Dodla Dairy, Heritage Foods, Parag Milk Foods: Why is Investec bullish on dairy sector?

Dairy stocks, stock market today: The Indian dairy sector, which has experienced several obstacles in the last three years, such as demand disruptions due to the COVID-19 pandemic and milk shortages that led to a sharp increase in prices, is finally moving past the tough stretch and offers an opportunity for investors to tap into the rising discretionary consumption in the country.

As consumer preferences evolve towards value-added dairy products, private players should gain. In the medium term, the anticipated decrease in inflationary pressures should drive earnings growth, the brokerage firm Investec said in its report issued on April 13. 

The brokerage has initiated coverage of India’s dairy sector with a positive outlook. Its pecking order is DODLA > HERITAGE > PARAG > HATSUN.

The brokerage notes that private dairy companies are poised for significant growth with key structural demand drivers in place, especially as the industry shifts towards a more organised sector. "As consumer demand expands beyond traditional liquid milk to value-added dairy products, private players stand to benefit. Additionally, industry consolidation is expected to support further
the growth of private dairy companies, positioning them as viable alternatives to larger cooperatives," it said. 

Further, the brokerage notes that the tide is turning in favour of the sector after three years of tough times. There has been some respite lately with a consistent supply of raw milk causing a drop in prices, leading to better operating margins. "As a result, we predict that a mix of lower inflation and healthy demand will boost earnings for the dairy industry, with private companies reaping the most benefits," it notes. 

Stock picks 

Dodla Dairy | Reco: Buy | Target Price: Rs 1,400 | CMP: Rs 906.80

Comment: DODLA is our top pick in India's dairy sector, outshining its peers in various aspects, including a robust core business, effective capital utilisation, and reasonable valuations.

Heritage Foods | Reco: Buy | Target Price: 450 | CMP: Rs 300.85

Comment: Despite its weak core business strength, HERITAGE demonstrates relatively better capital efficiency and reasonable valuations, offering a favourable risk-reward balance.

Parag Milk Foods | Reco: Buy | Target Price: Rs 310 | CMP: Rs 214.85 

Comment: Weakest in the group, primarily because of its below-par business strength and relatively dull track record in capital efficiency.
However, its relatively lower valuations offer a positive risk-reward skew.

Hatsun Agro Product | Reco: Sell | Target Price: Rs 700 | CMP: Rs 997.35

Comment: While Hatsun stands out in terms of business strength, it lags materially on financial performance, given weak FCF generation, poor capital allocation, and debt-funded dividends. Also, the high valuations pose a negative risk-reward skew.

KEY CHARTS

Source: Investec report