Hi HG,
Hatsun also looks good but it is already priced in. Whereas heritage is at 1/4 of Hatusn’s valuations for similar business and brand strength. And also Heritage is into retail which is favor of the markets with New govt in place.
And since heritage belongs Chandrababu Naidu, it has good chances of attracting FDI for well known reasons with new govt in place.
-Sridhar
Yes, Hatsun has had a great run esp. in the last 12 months. Its down from its recent high (325) and taking support above the 50 day ema. Was a technical buy initially but as I read more about the dairy industry and the company, I’m thinking a bit more long term. Current growth momentum seems to be good - so will see how it pans out.
While this is not my reason for investing but the industry also seems to be attracting PE investment and that might generate more interest in this area -
The total milk collected in India is 127 million MTPA worth Rs 3,50,000 crore and it is expected to increase to Rs 7,00,000 crore by 2022, according to IDFC. Most of this market is still dominated byunorganised players, with larger co-operatives like Amul accounting for only 3 per cent.
The industry has attracted interest from private equity players over the past three-four years. Black River Asset Management, an arm of US-based agribusiness giant Cargill, invested Rs 110 crore in Dodla Dairy. Parag Milk Foods has raised funding from Motilal Oswal Private Equity and IDFC Alternatives and is also expected to raise another round from World Bankâs arm International Finance Corporation (IFC).
IFC has also backed Modern Dairies in the segment, while Prabhat Dairy raised private equity funding from Rabo Equity Advisors and French development finance institution Proparco last year.
full article - http://www.vccircle.com/news/food-agri/2014/01/07/lactalis-acquires-tirumala-milk-products-carlyle-exiting-over-3x
A Fast expanding industry with MNC players looking for big league
I have loaded up on Heritage for the medium- long term, here are my reasons:
1). This business is definitely “right time right place”. The dairy segment in India has outstanding long term fundamentals which no country can match, China and other Asian countries are mostly lactose intolerant and dairy products hardly figure in their diet, so the global biggies such as Danone, Forterra etc all eyeing ( or will eye) India to drive their growth.
2). So how is this good for Heritage? I reckon sooner or later all these small private dairy companies will get gobbled up by the biggies and the biggest asset Heritage has is not its brand but its direct access to 3 lakh cows! Given the extremely fragmented and small scale of the Dairy industry here, global players will have no choice but to pay a premium for organised private dairy players in India. Those that have access to scarce resources (i.e cows) will be in high demand.
3). The valuation is attractive- for around 100M USD one is getting a fairly well recognized South Indian Dairy brand with direct farm access and great long term earning power. Also as Sridhar mentions, Hatsun Agro is pretty much a business of the same scale but trading at more than 4X Heritage’ valuations, might be management quality or some other factors the market is discounting but the difference does seem quite large, so this is a relative undervaluation play as well
4). While I do not expect great management performance and do expect volatile quarter to quarter performance, the management overall hasn’t done a shabby job either. they have invested to set up a modern operation in a traditional industry and built a reasonable brand, once they spin off their loss making retail business the numbers will look much better. Very important- the balance sheet is now much better with manageable debt servicing ratios.
5). The company has a good dividend paying history so you get paid something to wait.
To sum up, there are many catalysts to drive valuations up over the next few years and structural risks are minimal given the strong tailwinds the industry will enjoy and the good positioning Heritage enjoys.
Angel broking recently came out with a report on Heritage -
Of course, the dairy theme has a long way to play and I think there is room for players to grow. The big daddy, Amul grew 32% in FY14 to ~18000 cr.! The growing players seem to be focusing on increasing procurement, processing capacity and increasing the proportion of value added products to boost margins.
ricky - I’m not so sure about the comparison with Hatsun. Per the Angel report, 23% of Heritage revenues are non-dairy while Hatsun is pretty much a pure dairy play. Plus Angel estimates FY16 revenue as 2171cr. Hatsun had pretty much that revenue in FY13 and its mgmt is confident of 25% growth till FY15. As usual, how much to pay for that growth is the call.
disc: invested in Hatsun
Thanks for the report HG, don’t agree with their SOTP method for valuing Heritage though given that retail is just an albatross around their neck which will be restructured sooner or later… such situations where a company holds strong assets ( farms+ distribution network) in a growth industry but manages them less than optimally are ripe for PE type intervention.
Heritage is not a pure Dairy play because of retail while Hatsun is but this does not mean much given the difference in their valuations, it is much easier to get rid of a loss making division than to grow earnings at a high rate as the market expects of Hatsun.
As for earnings estimates, I don’t place much value on analyst estimates.
To clarify, by no means am I saying that Hatsun is overvalued as the market may be placing a premium on better management and scale. Just that at current prices I feel risk/reward for Heritage is better.
From the latest Q presentation it seems like the earnings fell because increase in input prices of milk were partially passed on to the customers. The retail, bakery and Agri businesses continue to be a drag on ROE.
Any one know details on why the company is still growing the retail business?
Thanks.
In Telengana / Hyderabad the govt promoted milk cooperatives Amul, Mother’s dairy , Karnatakas Nandhini seem to have joined hand to achieve multiple motives.
Questions on impact on heritage foods
-Has Heritage completely exited telengana?
VP members from Ap / telengana please provide your valuable inputs.
Larger question
Can this kind of cooperatives push/cartel spread to other states like Tamil nadu ? Team up with local cooperatives like aavin to stop the private dairies like hatsun from gaining market share?
VP members following the dairy industry please provide your inputs.
Disclosure : Not invested in heritage or hatsun.
Good growth expected in Retail as per stockaxis
Heritage seems to be loosing its edge at least in Hyderabad (24 lakh liters and Rs.3,500 crore) because of following reasons: Vijaya Milk, the state owned Dairy has been doing everything to dent the market share of Heritage obviously due to political reasons. Telangana government seems to be accommodating and encouraging every body else except Heritage! Amul’s entry in Hyderabad is a clear nagative. Amul garnered considerable market share (I don’t have exact statistics) within a short span. Another negative is that Godrej Agrovet has increased it’s stake in Creamline dairy(Jersy). I think it’s not wise to invest in a company whose fortunes/misfortunes depend on power politics.
Any update on the recent up move in the stock? I have done a bit googling but hardly found anything
Good result but the Retail division is yet to make it break even.
Heritage is still have loss in Agri, Retail and Bakeries bussiness. Not very focused approach on value added / premium/ high margin dairy products. Innovation is missing.
Parag milk and Britannia has good focus on high margin products innovation but both are at high price premium…waiting for correction !
The long wait seems to be over 
: http://economictimes.indiatimes.com/industry/services/retail/future-group-in-talks-to-buy-heritage-foods-retail-division/articleshow/54398527.cms
Disc : holding ar 3 percent of portfolio . No transaction in last 3 months
Do anyone have idea what kind of valuations we can expect from retail business sell? if we have previous transaction in the same segment we can use it to find out.
Thanks
Prashant
Good read of Dairy industry report by Ambit Capital.
Exposure to Reliance distribution channel will definitely a pulse for them.
What is a view on deal closed between future group and heritage?
My view is positive.
Prashant
Hi,
Can any one please help me to understand this deal between Future & Heritage. Heritage is selling it’s entire Retail Business of 124 Heritage Fresh stores in exchange of a 3.65% stake of Future Retail worth Rs295 crore. It seems very less to me because in the last year only the retail and allied businesses of Heritage Foods posted a revenue of Rs629.70. How this deal can help Heritage Foods ?
@KC1986 To reply to your question, I am not an expert on valuations and never tried to valuate a retail business, specially which are in losses. However, few things can be considered : 1. Heritage retail business was still a loss making business 2. It was also sucking capital. So, selling this means an improvement in EPS as well as better return on capital employed, both of which would be beneficial to shareholder. In case, they r getting a non-cash deal, in short term does not help to increase cash on books. I think there have been some consolidation in this industry (biyani buying nilgiris). we can do a comparative analysis of that deal if available in public domain to check how good this deal as. EV/EBITDA and EBITDA/per store, revenue/store (which ever available) comparisons could a good comparative indicator
could not get EBITDA info but nilgiris with 150 stores and 800 crore revenue, got a valuation of 300 crores.So, at least one a per store revenue basis or a 550 crore total revenue basis with heritage retail in loss, it does not look bad to me until and unless , nilgiris EBITDA numbers were highly screwed compared to heritage retail
