Heritage Foods Ltd (HERITGFOOD) Q2 FY23 Earnings Concall Transcript

Heritage Foods Ltd (NSE:HERITGFOOD) Q2 FY23 Earnings Concall dated Oct. 20, 2022

Corporate Participants:

Mr. Anuj Sonpal — Investor Relations

Dr. M. Sambasiva Rao — President

Mr. J. Samba Murthy — Chief Operating Officer

CA A. Prabhakara Naidu — Chief Financial Officer

Mr. Upendra Pandey — Chief Executive Officer

Mr. Srideep N Kesavan — Chief Executive Officer

Analysts:

Sameer Gupta — India Infoline — Analyst

Resha Mehta — GreenEdge Wealth — Analyst

Mayur Gathani — OHM Portfolio — Analyst

Dhruvesh Sanghvi — Prospero Tree — Analyst

Rohit Suresh — Samatva Investments — Analyst

Aditi Kern — Amaravati Equity Fund — Analyst

Disha Sheth — Anvil — Analyst

Rohan Kamat — Finterest Capital — Analyst

Mrs. Brahmani Nara — Executive Director

Amit Doshi — Care PMS — Analyst

Nitin Awasthi — Incred — Analyst

Shirish Pardeshi — Centrum Broking — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Heritage Foods Q2 FY 2023 Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Anuj Sonpal. Thank you, and over to you, sir.

Mr. Anuj Sonpal — Investor Relations

Thank you. Good evening, everyone, and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the Investor Relations of Heritage Foods Limited.

On behalf of the company, I’d like to thank you all for participating in the company’s earnings call for the second quarter and first half of the financial year 2023. Before we begin, let me mention a short cautionary statement. Some of the statements made in today’s earnings call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated.

Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decision. The purpose of today’s earnings call is purely to educate and bring awareness about the company’s fundamental business and financial quarter under review.

Now let me introduce you to the management participating with us in today’s earnings call and hand it over to them for opening remarks. We firstly have with us Mrs. N. Brahmani, Executive Director; Dr. M. Sambasiva Rao, President; Mr. Srideep Kesavan, Chief Executive Officer; Mr. A. Prabhakar Naidu, Chief Financial Officer; Mr. J. Samba Murthy, Chief Operating Officer; Mr. Upendra Pandey, CEO of Heritage Nutrivet Limited; and Mr. Umakanta Barik, Company Secretary and Compliance Officer.

Now, without any further delay, I request Mr. Rao to start with his opening remarks. Thank you, and over to you, sir.

Dr. M. Sambasiva Rao — President

Thank you, Anuj. Good evening to everyone joining us today on this call. We are pleased to welcome you all to this earnings call for the second quarter and first half of the financial year 2023. The financial results and earnings presentations have already been uploaded on the exchanges and I hope you had a chance to look at them by now.

Now, let me take you through the financial performance of quarter two of current financial year. Consistent with our performance in the last many quarters, we have delivered yet another quarter of strong growth in consolidated revenue of 21.8% year-on-year to INR86 crores, driven by healthy double-digit volume growth and higher net sales realizations.

EBITDA was INR40 crores as against INR65 crores during the corresponding period in the previous year. This decline in margins was mainly due to inflationary pressures, where raw material costs increased by 19% year-on-year during the — resulting into historically high milk procurement prices.

Additionally, freight cost, energy cost, and also delayed onset of flush season. further dampened earnings resulting in EBITDA margins of 4.8%. However, EBITDA margins improved by 192 basis points versus quarter one of this current financial year. PAT was INR19 crores in this quarter.

If you take first half year of the financial year 2023, our consolidated revenue grew by 24.2% year-on-year to INR1,637 crores. EBITDA was INR64 crores as compared to INR118 crore during the first half of last year. EBITDA margin stood at 3.9%, while PAT is INR26 crores. Company has a strong balance sheet with a debt-to-equity ratio of zero to 0.01x and the cash and bank balance of INR78 crores as on September 2022.

Now moving on to the operational performance for the quarter. The average milk procurement during quarter two was 1.46 million liters per day as compared to 1.27 million liters during quarter two of last financial year. Average milk sales during quarter two stood at 1.12 million liters per day compared to 1.03 million liters per day in the quarter two of last year.

The sale of curd during the current quarter was at 326 tonnes per day compared to 280 tonnes per day during the last year’s same quarter, registering a growth of 16.69% year-on-year. During the quarter, the value-added products revenue surged by 28.9% year-on-year to INR2,186 million. During quarter two, value-added products contribution to overall revenue increased to 27% vis-a-vis 25% in the quarter two of last year.

To insulate the company against these market volatility, our strategy and focus has been to consistently increase the share of value-added products, which now contribute to 30% of overall sales at the end of first half year for a mere 3% in 2007. The company aims to increase this share further to 40% in the coming years, which will, over a period of time, bring stability in our margin profile. The company launched a new product during this quarter called Blue Kosei [Phonetic], which is an instant way-based energy drink.

With this, now we open the floor for the question-and-answer session. Thank you.

Questions and Answers:

Operator

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Thank you. The first question is from the line of Resha Mehta from GreenEdge Wealth. Please go ahead.

Resha Mehta — GreenEdge Wealth — Analyst

Yes. Hi. So, congrats on a good set of numbers. It was good to see maintaining the quarterly revenue run rate of INR800 crores sequentially and also the volume growth that we’ve seen. So my first question is on the marketing bid, right? So, if we look at Amul, right, so it sources almost 90% of its milk from one state and is still able to deliver around INR60,000 crores of revenues.

So this perhaps also implies that marketing distribution is also very important in a B2C business. So — and if I see our ad revenues are around almost 0% as a percentage of net sales. So, considering that now we have an internal marketing team, can you just flesh out your marketing approach, be it in terms of ATS, BTL, the trade promotions, etc.? That’s the first question.

Dr. M. Sambasiva Rao — President

Resha, would you like to — if you have any additional question, you could ask them and then we could answer together.

Resha Mehta — GreenEdge Wealth — Analyst

Yes. Okay, sure. And the second is on the rights issue, right? So it’s a very small amount, its just INR23 crores. So what really is the objective here? And thirdly, on this particular quarter, just some data points like — what was the average milk procurement price and the selling price? And is there some directional sense on how we are seeing the flush season panning out? That’s it from my side.

Dr. M. Sambasiva Rao — President

Thank you, Resha, for the question — questions, rather. So the first question on marketing, you’re right. Absolutely, that — it is — because we are engaged in a B2C business and hence, marketing is a very important aspect of engaging with consumers.

At this point in time, like we have been discussing in previous many calls, our priority is to improve the product availability in the hands of the consumers. And that’s what we have been focusing on in the last several quarters and which is what is driving the aggressive growth that we are seeing in our value-added products.

And this means getting the product accessible to a consumer. And if you are living in any of the major metro cities, you would be able to find our products on most of the e-commerce channels. We are also expanding our footprint across modern trade retail, in addition to the traditional approach of aggressively expanding distribution through our product distributors and heritage distribution centers.

And we are reaching a stage where we have sufficient scale or saturation in each of the markets that we are now embarking on above the line advertising. And these — there is no one size fits all strategy for us. It depends on the market. It depends on the channel. It depends on the location.

Currently, we have a couple of campaigns that are on, for example, because it’s festive period, we have a very highly engaging digital campaign that is going on in ghee — for ghee, because this is a period when ghee sales go up.

We have also relaunched or restaged our products, milk, basically the milk variants in the city of Chennai, where we are having a campaign which engages the consumers, both above the line as well as below the line.

So we have these campaigns going on all the time, but the scaling up of it and the timing of it and the scale of it will depend on the level of saturation that we reach in, in every city. Secondly, we can give you first the milk procurement prices and —

Mr. J. Samba Murthy — Chief Operating Officer

[Indecipherable] this is content pricing. Hello?

Dr. M. Sambasiva Rao — President

Yes, please.

Mr. J. Samba Murthy — Chief Operating Officer

This is milk procure — average milk procurement price for the Q2, INR39.17. one-seven.

Dr. M. Sambasiva Rao — President

Sale price.

Mr. J. Samba Murthy — Chief Operating Officer

Selling price, milk selling price for the quarter, average, INR50.87.

Dr. M. Sambasiva Rao — President

Of course, these are average of variants — different variants, different markets and only the mill. So the net realization of milk plus value-added products all put together would be higher, much higher.

Resha Mehta — GreenEdge Wealth — Analyst

Sure, sure. Understand.

Dr. M. Sambasiva Rao — President

So the questions that you have raised about flush season, usually, the flush season should be starting around now. In some of the procurement fields, we are actually seeing the beginning of this. In certain other fields, we expect the flush season to begin any time around Diwali or post that. At this point in time, we did not see much reasons to have any worry about this.

Resha Mehta — GreenEdge Wealth — Analyst

Got it. And what would be the average — the price hike that you all would have taken cumulatively in the quarter?

Dr. M. Sambasiva Rao — President

If you’re asking about the milk procurement prices.

Resha Mehta — GreenEdge Wealth — Analyst

Yes.

Dr. M. Sambasiva Rao — President

So liquid milk prices have gone up by 14%, right? Procurement prices

Resha Mehta — GreenEdge Wealth — Analyst

The realization. So you all would have taken some price hikes, right, during the quarter?

Dr. M. Sambasiva Rao — President

So net realization, inclusive of value-added products have gone up by about 10.4%.

Resha Mehta — GreenEdge Wealth — Analyst

Okay. Okay.

Dr. M. Sambasiva Rao — President

So we had milk prices that went up by about 14%, and realization that went up that I bought 10.4%. So we have passed on — so it’s not a very linear equation. What we should understand is that milk contributes only about 63%, 64% of our business. And there are many value-added products as well. So the price increases have been at different levels for different products. But overall, we have not been able to pass on all the increase of cost to the consumer, and that probably explains the small difference in terms of the EBITDA and PBT variance for the dairy business compared to same period last year.

Resha Mehta — GreenEdge Wealth — Analyst

Right. Lastly, on the rights issue.

CA A. Prabhakara Naidu — Chief Financial Officer

Yes, I’ll respond to you. Objective as stated already in the notification, it is to raise funds for the business growth. We internally assessed our requirement is around INR20 crores, INR25 crores for the season. So we propose to raise that capital through the rights issue.

Resha Mehta — GreenEdge Wealth — Analyst

Okay. And just a follow-up on the marketing bit. So, your — essentially, if you could just call out that annually, is there some number that you all look at that, okay, ATL plus BTL should be an X percentage of net sales or something of that sort?

CA A. Prabhakara Naidu — Chief Financial Officer

Of course, we — we work on a budget. The specific budget number we are targeting anywhere between 1.5 — 1% to 1.5% of our revenue is what we invest in marketing. But this is — it’s not like we are committed to spending these monies that depends on the reality on the ground. At this point in time, we believe that we are getting strong traction because of consumer demand. And we are cautious of spending marketing money that doesn’t have immediate plans. I hope I have been able to answer that.

Resha Mehta — GreenEdge Wealth — Analyst

Yes, sure. Thanks. I have more questions, I’ll come back in the queue.

CA A. Prabhakara Naidu — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Sameer Gupta from India Infoline. Please go ahead.

Sameer Gupta — India Infoline — Analyst

Season on the milk cycle. So I heard your comments on the previous participant’s question. My question is that, there are a few headwinds here, there’s a lumpy skin disease which is going on. Unseasonal rains, we don’t know. I mean if it’s over, if it’s going to spill over to the next week. So in this context, do you expect it to be a normal flush season?

And when I say normal, not just the DNA but in terms of mix production also. So do you have any intuition that there is going to be some impact of on milk production. And in that case, we have seen that two, three years back, when there were unseasonal rains, it did affect our plus season and we had a year of the par margins. So, your thoughts on that?

CA A. Prabhakara Naidu — Chief Financial Officer

Sure. Thank you. So, see unseasonal rains and weather vagaries are here to stay. I think that we are living in a Vuca world. And going forward more and more, we’ll see these climate change events happening. So that’s something that makes life very unpredictable, but we are now learning to build the business in this unpredictable world. Specifically in terms of what is happening at the procurement level, I’ll ask Mr. Samba Murthy, the Chief Operating Officer to comment on that.

Mr. J. Samba Murthy — Chief Operating Officer

Yes. Now this milk production generally compared to last year to this quarter, there is a drop in the milk production basically because of this — every four, five years, we will see the cycle actually for production increase and decrease. So apart from that we could see that because of the rains also it has got affected.

And third point is on — because of the rains also — because this month actually October to be no flush actually, so that is got delayed. So then next is on the LSD. LSD also impacted particularly a few states not invest, but that is that LSD disease is now under control. And now we could see that there are no new cases reported, and it is under control.

So now we are looking at that production will increase post-Diwali or next month onwards, November onwards. There is going to be good production. It may not that of last year. But currently, there will be improvement in the production that we could foresee.

Sameer Gupta — India Infoline — Analyst

Thank you, sir. One more thing is that, last time around we — when there were unseasonal rains, we saw prices of cattle feed going through the roof. So isn’t that a worry? I mean production might not get affected, but it will increase the milk procurement prices as in the farmers’ cost will increase and that in turn will increase the procurement prices. So, is there some insight on this?

CA A. Prabhakara Naidu — Chief Financial Officer

Yes. Mr. Upendra, handling our animal feed subsidiary will respond to this.

Mr. Upendra Pandey — Chief Executive Officer

Thank you, sir. Thanks for asking the question. Feed price is already on a said in last couple of months because of the lean season from critical raw material point of view. November onwards, we see probability of decline in the price because the key harvesting season will start post-Diwali. So, with the availability of raw materials, we will see definitely the prices should go down on the feed front.

CA A. Prabhakara Naidu — Chief Financial Officer

And that would anyway help in conversion reducing the cost of production.

Sameer Gupta — India Infoline — Analyst

And no impact of these rains that we are seeing in October in this expectation of the decline in prices in November?

CA A. Prabhakara Naidu — Chief Financial Officer

It should not impact [Indecipherable] Our price will go down.

Sameer Gupta — India Infoline — Analyst

Fair enough. That’s very helpful, sir. Second question, and that’s a follow-up to the previous participant’s question again. So rise a share of INR23 crore. I understand you’re raising it to cover the growth perspective. But sir, just in the first half, we have generated around INR130 crores, INR135 crores of free cash flow. We hardly have any debt on the books.

So, I mean, I still don’t get the rationale to do this. I mean, there is enough money on the balance sheet, even after considering that INR25 crores, INR30 crores will be going towards some kind of growth, why do a rights issue? Is it just another way of giving a bonus, I mean, your thoughts?

Mr. Srideep N Kesavan — Chief Executive Officer

Yes, Sameer, we have not spent much money in the last financial year, if you recall, during the COVID year, we have spent only INR36 crores on the capex during the last financial year. This financial year, already we have incurred INR30 crores on the capex. And we have taken close to INR125 crores of the projects for current financial year itself under capex. So if we want to maintain the same balance sheet strength and we are supplementing from the internal approvals and reserves and this will help to meet the entire growth requirements.

While the bonus of the shares to the shareholders existing, this will give additional benefit of capital also for the business to grow. So this year is going to be a significantly high capex year and high-growth year. You are already seeing the growth coming in, and we are building ourselves for the mission INR6,000 crores as we have been explaining earlier. This will help in that way.

Sameer Gupta — India Infoline — Analyst

Follow-up, sir. We could have easily taken a INR20 crore debt even if it was just about the amount. So why dilute equity?

Mr. Srideep N Kesavan — Chief Executive Officer

Yes. You’re not the Managing Director right, to take a decision, whether you take debt or equity.

Sameer Gupta — India Infoline — Analyst

I understand, sir, but — just…

Mr. Srideep N Kesavan — Chief Executive Officer

It’s a call of the Board. It’s a call of the Board which were to raise money, and it is perfectly correct.

Sameer Gupta — India Infoline — Analyst

Thanks, sir. That’s all for me.

Operator

Thank you. The next question is from the line of Mayur Gathani from OHM Portfolio. Please go ahead.

Mayur Gathani — OHM Portfolio — Analyst

Hi, sir. I just wanted to check on the rights issue, but you seem to have answered it. I still don’t understand the fact that why do we need to dilute — and it was such a small fund raise. I mean there is enough cash flow that you will generate this year, next year and going forward, it just wasn’t needed — that’s on my view that I have to share. Thank you.

Mr. Srideep N Kesavan — Chief Executive Officer

I have already answered. It’s a considered decision to raise capital for growth.

Mayur Gathani — OHM Portfolio — Analyst

How much capex are you going to involve yourself in this year, sir, and this year and next year?

Mr. Srideep N Kesavan — Chief Executive Officer

Sorry.

Mayur Gathani — OHM Portfolio — Analyst

How much is the capex plan for this year and next year?

Mr. Srideep N Kesavan — Chief Executive Officer

It will be INR100 crores to INR125 crores per annum for the next three years.

Mayur Gathani — OHM Portfolio — Analyst

Okay. And where is this capex being put in?

Mr. Srideep N Kesavan — Chief Executive Officer

In all the levels, we have been investing in the village level for setting up milk collection infrastructure, in each village when we set up one unit for milk collection it will cost about one lakh rupees. And a cluster of villages, the milk will compare milk chilling facility, depending on the capacity of the milk chilling facility, suppose we put a 100 kl milk chilling facility in a cluster. It will pass us anywhere between INR60 to INR70 lakh rupees.

And a cluster, a few chilling centers will require, again, processing, tracking capacities in the nearest packing stations. And we have to invest in the products making also, as we are growing rapidly in the value-added product segment, back-end production capacity, cold store and the logistics investments.

In addition to this, in the front-end marketing, we have to put chillers, freezers for the market requirements. The end-to-end from village to the consumer, all along the value chain, we have to make investments. That is a model we have been following since inception. This is an integrated company from procurement from the farmer to delivering to the consumer. So this is a trend for many years, except during the COVID period, where our investments have come down in one financial year, that was last year.

Mayur Gathani — OHM Portfolio — Analyst

Great. So these chilling centers or clusters where you invest in, are these new markets that you are tapping or these are the old ones and you’re revamping the existing selling centers? What is it?

Mr. Srideep N Kesavan — Chief Executive Officer

There will be all the three. One, replacement capex will be there, wherever required depending on the aging and inefficiency of the machinery — are in the not only chilling, even in the processing stations, packing areas. We continue to do every year replacement capex, not only for the machinery even utilities like generators, boilers, ATPs, etc.

Secondly, in the existing geographies, wherever there is a milk available, see we have to increase our milk from current 14 lakh, 15 lakh liters per day to 28 lakh, 29 lakh liters per day in the next five years to achieve our growth ambition. So to get this milk, we have to put chilling centers in the existing milk sheds as well, also new milk sheds, which we are identifying in the same states, very rarely, we go beyond these states, but adjoining areas of the existing states, we are procuring milk from eight states now.

In these eight states, there are multiple milk sheds where we are present, where we are absent also. And peripheral fringe areas of these states, we can still capture milk from the neighboring states. There for milk sheds, state is not the boundary, is the milk availability is a boundary. We may stipend to one of the broader areas of the neighboring states. So it includes existing milk sheds, new milk sheds, in the same states, in the adjoining states of the present areas and replacement capex.

Mayur Gathani — OHM Portfolio — Analyst

So from a top line of INR2,700 crores in FY ’22, we are looking to achieve a INR6,000 crore top line in the next five years’ time?

Mr. Srideep N Kesavan — Chief Executive Officer

Sorry, can you repeat?

Mayur Gathani — OHM Portfolio — Analyst

From a top line of INR2,700 crores in FY ’22. Are you guiding that by the next five years’ time, you will be at INR6,000 crores because of these investments that you’re making?

Mr. Srideep N Kesavan — Chief Executive Officer

That is our mission. That is what we are pursuing.

Mayur Gathani — OHM Portfolio — Analyst

Okay. Great. All the very best.

Mr. Srideep N Kesavan — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Dhruvesh Sanghvi from Prospero Tree. Please go ahead.

Dhruvesh Sanghvi — Prospero Tree — Analyst

Just one, I wanted to understand how this collection and procurement networks work. So let’s say, we identify a milk shed, usually, in your experience in the states or and the milk sheds where you are, are there more than one or two players already collecting milk? Or — and how has been the competition like? Is it always with the cooperatives or other players, other private companies?

And why I’m asking and wanted to understand is, over the last 30, 40 years, we have first heard cooperative movement really doing very well — but if the leads of Amul or Aavin or respective federations, really now are looking at the stage three where they will try to procure from other areas where they have been not doing it. How does this shape up for private companies like ours or anybody else, but some of your thoughts would be helpful.

Mr. Srideep N Kesavan — Chief Executive Officer

Yes, certainly. See, the milk in India, certain cooperatives are more than 70 years old, 65 years old, 60 years old. They have been collecting milk in a manner of organizing the farmers in the villages under the Cooperative Act that they form cooperative unions at the village level, district level, state level under the Cooperative Act of the respective states and the farmers who supply milk to them will be members of that unions and they have rights to or right to elect their organization members, etc.

While this was the case going on for the last six, seven decades in India, during the 1992 economic reform, the sector was opened up for the private companies. All private companies are all 30 years old, who are handling milk, except a few who are handling some products earlier. So in the three decades of privatization of the sector, close to 500 companies have come and 250, 300 companies are operating actively in the country now.

So which means in all the villages, where milk is available in India, more than one player is operating. Like cooperatives are definitely good because they are six decades old, and they were functioning under the Cooperative law. And private companies have come 30 years back, and these are functioning at the Companies Act.

And everybody has freedom and rights to go anywhere to collect milk in any village. So by experience, if you see, more than four or five players would be seen in the same village where milk is available, besides cooperative union collecting milk. So in certain villages where we have not yet entered, they are the potential villages for us.

And why a farmer choose to Cooperative, why farmer choose to a particular private company depends on the price paid services rendered assistance given in multiple forms of inputs and extension services and the relationship one builds with the partners. And we have been increasing from 20,000 liters in the year one 1993 when Heritage started its operations to 15 lakh liters now operating 11,000-odd villages in eight states. That is our spread. And we can further spread from 11,000 villages to another 3,000, 4,000 villages in the same state, also in the fringe areas of our neighboring states.

And why a farmer come to us? We have a package of practicing. We pay at par with the market prices to the farmer. We extend all support for getting credit from the banks, getting nutritious feed from our subsidiary company delivered at home. And we also have massive veterinary services for improving the cattle productivity.

We have artificial insemination for improving the breed. We have health care for well-being of the animal and also have mobile clinics on run 24 hours, 365 days extending veterinary services. We also have a program to ensure our farmers from accidental insurance. We also have support programs for ensuring their cattle, so that they get relief in case of any incident.

Our massive extension and input services we extend, besides paying the price to the farmers at par with market, we also ensure 100% power linkage for the milk. We never declare a milk holiday for our farmers, all through the year, whatever quantity they give in all the seasons, we pick up the milk with our denying marketing opportunity.

We are ensuring highly transparent and fair practices in valuing the milk of the farmers by deploying electronic weighing machines and making digital payments online on the payday. And this is one company which respects punctuality in payment, which was a problem dairy farmers were facing for many decades in India. We ensured on payday payment happens through the bank accounts of the farmers for our suppliers. These are the areas — these are the reasons for farmers to stay with us.

Dhruvesh Sanghvi — Prospero Tree — Analyst

Right.

Mr. Srideep N Kesavan — Chief Executive Officer

Our new farmers to join us.

Dhruvesh Sanghvi — Prospero Tree — Analyst

Right. Sir, but one more point on this context is considering a lot of companies who are doing this, but we still saw the private companies having a very low growth versus the league of Amul or Mother Dairy, who have been growing at 15%, 20% procurement. So why would that happen if all of this is good with all the private companies in general?

Mr. Srideep N Kesavan — Chief Executive Officer

There’s some voice breaking in between.

CA A. Prabhakara Naidu — Chief Financial Officer

We couldn’t hear you. Ravi, we couldn’t hear you. Are you saying that despite all of these private companies are growing slower than co-operative?

Dhruvesh Sanghvi — Prospero Tree — Analyst

Yes, yes. That’s the broad line question, yes.

Mr. Srideep N Kesavan — Chief Executive Officer

If you take — in 1993, 100% market share was in co-operative…

Dhruvesh Sanghvi — Prospero Tree — Analyst

I’m sorry to interrupt, but I’m more talking from a four, five-year angle. I understand from a 1990 angle, of course, there is a great leap that has been happening. But I’m more talking from an angle of three to five years, if I see Amul has doubled in procurement as well as in sales. I think Mother Dairy has done a very similar job. In that context, I was asking over the last three to five years?

Mr. Srideep N Kesavan — Chief Executive Officer

That number is not correct. Actually, in fact, the share of co-operatives to private, 60/40 five years ago, now it is 50/50. And anyway, now here, the main point is that — which means that privates have grown faster than co-operatives. But anyway, see, we are not answering for all private industry or private companies. We are talking about Heritage. And I think we’ll stick to that. And we have demonstrated that we are growing faster than many of the people around us, including co-operatives.

Dhruvesh Sanghvi — Prospero Tree — Analyst

Right. Thanks a lot.

Operator

[Operator Instructions] We move to the next question from the line of Rohit Suresh from Samatva Investments. Please go ahead.

Rohit Suresh — Samatva Investments — Analyst

Good evening sir. Thank you for the opportunity. Sir, my first question was on the lumpy skin disease. There was an article recently stating that around 30 districts in Telangana were impacted by the disease. So I just wanted to know, has there been any impact on our procurement in the last one, 1.5 months? And just to add on that, I just wanted to know the efficacy of the vaccines that are being provided, and how good is the vaccine? So your thoughts on that?

Mr. J. Samba Murthy — Chief Operating Officer

This is Samba Murthy. So it is news, but underground, those many cases are not reported, and there is no impact on our procurement or anybody’s procurements, and of course, vaccination is going on by the trade government and everybody follow the vaccination. But there is not much impact on any of these whatever article has come through is not — so that much is not impacted that in the trade practice underground.

Rohit Suresh — Samatva Investments — Analyst

Got it. Sir, and my second question would be recently in Bombay I have seen some of your products in the modern retail outlets. I would like to know what has been the feedback, and what steps are we taking in terms of marketing and brand push in the metro cities for your products. And any new products that you are planning to introduce, because right now, I’ve only seen milkshakes, any other products through the modern retail that you plan to introduce in Bombay and other metro cities?

Mr. Srideep N Kesavan — Chief Executive Officer

Yeah. So thank you very much, that you have seen our products. So we hope that you see more-and-more and you buy more-and-more. Wherever we have launched, we have very strong positive response.

In fact, I should say that the primary driving force of market expansion for heritage has always been the superior product quality compared to any other brand that is there in the market.

So this is something that we can say, with a lot of confidence. Blindly I can say this that, if you pick any dairy product, heritage would naturally be the best in any of the markets that we operate in. But apart from that, and we don’t just stay with this belief, but we also constantly continuously tested.

We have a very strong market research team which is — which constantly engages with consumers in terms of like taking feedback on any given month, we are doing at least two or three consumer product tests, blind tasting.

All these things are continuous processes that we keep doing, and we keep doing continuous improvement of our products as well. So there is a continuous process which keeps us ahead of others in terms of the quality of the product.

Secondly, in terms of the pipeline, we have a very well-established process called as Heritage Innovation Framework. We call it HIF for short, internally. And it’s the process that guides our innovation pipeline.

At any point in time, we have more than close to two dozen innovations that we have in pipeline in various stages from ideation to product development to testing validation or launch phase.

So we have — we have a good strong pipeline and you will see many products coming and hitting the market month-after-month, quarter-on-quarter.

Rohit Suresh — Samatva Investments — Analyst

Got it. Sir, just one last question in terms of the milk procurement that we make, I just wanted to know how much what percentage would be buffalo milk?

Mr. Srideep N Kesavan — Chief Executive Officer

It keeps changing. You should say that it is roughly around 25 to 30 percentage of our procured milk would be buffalo milk, but it changes. It varies with season because, as you would know, that the Cow Flush Season does not correspond to the Buffalo Flush Season.

So there are times when buffalo milk goes up and commit comes down, cow milk goes up and buffalo milk comes down. But — on an average, you can see in a year, it will be about INR75, INR25 will be the ratio.

Rohit Suresh — Samatva Investments — Analyst

Got it. Sir, thank you so much and wishing you, all the very well. Thank you

Mr. Srideep N Kesavan — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Aditi Kern [Phonetic] from Amaravati Equity Fund [Phonetic]. Please go ahead.

Aditi Kern — Amaravati Equity Fund — Analyst

Hello Sir, am I audible?

Mr. Srideep N Kesavan — Chief Executive Officer

Yes, please go ahead.

Aditi Kern — Amaravati Equity Fund — Analyst

Sir, as the raw material prices continuously increasing, and it increases by 19% against the previous year. So it results into high milk procurement price as well as there is a lumpy skin disease problem as well as the problem of second wave of 2019.

And in October and November, the milk availability is going to be increased due to the festive season. So what should be the strategy? And what should be your take on this kind of volatile market situation and conditions?

Mr. Srideep N Kesavan — Chief Executive Officer

So see, the input prices, there is inflationary trend that has been continuing post-COVID, and it’s been happening for some time, not just for milk or other inputs such as fuel and other fuel and logistics costs as well. See, our strategy has been very, very clear. And I think we are sticking to that one, in the markets where we are, we are going deeper so that we are able to get more share of the basket of the consumer, right? So which means that if we have n number of consumers, selling to a same consumer, more number of products is always cheaper for us. I hope you understand the economics of that, right?

We have — we are a company with 18 product categories, right from milk, we go into a cultural product, culture products of curd, lassi, buttermilk and all of that up to ice creams. The idea is to increase the share of wallet or share of basket of our consumer, and that is that we have been doing very successfully in the last many quarters, which is what is driving our growth.

Secondly, we are consciously trying to shift our revenue towards value-added products and from roughly around 25.5% or 26%, now we have grown to about 30.5% in the first half. That is a swing of about four percentage, 4.5 percentage value-added products swing we have been able to achieve in this year, this year so far. And that’s a trend that we are continuing.

And if you recall, our many — past many quarters, we have been growing value-added products upwards of 25%, 26%. This quarter, again, we have grown at 28%. That helps us in getting as on value-added products naturally are — have doubled the gross margins compared to milk. So that helps us weather the storm. That’s the second thing.

Third thing is that we continuously look for efficiencies. For example, with volume growth, despite fuel and logistics costs going up, our cost on a revenue basis has come down. The only reason is that we have been able to lower our trucks much more better, the loadability and the efficiencies have gone up, and it continues to go up. So that’s just one aspect. In every section segment, we are looking at efficiency gains, and we are getting them as we are gaining the volumes. So we are looking at factors that we can control to tide over whatever comes.

Aditi Kern — Amaravati Equity Fund — Analyst

Yes. Sir, yes. Thank you sir. Wish you all the best for future.

Mr. Srideep N Kesavan — Chief Executive Officer

Thank you.

Operator

The next question is from the line of Disha Sheth from Anvil. Please go ahead.

Disha Sheth — Anvil — Analyst

Hello. Sir, am I audible?

Mr. Srideep N Kesavan — Chief Executive Officer

Yes, please. Go ahead.

Disha Sheth — Anvil — Analyst

Sir, I wanted to ask what is the price average selling price of curd per liter?

Mr. J. Samba Murthy — Chief Operating Officer

It is INR56 [Phonetic]

Disha Sheth — Anvil — Analyst

Pardon sir. I cannot hear you.

Mr. J. Samba Murthy — Chief Operating Officer

INR56 per kg.

Disha Sheth — Anvil — Analyst

INR56 per kg. And what was that last year?

Mr. J. Samba Murthy — Chief Operating Officer

INR52.24. INR52.

Disha Sheth — Anvil — Analyst

Okay. Okay. And sir, as the flash reason is coming post Diwali and all started, do you see the milk prices coming down? Or the demand is very high, we don’t expect lowering of procurement prices. What is your view on that, please?

Dr. M. Sambasiva Rao — President

See, we did not — we hope, yes. We cannot put things into our future. But we have been in business for the last 30 years. Every year post Diwali, prices come down. Because, you know, till Diwali there is some amount of milk, which farmers use for their own internal consumption purposes. There is a village level consumption this goes up. Post Diwali that the entire milk comes and hits the market and it’s a simple equation of supply and demand, and prices come down.

And we are hopeful that this will happen again. And right at this point in time, whatever we are seeing in the villages, we don’t see anything to the contrary. Now the question is how much will it come down? Will it come down by INR2, INR4. Now that is something that we’ll have to wait and watch.

Disha Sheth — Anvil — Analyst

And sir, over long-term what is our margin guidance like today H1 with improvement in value-added, we have reached around a 4% average H1 margin — EBITDA margin, 4% to 5%. What is short-term to medium-term? What do we guide for?

Mr. Srideep N Kesavan — Chief Executive Officer

See, we have been speaking about to stay around an eight percentage EBITDA margin, and as we have spoken in the previous quarters also. Currently, we are seeing an unprecedented situation where milk prices have gone up by 14%, and it was not just one time, it was sequentially month-on-month expense kept on going up. And I spoke about 14% price increase and 10 percentage market realization improvement.

That’s a gap of about 4%. And — but we have had internal efficiencies improvement across both — but nevertheless, all of this has resulted in our EBITDA going down by about 3%. So that is what we are seeing in our quarterly results. But we are hopeful and confident that with some more price hardening at the market side and a little bit of correction on the procurement side, we can come back to what we have been delivering.

Disha Sheth — Anvil — Analyst

And sir…

Operator

Excuse me. This is the operator. Ma’am, may we request you to please rejoin the queue for follow-up question.

Disha Sheth — Anvil — Analyst

Yes. Just last question from my side.

Operator

Other participants waiting in the queue.

Disha Sheth — Anvil — Analyst

Yes. Just last question. Sir, does — how much does the curd contribute to our total sales — the value-added sales? Hello?

Operator

Please wait they are…

Mr. Srideep N Kesavan — Chief Executive Officer

Yes, is the — was the question, how much does curd contribute within value-added products?

Disha Sheth — Anvil — Analyst

Yes. Within, within..

Mr. Srideep N Kesavan — Chief Executive Officer

Roughly around 75% is the contribution of curd to value-added products.

Disha Sheth — Anvil — Analyst

Or can plan to keep it same going forward?

Mr. Srideep N Kesavan — Chief Executive Officer

See, we are growing everything. But as maybe you would have recalled and Presidents has commented in the opening statement, curd grew at 16%, value-added products go at 28%. So it’s our effort to keep all our value-added products are equally profitable. In fact, ice creams, drinkables, curd, sweets they’re all on similar profitability. So it doesn’t matter, which one grows fast. We are trying to grow all our value-added products at the same pace.

Disha Sheth — Anvil — Analyst

Thank you so much, sir.

Operator

Thank you. We have the next question from the line of Rohan Kamat from Finterest Capital. Please go ahead.

Rohan Kamat — Finterest Capital — Analyst

Yes, sir. Am I audible, sir?

Mr. Srideep N Kesavan — Chief Executive Officer

Yes, please. Yes. Please go ahead.

Rohan Kamat — Finterest Capital — Analyst

Sir, just one question was, right now was, our expense we’re focusing only on the total market, right? Our existing market will penetrating much deeper. We will be not getting into north and western market right? Sir, I want to know about — about that curd market, sir.

Mr. Srideep N Kesavan — Chief Executive Officer

Your voice is…

Mrs. Brahmani Nara — Executive Director

We didn’t hear anything.

Operator

This is operator. Mr. Kamat maybe request you to please use the handset mode instead of the speaker because we’re unable to show you clearly.

Rohan Kamat — Finterest Capital — Analyst

Yes, sir. Am I audible sir?

Mr. Srideep N Kesavan — Chief Executive Officer

Yes.

Rohan Kamat — Finterest Capital — Analyst

Sir, just one question was that right now, over expansion we are be focusing only on the total market, right? Our existing market will be penetrating much deeper, we would not be getting into the north and western market. Sir, I want to know about that more, sir?

Mr. Srideep N Kesavan — Chief Executive Officer

Yes. We’ll be operating within the same state. We are now having sales to spread over 11 states in India. We’ll be operating in the same 11 states going deeper into other towns and edge joining suburbs. We are not planning to enter any new state.

Rohan Kamat — Finterest Capital — Analyst

Yes, sir. Okay. Sir, I want to know about some lumpy skin. I have one question regarding the upcoming flood season which has been talked about by you and your competitor also. What is you are seeing in the market with this disease that’s going around the lumpy skin diseases, which is affecting a lot of cattle and dropping field, are they under surveillance. So will that have an impact in the upcoming flood season? Do you think that would be the part of because of drop, which you will see in the field?

Mr. Srideep N Kesavan — Chief Executive Officer

Your voice is not so clear, but I’ll try to attempt whatever I understood. Lumpy skin disease fortunately has not spread into the states where we are operating significantly. It is a sporadic incidence. This disease is more prevalent in west and northwest of the country. There also, as earlier clarified by my colleague the disease is under control now. The governments have started vaccination. And the impact is getting reduced. So we don’t see significant impact going forward on the production and availability of the milk as the LSD seem to be subsiding.

Operator

Thank you. The next question is from the line of Amit Doshi from Care PMS. Please go ahead.

Amit Doshi — Care PMS — Analyst

Yeah. Thank you. Sir, you mentioned about that INR100 crores and INR125 crores of capex this year and in fact, for every probably next two to three years. So with refers to this one particular year of INR125 crores, in terms of volume, what kind of growth can we see? And if you can give a rough breakup between, say, value-added product and others, that would be helpful.

Mr. Srideep N Kesavan — Chief Executive Officer

Yes. As you know, the investments we made this year in the infrastructure do not give growth during the current year. Most of the projects will be completed towards the end of the year. And they are aimed at providing back-end processing support for the next financial year. In any year, whatever year we do, our investments begin and some projects will be over in the midyear, some projects will go to the end of the year, etc. And it’s a continuous activity throughout the year. So this year, growth — we are trying to maintain above 20% in terms of revenues.

In terms of volumes, it varies for different products in different rates, like, for example, one product may be growing at 35%, one may be growing at 50%, one may be growing at 10%. They are variable sizes and variable markets. But this is a trend of capex proposed to maintain the momentum in terms of growth. Otherwise, we will not be able to raise this rate of growth, or achieve our mission in the years to come. That’s the context I would say.

Amit Doshi — Care PMS — Analyst

Okay. But primarily towards the value-add product?

Mr. Srideep N Kesavan — Chief Executive Officer

Milk also included, right? See, when I want to make value-added product, I have to invest for milk in the village for collection center, milk for the chilling center, milk for the processing station. So, the value-added product is one part of processing of the milk. So, investment continues from end-to-end and the decision of selling milk as milk, selling milk as product is taken in the fag-end of the production cycle. So, production requires from milk also. So, — but there will be specialized investments for a particular product after the milk processing pasteurization is completed. So, it will continue to be on both milk and value-added products.

Amit Doshi — Care PMS — Analyst

Okay. Okay. And sir, this 28% growth in value-added products that have come, it is again value terms. So, what would that be roughly in volume terms, a rough estimation?

Dr. M. Sambasiva Rao — President

Volume terms, as we just said, our lead product is curd, which is giving 16%, right?

Amit Doshi — Care PMS — Analyst

So, curd 16% growth is separate. The value-added 28% is what you’ve said, right?

Dr. M. Sambasiva Rao — President

Yes.

Amit Doshi — Care PMS — Analyst

So, value-added product — what is the price contribution?

Dr. M. Sambasiva Rao — President

Overall, value-added products in terms of volumes grew at 19% for the quarter. Curd grew at 16%. So, some of the other products grew much faster. As you can imagine, we can do the arithmetic, 75 percentage contribution is from curd. So, curd contribution is dipping within the value-added products because it is growing slower than the rest of the value-added product category, but curd is still growing at 16% compared to overall growth of 11%.

Amit Doshi — Care PMS — Analyst

Okay. Okay. And sir, you have mentioned about this the price — the input milk procurement prices of around 14%. In the presentation, there is a mention of increasing raw material cost of 19%, so what is that extra 5% of–?

Dr. M. Sambasiva Rao — President

That’s a–

Mrs. Brahmani Nara — Executive Director

19% is–

Dr. M. Sambasiva Rao — President

Cost of raw material right, which includes the weighted average of liquid milk as well as SMP, skim milk powder that we use for our manufacturing.

Amit Doshi — Care PMS — Analyst

Okay. Okay. Thank you and wish you all the very best.

Operator

Thank you. The next question is from the line of Nitin Awasthi from Incred. Please go ahead.

Nitin Awasthi — Incred — Analyst

Hello sir. Thank you for the opportunity. I have one question. Do you think that the value of the company today — reflected today is the fair value? Or do you think that the company is undervalued on the brochures given the fact that it has a brand, that it has the distribution, that it has for business clarity that it has?

Mr. Srideep N Kesavan — Chief Executive Officer

That is anyway perceptional issue. We think we should leave it to market.

Nitin Awasthi — Incred — Analyst

No, why I asked that question is if you believe that, it’s highly undervalued or it’s not fairly valued, why would you tend to dilute it even further at this rate?

CA A. Prabhakara Naidu — Chief Financial Officer

When we try to stay away from the subject at the management side.

Nitin Awasthi — Incred — Analyst

Okay, sir. So, the next question was, are those competitors — sorry competitors, cooperatives increasing the price of milk procurement to somehow subsidize or pass on some benefit to the farmers because of the loss that they have had due to LSD?

CA A. Prabhakara Naidu — Chief Financial Officer

We don’t have LSD impact in our operational areas as a earlier —

Nitin Awasthi — Incred — Analyst

Okay. So even the cooperatives have no function of increasing the prices to subsidize to the farmer?

CA A. Prabhakara Naidu — Chief Financial Officer

Sorry?

Nitin Awasthi — Incred — Analyst

Cooperatives in your area is not increasing the prices to subsidize for the effect of LSD you are saying?

CA A. Prabhakara Naidu — Chief Financial Officer

See milk procurement prices is quite dynamic. And whatever prices that we have seen increase in the first half has happened without Lumpy Skin Disease in the areas that we operate. So that’s — I don’t think that, there’s a direct correlation between that. In some areas like Rajasthan, Gujarat and all that have been slightly more impact of Lumpy Skin Disease, but those are not our primary procurement areas.

So you can’t put a one-to-one relation between the two. It is — the procurement prices have gone up because of general inflationary effect because farm prices have gone up. And I think you have seen this not just in dairy, there — it’s happening in other Agri commodities as well so.

Nitin Awasthi — Incred — Analyst

Okay, sir. Thank you for answering my questions.

Operator

Thank you. The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead. Shirish Pardeshi, your line is un-muted. You may go ahead, with your question, please.

Shirish Pardeshi — Centrum Broking — Analyst

Hi. Good evening. Just two quick questions. Any word you can say how the Gujarat market, the recent entry is faired well or how it is having the issues or maybe challenges? And second, just I didn’t find any word on Novandie in the presentation. I don’t know, I joined a little late. So maybe if you can help me with the update?

Mr. Srideep N Kesavan — Chief Executive Officer

It was mentioned in the presentation, but we can request Brahmani to respond to that.

Mrs. Brahmani Nara — Executive Director

Sure. This is Brahmani here, Executive Director. We’ve seen some very good traction in Novandie. I think the biggest best news is that — the products have been very positively accepted by the consumers in terms of quantity as well as space. The products are being manufactured in our own processing facility close to Mumbai. And we have also been able to successfully launch the product of curd as well as drinkable yogurt as well as natural yogurt, which are trends time in not just Mumbai, but Hyderabad, Bangalore, Goa, part of Gujarat since the beginning, and we’ve seen very good traction across channels, be it modern trade, e-commerce, general trade, quick commerce etc.

And I’m very happy to be saying that as of last quarter, we are also listed with the most relevant and national change in the markets where we are operating. We intend to see about 50% to 60% growth quarter-on-quarter, and we are already seeing that traction this month. And we are, again, going deeper into these markets and grow. And you’re seeing that going forward as well, a lot of the costs, especially overhead costs, logistics costs, etc. are getting absorb because of growth in volumes.

Shirish Pardeshi — Centrum Broking — Analyst

Okay?

Mrs. Brahmani Nara — Executive Director

Thank you.

Shirish Pardeshi — Centrum Broking — Analyst

Thank you. On the liquid part?

Mrs. Brahmani Nara — Executive Director

Sorry, go ahead, Mr. Shirish.

Shirish Pardeshi — Centrum Broking — Analyst

Hello?

Mrs. Brahmani Nara — Executive Director

Yes, go ahead, please.

Shirish Pardeshi — Centrum Broking — Analyst

No. My second question was how we have — how the Gujarat market, where we have made the recent entry for the liquid milk?

Mr. Srideep N Kesavan — Chief Executive Officer

Gujarat we have not entered. I don’t know where you got this.

Shirish Pardeshi — Centrum Broking — Analyst

We were planning to get soon. So, have we already entered or we are planning to soon.

Mr. Srideep N Kesavan — Chief Executive Officer

No, we haven’t gone to Gujarat, and we — just to clarify, we are in 11 states at this point in time, which primarily is Maharashtra, that is the extent of — that’s the closest probably market to Gujarat, but we have no plans of Gujarat. We are in Delhi and Haryana, in the North, AP, Telangana, Karnataka, Tamil Nadu and coast.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, this was the last question for today. I now hand the conference over to Mr. Anuj Sonpal for his closing comments. Over to you, sir.

Mr. Anuj Sonpal — Investor Relations

Yes. Thank you, everyone, for joining us today for this earnings call of Heritage Foods Limited for the Q2 FY ’23 earnings. In case you have any further questions, clarifications, suggestions or feedback, please feel free to contact either Mr. Umakanta Barik, Company Secretary and Compliance Officer of Heritage Foods or us at Valorem Advisors. I wish you all a Happy Diwali in advance. Thank you, everyone.

Dr. M. Sambasiva Rao — President

Thank you, Anuj. Thank you all.

Mr. Anuj Sonpal — Investor Relations

Thank you.

Mrs. Brahmani Nara — Executive Director

Thank you. Thank you so much.

Operator

[Operator Closing Remarks]