Heritage Foods Limited (HERITGFOOD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Heritage Foods Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to Ms. Garima Singla from Go India Advisors for opening remarks. Thank you, and over to you.

Thank you. Good afternoon, everyone. I'm Garima Singla, and it's my pleasure to welcome you on behalf of Heritage Foods Limited. Thank you for joining us today for Q1 FY '27 Earnings Conference Call. This call is being hosted by Go India Advisors. Please note that today's discussion may include certain forward-looking statements. Therefore, they must be viewed in conjunction with the risks that the company faces. Today, on the call, we are joined by Mr. Brahmani Nara, Executive Director; Dr. M. Sambasiva Rao, Whole-Time Director; Mr. Srideep Kesavan, CEO; Mr. A. Prabhakara Naidu, CFO; Mr. J. Samba Murthy, COO; Dr. Brij Mohan, CEO, Heritage Nutrivet Limited; and Mr. Umakanta Barik, CF and Compliance Officer. I now invite Dr. Rao to present the company's business outlook and performance, after which we will open the floor for Q&A. Thank you, and over to you, sir.

Good afternoon, everyone, and thank you for joining us today. Financial year '27 has begun with another quarter of disciplined execution for Heritage. Despite the challenging environment for the dairy industry, we delivered the highest quarterly revenue in the company's history while continuing to strengthen the building blocks of our long-term growth. Throughout the quarter, we remain focused on our strategic priorities, namely reinforcing our procurement network, expanding our value-added products portfolio, investing in manufacturing capabilities and building new growth platforms. Our integrated farm-to-consumer model continued to differentiate Heritage by ensuring reliable milk availability while supporting the rapid expansion of our value-added products portfolio. This disciplined execution was reflected in our financial performance. Consolidated revenue increased 18% year-on-year to INR 13,381 million, marking another important milestone for Heritage. EBITDA stood at INR 619 million with an EBITDA margin of 4.6%, while profit after tax stood at INR 150 million, translating into PAT margin of 1.9%. Although elevated milk procurement costs continue to weigh on the dairy industry, resilient demand across our value-added products portfolio, calibrated pricing actions and disciplined execution enabled us to deliver another quarter of healthy growth while continuing to invest for the future. Every successful dairy business is built on a strong and resilient procurement network. During the quarter, milk procurement prices increased 7% year-on-year to INR 46.61 per liter, reflecting continued supply tightness across key milk producing regions. Despite these industry-wide challenges, [ Perrigo ] increased milk procurement volumes by 2% year-on-year to 18.10 lakh liters per day through its sustained investments in farmer engagement, web services, capital nutrition programs and timely payments. These initiatives ensured uninterrupted milk availability while further reinforcing one of Heritage's most enduring competitive strengths. On the demand side, milk sales volume remained stable, while average milk [indiscernible] prices improved 4% year-on-year to INR 58.68 per liter, reflecting the strength of the Heritage brand and sustained consumer trust. The benefits of these investments are becoming increasingly visible in the evolution of our business mix. Value-added products continue to be the primary growth engine during this quarter with [ WAP ] revenues growing 40% year-on-year to INR 5,636 million. Importantly, this performance was driven by healthy underlying volume growth across categories with [indiscernible] volumes growing 33%, [indiscernible] 26% ice cream 25%, buttermilk 60% and [indiscernible] 98% year-on-year, demonstrating the growth -- demonstrating the growing consumer preference for our differentiated portfolio. Consequently, value-added products contributed a record 44% of consolidated revenues compared to 36% in the corresponding quarter last year. Including our consumer pack and butter portfolio, the broader VAP portfolio grew 39% year-on-year to INR 6,322 million, contributing a record 49% of consolidated revenues versus 41% a year ago. This continued improvement in our product mix reflects the premiumization of our portfolio and our steady transition towards a more branded value-added business. Our ice cream business also continued to build strong momentum during the quarter. It crossed INR 550 million, growing 65% year-on-year with Alpenvie, our new brand, delivering robust growth of 44%. [ Ketaware ] also delivered an encouraging performance with revenue growing 19% year-on-year, supported by improved product availability following capacity expansion while achieving a near breakeven bottom line. Supporting this momentum, our newly commissioned ice cream facility ramped up well during the quarter, reaching approximately 40% capacity utilization. The facility now manufactures both Alpenvie and [indiscernible] portfolios from a common platform, enabling faster capacity absorption, improving operating leverage and providing sufficient headroom to support future growth. Together, these developments reinforce our strategy of building differentiated high-growth brands across premium dairy and nutrition-led categories. Beyond our core dairy operations, our adjacent business also delivered encouraging performance. Heritage Nutrivet reported revenue of INR 728 million, represent a robust growth of 37% year-on-year despite elevated input costs across the animal nutrition industry, while delivering a [ PBT ] of INR 20 million. This performance reflects the strength of the business model and the growing opportunities within the Animal Nutrition segment. We also continued to strengthen our long-term growth platforms during the quarter. Heritage Novandie Foods became a wholly owned subsidiary, reinforcing our presence in the fast-growing high-protein yogurt category through [ Levo ] brand. We also increased our shareholding in [ Peanut Butter and Jelly Limited ] to 71%, reflecting our conviction in the long-term potential of the better-for-you nutrition segment and further expanding our presence in attractive premium food categories. Alongside these investments, we continue to build a stronger portfolio of brands. Alpenvie is undergoing a comprehensive brand refresh with a new identity and several new SK launches. [ Nourish Plus ] continues to gain strong traction, particularly its high-protein puny variant, while Levo continues to perform well across organized retail. [indiscernible], [ Chef's Choice Curd ] and organic milk are also witnessing encouraging consumer acceptance and building salience across the markets where they have been introduced. Collectively, these initiatives are expanding our presence across premium dairy, nutrition-led and differentiated food categories while reinforcing our long-term brand building strategy. The quarter also brought encouraging external recognition. Heritage Foods received the [ Investor Relations Excellence Award ] in the F&B category from the Investor Relations Society, while our Vice Chairperson, Managing Director, Mrs. Bhuvaneswari Nara; and our Executive Director, Mrs. Nara Brahmani, were recognized among [ Fostune India's ] Most Powerful Women 2026. These recognitions reflect our continued commitment to strong governance, transparent communication and long-term value creation. As we continue to invest for the future, we remain disciplined in allocating capital towards opportunities that strengthen our competitive positioning while maintaining a prudent balance sheet. Our long-term direction remains unchanged. We are building a larger, more premium and more resilient branded value products category anchored on a trusted dairy platform. Every investment we are making today across procurement, manufacturing, brands and adjacent growth platforms is aimed at improving the quality, resilience and predictability of our business while creating sustainable long-term value for all our stakeholders. On behalf of the entire management team at Heritage Foods, I would like to thank our farmers, employees, distribution partners, customers, consumers, shareholders and all our stakeholders for their continued trust and support. With this, I would like to conclude my remarks and open the floor for discussion. Thank you.

[Operator Instructions] We take the first question from the line of Sameer Gupta from IIFL Capital.

First question is on the milk procurement outlook. So we are now well into the summer flush or the cow flush. Any inkling to the milk production or procurement that has happened so far? Are the milk procurement prices kind of easing or they have continued to remain firm? Any outlook you could provide on the upcoming overall flush also would be helpful given that it is likely to be an El Nino year with deficient monsoon plus also in an inflationary environment. That would be my first question, sir.

This is [indiscernible]. I'd like to inform you that this time actually, this season generally [indiscernible] we expect in April, May, which because of this weather condition, climatic conditions that could not happen much. And however, we have procured about 18.1 lakh liters during Q1 and the prices have gone up actually. So if you take March to April to May to June, prices have gone up. And looking that prices are now stable, but still we have to see that there is any challenge further in that based on the geography and weather conditions because it is depend on and temperatures and all different geographies are behaving differently. So that is the prices currently now looking at stable now. And then as usual, we expect that in Q3 that October onwards, there is going to be a [indiscernible] season. This Q2 actually now we are observing that price is going to be stable or a little bit increase. But apart from that, whatever the quantity required for us actually, we are able to source this by expanding our network at the village level through heritage procurement centers by adding number of farmers actually each village level and improving the throughput at that village level procurement volumes and working with the farmers and improving the farmers level production actually. So throughput from the farmers productivity has come down, but throughput from the farmer actually, we are trying to increase it and to get more milk in Q3 as well. So that is a condition.

Got it, sir. So what I gather is that the mini flush in April, May, you said, right, typically happens. That hasn't happened. And typically, prices which should have come down have not come down, but firmed up and you still expect October flush to be stable to inflationary, which may not be the case normally. Is this a correct understanding?

Yes. Yes, yes.

Got it. Sir, I understand that you will not have any procurement challenges, which brings me to my next question. So when I am looking at milk procurement for Heritage, what I'm noticing is that it's been flattish to negative for the past 4 quarters. Any guideline here as to what is happening? Is it a conscious choice to not procure much given the inflation or you increase your third-party milk procurement using old cost inventory? What exactly is happening here?

Yes. Sameer, this is Srideep here. We do very measured material balancing planning. If you recall, last year was not very good as far as the volume growth was concerned and the procurement was in line with that. And as Mr. Samba Murthy just explained now, in this year, as the volumes have gone up and we have had good performance in the -- on the sales side, demand side, we have grown the procurement volumes in line with that in spite of, let's say, the prices. But we should remember that this is nothing to do with only Heritage. The industry is actually facing -- there is a little bit of a shortage of milk on the supply side, and this is something that all companies are reporting. The industry has been facing this for the last several quarters and our lack of growth procurement is also in line with that.

Got it. So basically, you're saying that the procurement is growing in line with consumption and that is likely to continue?

That is right. So like Mr. Samba Murthy said, we are investing in growing our farmer procurement network. We are investing in expanding our village level collection centers, farmer productivity, et cetera, which is what is going to help us in good stead in the long term.

Got it, sir. Got it. But I was actually looking at it in conjunction with the VAP growth also because that also will require milk procurement volumes to go up. So that was why the question was there. I mean ...

So see, what we should understand, that is why I use the word our milk procurement is in line with material balance planning. See value-added products, for example, if it is butter milk or, let's say, any of the drinkables or if it's ice cream, the amount of solids and fats required is what we have to look at. It's not always one is to one. We are able to manage it with the materials level.

No, got it. I absolutely agree. Fair. And last question, if I may squeeze in. VAP growth of 40% this quarter, how much would be from price hikes and how much would be volumes? Any blended level number could can help?

Yes, it is largely all volumes driven. Price hike, we have had price hike of about 5 percentage in value-added products, weighted average. 5.12 percent weighted average price increase across value-added products and the balance 35% is all volume driven. If you have seen our largest value-added product, which is curd itself has grown at about 25%. [ Paneer ] has continued to grow at the trajectory of 34%, 33%. So all -- yes, 26% is the growth, 33% is [indiscernible] growth. [indiscernible], of course, there is no base, and we have done about 150 tonnes in this quarter. All like whether it is drinkables, butter milk, for example, has grown at 108%. So it's largely volume-driven growth and prices contributed about 5%.

Got it. And just on this one, [indiscernible], how much of value-added would be [indiscernible] now as a percentage?

That's -- I don't know what is the purpose of that question, Sameer, but [indiscernible] as a percentage contribution to the value-added products will continue to decline because [indiscernible] grows slower than the rest of the value-added product category, right? Currently, it's at 68.9%. So it's about 69% of our value-added. So it used to be about 75% some time back.

That was the purpose. So yes, I remember it used to be 75% and just wanted to gauge like how the contribution is trending. There is no other intention.

It will -- you should -- one should expect that the [indiscernible] as a percentage contribution to value-added products will continue to...

[Operator Instructions]. We take the next question from the line of Abhishek Mathur from Systematix.

Sir, this growth in the value-added products of about 40% or so is quite exceptional in the light of the recent trajectory that we have been on. While you have indicated the category-wise volume growth in VAP. But still, if you can give some more color on how we are able to achieve a 35% volume growth, is it to do with geographic expansion or distribution expansion? Or are we taking some shift? So what exactly is driving this 35% volume growth in VAP? If you can shed some color on that? And also as a corollary, we have in the past spoken about a 20% plus -- 20% to 25% growth in VAP. So does that guidance change in the light of this recent delivery? Or is that intact? That's my first question.

Yes. Thank you, Abhishek. This is Srideep here. See, we should look at growth over a long period in time. On a year-on-year basis, there might be a little bit ups and downs because of weather influences, et cetera. We should also acknowledge the fact that we are cycling a low base of last year because investors will recall that last year, quarter 1 was heavily marred by rains and adverse weather. So we are cycling a low base as well, number one. But when it was raining last quarter, we told you that the underlying business is pretty strong. There is nothing wrong. And if we had a decent support in terms of decent weather, the performance would come back. And we had delivered in the subsequent quarters of last year as well. The long-term trajectory, what one should expect is that -- and this is something that we have mentioned in the past as well, is that we are aiming to grow in the mid- to high teens, so 16 to 17 percentage kind of growth is what we are aiming to deliver, which requires milk to grow at about 7% to 8% and value-added products in the range of 25%. Now this is what you should expect in the long period in time. And this on a sustained basis, we should be able to deliver.

Yes. You also asked about the underlying factors. Primarily, you can say that 90% or 80% of the growth is primarily due to distribution expansion, new distribution points opened in existing geographies. We have not opened any new geography whatsoever. 20 to 25 percentage of the growth is on account of consumer traction increasing, which is where we have gained market share. In most of the organized channels where we are able to measure our market share, where we get quantitative data as to our market share, we have made significant gains in market share in this quarter 1. And that is something that in every category. We have gained market share in curb. We have gained market share in [indiscernible]. We have gained market share in butter milk. So this is something that we celebrate as well. So 80 percent is with distribution or increased availability, 20 percent is because of increased consumer traction with our brands getting stronger.

Right -- just a follow-up. This market share gain that we have talked about, is it from the unorganized sector? Or is it from the other listed dairy peers, organized peers that we are talking about?

No, of course, all dairy growth, not just for Heritage for every single branded company in the country, all growth comes from unorganized sector, right? So that's a given. I was mentioning market share gain in the organized channel. In the organized channel, there is only organized brand. So when we are gaining share, we are gaining share from other branded players.

Understood, sir. Very clear. Just a quick second question. Any pricing action, any hikes that we have taken in the month of July so far? That's it from me.

Yes, we have taken pricing. So as Mr. Samba Murthy actually elegantly put in the beginning that we are actually going through a phase of prices remaining firm and flush being weak. While we wait for the [ Buffalo ] flush to come in October, November, at this point in time, we do not see prices easing, which means that we have to pass on the increased raw material prices to our consumer. There is no other way. And we are doing it successfully in each market. Even this week also, we have seen price increases across several of our markets.

We take the next question from the line of Pratik Kothari from Unique PMS.

I think excellent delivery on the VAP side. Sir, my first question on gross margin, right? So if we compare ourselves to last quarter Q4, the procurement price that we report is almost stable. The VAP share has gone up materially, even we have taken some price hikes between the 2. But gross margin has come down. So is this a mix change that is driving this? I mean ideally would have expected gross margins to have started improving now.

Pratik, it's a very, very valid and very right question to ask. So on a weighted average basis, the numbers are not really telling the story. Our weighted average milk price is INR 46.61 in this quarter compared to INR 46.67 last quarter. So it looks like it is flat. But the reality is cow milk -- cow milk last quarter, which is Q4 of FY '26 was INR 42.10 and cow milk now is INR 43.2. So if I just look at cow milk, it has gone up by almost INR 1. And Buffalo Milk was INR 61.38, which has gone up to INR 65.99. So that's a significant increase in Buffalo milk. But we saw in this quarter a heavy decline in Buffalo Milk volumes. We actually had over 20 percentage of decline -- degrowth in Buffalo Milk. It was very difficult to get Buffalo milk. And because of the mix change and mix going towards cow milk, the weighted average is looking like that. But see, the gross margins are impacted primarily because many of the regions are purely [indiscernible]. So those regions like milk has actually gone up by INR 1, and that is seriously impacted, number one. Number two, if you look at it, the milk prices have gone up by about 2.1% in this manner, if you look at it. But about 0.5 percentage or so impact is also because of [ SMP ] that we consumed in this quarter, number one, in higher quantities and number two, at a higher price per kg. This also is another impact. So net-net, we have had 2.5 -- and the other third impact that we have had is packing material. Packing material on account of the war the packing material also had a significant material impact, almost 30 basis points of bottom line impact. All of these put together have worsened the gross margin. So if you see the gross margin declining by about 2.5% compared to last year, it's only -- it's because of, one, mix change; number two, the SMP and the third is the packing material.

And sir, I mean, we have called out a couple of areas where we wanted to kind of first break even and then make money. So one is the consumer fats and is the 2 new geographies which we have seeded, which is Mumbai and North of India. If you could just touch upon where are we in that journey of at least first breaking even there? And how do we see that -- when does that break even over what time period and where are we in that journey?

Okay. See, in GE, last year same time, we had about -- we were negative about 12% in EBITDA. And now that EBITDA number is about minus 8.5%. So despite the entire business looking worse off compared to last year, GE is actually better off by almost 4%, right? But it is still negative. Secondly, the reasons that you called out again, the losses have reduced. So while the overall profitability has declined for the company, the losses in the loss-making regions have reduced, which means they are on the right trajectory. So if you calculate the delta, it's quite significant. If those regions have performed in line with the company's profit decline because those regions also had raw milk price increases, right? If they also declined in line with the raw milk increases, then we would have had additional INR 1 crore of bottom line hit. So that was avoided. So you're right, Pratik, in asking that question. The negative businesses have improved. It's just that the positive businesses have declined because of our ability to -- or rather delay in passing on the raw milk increase to consumer.

And last one, sir, I mean, this has been a pain point and you have kind of called it out and sorry for asking again. But this liquid milk growth volume-wise, et cetera. I mean we have been in this band for a while now. I know even you guys are as worried, but just any breakthrough, anything that we are seeing to kind of solve this?

So I should admit that this is the main problem that we need to solve. If liquid milk volume growth comes back, it supports overhead absorption and the numbers would look very differently. It's something that we are working on. We have -- maybe you could talk about distribution network expansion -- so regarding this milk actually, we are now focusing on the distribution network expansion almost through adding that fresh distributors and [indiscernible] happiness points and all. So now we have almost in the quarter compared to previous quarters, we got about 1 lakh liters addition [ liters ] 1 lakh liters. And we are expanding it and focusing on expanding it basically on the network, distribution network expansion. And even within that also, then we are also focusing on the throughput distribution point. So that's also there. And then we can see now month-on-month growth is there in the [indiscernible] like you take that March to April, April to May, May to June, June to even July, there is a growth actually. I think, yes, it is going actually in the right direction.

Yes. Thanks, Mr. Sami. So the numbers that we report here is an average of the quarter. In March and April, we took the prices, which actually came with a little bit of decline in volumes. We usually see that. And the team with distribution expansion was able to claw back. This is -- there's always a work in progress, but you're right in calling it out. This is the highest priority for us.

[Operator Instructions] We take the next question from the line of [ Vignesh Iyer ] from Sequent Investments.

Sir, my first question is on the price hike part of it. I heard your earlier commentary and considering how the situation has not the flush season flush season that was expected didn't turn out in this quarter as well. So what kind of price increase are you in to be taken for the upcoming quarters? And also can you tell me if you took any price hike in quarter 1? I mean was it at the start of the quarter or if you can give us a rough time line of that?

Mr. [ Vignesh ], this is Srideep here. I didn't get the last question. Could you please repeat?

I wanted to know if you took any price hike in quarter 1? And if you could tell me if the price hike was taken on the later part of the quarter or the start of the quarter?

All right. Yes. Mr. [ Vignesh ], so yes, we had taken up prices in the -- towards the end of quarter 4 of last year. And through quarter 1, so we got the benefit of that in quarter 1, right? For milk, for example, our prices were 4 percentage higher than same period last year, right? And so -- but that said -- and same -- like I mentioned, 5.1% for value-added products, et cetera. But it doesn't mean that all pricing was done at one point. There were certain markets in which price increase was done in middle of May. There are certain other markets in beginning of June, et cetera, et cetera. because all markets did not go up at the same time. It's also a function of competitive scenario.