ICICI Securities has reiterated a "BUY" rating for Hatsun Agro Products (HAP) with a target price of Rs 1,250, suggesting a 17% upside from the current market price (CMP) of Rs 1,068. HAP’s Q2FY25 results show stable growth despite lower-than-expected revenue, reflecting resilience in margins due to stable milk procurement prices and improved product mix. With debt reductions and stable procurement costs expected to continue in H2FY25, Hatsun maintains a favorable long-term growth trajectory. However, a cyclical price increase in milk procurement could impact margins in later quarters, posing a potential risk to profitability.

Key Financial Highlights

Revenue and EBITDA Growth:
Hatsun reported an 8.7% YoY revenue increase in Q2FY25, reaching Rs 20,721 million. EBITDA rose by 10.2% YoY to Rs 2,411 million, showcasing resilience in margin management despite the high base of Q2FY24.

Profit Decline:
Adjusted PAT decreased by 17.1% YoY, largely attributed to a reduction in other income and increased interest expenses from higher SMP (skimmed milk powder) inventory. This inventory liquidation, which reduced total inventory to Rs 11.5 billion from Rs 14.5 billion as of March 2024, is expected to moderate going forward.

Debt Reduction:
Hatsun’s net debt-to-equity ratio improved from 1.6x in March 2024 to 1.3x in September 2024, attributed to a strategic reduction of short-term debt by Rs 4 billion. Borrowings stood at Rs 22.4 billion, indicating efficient capital management.

Outlook for H2FY25 and Beyond

Stable Milk Procurement Prices:
ICICI Securities projects continued stability in milk procurement prices, a crucial factor supporting Hatsun's margin expansion. This stability is anticipated to persist due to favorable flush season conditions, which could improve production and maintain low procurement costs.

Enhanced Capacity Utilization:
Newly built plants are anticipated to operate at higher utilization rates in H2FY25, potentially driving further margin improvements. Enhanced utilization should help Hatsun balance growth in demand while maximizing cost efficiencies.

Future Margin Risks:
While the outlook for milk procurement prices remains optimistic, a cyclical upturn could drive costs higher, especially by Q4FY25. This anticipated rise could create margin compression if procurement prices surge unexpectedly.

Valuation and Investment Recommendation

Target Price:
ICICI Securities’ revised target price for HAP is Rs 1,250, down from an earlier target of Rs 1,400, implying a P/E multiple of 53x FY26E and 40x FY27E.

Revenue and Profit Projections:
From FY24 to FY27, Hatsun is expected to see a 14% CAGR in revenue and a 37.2% CAGR in PAT. EBITDA margins are projected to improve incrementally from 11.3% in FY24 to 12.2% in FY27, with steady growth supported by disciplined cost management and operational efficiencies.

Investment Horizon:
With consistent revenue growth, ICICI Securities advocates a long-term investment in HAP due to its solid business model, efficient capital structure, and market leadership in the dairy segment.

Potential Risks

Competitive Pressures:
The Indian dairy market remains highly competitive, and increased pressure from other players could affect HAP’s market share and profitability. Strategic investments in branding and distribution may help mitigate some of this risk.

Raw Material Inflation:
Any significant inflation in raw material prices, particularly in milk procurement, could pose a substantial downside risk to Hatsun’s margin expectations. Additionally, unforeseen regulatory changes impacting dairy prices could alter profitability projections.

Project Delays:
Delays in the rollout of new plants or products could hinder Hatsun’s earnings growth. Maintaining a timely schedule for expansion projects will be critical for sustaining projected revenue growth rates.

Financial Projections and Ratios

Revenue, EBITDA, and PAT:

FY24: Revenue at Rs 79,904 million, EBITDA margin at 11.3%, PAT at Rs 2,673 million.
FY25E: Revenue to rise to Rs 90,739 million with EBITDA margin improving to 11.8%. PAT is projected to reach Rs 3,895 million, reflecting a 45.7% YoY growth in EPS.
FY26E: Expected revenue of Rs 1,03,568 million with EBITDA margin at 11.9%. PAT expected to increase to Rs 5,227 million.
FY27E: Revenue forecasted at Rs 1,18,229 million with EBITDA margin of 12.2%, and PAT estimated at Rs 6,900 million.
Valuation Ratios:

P/E Ratio: 61.1x for FY25E, decreasing to 45.5x in FY26E and 34.5x in FY27E.
Return on Capital Employed (RoCE): Expected to increase from 13.1% in FY25E to 24.1% by FY27E, indicating efficient capital utilization.

Conclusion

ICICI Securities continues to recommend a “BUY” on Hatsun Agro Products, highlighting its robust operational efficiencies, debt reduction progress, and long-term growth potential. While certain risks, particularly raw material costs and competitive pressure, pose challenges, the company’s proactive debt management and expected margin improvements paint a positive outlook. For investors seeking growth in the dairy sector, Hatsun Agro Products offers a compelling case for sustained gains over the long term.