retail Division all set to become profitable at EBITDA level from FY16E on the back of economy of scale and improvement in same store sales. Store level EBIDTA is already positive at 6.5% margins and as scales up from 300000 sqft in FY 2017, The Company will break even on the PBT level. A potential demerger could unlock immense value for shareholders.

Established Brand:
HFL, which is an established brand with a strong foothold in south India, has 77% of its revenue streamed in from its dairy division. It receives around 92.5% of its revenue mainly from three states- Andhra Pradesh (AP), Tamil Nadu and Karnataka. HFL has 4.4% of its revenue sourced from Maharashtra and 0.7% from Delhi. In order to increase its contribution from these geographies and further gain from the boom in the dairy industry; HFL has recently acquired a dairy plant in Haryana in order to source milk supply for Delhi. In Mumbai, the company has tie-ups with local dairies like “Prabhat dairy” for co-packing of milk.

Strong Proxy for Indian dairy story:
India is the largest producer of milk with total production of 132 Mn Tonnes in CY13. National Dairy Development Board (NDDB) projects Indian milk demand to go to 200 Mn Tonnes by 2021‐2022 which means milk demand is expected to grow at 4.56% CAGR over next 9 years or 6 mn Tonnes incremental Milk demand every year. At Av Milk price of Rs 35/ kg, this offers incremental business opportunity of Rs 266bn every year over next 9 years. Hence company like HFL is bound to gain from this growing demand.

Stock Data

CMP (Rs)
334.9
Face value (Rs)
10
52 Week Range (Rs)
442.20 - 195.10
Market cap (Rs Crores)
738.89
Price To Book Value (x)
4.11
P/E Ratio (x)
17.15
EV/EBIDTA (x)
8.63

One Year indexed Stock Performance

Heritage Foods LtdSensex
Heritage Foods Ltd
Performance (%)
1m
6m
12m
Absolute
-8.61
19.44
63.61
Sensex
1.72
8.47
38.52

Shareholders

(in %)
31-Dec
Promoter
39.78
FII
2.25
DII
3.13
Others
54.84
Total
100

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Industry

India is the world’s largest consumer of dairy products, consuming almost 100% of its milk produce (17% of world’s production). For the last few years, production growth of milk has been 4% (CAGR) while consumption growth has been 11%. Going forward, according to industry reports, the current market size of US$10bn of the Indian dairy industry is expected to grow at a CAGR of 13-15% till FY2020. Robust growth is expected on the back of various reasons- A) Milk considered as an inevitable part of Indian diet B) Rising health consciousness C) Heightened consumer interest in protein diets; all coupled with D) Rising disposable incomes.

According to the Indian Dairy Association (IDA), the organised sector (cooperatives, producer companies and private players) handles 30% of the marketable milk surplus. However in interest of both producers and consumers, it is necessary to increase the share of the organised sector. Hence, the National Dairy Plan (NDP) has set a target to increase this share to 65% by 2030. Consequently, efforts towards increasing the organised sector’s share are expected to benefit HFL and drive its future growth.

Profile

Heritage Foods, based in Hyderabad, is a leading corporate in the food and retail business. The company operates through four divisions- A) Dairy B) Retail C) Agri and D) Bakery. During FY2013, the company commissioned 21 units (including bulk coolers, chilling units and franchise units) in the dairy segment to increase milk procurement, which has resulted in the current capacity standing at 72,000 LPD. Heritage Foods being in the highest milk producing state (AP), has 55% of its milk consumption from AP while 92% from AP, Tamil nadu and Karnataka.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-12
Mar-13
Mar-14
Mar-15E
Mar-16E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBIDTA
  • EBIDTA Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Profit Before Tax
  • Provision for Tax
  • Tax Rate (%)
  • Profit After Tax
  • Adjusted EPS
  • 1393.41
  • -
  • 1340.17
  • 53.24
  • 3.82
  • 3.47
  • 56.71
  • 22.10
  • 34.61
  • 21.19
  • 13.43
  • -
  • 13.43
  • 4.24
  • 31.59
  • 9.19
  • 3.99
  • 1601.81
  • 14.96
  • 1498.02
  • 103.79
  • 6.48
  • 4.20
  • 107.99
  • 19.42
  • 88.58
  • 22.02
  • 66.56
  • -2.91
  • 63.64
  • 13.69
  • 21.51
  • 49.95
  • 21.53
  • 1722.04
  • 7.51
  • 1625.14
  • 96.90
  • 5.63
  • 5.12
  • 102.02
  • 15.31
  • 86.71
  • 25.00
  • 61.71
  • -0.50
  • 61.21
  • 15.90
  • 25.98
  • 45.31
  • 19.53
  • 1950.00
  • 13.24
  • 1840.00
  • 110.00
  • 5.64
  • 5.25
  • 115.25
  • 13.50
  • 101.75
  • 27.50
  • 74.25
  • -
  • 74.25
  • 21.50
  • 28.96
  • 52.75
  • 22.73
  • 2250.00
  • 15.38
  • 2095.00
  • 155.00
  • 6.89
  • 5.25
  • 160.25
  • 13.50
  • 146.75
  • 29.50
  • 117.25
  • -
  • 117.25
  • 35.50
  • 30.28
  • 81.75
  • 35.23
Source: Stockaxis Research, Company Data

Valuation

With the revival in retail business expected the company is poised for the strong growth in next three years. Retail Division is all set to become profitable at EBITDA level from FY16E on the back of economy of scale and improvement in same store sales. Hence turn around in retail business can be big trigger for stock re rating.

We recommend Buy rating on stock with target price of Rs 700 trailing at 19.87x FY 2016E which is a fair valuation for company considering its strong product portfolio and vast geographical presence.

 

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