Heritage Foods - Why is it such a fancied stock?

undervalued? trading at 30x TTM earnings

all the value added products pitch - milk is the largest constituent of the dairy market, ghee comes in 2nd and in dairy 75-85% of the consumer money goes to the farmer, milk business huge volumes 3-4% margins, value added products 10-12% margin
75-80% of the dairy market still unorganized
not just competition, but ultra-competition in the segment

 

Inspite of being a crowded place in FMCG sector,there are two bright spots.First is 1.3 billion still growing population .Second is increasing urbanisation and increasing consumption per capita which is still very low level as compare to Devolped world.

 

Then how profits came in bumper manner?

Heritage Foods has rallied 8% to Rs 475 on the BSE in otherwise weak market after the company reported three-fold jump in consolidated net profit at Rs 15.29 crore for the quarter ended September 30, 2015 (Q2FY16), on back of strong performance from dairy segment. The packaged foods company had profit at Rs 4.83 crore in the same quarter last year.

Net sales of the company increased by 14% at Rs 576 crore against Rs 504 crore in the corresponding quarter of previous fiscal. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanded nearly 300 basis points (bps) at 6.11%.

The company’s dairy segment, accounted 73% of total revenue, have posted profit before finance cost and tax of Rs 34.10 crore for the quarter against Rs 13.99 crore in a year ago quarter. EBITDA margin of dairy business expanded nearly 400 basis points to 8.88% in Q2FY16 as against 4.96% in Q2FY15.

Even Kwality is doing well. Also DFM Foods which are making Rs. 5 chips and wafers. DFM Foods is now multibagger. I think Q is of branding products. Amul Milk or Brittania Milk sells at much higher rate compared to rate of local dairy because of branding and confidence of customer in product. So, competition is there in every field of industry. Nobody has monopoly. But companies can do well still in spite of competition. I think big picture has to be seen as done by @kharb sir

 

lol I'll keep this as my last post in this topic and say that Heritage is the greatest ever dairy company I've seen

now it's demographics when I'm referring to competition in the segment

Profit growth, you tell me why? Aren't Hatsun & Kwality reporting better numbers?

Local milk is no way cheap. If there was a dairy farm in South Bombay, I'd still buy fresh milk instead of the tetra pak that I'm forced to use now.

1.3 billion people - unorganized market

anyways, I'm sold out on the Heritage Foods story and will pay any premium just to consume products made by Heritage, only if it is available in Mumbai

 

Sir Q is how co is making consistent better profits and sales over years and why it cannot continue in future? Competition is not new thing. Co has explained business model and growth plans in Mint. They are having ambitious plans for growth by investing Rs. 170 cr. They want to become $1 billion company by 2020. If the plans come true then P/E of 30x today will look cheap. However, imp issue is whether Co can deliver. That risk investor has to take like any investment risk.

Heritage Foods to invest Rs170 crore over next four years
Heritage Foods has started dairy operations in the NCR, Mumbai and Pune markets, away from its stronghold in the South

https://www.livemint.com/Companies/...-invest-Rs170-crore-over-next-four-years.html

 

right sir consumption per capita will go up significantly.

 

The strong point is the industry is in growth mode. The reason I started this thread was to answer a basic question : if I understand correctly, dairy products are 72 per cent of the revenue mix of this company. This segment had a 15 percent growth CAGR. Company is planning a 3x growth.

This is possible if there is a differentiated business model. One difference certainly is that this group will enjoy terrific political patronage. What else is the differentiated plan that will deliver the stated intention of 3x growth. Intention is not a strategy. I am sure there is a strategy but in the absence of seeing it, how does one accept it? Is there info in public media which can help us to get a sense of their differentiated business model?

 

REJOICE !!! Your prayers have been answered !
Heritage Milk is now available Mumbai. Over the last few days many hoardings, and ads have come up in Borivali Kandivali and nearing areas. (Not sure about south Mumbai though). Heritage milk is fast penetrating into Mumbai.

 

They have sales depot in Mumbai and are looking for employees in Mumbai

 

The rate at which I see these Heritage ads increase in the Mumbai suburbs make me feel bullish on the company. Very fast penetration. Eager to try the products. Ice cream, lassi.... Yum yum

 

now we all can go bullish on heritage foods without a second thought. i may add it on monday. what about u people?

 

I know Srouta likes this stock and I have respect for his balanced approach. But I am just starting to understand this stock so it will be sometime before I get the conviction to buy. Surely I see the points of those who have high conviction but my basic doubt is still not cleared : what is the differentiated business model?

 

There is no differentiated business model. The big theme in diary sector is the shift of consumers from unorganised doodhwalas to organised sector tetra milk packs. Since the unorganised players dominate a lion's share of the milk and related products (ghee, paneer, khoya) there is immense scope for organised players to capture the business share from them.

Another big theme which I am observing is that the tabelawalas and doodhwalas are reeling under a lot of pressure. The reason is the growing prices of fodder which keeps increasing almost every year and has broken record this year after the bad monsoon.

On an average the fodder prices have shot up 20% however the doodhwalas are not able to raise the prices of their milk adequately because of immense price competition from organised sector players.

The prices of fodder has risen sharply after the bad monsoon.
One kg of Laal Chunni( the main ingredient of fodder) has risen from Rs 16-17 per kg to Rs 23 per kg
One kg Oil Cake (pend) from Rs 18 per kg to Rs 22 per kg
Bhusa (wheat bran) from Rs 670 per quintal to Rs 740 per quintal.
Kutti from Rs 7 per kg to Rs 13 per kg. (big blow again to the tabelawallas. Its a major ingredient in fodder)
Pinda (green grass) prices have shot up almost 20-25% after the bad monsoon.
(I gathered this information by quizzing some tabelawallas and small diary owners so as to get a consensus of whats happening inside the diary industry)
(The prices indicated may not be 100% accurate and may vary from state to state but I just tried to get the general quantum of increase in fodder prices)

One litre of buffalo milk in Mumbai from a tabela costs north of 62-64 rupees per litre. And there is no guarantee for purity. (We all are aware how these milkmen mix water and sometimes thickening agents and God knows what into the milk). The organised sector tetra pack milk is atleast more reliable.

Therefore in my personal opinion the opportunity for Heritage is not only by means of its own penetration in newer states and areas but also the shift of consumers from unorganised to organised milk.

The unorganised sector is getting weaker due to its own share of problems. This may be the opportunity for organised players to disrupt the unorganised sector. It is easier to beat a sick man than a healthy one.

So in a nutshell, in my personal opinion Disruption in the diary industry by the organised sector is the next big theme which will augur well for Heritage and similar companies.

 

Thank you for taking the time to detail this out. Extremely informative and insightful. So the industry level opportunity is the shift from unorganized to the organized sector. This is because the large players have scale to control cost of fodder better. Extremely logical arguments so far.

The next question is : What is the basis to assume that Heritage will garner a disproportionate market share of this growth ? I was just looking at a few of their numbers over the last couple of hours. A few factors stand out when I see their numbers over a five year horizon :

1.While revenues have grown by 17%, operating margins have grown by 23%. Possibly the emergence of operating leverage as scale sets in. The interesting aspect is that Net Margins have grown by a CAGR of 124% over this period. Yet, the margin is 1.32% from 0.1% five years back. So from the operating level down, there are significant financial leakages. I need to understand that better. Clearly, this is around interest costs on loans. Possibly.

2. There is consistent Equity dilution. From 11.53 crores five years back to 23.2 crores today.

3. Things were best in 2013. Net margins were 3% in 2013 and since have declined to 1.3%. This has reduced ROE to 14.6% from around 32 % in 2013. Does anyone know why 2013 was such a good year and what has gone wrong since ?

4.EPS numbers are erratic. Five year EPS numbers look like this :
12.16, 19.53, 43.07, 8.1, 0.97 ( 43 was EPS in 2013)
5. Operating Cash Flows are also inconsistent and show a similar pattern

6. So why is there this inconsistency in performance ?

 

Is it correct 2013 EPS was 43.3 to compare we have to divide by the expanded equity base right ...

 

parin thanks for making right understanding of the sector.

 

The fact is Net Profit is coming down from 2013. From 47 crores to 28.71 in 2015. So the reduced EPS effect from 2013 to 2015 is due to reduction in absolute Net Profit numbers.

The scenario you are alluding to, I think, is a situation where net profits have actually grown but the EPS reflects lower numbers because of an expanded equity base. I wrote about this effect in camlin fine sciences.

 

Unconfirmed reports suggest that the western suburb of Goregaon (Mumbai's tabela hub) will soon have large tracts of land available for commercial use. Sources (wish not to be named) tell us this will occur as Aarey Milk Dairy situated in Goregaon and the many doodhwalas and tabela owners are mulling to shut operations due to the instant and huge success of the South India based colossal Heritage Products Dairy Products just introduced in the city of Mumbai. Mumbaikers apparently have gone beserk lapping up their yummy icecreams, lassi and milk on an unprecedented scale. It is expected that the ruling BJP-Shiv Sena alliance is likely to raise thousands of crores by this move helping it reduce the debt trap it finds itself in. Ofcourse Congress is crying foul saying this was a Nehru dream and was set in motion by Rajiv Gandhi. Rahul Gandhi and Robert Vadra are sulking that they werent able to unsurp this tract through the usual long winding route of shell and Section 25 companies. MNS is likely to join the list of agitators as they think this is the death knell of our amchi Aarey Milk Dairy ( though their leaders are happy at the development of tabela closure). There is grumbling amongst activists on the likely loss of the picturesque and green belt Aarey Colony and some are threatening to disrupt parliament as its a matter of life and death of our sacred and revered Cattle.

In all this melee, our Honourable Prime Minister did not forget to congratulate his dear political ally on this grand success of his but has managed to wrangle a commitment to keep his beloved Gujarat and Amul out from this blitzkreig. Afterall for his survival, he needs to have Gujarat shining when he returns to his old job of Gujarat's CM in 2019

Taking note of the potential fallout of this development, the CM of a particular state has announced that liquor shops can sell milk thus providing the homecoming dudhwalla an opportunity to sell their produce through new channels

Way to go Heritage Foods.

Impeachable logic to buy a stock.

 

Nice. Very nice.

 

Is this discussion for academic interest? or is it to buy this scrip? Is it opportune time to go for fmcg stocks? Does it appear under valued ?Does risk reward ratio is suggestive of buying at present level ? I am not sure.