In its note, domestic brokerage firm HDFC Securities has maintained its optimistic view on Heritage Foods, highlighting its well-diversified product portfolio, robust distribution network, strong long-term relationships with farmers, and commitment to high-quality premium products, enables it to capitalize on the growing dairy industry in India.
The company boasts a strong balance sheet characterized by low debt, improving margins, and healthy operating cash flows. Although its EBITDA margins are slightly lower than those of its closest peers, HDFC Securities believes that stability in milk procurement prices—due to a normal monsoon and the expectation of a good flush season—will help sustain margins in the liquid milk segment.
Additionally, an increasing share of higher-margin value-added products is expected to drive margin expansion in the future. It highlighted the company’s strategy to enhance growth in its value-added product segment, aiming for a topline of ₹6,000 crore within the next three years while maintaining EBITDA margins in the high single digits by increasing the VAP contribution to the overall mix.
Heritage Foods entered the ice cream space in 2009, and the segment contributed around 9 per cent to its value-added dairy segment in Q1 FY25. It clocked ₹31 crore in ice cream revenue at a run rate of ₹110–120 crore annually.
The company’s current facility has run out of capacity, and hence, it aims to grab a bigger piece of the ever-growing ice cream market in India. The ice cream market is relatively underpenetrated in India compared to the overall Impulse retail space (Ice cream distribution outlets are only 10 per cent of the overall Impulse retail distribution).
With the increase in per capita income in the country, the brokerage noted that consumers are likely to boost discretionary spending, leading to a significant increase in impulse purchases, which will drive sales in categories such as ice cream and other value-added dairy products.
In light of this, HDFC Securities advises investors to buy the stock within ₹588 to ₹614 and accumulate shares on dips between ₹525 and ₹550. The brokerage set the stock's base case fair value at ₹655 and the bull target price of ₹707 (15.5% upside potential) projected over the next 2 to 3 quarters.
After a challenging period between November 2021 and March 2023, during which the stock faced significant selling pressure from investors, it remained relatively stagnant while other mid-and small-cap stocks experienced substantial gains.
However, the tide turned in April 2023, when the stock rebounded swiftly from its previous lows. Since then, it has maintained consistent bullish momentum. During this rally, the stock surged from ₹144 per share to its current trading price of ₹612.90 per share, translating to a remarkable gain of 325 per cent.
Notably, the stock ended 12 out of those 18 months in positive territory, demonstrating its resilience. June 2023 marked the highest monthly gain, with the stock climbing by 40 per cent, while December 2022 followed closely behind with a robust gain of 27 per cent.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
