Heritage Foods Ltd

Sale of retail may help improve focus on diary, but other challenges remain for Heritage

  • Capex needs could go up significantly for their stated goal of tripling revenues in next 5 years
  • This may drag down ROE’s below 10%
  • Debt is already around 40%. Cash flows are volatile
  • Focus on branded value added diary products may help…not clear how it will pan out
  • They are better than competitors like Hatsun & Umang, but that alone is not sufficient for a long term buy


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.


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.


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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.


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 -

  • Gujarat Co-operative Milk Marketing Federation (GCMMF, brands - Amul, Sagar),
  • Karnataka Milk Federation (KMF, brands - Nandini),
  • National Dairy Development Board (NDDB, brand - Mother Dairy).

The major private players are as follows -

  • Hatsun Agro Products Ltd.
  • Heritage Foods Ltd.
  • Parag Milk Foods Ltd.
  • Prabhat Dairy Ltd.
  • Kwality Ltd.

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.


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.


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.


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 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 →

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 -

  • Decided to acquire dairy business of Reliance - 2.25 LLPD procurement (Big positive if farmers stick)
  • De-merger of retail/agri/bakery undertakings to Future Retail Limited (Big positive as bottomline will have predictability)


  • The retail business did take byte out of bottom line every year and made the performance of the company look inconsistent.
  • But the dairy business has been growing with very good consistency. Topline growth, Asset Turns, ROCE, Negative WC cycle everything checks out. The dairy business actually fits the bill of Warren Buffet’s ideal business - “The business that has high return on capital employed and requires very little additional capital to grow”.

  • The % of milk in dairy business has consistently gone down i.e. VADP + Fat products consistently contribute more to dairy business.

The company used to give installed capacity and production numbers earlier. Newer ARs do not have those.


  • 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.

N Bhuvaneswari, Vice Chairman and MD

  • WIfe of N Chandrababu Naidu

N Lokesh, Executive Director

  • Son of N Chandababu Naidu
  • Resigned as ED in FY13, continues to be non executive director
  • Chairman of Nirvana Holdings which holds 11% stake in company

N Brahmani, Executive Director

  • Wife of N Lokesh

Ashok George, COO, Dairy

  • Formerly employed with Mother Dairy, Salary seems less at 12L
  • Left company in Aug 2008

M Sambasiva Rao, M. Sc., PhD

  • Previously joint secretary, Ministry of commerce, retired IAS

K Durga Prasad Rao

  • Resigned in July 2014

J Samba Murthy


  • Decided to setup own Fresh Outlets in South India so farmers can get better price.
  • 70 stores operating in Hyderabad, Bangalore and Chennai
  • Plan to open 30 more stores
  • Two pack houses - Mattam (Chittoor), Mulugu (Medak)
  • Convertible Warrants issued to N Bhuvaneshwari - 8L, N Lokesh - 10L, Kotak India Focus fund - 10L


  • Created 400 heritage parlors, plan to setup 1000 in next year
  • Appointed 400 milk distributors
  • 14% milk share in AP, 7.4% in KA, 6% in South India
  • Floods in AP where company has substantial operations


  • Convertible warrants issued to following were forfeited due to nonpayment, N Bhuvaneshwari - 2.6L, N Lokesh - 8L
  • Retail - following steps were taken Restricting roll out of new stores cost reduction initiatives like closure of nonviable stores, manpower reduction, rent reduction etc.
  • Started bakery division


  • setup 1000 franchise outlets
  • Threats mentioned Excessive grazing on small and marginal community land resulting in degradation of land Extinction of indigenous breeds due to excessive cross breeding

Exported 25MT butter to Bahrain


  • 15L customers
  • Only packaging partner for curd for Nestle in South India
  • 1176 Heritage Parlors and 67 Heritage Fresh Stores
  • Milk 9LL procured every day from 3L farmers 14LLPD chilling capacity (123 chilling units) 12.50 LLPD packing capacity (13 packing units) Increased milk procurement capacity by 0.72 LLPD


  • 1:1 bonus share issued in July 2013.
  • Expansion into MH, Odisha and Delhi
  • Focus on ice-creams emphasized ahead of curd, paneer, ghee etc.
  • AP, TA, TN, KA contribute 93% of revenue
  • Commissioned 2.34 MW solar plant at Medak This will generate 10,000 KWH of power per day
  • India has 200Mn cows and 170Mn buffaloes
  • Plan to double the share of value-added products from 15% to 30% over next 5 years
  • Dairy business needs 65,000 KWH power per day.
  • Acquired plant in Sangavi, MH for processing of milk
  • Around 4Cr paid as commission to N Bhuvaneshwari, N Brahmini, N Lokesh


  • Aim to achieve 6000 cr revenue by 2020 Dairy to contribute 4500 cr
  • Engaged external consultant for business rationalization, restructuring etc.
  • Value Added Dairy Products (VADP) has twice EBITDA margins compared to raw milk
  • Aim to grow share of VADP to 40% in next 5 years
  • The bottomline was hit despite 32% growth in VADP. Reason was that the price of Skimmed Milk Powder had gone up from 153/kg to 232/kg.
  • Number of retail stores - 92


  • Retail vertical was affected by Chennai floods
  • Commissioned wind plant at Ananthpur, AP - expected to produce 50L units per annum.
  • Number of retail stores - 110, Number of Heritage Parlors - 1455
  • Plan to spend 100Cr capex in next 2 years, 80 cr in dairy
  • Co-operatives have advantage of subsidies in terms of milk procurement
  • Compensation of N Bhuvaneshwari and N Brahmani is around 9Cr
  • Milk procurement at 11L LPD

FY16 Investor Presentation
Average procurement cost - 30.90/L, selling price - 36.55/L

[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 →

Another thing I noticed (& dislike) is debt at consolidated level increased to 176Cr in FY17 from 139Cr in FY16.


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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:

  1. company stick to their 2022 target of 6000cr revenue…it is not possible by organically only so company going inorganically too…And recent business deals (reliance retail, Furture retail, JV)are in that direction …
  2. company is going to setup JV with European company for yogurt near mumbai…plant not commissioned yet…documentation work is on…(Company dont disclosed Europe company name)
  3. to achieve value add product share of 40% in coming 5 yrs, Company will increase their marketing spend from existing 0.5% of sales to 1%. (Double marketing spend)
  4. milk prices decreased in first half of last FY and now things are reversing. And better monsoon will increase milk realization going forward.
  5. Value add prdts having Ebidta of 15.6% whereas milk has 8%
  6. Future retail continue to marketing Heritage milk in their acquired stores. IN addition to that they will also sell Heritage milk in their other stores too…
  7. Fat losses decreased to 16crs this yr compare to 43cr to last year…(Need to understand this)…
  8. Heritage fresh parlours will remain with company only

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.

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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?

  • The company has the policy of matching the prices in a given geography. Cooperatives tend to set prices in most geographies.
  • We assure farmers that 100% of the milk will be procured. We have never taken “milk holiday”
  • The farmers are paid transparently for both quality and quantity.
  • Punctuality of payments
  • We provide many complementary services like veterinary care, vaccinations, help with bank loans etc.

Corporate dairy farming is not viable in India and the management feels that it is 2-3 decades away in India.

Milk Policy

  • Procurement Center -> Bulk Cooler = 25 kms one way
  • Procurement Center -> Chilling Center = 50 kms one way
  • Chilling Center -> Packaging/Processing Station = 250kms one way
  • Packaging Station -> End Market = 30 mins one way

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.

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 -

  • Some parlors are only selling milk and are unable to sell VADP due to geographical constraint etc. Since the sales model is different for milk vs. VADP, converted them into milk distributors.
  • Some parlors were selling unauthorized products and hence they were discontinued.
  • Some parlors were closed due to road construction, flyover construction etc.

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 ->

FY17 AR ->

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.

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.

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.

The company expects to spend close to 100Cr in capex every year till 2022.

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.