Dairy - Outlook CY21: Sector at cyclical high margins - ICICI Securities

Due to reduction in milk procurement prices, the dairy companies under our coverage reported life-high margins in CY20. While there was some impact on revenues due to lower sales to HoReCa and institutions, the B2C sales were not impacted in CY20. Milk procurement prices declined due to (1) reduction in demand from HoReCa and B2B consumers and (2) normal monsoon as well as flush season. Global SMP prices declined c.10% which also impacted milk prices in India. In H1CY21, we model the dairy companies to continue to report life-high margins. However, we expect milk procurement prices to increase in H2CY21 and expect reduction in EBITDA margins in H2CY21. We model the Dairy companies under our coverage to report revenue and PAT growth of 12% and 28%, respectively in CY21, YoY. Stock calls: Retain BUY on Heritage, HOLD on Hatsun and Parag.

- What happened in CY20: Stock prices of dairy companies (Heritage & Parag) declined 12-15% whereas Hatsun's share price increased c.40% due to better earnings. The revenue growth of dairy companies was in the range of min-single digits in CY20, YoY whereas PAT growth was 60-100%, YoY. EBITDA margins expanded due to reduction in milk procurement prices.

- Lower milk procurement prices: Milk procurement prices declined 12% in Dec'20 from Dec'19 levels. Key reasons for higher milk procurement prices were (1) lower demand for milk from B2B customers, (2) lower demand for value added products such as ice-cream, (3) normal monsoon in CY20 and (4) normal flush season in CY20.

- Lower global SMP prices: Due to lower demand for milk globally, SMP prices declined to US$2,799 in Dec'20 from US$3,036 in Jan'20.

- Deflation in animal feed prices: The animal feed prices also declined during CY20 and key reasons were (1) Lower demand from farmers due to lower milk prices, (2) Higher production of food-grains and (3) availability of green fodder due to normal monsoon. Godrej Agrovet's animal feed prices deflated 3% in Q3CY20.

- What to expect in CY21: We expect milk procurement prices to remain lower in H1CY21 but increase in H2CY20 due to rising food inflation which will push animal feed prices upwards. We also model dairy companies to raise prices in H2CY21. We model the dairy companies under our coverage to report revenue and PAT growth of 12% and 28%, respectively in CY21 over CY20.

- Stock Calls: We maintain Heritage as our top pick in Dairy sector with BUY rating. While we remain structurally positive on Hatsun, we need more comfort on valuations to turn bullish. Hence, we rate Hatsun HOLD. We also maintain HOLD rating on Parag as the company is unlikely to retain benefits of lower milk procurement prices. It generates c.35% revenues from B2B consumers.

Source : Equity Bulls

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