Hatsun Agro Products - Healthy revenues; strong margins - ICICI Securities

Three pointers from Q2FY21: (1) dairy business reported low single-digit revenue growth led by procurement growth in mid single-digit, (2) the fall in milk procurement prices will likely lead to life-high gross and EBITDA margins in FY21E, and (3) Hatsun managed to stabilise volumes despite multiple challenges such as lockdown and volatile procurement prices. We model Hatsun to report an earnings CAGR of 56.5% over FY20-FY22E with: (1) high single-digit growth in milk procurement, (2) lower milk procurement prices due to lower offtake by HoReCa and commencement of flush season and (3) commencement of three plants in FY21E. While we remain structurally positive on the company, the stock price upside is capped at current valuations. Retain HOLD with a DCF-based target price of Rs830 implying P/E of 49x FY22E (earlier target price: Rs650).

- Dairy business reports low single-digit growth: Hatsun reported 3.8% revenue growth in Q2FY21. Milk and milk product revenues grew 1.8% while other businesses (cattle feed, Oyalo pizza, etc.) grew 26.4%. Considering the carryover effect of price hikes in FY20, we believe volumes were flattish during the quarter.

- Expect EBITDA margin to remain elevated in FY21E: Price hikes, lower input prices and some cost-saving measures were the chief reasons for 400bps higher EBITDA margin YoY. We expect milk procurement prices to be lower in rest of FY21E due to commencement of flush season. We estimate Hatsun's EBITDA margin at 13.4% for FY21E vis-à-vis 10.4% in FY20.

- Onset of festive season and gradual opening up of HoReCa augurs well: With the onset of festive season and opening up of the HoReCa channel, demand for value-added products such as ice cream will likely recover in H2FY21E.

- Capex projects: (1) Solapur, Maharashtra: Full-fledged commercial plant with production capacity of 4-LLPD of milk expected during Nov'20; (2) Dharapuram, Tamil Nadu: Hatsun will install milk products manufacturing facility in Dec'20 and milk processing unit with capacity of 1.5-LLPD in Mar'21; (3) Sangareddy district, Telangana: Plant is expected to be commissioned in Q4FY21 with expected capex outflow at about Rs2.45bn.

- Maintain HOLD: We expect Hatsun to report PAT CAGR of 56.5% over FY20-FY22E with RoE higher than the cost of capital. Though we remain positive on the company's business model due to the established moats and growth opportunities, we believe upside is limited at current valuations. Hence, we retain HOLD on the stock with a DCF-based target price of Rs830 (implied P/E 49x FY22E).

Shares of HATSUN AGRO PRODUCT LTD. was last trading in BSE at Rs.847.3 as compared to the previous close of Rs. 841. The total number of shares traded during the day was 14086 in over 2259 trades.

The stock hit an intraday high of Rs. 864 and intraday low of 808.55. The net turnover during the day was Rs. 11901792.

Source : Equity Bulls

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