Top Stock Picks: 2 Buy & Hold Stocks To Watch Now From Dairy Products Space

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oi-Vipul Das

| Published: Tuesday, April 26, 2022, 15:55 [IST]

The brokerage company ICICI Securities has picked up the Dairy sector today, giving Heritage and Dodla a buy rating and Hatsun and Parag a hold rating.

The brokerage has claimed that “We note the milk prices are steadily rising and chief reasons are (1) animal feed prices and rural wages have increased by ~15% indicating higher costs for dairy farmers, (2) global SMP prices are up ~35% YoY resulting in likely higher exports and (3) with normalization of economy, the out-of-home consumption is largely back on track. After a period of lower milk prices for two years, milk prices have started the upcycle.”

“We note higher milk prices will result in higher revenues for dairy companies but will also result in lower margins in FY23-24. While private dairies have started raising selling prices, we believe the inflation in freight, transportation, salary & wages and other costs will have 100-200bps impact on EBITDA margins in FY23-24. We have BUY rating on Heritage Foods and Dodla Dairy and HOLD rating on Hatsun and Parag,” ICICI Securities has said on 26th April 2022.

ICICI Securities has highlighted that “Out-of-home consumption, which contributes ~30% of milk demand in India, is largely back on track as the HoReCa sector has gradually opened up. This has resulted in higher demand for milk, resulting in milk procurement prices moving upwards. Wholesale milk prices have increased 4.8% YoY pan-India in Apr’22. We believe the rise in wholesale prices is attributable to (1) the end of the flush season and (2) higher consumption in the economy.”

“Global SMP prices have steadily increased over the past 12 months. They are up 35.7% YoY and 5.8% MoM in Mar’22. We believe attractive export opportunity may disturb the demand-supply equation of Indian milk industry as well. Rise in prices of key raw materials such as maize, wheat and soybean has resulted in higher food cost for bovines. Further, rural wage rate is growing steadily. We expect dairy farmers to pass on any further inflation in key raw materials and wages via higher milk prices,” the brokerage has added.

“We expect all dairy companies to be adversely impacted due to higher milk procurement prices. While revenues of dairy companies may increase due to inflation, we believe EBITDA margins of dairy companies have peaked in FY20- 21 and expect correction over FY22-24E. Considering the strong return ratios and growth potential, we remain positive on the dairy sector. We also expect migration from unorganised to organised sector to steadily generate value. Heritage and Dodla are our top picks,” the brokerage has claimed.

For the above stocks, higher-than-expected rise in milk prices, delay in price hikes and irrational competition, any major increase in commodity prices, and any major disruption in the supply chain of milk products are the key risks as per the brokerage.

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Story first published: Tuesday, April 26, 2022, 15:55 [IST]