Sale of retail may help improve focus on diary, but other challenges remain for Heritage
http://www.heritagefoods.in/vetcahome.html
Heritage commisions a cattle feed plant,offering catle feed branded vetca
Question to anyone familiar with cattle feed business, is it a case of diworsification?
Or is it a clever use of their existing procurement chain.
I am a bit disappointed that they did not plough the cash into their high roce, fresh value added products business.
hi,
I think they are on right track as they do not need to find out customers for the same business + this business is highly unorganized + i think it has better margins too. so lets see how it works.
correct me if i m wrong in observation.
Thanks
One of my relative is looking to take up dairy farming by the end of the year with the aim to expand into dairy business eventually. So I decided to dig out about the sector. Following are some notes from research with major focus on Heritage Foods.
INDUSTRY
Milk and milk products form a major part of diet of Indian populace unlike a lot of other countries. Most of the milk consumption is in the form of liquid milk but consumption of milk products like curd, butter, ghee, cheese, Paneer is also growing. Indians prefer buffalo milk over cow milk due to higher butterfat content in the former.
If someone thinks about whether this industry will be around for 10 years from now and whether it would still be growing, the answer comes to a resounding yes. That is one of the strengths of the dairy businesses i.e. forever and repetitive market.
The dairy industry can be sliced into three categories - Co-operative, Private and Unorganized.
The prominent examples of co-operatives are -
The major private players are as follows -
In unorganized sector, the milk is produced/procured locally and then sold locally.
As per some reports, Co-operatives and Private players constitute 50% of the total industry size while rest is controlled by unorganized players.
MILK PRODUCTION
In India, milk is produced by lakhs of small and marginal dairy farmers. This is unlike developed countries where large corporate dairy farms are present. In India, due to high land cost, large corporate farms have not been developed. Also average animals per farmer is less than 10 in India whereas that number is quite high in other countries. This creates an interesting entry barrier where a company has to develop large network of farmers and have to gain their trust. The building of such network takes years and gaining trust is even harder.
On productivity front, there is usual nonperformance by India. The average milk per day per animal is 6-8 liters whereas average in US/NZ/UK is almost three times. This is also due to usual suspects like - cows/buffaloes are fed low quality/leftover food, lack of quality grazing lands, lack of proper veterinary care, inefficient cross-breeding etc.
Since Indians prefer buffalo milk, there is another intricacy with that. Buffaloes produce twice as much milk in winter compared to in summer. But demand for milk products (ice cream, flavored milk etc.) is more in summer. This creates supply-demand imbalance. This seasonality further complicates relationship with farmer. Farmer expects that entire surplus milk will be procured during winter even though company might not be able to sell that milk.
MILK PROCUREMENT
To develop relationship and gain trust of the farmer, procurer has to provide payment on time, payment has to be as per the quality of the milk. It is also nice if procurer can help in cattle feed, provide guidance on veterinary practices and also help to get small loans from the banks.
The issues faced in milk procurement are usually - inability to grow outside home state, home district, political interference and policy interference.
Parag has been unable to grow its supply outside of Pune, Prabhat has been unable to grow outside of Ahmednagar. Most of the local co-operatives in Maharashtra are dominated by politicians and hence it gets difficult for private players to compete. In Karnataka, farmers get subsidy for supplying milk to KMF.
MILK CONSUMPTION AND DISTRIBUTION
90% of the milk in India is consumed in liquid form and this product has very low margins. Due to this, milk produced have to be sold within 200-300kms of radius as costs of storage/transportation make it nonviable after that distance.
Due to above, milk business is very competitive in regional pockets. There is virtually no entry barrier in packaging and selling liquid milk. Also regional player or co-operative can always hit private player with lower selling cost to consumers or higher remunerative cost to farmer.
So having a strong distribution network, well recognized brand and efficient operations is only insurance from this potential disruption.
MILK PRODUCTS
Milk products can be categorized into two categories viz. Fresh Products and Value Added Dairy Products (VADP). The Fresh products are set curd, pouch curd, Paneer, flavord milk etc. The VADPs are mainly Cheese, Butter, ghee etc. The consumption of these products is growing faster than liquid milk and they have higher margin than liquid milk. A company with increasing proportion of Fresh Products will see bottom line grow faster.
Following table provides the margins of various products →
COMPANY
Now coming to company, Heritage Foods was founded by N Chandrababu Naidu in year 1992. The company has six business verticals - Dairy, Retail, Agri, Bakery, Renewable Energy and Vetca. My primary focus of analysis is dairy business.
The recent relevant announcements are as follows -
NUMBERS
The company used to give installed capacity and production numbers earlier. Newer ARs do not have those.
LESSONS LEARNED
The stock has been amazing wealth creator. In FY12, the stock was trading around 100 odd. FY13 the stock was trading around 200 and today stock price is around 1200. The company issued bonus shares in ratio 1:1 in July 2013. So in last 5 years, stock has been amazing 10+ bagger.
The above performance is despite blunders. The company did a classic case of “Peter Lynch Diworsification” by entering into Retail business and losing money consistently. Also the D/E > 1 till FY13. Also the promoters of the company are politicians (N Chandrababu Naidu Family). Based on above three, my checklists would have ruled the stock out as an investment candidate.
To rationalize the point 2, we will use HM. As he says, just because an investment worked out does not mean it was not risky and just because investment did not work out does not mean it was not good call. So maybe it is still okay to miss out on this story. BUT I think our checklist filters can not be absolute. They have to be relaxed from time to time if one finds some good insight into story.
The company was trying to hive off retail business for almost 3-4 years without much success. they did so finally in Q3FY17. The lesson here is that - one can not be a hawk and track and question company on quarterly basis. Business is combination of several variables and sometimes it can take a long time to achieve something. The patience is virtue if one has done proper research.
OTHER INFO
MANAGEMENT
N Bhuvaneswari, Vice Chairman and MD
N Lokesh, Executive Director
N Brahmani, Executive Director
Ashok George, COO, Dairy
M Sambasiva Rao, M. Sc., PhD
K Durga Prasad Rao
J Samba Murthy
AR FY08
AR FY09
AR FY10
AR FY11
AR FY12
Exported 25MT butter to Bahrain
AR FY13
AR FY14
AR FY15
AR FY16
FY16 Investor Presentation
Average procurement cost - 30.90/L, selling price - 36.55/L
REFERENCES
[1] Milk, Dairy Products Manufacturer & Supplier | Heritage Foods
I find above Ambit report excellent and a must read. A lot of industry data has been taken from this report and credit goes to Ambit for providing this data.
Disc - Never Invested into Heritage so far, this may change in future. This is not a buy/sell recommendation. Please do your own due diligence before investing. I am not SEBI registered analyst.
excellent summary…You have researched well into company…Hiving off Retail business is a big big trigger…which will be seen in balance sheet in coming quarters…Acquiring Reliance retail business is fit into their growth plan…Now company wants to do 6000cr Diary revenue by 2022 from 1800 odd in fy 2017 resulting into a @25% cagr growth but company still growing at meager 13-15% in dairy sector…lets see how company progress and achieve its goal…
Heritage Foods results out. Since company is in the process of selling Retail, Agri and Bakery business to Future Retail, quarterly results look complicated. I have just looked at results at consolidated level for full year.
Note about sale →
Note on accounting →
Results Link →
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/ad87b06c-7cee-4f4d-99e7-8a325ca24f77.pdf
Another thing I noticed (& dislike) is debt at consolidated level increased to 176Cr in FY17 from 139Cr in FY16.
Regards,
Rupesh
anybody attended Q4FY17 concall…
Yes,not getting time to send notes but broadly ,there is increase in raw material milk powder which dented margins, company could not pass n does not look like passing cost consumer .Yoghurt n flavored milk to be launched with JV partner as a JV. Area picked is mumbai but marketing plan etc not yet started. Seeing raw material price pressure n less pricing power , q1 may be challenging but a good monsoon can change demand supply scenario. Disc : Booked partial profit post q4 post 1 year of holding
No information regarding European company name…company is not disclosing the deal value of Reliance dairy business acquisition…
Some points from concall:
Does anyone know how many shares of future retail will heritage shareholders get? And what is the status of the deal?
I don’t think that heritage shareholders are going to get any shares of future retail as it was sale of a part of business not whole business.
And it was a sale on all share deal basis. So, the company (Heritage Foods) will be getting stake of around 3% in future retail (acc. to what i recall) not the shareholders.
Thanks for the clarification
I am not sure of 2022 plan. This may be good as a tactical play but not long term, due to its promoters who are into politics. If they lose in 2019 elections, their market share is going to fall big time in their main state of Andhra Pradesh and will not recover for another 5 years. My sincere advice is not to buy into any stocks where owners have clear political affiliations. In this case it is the first family of TDP party which owns the company.
Have you seen how they ve done in last 20 years including times when they were in govt n they were not in govt. ?Anyway I don’t think they r going to achieve it . May be closer with inorganic route but they ve taken right decisions n ve corrected mistakes when made wrong decision. I think one need to do deeper study to analyze them vs competition before putting them off just due to political link. Disc: sold off recently after holding for long. Not due to anything wrong but got better opportunity
Heritage in for Windfall Gains from Future Deal http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=Heritage-in-for-Windfall-Gains-from-Future-Deal-21072017010036
My notes from AR FY17, Q1 FY18 Investor Presentation and Conf Call ->
Margin Drop
The margins dropped in Q1 FY18 because there was 10% increase in the cost of raw milk. Out of this only 5% cost was passed on to consumer. For Q1 FY18, the cost of the price hike which was not passed on is around 16Cr. This along with expenses for re-branding initiatives and silver jubilee celebrations caused margins to drop in Q1 FY18. The company plans to spend close to 1% of revenue on marketing & brand building in FY18.
The milk prices are linked to Monsoon and historically milk prices fall by about 10% from lean season (summer) to flush season (post-monsoon). In CY18, Monsoon is progressing very well from dairy point of view and the company expects milk prices to fall from mid Sept.
How does one ensure security of milk supply from farmers in the view of increased competition from private players and cooperatives?
Corporate dairy farming is not viable in India and the management feels that it is 2-3 decades away in India.
Milk Policy
Reliance Dairy Acquisition
The RILD business has procurement network of 50,000 farmers and milk procurement of 2 LLPD. The final acquisition cost of RIL dairy business was at 61.5 Cr and it had reported sales of 560Cr in FY16. This business contributed 67Cr to revenue (mainly from Dairy Pure & Dairy Life) brands. The revenue was contributed for 80 days in Q1 FY18.
The RIL dairy business had negative impact of 10% at EBIT level. The company is in the process of rationalizing the operations subject to above milk policy. The company has completely withdrawn operations from the state of MP and UP. RILD was procuring on 184 routes, some of the routes are being closed. There was imbalance in terms of supply-demand of milk in some regions, the company is trying to restore balance. The company hopes to achieve Heritage base business margins in FY19.
The company will continue to use Dairy Life & Dairy Pure brands in Punjab and haryana where penetration was good. In rest of the places, Heritage brand will be used over time. Post acquisition, butter and ghee is being sold in northern markets. Heritage products are now being sold in Reliance Fresh stores which was not the case earlier.
Growth
The company has set target of 6000 Cr revenue by 2022 (earlier 2020). They had engaged KPMG to arrive at a target. The company has further engaged E&Y to identify potential acquisition targets & company is currently evaluating one target.
The milk volume is growing at 6% rate in India, the demand might grow faster. In FY18, the company is projecting milk procurement growth of 20% ex-Reliance Dairy. The company has 10% market share in liquid milk in south India. VADP contributed 26% of sales in Q1 FY18, out of which 76-77% was contributed by curd alone.
Heritage Parlors
The company has reduced the number of heritage parlours from 1670 in FY17 to 1270. This is primarily due to following reasons -
JV with Novandie
The company has entered 50:50 JV with Novandie SNC, France. The company is famous for brands like Mamie Nova & Bonne Maman. As a part of JV, fruit based & flavored yogurts will be produced.The JV will also produce western deserts like custards, puddings, rice based deserts etc.
The JV has chalked out a 5-year plan with total capex outlay of 75Cr. In the first year, a brownfield plant of 16Cr will be setup in MH near Mumbai. The plant will have capacity of 20 TPD and has potential for 100Cr revenue at 100% capacity utilization. The products will be launched in another 9 months. The expected EBITDA margins are between 10-20%.
Q1 FY18 Investor Presentation ->
http://www.bseindia.com/xml-data/corpfiling/AttachHis/9ac663e3-f707-492c-aae6-ef1e18eb8022.pdf
FY17 AR ->
http://www.heritagefoods.in/images/25thAR16-17.pdf
Disc - I hold tracking quantity. This is not a buy/sell recommendation. Investors are advised to do their own due diligence before investing.
I attended Heritage Foods AGM and following are some notes -
Heritage Parlours
The parlour makes 20-30,000 Rs. per month in income after first 6 months of operation. It takes around ~1L to setup a parlour, around 50% of the cost is borne by Heritage. The products are sold in cash and carry model to parlours and they contribute ~17% of the sales.
Geographies
The company plans to focus on North and the West markets. Heritage started selling products in MH 2 years back and started selling in GJ this year.
The company sells 25000 LPD in Kerala market. The company has no procurement or packaging stations in Kerala, the sales is managed from border areas of TN. Kerala is a milk scarce state and 33% milk is supplied by Karnataka.
The company is not looking to export any products over next few years.
VADP
The company acknowledged that Heritage is not a well-known brand in VADP products and they are planning to spend ~1% on marketing.
When asked about growth in non-curd VADP business, the company said that - currently curd is not available in all the markets and curd business will grow at current rate (~20%) for next 5 years. For variety of reasons, curd is not made at home and it is a stable growing segment.
Reliance Dairy
The company expects the business to breakeven in Q4 of this year. RILD used co-packaging arrangement, the company is working on moving the packaging to Heritage stations or building packaging stations. The company reported sales of 68Cr in Q1 from RILD. Majority of revenue comes from sale of the milk, 2-3% revenue comes from curd and 5-6% from fat products.
Capex
The company expects to spend close to 100Cr in capex every year till 2022.
GST
Milk, butter and curd are exempted from GST and hence majority of sales has no impact of GST. GST rates for ice-cream have increased by 2.5%. Sweets and condensed milk are now taxed at 28% vs. 18% earlier. The overall additional impact of GST is ~1-2Cr.
Farmer Network
The company intends to increase the farmer network from 3L (+50k RILD) to 6L by 2022. Assuming 5LPD supply from each farmer, they can have procurement of 30LLPD.
The company has invested its first cattle feed plant and they plan to invest in 1 plant every year for next few years.
Disc - Any mistakes are solely mine. I hold tracking quantity.
