Commencement of three plants in a span of just 12 months is likely to lead to strong revenue growth and drive the return ratios upwards in FY22-23. Hatsun has commenced Solapur plant in Q4FY21, Dharapuram (TN) plant in Q2FY22 and plans to commence Govindapur, Telangana plant in Q3FY22. While milk procurement prices are expected to move upwards, we note (1) accumulation of SMP inventory at lower prices on Mar’21 Balance Sheet will partially arrest decline in EBITDA margin and (2) possibility of price hikes in H2FY22 as most co-operatives have raised prices now. We model Hatsun to report an earnings CAGR of 19.2% over FY21-23E with: (1) high single-digit growth in milk procurement, (2) commencement of three plants and (3) lower effective tax rate in FY22E. We remain structurally positive on Hatsun due to its competitive advantages and strong growth opportunity in South India. Maintain ADD with a DCF-based TP of Rs 1,060 (65x FY23E; Earlier TP-Rs 860).
Q1FY22 performance: Hatsun reported revenue growth of 20.7% YoY. We believe ice cream business reported strong growth. While gross margin was flat at 30.5% YoY, the EBITDA margin declined 320bps due to higher other expenditure. In our view, ad-spend and travel cost has increased YoY. With cut in effective tax rate, the PAT grew 4% YoY.
FY22 earnings drivers: (1) Ice cream business is largely back to normalcy and we expect strong growth in FY22 due to (i) favorable base, (ii) market share gains and (iii) commencement of Govindapur ice cream plant in Q3FY22, (2) commencement of Solapur plant (Maharashtra) in Q4FY21 and Dharapuram plant (TN) in Q2FY22 will lead to higher milk revenues and (3) migration to new tax regime will result in reduction of effective tax rate to ~25.5%.
Additional investments in FY22-23: Hatsun plans to invest in (1) 50,000 LPD lassi and butter milk plant at Solapur, (2) 0.1mnpd curd processing plant at Dharapuram and (3) it is in process to set up greenfield unit at North Andhra Pradesh.
Increase in milk procurement prices in FY22E: We model milk procurement prices to increase in FY22 from lower levels of FY21 and Q1FY22. Anticipating likely increase in milk procurement prices, Hatsun has accumulated large SMP inventory at end of Mar’21 which can partially arrest EBITDA margin decline in FY22E. We also expect the company to raise selling prices as most co-operatives have raised prices.