There is no doubt heritage has been a company well managed. But the share price has always been tied with the political destiny of Chandra Babu Naidu. Now the sentiment is down and it seems to be already priced in. If top management is targeted in some kind of witch hunt in the name of Quid Pro Quo allegations, it will be a huge negative for the stock. Even nothing of such happens, the stock may not give the stellar returns that it gave during Naidu’s tenure.
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Any reason for such a steep fall?
Seems like CBN image is affecting stock price heavily.
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Very click-baity video.
But it makes the actual point of the video around 4:00 time range.
The barriers to entry are MASSIVE in the dairy industry in India. Setting up a cold chain and defining the distribution process to minimize wastage of milk itself takes up to 7-10 years to perfect, not to mention the huge Capex required for the same. The other important part being the contact with local farmers, a relationship which is usually built over several decades and maintained throughout the lifecycle of the company.
But of course, GOI has a special focus on milk, because it’s the major source of nutrition for many poor people in India. That’s why co-operatives are the only big competitors to big corporate dairy companies here. If government subsidies were to stop, co-operatives would fold in under a year, simply because it is too challenging to run a profitable dairy business (Something which the likes of Hatsun, Heritage, Amul, Nestle etc have been doing for years and years).
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Dairy has done fine, it’s the feed, renewable energy and others segment that have under performed
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I think results are okay, but some explanation is certainly expected from the management.
The most interesting fact is that the Profit due to change in Equity holdings has been exactly covered by loss due to Derivatives. That’s something we can ask the management in the Concall. In fact, if the loss due to Derivatives stayed the same as Q1FY19, the Profit would have grown by ~21%, instead of the current flattish results.
Otherwise, the management had indicated that milk prices would come down after winter. But Cost of Materials Consumed has gone up by ~21%, so that again could be a line of questioning to the management (Although Purchase of Stock in Trade has decreased drastically, so RM prices could actually be going down).
A minor item is the ~16% jump in Depreciation and I can also see that Dairy segment Assets have gone up. So could be some new Capex.
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They have a hedge for the future retail stake and this trend of same other income and derivative profit loss is always there.
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Investor Presentation
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VAP sales have shot up 27% mainly on account of curd sales.
But still i was expecting 20%+ growth in diary division cz it was peak season.
Let’s see wat mgt has to say tomorrow.
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Analyst Concall Transcript is out
Major updates / My Thoughts:
- VADP as a percentage of Sales took a massive jump from 29.40% to 33.50%, just as the management promised before. This is good.
- The reason for OPM being low this time too, is because the management chose not to pass on increased RM costs in all market. They expect to pass them on eventually, as well as expecting that good monsoon will aid in lower RM cost itself (This is sort of going back on their earlier statement that they were seeing ‘green shoots’, but I suppose you really cannot predict something that’s linked to monsoons and the dynamics of demand/supply)
- 6000 Cr Topline by 2024, which translates to ~18% topline growth in the next 5 years. Capex linked to this will be 120 Cr each year for the 5 years in question. On average, that’s a Capital Turnover of 5-6, right along the historical average. If they can grow that fast while still maintaining the RoCE profile, that’s going to be amazing.
- As far as the Capex is concerned, they seem to be targeting Maharashtra as the major market next. The new Capex is lined up for Maharashtra and states around Delhi, Punjab, Haryana, Rajasthan.
- There was a brief mention about how the AP Government’s Rs. 100 Crore subsidy for dairy farmers may not really impact the company all that much. This is right in line with what I anticipated and a big reason why, instead of selling in this steep fall, I have actually added to my position in Heritage.
- Great piece of info about how the Renewable Energy division helps the company. Do give it a read in Page 6.
- Good suggestion about the FRL stake being used to repay debt. However, the management said they will have to take a call. FYI, the lock-in period for the FRL holding is coming to an end within the year.
- More justification for low Margins along the line of a long and harsh summer. I suppose we can all agree with that.
- Once again, an excellent piece of detail on the networking side of the dairy business. As expressed in a few posts before, I think this is a great source of entry barrier to the industry. Read in pages 13-14.
- Surprising info that the company has now started producing Ice-creams on their own under the Heritage brand, while the JV (Alpenvine) also continues to exist.
Overall, another great concall. Heritage Foods concalls continue to be an excellent source to learn more about the company and the industry.
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At first i was lil skeptical of reasons given by mgt for lower growth but cross checking with other players , the situation was same for all players this quarter.
One qualitative aspect of mgt which i really appreciate is patience with which they listen and answer the question esp. Dr.Sambasiva Rao,really a gem though.
The only negative thing about top Mgt is the amount of salaries paid to MD & ED(Promoter’s family). They have been paid Rs.12.84cr for full year FY18-19 including commission on NP, whereas the PAT for full year was around 80crs.That’s too high when u compare it with that of HATSUN & PARAG.
Even the total employee cost is too high,that too for fewer employees.
Some details about employee cost:
Heritage foods:
No. of permanent employees -3011
No. of temporary employees - 3200
Total Employee benefit exp.- 141cr (out of which 12.84cr is paid to top mgt)
Hatsun Agro
No. of permanent employees - 4952
No. of temporary employees -3873
Total Employee benefit exp. - 155cr (MD earns 44cr through dividends only)
Now considering the above facts, Hatsun has 42% more employees but employee cost is almost similiar.
It feels the only aim of top mgt is to earn as much by the way of commissions.
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This is always an iffy subject. As long as there is no breach or any sort of illegality involved, I’m okay with a high-maintenance management, provided the company’s economics is still great. Heritage’s growth and return profile have been more than satisfactory in the last decade and I believe the next decade will likely be similar, if not better.
On a related note, I don’t think a comparison with Hatsun is justified. Mr. Chandramohan is an entrepreneur par excellence and an unrivaled pioneer in the dairy industry. I think you can compare the ethics and corporate practices of such a man only with a handful of people in India, let alone the industry.
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Please checkout my post in Hatsun thread
“Comparison of Heritage and Hatsun on some specific aspects.”
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I attended Heritage AGM today & following are some notes -
- The company introduced Subja & Ragi Lassi
- Mission 2024 of 6000Cr, why growth was low in FY19? - There was a massive glut of milk in FY19, which was not seen previously for many years. The company focused on bottom-line & hence was not very aggressive in growing. To grow to 6000Cr revenue, milk handling capacity needs to be doubled at 30 LLPD. For that ~120Cr of investment is needed every year for next 5 years.
- VADP Growth? - The VADP contribution was 3% in 2007 & it was 29% in FY19.
- The company is increasingly using more automation which is very high end IT/Software.
- It is difficult to provide how much RIL dairy operations contributed as everything is integrated. Approx contribution is 145Cr. Won’t be able to give this number going forward.
- Renewable Strategy? - The company will develop capacities only for captive consumption. Approx. 2MW of capacity can be added over next 3 years. This allows for accelerated depreciation as well as lower electricity tariffs.
- Seal of Flavored Milk does not open easily? - The company is aware of this problem. It happened due to packing happening at high temperature etc. Correction with vendor is already in process.
- Inorganic growth? - The company has appointed EY to shortlist acquisition candidates & company keeps evaluating them. Currently 3/4 proposals are under consideration.
- Other operating income? - This includes export incentive, insurance claim & charges for using milk analyzer etc. given to farmers for rent
- Absence in Premium Products? - The company wants to be present in Cheese market but technology is complex & hence company is trying to find a partner. The cheese has to be customized for Indian taste as well as cost has to be brought down. The company is also trying to grow the UHT milk product in rural areas.
- Novandie JV? - The plany got delayed due to heavy rains in & around Mumbai. Expect commercial operations to start at the beginning of CY20.
- Brand - Philosophy, Strategy? - The company does many below the line activities in branding. The company has 1365 exclusive Heritage Parlors which provides some branding. So far company was working establishing distribution in western & northern markets, now company will start focusing on branding. The company did some digital campaigns around cricket world cup. Also company is trying to get products in all distribution channels to increase brand awareness - brick & mortor, e-commerce (BigBasket, Grofers etc.), 1.2L general trade outlets & modern trade. Branding need & spends will rise with increasing share of VADP products.
- Why number of farmers are stagnant at 3L? - The number of farmers will not grow as company is supporting buying of additional cattle to existing farmers so that there income levels go up. This also helps in efficiency.
- B2B in VADP - Nestle? - All the VADP sales are B2C sales, there is no B2B sales. The company is a co-packer for 2000 LPD curd for Nestle & gets processing charges which are booked into other income. The curd process is completely different for Nestle which is premium product vs. for Heritage curd.
Disc - token position to attend AGM, not a buy/sell reco
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Heritage Foods has stressed its focus on value-added products and continues to do so going forward. Many other dairy players are banking on the same. The demographic which has been driving this growth is arguably the younger population, especially the young working force who opt for convenience and standard quality.
In the western countries, such a demographic has been seen shifting to veganism in larger numbers in recent years.
The younger Indian population is quick to change their preferences according to global trends.
While this wave hasn’t reached Indian shores in large numbers till now, I wonder how this would impact consumption of value-added dairy products in India going forward.
Indians need their curd and paneer. Ice cream too is evergreen. I don’t think this will change a lot in India. If anything, VADP consumption has likely increased because of the rise of Food Delivery Apps.
But of course, doesn’t hurt to keep a look out for emerging trends.
We could have made similar assumptions for western countries where meat, cheese and eggs are staple. Maybe not cheese but the other two definitely.
You are right that humans tend to stick to their foods but having caught in a dilemma of moral/social obligation vs natural tendencies, look how the industry has adapted there to introduce vegan milk, meat substitutes, etc.
I too do not see this happening in the near term, but with more and more sections of our society getting connected to the global trends, it’s difficult to remain confident in the long term.
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