Heritage Foods Ltd

I am not able to recall the exact source (most definitely a conf call a 1-2 years back) wherein they said that there is usually excess milk in the winter season especially from buffaloes which is higher in fat content. The standard milk doesn’t have fat content more than 4.5% and hence the excess is converted to SMP or fat products for B2B.

Need to verify this though.

Q3 FY19 Results ->

Investor PPT ->

Conf call is also available on researchbytes.

I will talk about one or two points related to business quality of Heritage & not everything -

  • For Heritage, TN, MH & north all three markets degrew due to glut situation on milk supply and cooperatives selling milk at a much lower price. Avin sells two varieties on toned milk at 37 & 34 Rs. vs. 40 Rs. price of Heritage. The sales degrew by double digits in TN market. Hatsun is not majorly present in toned milk market, they are present in full cream milk where Avin is absent. Hence the impact on Hatsun is limited. If someone from TN can share some ground experience in Avin/Hatsun/Heritage, that would be good.
    In MH, 5Rs. subsidy is only available to players who are based out of MH & hence Heritage is not able to compete on procurement side & that flows through to sales.
    As it can be seen, the ability to defend market share of Heritage vs. Cooperatives remains limited. An extremely “anti fragile” business would have been able to gain/grow market share in current distressed time. The balance sheet strength & ROCE of Heritage allows it to lay low in current market but this situation can repeat again and growth would always remain patchy.
  • The other thing is Farmer’s trust becomes non-controlling/minority interests in consolidated statements of Heritage. This ownership incentive has resulted in good retention of the farmers. I would like to dig more in this aspect.

I also have been reading about dairy business in various news paper articles & it looks like several players are very interested in this space and competitive intensity is expected to remain high. Following are some notes ->


  • ITC launched Aashirwad branded milk and curd
  • Also launched ghee under brand Svasti
  • Project Gomukh - integrated animal husbandry project to increase milk productivity
  • Brand sunfeast for flavored milk - Sunfeast Wonderz Milk
  • Has a plant in Kapurthala in Punjab


  • Acquired ‘Aaditya Milk’ ice cream brand from Vijayakanth dairy in Karnataka
  • It sells products under Kwality Walls, Magnum and Cornetto


  • Lactalis acquired Tirumala in South for 1750 cr at 1.22 times price to sale and Anik industries in the north for 500cr
  • Acquired Prabhat dairy at 1700cr at 1.1 times price to sale


  • Amul won the bid to run Delhi Milk Scheme


  • The company has 125 stores


  • Ice cream is 9000cr market growing at 10-15%
  • South Korean Lotte has acquired Ahmedabad based Havmor

Disc - Heritage forms 2% of my portfolio. No transactions in last 90 days. Not a buy/sell reco.


I think it has more to do with the power of a brand than anything else. I have used all three brands of milk (Aavin, Aroyka and Heritage). I personally see very little difference in quality. Being a shareholder, I always make sure I buy Heritage if available. Interestingly, I have seen Heritage milk being used in Corporate places a lot, although this could really be a sampling bias from my side.

But when I tried to convince my parents and relatives into buying Heritage instead of Aavin, they wouldn’t budge. The brand loyalty is extremely strong. They aren’t even willing to try other brands. They’d buy other brands only when Aavin is not available and the requirement of milk is urgent. If it’s not, they’d rather get it when it arrives the next day.

When I was touring Kerala last month, I felt the same about their local co-operative brand, ‘Milma’. I must have asked at least 5-6 shopkeepers about whether they’d consider using other brands of milk if the quality was high / discounts were given etc., The answer was an unanimous ‘No’, except one shopkeeper who said he’d be open to trying new brands, provided a sufficient discount.

The only advantage for Hatsun and Heritage I see is that these co-operative brands spend less on marketing and sales (Well, they don’t have to, to be honest). Hatsun and Heritage pip them exactly because of that. On supermarkets / hypermarkets, I see more of Arokya and Heritage than I do Aavin milk. In the long term, this could prove very valuable indeed and perhaps even be a source of an expanding moat. But for now, the co-operative brands have the lower-middle-class to the lower class in their bear grip.

That’s why my thesis for investing in Heritage hinges a lot on the success of their VADP segment. I don’t expect them to be as successful as Hatsun, but at least halfway there. It will take a long time for Hatsun and Heritage to tap into the mass segment, simply because it’s uneconomical for them.


As mentioned, above, does the difficulty to budge the local market shares be seen in the dairy players’ cross country expansion plans?

Hatsun’s promoter Mr. Chandramogan, as well as Amul’s Mr. Sodhi also mentioned that it is a first mover’s advantage. Whoever can reach places of supply as well as demand and setup procurement and distribution quicker can have a good hold on the local market.

We are recently seeing a lot of players trying to expand beyond there local markets including Heritage and Hatsun.

However, one question is- For the future growth, can private players or co-operatives easily uproot the unorganized players already present? What are the margins and payment terms usually in unorganized sector? Why would dairy farmers prefer organized?

Expansion is a different question altogether. It has nothing to do with the branding (Maybe it does a little), but more to do with Supply Chain related problems. It takes almost a decade for a milk supplier to successfully set up a Supply Chain for a single state. The quality of Cold Storage chains is less than desired in India and transportation is another additional problem. A single hour of power cut in a plant means the entire batch is spoiled and written off.

So, yes, I think established players in the diary industry command huge entry barriers. This will eventually help them gain incremental market share from the unorganized players. But I don’t think they can touch the co-operatives in a hurry, since they are protected by the government itself.

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How did you access it? I am not able to locate the app on play store and the website links are not working for me in either edge or chrome…

Do you have flash enabled? Unfortunately website heavily uses flash which most browsers disable by default.

They uploaded the transcript now, can access it.

CRISIL has upgraded its ratings on the bank facilities of Heritage Foods Limited (HFL; a part of the Heritage group) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Positive/CRISIL A2+’.


Key Rating Drivers & Detailed Description


Established market position

HFL is one of the largest private dairies in South India with significant market share in Andhra Pradesh, Telangana, Karnataka and Tamil Nadu. HFL also has a wide product portfolio of over 22 products and a strong distribution network of 1,380 own parlors under the brand, Heritage, and wide availability of products in 1.2 lakh retail stores. Benefits derived from the promoter’s experience of over 25 years and healthy relations with customers and suppliers should continue to support the business.

Prudent working capital management

Gross current assets were 35 days on March 31, 2017, driven by inventory of 25 days and receivables of 2 days.

Comfortable financial risk profile

Networth and gearing were healthy at Rs 343 crore and 0.82 time, respectively, as on March 31, 2018; the TOL/TNW ratio was also comfortable at 1.44 times. Debt protection metrics were robust, with interest coverage and net cash accrual to total debt ratios of 7.04 times and 0.29 time, respectively, in fiscal 2018.


High geographic concentration in revenue

HFL derives over 75-80% of revenue from South India indicating high geographical concentration risk in the revenue profile.

Susceptibility to changes in government regulations, intensifying competition and epidemic-related factors

Raw material prices in the dairy industry remain susceptible to change in government policies and environmental conditions. Dairies are also vulnerable to risks of failure in milk production due to external factors, such as incidents of epidemics affecting cattle. Moreover, intense competition may continue to constrain scalability, pricing power, and profitability.


Normally, I am too cautious about the company linked to any politician.
Chandrababu Naidu under ED scanner for money laundering case. I think this company is directly related to his family. Bad news always derate PE

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Mr. Naidu has very little intervention in Heritage’s business. He’s been the quintessential ‘Silent Partner’, both through the years he was not in power and the years he was.

If you’re considering political fallouts, I think a more relevant point would be Mr. Reddy coming to power and announcing huge subsides to diary farmers.


Disc - I have sold majority of my stake in Heritage after watching Jagan’s interview calling out Heritage.
Since I have been frequent poster on this thread, it is important to provide above disclosure.


could u plz share link of the interview.

Heritage is mentioned around 15 mins


That’s nice of you!! Very few people does that.

Disc: never had position in heritage.

New CM speaks like an intelligent fanatic who could end Naidu’s heritage!
Disc: no holding & not aligned with any party.

I watched that interview over the weekend. But isn’t it the ‘bad news giving good price ‘ scenario ? He only talks about alloying land to heritage and I read various other articles on that. Although it may be a scam but it was more about insider trading kind of situation where he let heritage buy land where the capital was going to come. So if anything it’s only about the land parcel and they may have to compensate as per prevailing land prices. How does it impact the business anyway, for which we invested in first place ? Doesn’t fears like this brings the value on board ??

Disc - invested since 2015 and added more in last one week.

Similar articles appeared in 2009 too when TDP lost the election, blaming Heritage of land scams, milk quality etc. But as usual there was no proof against Heritage.
N its not insider trading at all just a phrase used by media to hog limelight.
Whats wrong if someone buys land in anticipation of price increase.
N taking lessons from 2009 they have kept the company clean.Even sold off unnecessary subsidiaries

Risk though is that if govt. decides to form one milk federation on the lines of Nandini etc.
But then not only heritage all other private players will be affected.

I am not very political savvy, so I won’t talk about the political-rivalry thingy. Ignoring this whole political-rivalry angle, purely from a government policy view point, probably a few things to consider:

  1. Heritage only does ~24% of Revenues in AP (The majority, as you can guess, is in Telangana - 34%). The rest is elsewhere, like TN, Karnataka and other northern states.
  2. Even if Jagan re-opens Chitoor Dairy, its capacity is ~2.5 lakhs liters, only 10% of the entire supply from Chitoor. So this 10% blow, if it materializes, will have to be shared equally by all private players. Heritage’s share of this blow could be somewhere around 3-4% or so, which I think they can safely mitigate by procuring from somewhere else or reallocating capital to TN or Karnataka.
  3. The subsidy is beyond question. AP treasury in shambles. If Jagan does decide to provide the subsidy, he will be shooting himself and his party in the foot. Supposing he somehow manages it, we should refer to the above point. The blow will be finalized in this case, but the ultimate impact on Heritage will be softened.
  4. Now, will the subsidy be helpful? May be, may be not. Research a bit on what happened in Maharashtra after they announced a subsidy to milk farmers. Also, we have to note that Telangana already provides the Rs. 4 subsidy to their milk farmers. Seeing as how Heritage’s major Revenues come from Telangana, we can only assume that it will not impact Heritage too much… or at the least, that Heritage is competitive enough to prevail over the subsidy eventually.
  5. On top of all this, Heritage is actively diversifying geographically. This will naturally reduce their dependency on AP and any associated political fallouts.

My core thesis for investing in Heritage is that VADP will drive the next leg of value creation for the company. This seems to have started playing out, as the company is taking material efforts in advertising/marketing/producing more VADP stuff.

Unfortunately, I don’t have too much cash left to invest. But whatever I can gather, I will attempt to invest in this counter. Let’s see.


Adding to my earlier comments, let’s understand the key competitive factors a dairy player requires in order to succeed and evaluate if they have any material impact because of gov polices:

  1. Direct Procurement from farmers - Heritage scores high on this as 95-100 of their milk is sourced directly from farmers. Can YSR or any other party influence / effect this. Likely not. Besides he wouldn’t want to hurt farmers by making any irrational decision.

  2. Product mix - they only have 25% of share coming from VADP but company wants to increase this in coming months. This again is in complete control of the company and doesn’t not have any influence from gov polices.

  3. Distribution / sourcing mix - they have reasonable presence across other states apart from AP which again is in complete control of the Company and how they want to scale or expand in to other geographies.

  4. channel mix - currently they are 100% B2C but as they increase their VADP product line like cheese and butter, they may get in to B2B as well which again is in their control.

All of the above are the key parameters when evaluating a dairy company which have little to no influence of any gov policy.

Counter views are welcome.

Disc- invested and may add more more and hence biased.

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