Distribution network and market presence should stem growth for Heritage Foods Limited
Heritage Foods Limited has an extensive presence and is consistently expanding its distribution, enlarging its portfolio and making continuous investments in brand. Market position and management of working capital should act as principal growth enablers. Strong distribution network should continue to help in product supply. Heritage Foods Limited focuses on penetrating into newer geographies and expanding presence into existing ones so that distribution footprint and product outreach can be increased.
Heritage Foods Limited
Heritage Foods Limited is one of leading and fastest-growing private sector Indian dairy companies. It is serving 15 lakh households. Having a key focus on product innovation, the company has developed a strong portfolio of milk and value-added products such as curd, ice cream, frozen dessert, paneer, butter milk, flavoured milk, lassi, A2 milk and milk powders under Heritage brand. The company’s capabilities include state-of-the-art milk processing facilities, R&D infrastructure having technologically-advanced equipment and testing laboratories and stringent quality control. Heritage Foods Limited has two business divisions - Dairy and Renewable Energy. The company has 18 processing plants, 187 bulk coolers, mini chilling and chilling centres. All these facilities help it to ensure availability of fresh and high-quality products. Heritage Foods Limited has wide distribution network, ensuring that its products are available across country. Heritage parlours and Heritage distribution centres are franchised stores and distribution wings which sell whole line of items. Through these distribution arms, the company ensures that consumers get high-quality goods and services. As on March 31, 2022, it had 6,464 agents/distributors in general trade, 859 Heritage parlours, and 65 Heritage distribution centres in 11 states across India.
Growth Enablers of Heritage Foods Limited:
- Healthy Financials Helped 4Q22 and FY22: In FY22, its consolidated revenue from operations grew 8.4% year-over-year to INR26,813 million during FY22 led by growth in milk sales and VAP products. EBITDA came at INR1,848 million and net profit was INR965 million. Increasing value-added products share and strong supply chain network are expected to lend support to the company in FY23 and beyond.
- First Line of Products: Heritage Novandie Foods Private Limited announced its entry in Indian market with first line of products. Heritage Novandie entered into yogurt production in Maharashtra and introduced Mamie Yova branded ‘French Yogurt’ along with ‘Yo Pop’, a drinkable yoghurt. It is focussed on pushing its brand recall higher through franchisee operated parlours and distribution centres, besides omni-channel network.
- India- A Growing Market: India has been transformed from a country of acute milk shortage to world’s leading milk producer. Tide has turned for India only in past few decades. Growing consumer preference for branded and value-added milk and milk products, and increased awareness of nutrition should act as growth enablers in India. While demand for liquid milk lends support to Indian dairy industry, value-added products hold more potential and promise growth in corridor of 15%-20%. Growth is widely supported by value-added products including UHT milk, cheese, ice-creams, flavoured milk, curd and butter milk, among others.
- Improved Financial Risk Profile: The company has seen its financial risk profile getting improved as a result of prepayment of term debt and improvement in operating performance. Heritage Foods Limited has earlier sold its entire stake in Future Retail Ltd and Praxis Home Retail Ltd. Proceeds from selling is utilised for long-term debt reduction. The company has seen an improvement in operating performance. Though operating margin may moderate with rise in milk procurement prices, financial risk profile should be strong. This is principally because cash accrual should be enough to fund incremental capital expenditure and working capital requirement. Heritage group has an established market position in dairy business and it also has a strong distribution network. With significant market share in Andhra Pradesh, Telangana, Karnataka and Tamil Nadu, Heritage Foods Limited is counted as one of largest private dairies in South India. Liquidity should remain healthy. Significant reduction of debt has been seen which should help in improving its credit risk profile.
- Heritage Foods Should Capitalise on Industry Dynamics: Agriculture is primary source of livelihood for about 58% of this country’s population. Indian food industry should see strong growth, increasing contribution to world food trade every year because of immense potential for value addition, principally within food processing industry. Indian food and grocery market is world’s sixth largest and retail contributes 70% of sales. Indian food processing industry makes up 32% of India’s total food market, one of largest industries in this country and ranks fifth in terms of production, consumption, export and future growth. Agriculture sector in India should be able to see growth in next few years because of increased investment in agricultural infrastructure like irrigation facilities, warehousing and cold storage. Growth in demand and population should help in achieving growth in Indian dairy market. Significant population is in dairy production, making a source of income for rural population. Government plans to triple food processing sector capacity in India from current 10% of agriculture produce and has also committed INR6,000 crore as investments for mega food parks in this country. Indian government allowed 100% FDI in marketing of food products and in food product e-commerce under automatic route. Indian government has taken several initiatives to help dairy industry and to improve production capacity. With stagnation in world dairy prices, Indian dairy industry’s emphasis has been on achieving greater cost efficiencies. This industry focuses on improving quality of products so that premium price can be achieved in world market and reliance on government can be reduced. Milk consumption in India should see an increase than any other country and this consumption growth should stem from growth in population and income and urbanization. Inspite of lower per capita income, country’s demand for milk at 48.8 million metric tons overshadows demand in other parts of world.
- Focus on Increasing Footprints Should Help Achieve Desired Growth: The company is having an extensive presence and is consistently expanding distribution, enlarging its portfolio and is making continuous investments in brand. Apart from deeper penetration into existing territories, the company works on increasing footprint in high milk producing and consuming states. So, while milk procurement is done in Haryana and Rajasthan, selling of products is taking place in Uttarakhand, Haryana, Rajasthan, Uttar Pradesh and Delhi NCR. Initiatives to expand presence to states beyond southern and western parts of India are also on cards.
- Strong Capabilities: The company is expanding milk processing capacity and is improving research & development infrastructure with technologically advanced equipment and testing laboratories. It focuses on maintaining stringent quality control, apart from enhancing product innovation. Optimising management of supply chain with development of customised processes and systems is another focus area of Heritage Foods Limited. Integration of modern technology across all verticals should help in procurement and distribution capabilities and better management of inventory. Aim is to reduce costs and achieve better operational efficiency.
Strong Outlook Means Going Long on Heritage Foods Limited
Heritage Foods Limited has a total market cap of INR1,32,907.07 lakhs and free float market cap of INR65,488.23 lakhs. The company has compounded its turnover at ~12% over FY10-FY20. Rising awareness and preference for healthier and nutritious alternatives stemmed increased demand for value-added dairy products. Heritage Foods Limited focuses on expanding portfolio of value-added products including curd, buttermilk, flavoured milk and paneer etc. so that evolving consumer aspirations can be taken care of. This should result in increased growth potential and improved margins.
Dairy industry offers a range of opportunities. These opportunities stem from population growth and urbanization, changes in dietary patterns and demand growth for value-added milk products. The company should be able to capitalise on rising opportunities and create innovative products, addressing diverse consumer requirements. Focus is on enhancing presence in high milk producing and consuming states, extension of distribution network and enhancement of production of value-added products. Investment on marketing and advertising should help the company deepen its brand engagement. Automation in operations should strengthen supply chain and improve processes. Milk procurement system of Heritage Foods Limited comprises 3 lakh+ farmers, spanning from 8 states across India. Milk procurement at remunerative prices, timely payments and programmes targeting improved milk production helped the company maintain strong relationships with farmer community. Judicious investments in village-level milk collection infrastructure, bulk coolers and chilling centres and processing capacity should help the company in scaling milk procurement levels.
Sound supply chain management, efficient management of procurement and sales, financial strength and strong distribution network are all expected to contribute to rise in share price in next few quarters. The company trades at dirt cheap valuation. Stock currently trades at ~13.05x of FY22 EPS, which is at a deep discount against sectoral average of ~21.65x. This means investors can go long on this stock.
