Buy This Small Cap FMCG Stock, Shares Can Surge 18%, Says ICICI Securities

ICICI Securities has recommended a "buy" call to the Stock of Heritage Foods Limited for potential gains up to 18% with a given target price of Rs 380 per share. Heritage Foods is a small cap company operating in the FMCG sector primarily engaged in dairy products. It has a market capitalisation of Rs 1,504.69 crore.

The company reported a Consolidated Total Income of Rs 819.05 Crore for the quarter ended September 30, 2022, up 21.67% from the same quarter last year. In Q2 FY23, the company reported a net profit after tax of Rs. 21.31 Crore.

Stock Outlook & Returns

The Current Market Price (CMP) of Heritage Foods on NSE stood at Rs 324.30 apiece. The stock recorded its 52-week low level at Rs 250 on 20 June 2022 and its 52-week high on 28 October 2021 at Rs 565, respectively.

The stock in the past 1 week has surged 3.13%, whereas, in the past 3 months it surged 12.2%, respectively. Over the past 1 year, it gave 29.47% negative return. However, in 3 years, it gave 1.45%. In the 5 years, the stock fell 58.33%, giving a negative return.

The company delivered an ROE of 14.68% in the year ending 31 March 2022 outperforming its 5-year average of 7.0%.

Q2FY23 results

Heritage reported revenue growth of 21.8% YoY, but EBITDA and adjusted PAT declined 38.8% and 50.8% YoY respectively. Gross and EBITDA margins contracted by 511bps and 483bps YoY due to 19% higher milk procurement prices. Due to price hikes, EBITDA margin improved sequentially. 

Segment-wise performance

While dairy and feed segments reported revenue growth of 22.5% and 7.9% respectively, renewable energy revenues declined 9% YoY. Share of VAPs increased to 27% in Q2FY23 from 25.7% in Q2FY22. Curd volume sales were up 16.7% YoY during the quarter. "We believe the company is on track to achieve 40% of its sales from VAPs in the next three years," the brokerage has said. 

Steady launch of new products

Q2FY23 saw launch of Heritage's Gluco Shakti (200ml pouch) - instant whey energy drink. We note the company is consistently introducing new innovative products every quarter. Rising share of VAPs indicates customer acceptance of these products. 

Strong volume growth

Company procured 1.12mn-litres of milk per day, up 8.4% YoY, in Q2FY23 (3-year CAGR: -2.4%). Average milk sales during the quarter were also up 15.4% YoY (3-year CAGR: -1.8%). 

Revenue growth remains strong; margin recovers sequentially

While 19% increase in milk procurement prices impacted EBITDA margin (in-line with expectations), we note the positives as (1) the revenue growth was strong and share of VAPs has increased to 27% now, (2) EBITDA margin has improved sequentially. "We believe the EBITDA margin has probably bottomed out now and should move upwards in H2FY23. We model the company to report PAT CAGR of 25.4% over FY22-FY24E with: (1) high single-digit growth in milk procurement, and (2) steady increase in the share of VAP portfolio. We believe Heritage will benefit from steady value migration from cooperatives and unorganised players to private organised players. We cut our earnings estimates due to delay in price hikes and likely impact on milk prices due to lumpy skin disease," the brokerage has said. 

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Maintain BUY for Target price of Rs 380 per share

"We model Heritage to report revenue and PAT CAGRs of 18.4% and 25.4% respectively over FY22-FY24E with RoE > cost of capital. We remain positive on the business led by competitive advantages and strong growth opportunity. We maintain BUY and value it as per DCF at Rs 380 (implied P/E 10.5x FY24E)," the brokerage has said.