ICICI Securities: Dairy Companies - Expect Higher P/E Ratio

BQ Blue’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages. These reports offer BloombergQuint’s subscribers an opportunity to expand their understanding of companies, sectors and the economy.

ICICI Securities Report

With reduction in interest rates and slow-down in gross domestic product (GDP) growth, investors question the historical price to earning (P/E) multiples enjoyed by dairy companies. We expect dairy companies with strong business moats such as brands, distribution network and healthy Balance Sheet to enjoy lower cost of capital as there will not be any (material) change in risk premium. We expect Hatsun Agro Products Ltd. and Heritage Foods Ltd. to be beneficiary of lower cost of capital. Their growth rates will be largely unchanged even if there is slow-down in GDP growth. Private dairies account for only 12% of total dairy industry and can continue to grow due to formalization of sector and migration from co-operatives. However, some non-essential added products (e.g. cheese, ice cream, premium yoghurts) are likely to suffer due to higher linkage with GDP and disposable income.

We expect lower cost of capital and stable growth rates should lead to higher P/E multiples of Hatsun and Heritage. We maintain Heritage as our top pick in the dairy sector with a Buy rating. While we remain structurally positive on Hatsun, we need more comfort on valuations to turn bullish. Hence, we give a Hold rating for Hatsun. Parag Milk Foos Ltd. is likely to be impacted in the near term due to higher share of -added products and higher business to business/ Hotel Restaurant Cafe ( B2B / HoReCa) sales. Hence, we maintain our Hold rating on Parag too.

Click on the attachment to read the full report:

ICICI Securities Dairy Sector Update.pdf

Read Document

DISCLAIMER

This report is authored by an external party. BloombergQuint does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the brokerage and do not represent the views of BloombergQuint.

Users have no license to copy, modify, or distribute the content without permission of the Original Owner.