PAT for FY 2024 was reported to be 107 crores and stock currently quotes at 50 p/e (way over Industry median).
But let’s try to predict what earnings could be in the future as it’s more important for stock price. (Disclaimer- calculations may not be very precise and I have ballparked a few numbers).
1- Management in the last concall, after a lot of prodding from the analysts, nodded towards a topline growth in the range of 15%. Management’s view is that milk consumption (70% of current topline) tracks country’s GDP growth and since milk is quite organized (40% of total country’s milk consumption), heritage’s top line growth in the best case scenario (growth in consumption and steady gain in market share) will not be more than lower double digit (say 10-12%).
2- Main trigger to topline growth will come from value added product (VAP) category where margins are higher and organized sector’s share is very low. Heritage is growing its VAP portfolio in 18-20% range and currently it accounts for some 30% of total revenue. Management seems to be confident about VAP reaching 40% of topline in next few years which will also improve EBITDA.
So combining above, I feel that weightage average growth in topline should be around 15% (in the best case scenario) doubling in 5 years.
As for EBITDA, a higher share of VAP in portfolio and some operating leverage could yield an EBITDA of 11-12% (historically it’s been in 5-7% range). So if Heritage were to reach a topline of 7000 crores say end of 2028, we’ll have an EBITDA in the range of 800-900 crores (again in the best case scenario).
Coming to PAT, it’s been 1-4% of topline historically. But at 11-2% EBITDA, it’s very likely that PAT grows to 6-7% of topline giving us 400-500 crores.
Taking your median P/E of 35, this translates into 1400-1700 of share price, implying a stock price CAGR of 15-20% for next 5 years.
Now if you were a pessimist like me, and projected a 15% CAGR from here onwards, it may not look exciting for a small caps stock, considering that growth prices in the best case scenario. But then 20% CAGR on the other end of the spectrum is quite satisfying (if not mouth watering).
So I think investors getting into Heritage food will have to be fully sold on company’s future growth prospects hoping for everything to play out perfectly without any hiccup which hinge on the management’s ability to:
1- Grow VAP to 40% of total revenue in next 5 years
2- Consistently grow market share in both milk and VAP category
3- Consistently pass increase in milk prices to consumers
If management could deliver on the above and Heritage traded at multiples above sector median (due to reasons such as a friendly state government or company’s recent foray into now BJP-ruled Odisha), one can make a very strong bull case for the stock. But it will be a P10 bull case. One should temper this scenario with analysis of potential downsides and then take a call accordingly.
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