Heritage Foods - Sale of entire stake in Future Retail: DCF accretive transaction - ICICI Securities

Heritage Foods has sold its entire stake in Future Retail (17.85mn shares) for Rs1,319mn, at an average price of Rs74/share. We believe the transaction will be DCF-accretive as Heritage can deploy the funds in dairy business, which earns RoE in excess of 25%. The company plans to repay its term loans with the proceeds, and will be net-cash by the end of FY21. We believe this transaction to boost FY22E earnings by ~Rs100mn (6.5% increase in EPS). With stake sale in Future Retail and repayment of debt, the company can invest more resources and bandwidth in its core dairy business. We model Heritage to report PAT CAGR of 63% over FY20-FY22 with improvement in core return ratios. Maintain BUY with a DCF based target price of Rs400 (12x FY22E).

- Stake sale in Future Retail: Heritage has sold its entire stake in Future Retail (i.e. 17.85mn shares) for a total consideration of Rs1,319mn at average price of Rs74/share. It plans to use the proceeds to repay term loans. The company will be net cash company by Mar'21. We believe, the company will be able to save interest cost (post tax) of ~Rs100mn and may boost FY22E EPS by 6.5%. We also believe the transaction is DCF accretive as Heritage will be able to generate higher RoI on cash proceeds than idle investments.

- Focus on dairy business: With stake sale in Future Retail as well as debt repayment, the company's focus and investments in dairy business are likely to increase. We also believe the company can either expand geographically or increase its dividend payouts.

- Summary of transactions related to Future retail: Heritage has sold its retail, bakery and agri business to Future retail for 3.65% stake in the company in FY18. However, there was lock-in period for three years which ended in Q1FY21. There was also an agreement to share sale proceeds between Heritage and Future group if the sales value is higher than Rs4bn. While value of Future retail stake was higher than Rs4bn during past 3 years, Heritage could not sell stake due to lock-in restrictions.

- Sales value lower than losses incurred: Heritage's Retail, Agri and Bakery segments had incurred cumulative losses (EBIT) of Rs2,960mn over FY07-17 and it has received consideration of Rs1,319 in FY21. We have not considered any time-value impact.

- Retain BUY: We model Heritage to report revenue and PAT CAGRs of 4.8% and 63%, respectively, over FY20-FY22. Core return ratios are expected to improve over the same timeframe. We have valued the stock as per DCF methodology at Rs400 (implied PE 12x FY22E). Risk: Prolonged economic slow-down in South India.

Shares of Heritage Foods Limited was last trading in BSE at Rs.330.45 as compared to the previous close of Rs. 279.95. The total number of shares traded during the day was 191580 in over 7877 trades.

The stock hit an intraday high of Rs. 335.9 and intraday low of 279.7. The net turnover during the day was Rs. 61511717.

Source : Equity Bulls

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