Heritage Foods has sold its entire stake in Future Retail (17.85mn shares) for Rs 1,319 mn, at an average price of Rs 74/share. We believe the transaction will be DCF-accretive as Heritage can deploy the funds in dairy business, which earns RoE in excess of 25%. The company plans to repay its term loans with the proceeds, and will be net-cash by the end of FY21. We believe this transaction will boost FY22e earnings by ~Rs 100 mn (6.5% increase in EPS). With stake sale in Future Retail and repayment of debt, the company can invest more resources and bandwidth in its core dairy business. We model Heritage to report PAT CAGR of 63% over FY20-FY22 with improvement in core return ratios. Maintain Buy with a DCF based target price of Rs 400 (12x FY22e).
Focus on dairy business: With stake sale in Future Retail as well as debt repayment, the company’s focus and investments in dairy business are likely to increase. We also believe the company can either expand geographically or increase its dividend payouts.
Sales value lower than losses incurred: Heritage’s Retail, Agri and Bakery segments had incurred cumulative losses (Ebit) of Rs 2,960 mn over FY07-17 and it has received consideration of Rs 1,319 mn in FY21. We have not considered any time-value impact.
Retain Buy: We model Heritage to report revenue and PAT CAGRs of 4.8% and 63%, respectively, over FY20-FY22. Core return ratios are expected to improve over the same timeframe. We have valued the stock as per DCF methodology at Rs 400 (implied PE 12x FY22e). Risk: Prolonged economic slow-down in South India.
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