Buy Heritage Foods; target of Rs 350: Angel Broking

Angel Broking`s research report on Heritage Foods

“Heritage Foods Ltd (HFL) reported a disappointing operational performance for 4QFY2014, dragged by the dairy segment. Its top-line surged by 11.0 percent yoy to Rs438cr, in line with our expectation. However, the EBITDA plunged by 32.3 percent yoy to Rs18cr, which is way lower than our estimate of Rs25cr. The EBITDA margin dipped by 267bp yoy to 4.2 percent, which is attributable mainly to a rise of 458bp yoy in the raw material cost as a percentage of sales. The interest cost increased by 7.0 percent yoy. The bottom-line for the quarter dipped by 53.4 percent yoy to Rs7cr against our estimate of Rs13cr.”

“The dairy segment, which contributes ~74 percent to the total revenue, has ~92.5 percent of its revenue sourced from Andhra Pradesh, Tamil Nadu and Karnataka. Hence, in order to increase its contribution from other geographies and further gain from the boom in the dairy industry; HFL has recently acquired a dairy plant in Haryana to source milk supply for Delhi (operational by July’14) from which it drives mere 0.4 percent of its revenue. Also, in efforts to have strong foothold in Mumbai, HFL has tie-ups with local dairies like “Prabhat dairy” for co-packing of milk. Considering the growth opportunities in the dairy industry, we expect the top-line and EBITDA of the company to grow at a CAGR of 11.8 percent and 18.8 percent respectively over FY2014-16E while PAT is expected to grow at a CAGR of 27.8 percent (due to low base) over the same period. Currently the stock is trading at a PE of 9.5x for FY2016E earnings. We maintain our Buy recommendation on the company with a target price of Rs350 based on target PE of 11x for FY2016E, considering return ratios at a stable level, ROE and ROIC of above 20 percent,” says Angel Broking research report.           

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