Heritage Foods Ltd (HERITGFOOD) Q3 FY23 Earnings Concall Transcript

Heritage Foods Ltd (NSE: HERITGFOOD) Q3 FY23 Earnings Concall dated Jan. 23, 2023

Corporate Participants:

M. Sambasiva Rao — President

J. Samba Murthy — Chief Operating Officer

Srideep N Kesavan — Chief Executive Officer

Upendra Pandey — Chief Executive Officer

Brahmani Nara — Executive Director

Analysts:

Resha Mehta — GreenEdge Wealth Services — Analyst

Bhargav Buddhadev — Kotak Mutual Funds — Analyst

Aniruddha Joshi — ICICI Securities — Analyst

Ankur Kumar — Alpha Capital — Analyst

Sameer Gupta — India Infoline — Analyst

Rohit Suresh — Samatva Investments — Analyst

Rajat Setiya — ithought PMS — Analyst

Presentation:

Operator

[Starts Abruptly] And Mr. Umakanta Barik, Company Secretary and Compliance Officer.

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

M. Sambasiva Rao — President

Good evening to everyone joining us today on this call. We are pleased to welcome you all to this earnings call for the third quarter and nine months ended for the current financial year ’23. Financial results and earnings presentations have been uploaded on the exchanges and I do hope you must have got a chance to look at them.

Now, let me take you through the financial performance of the quarter under review. Consolidated revenue for quarter three, grew by 17.8% year-on year to and INR786 crores, despite inflationary pressures in our important markets. EBITDA during quarter three stood at INR33 crores as compared to INR41 crores during the previous year same quarter. The EBITDA margin stood at 4.15% in quarter three for current year, the decline in EBITDA was mainly on account of sustained increase of raw-material costs which were higher than the increase in the sale prices of products undertaken by us. During the current quarter, net profit stood at INR14 crore.

Now I take up the nine months performance. Consolidated revenue grew by 22% year-on year at INR2,423 crores. EBITDA is INR96 crores and the EBITDA margins stood at 3.97%. Net profit for the period was INR40 crores.

Now moving on to the operational performance for the quarter. The average milk procurement during the quarter under review was 1.43 million liters per day as compared to 1.19 million liters during quarter three of last year. With regards to the sales of our products, we have had a healthy year-on year growth across product categories. Average milk sales during the quarter three, stood at 1.07 million liters per day compared to 1.04 million liters per day-in the same-period of the previous year. The sale of curd during quarter three was at 294 metric tons per day compared to 271 tons per day.

During this quarter, the value-added products revenue surged by approximately 21% year-on year to INR199 crores and its contribution to the overall revenue increased 25.55%, while for the nine months ended the contribution of value-added products was around 29%. We continued on our part to add innovative and unique value-added products. During the quarter, the company launched new products like in Mawa Kulfi ice cream in bars, matka kulfi ice cream in matkas and Chocolate Doodh Peda.

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

Questions and Answers:

Operator

Thank you very much. [Operator Instruction]

The first question is from the line of Resha Mehta from GreenEdge Wealth Services. Please go-ahead.

Resha Mehta — GreenEdge Wealth Services — Analyst

Yes, thanks. So the first question is that if you could just comment on the milk price inflation that we’re seeing right now. So has that moderated in Q4 and directionally if you could just give some sense on the procurement prices, considering that the flush season has been weak. That’s the first one.

Second, now despite seeing healthy top-line growth, we are not seeing the benefits of operating leverage kicking-in, and here two sub-questions. So first is on the employee costs. So historically, it’s been in the top 6% range, but now it’s kind of moved to that 7% of net sales range, right. So I understand that on the people front, we’ve added a lot of people across different functions, but where do we see this employee cost number settling? And the other sub-question is that, are there any one-offs in the operating cost for Q3?

And thirdly, on the demand front. So because of the price hikes that we have been seeking, are we seeing any kind of sluggishness in the demand in the markets that we’re operating and this — the context for this is that, if I look at the curd volumes, sequentially curd volumes have dropped 10%, which is much sharper drop than the previous years.

And lastly, on the distribution, so we had outlined an aggressive plan to increase the number of distribution — Heritage distribution centers to around 1,000 in two or three years, but I see that, since the last nine months, the number has been constant at around 122, so has there been any change in the target or are we reevaluating the expansion plan? So, yes, these are the questions.

J. Samba Murthy — Chief Operating Officer

Good evening to all. [Indecipherable]

Operator

Sorry to interrupt you, sir, your audio is not very clear. May I request you to come a little more closer.

J. Samba Murthy — Chief Operating Officer

So regarding this procurement prices have gone up by 14% compared to the previous year same quarter, and the sale price also have gone up by 17.5% in the same — compared to the previous year quarter. And even compared to last year also there is a increase of 2.55% in the sales price increase. And the — Regarding this curd volumes, because of this season, because of the seasonality, generally Q3, the volumes will come down compared to Q1 and Q2. So that is there, and whereas the growth is there actually, in Q3 a growth — almost 17% growth is there in — compared to the last year in-quarter.

Srideep N Kesavan — Chief Executive Officer

Yes. Thank you Samba Murthy. This is Srideep Kesavan. So if I could just add a few points to what Mr. Samba Murthy said. First is, procurement prices, like he mentioned, sequentially we’ve seen increases and even at this point in time, we feel that the situation has not stabilized and it might continue to see some more inflationary trend going into the next few months. So that’s something that we are preparing ourselves for. And as we speak right now also we are seeing that trend continue.

Secondly, yes, you’re right that the top-line growth is something that we have delivered consistently and the bottom-line is something that has been under strain for some time and primarily for us, this has been only due to raw milk price increases and not because of the other cost pressures. And I’d just like to — you mentioned, for example, the employee cost increase, the employee cost increase for us is well within control. For example, in this particular year, financial year, we have within the financial budget that we had created at the beginning of the year.

As far as direct employees are concerned, we are still — direct, as well as indirect employees are concerned, we are still below 6% of revenue as far as the employee cost is concerned. So, we do not see, while there are definitely opportunities for improving the productivity of people is something that we are working on constantly and with revenues growing, that will naturally happen as well. But at this point in time, we are not alarmed or we do not have anything to worry about as far as the employee cost is concerned.

And same goes with other operating cost as well. So you mentioned about other operating costs in our business, we are actually held our transport cost, which is the second biggest cost, after employee cost at this almost stagnant, despite increases in the fuel prices and all of that, because we have been able to improve the transportation and logistics productivity for our — across our operations. In fact, in-quarter three, we have been able to deliver on many other operational cost-improvement parameters, which we can discuss later. And those have also contributed to sustaining our profitability despite significant increase of raw milk prices.

Curd contribution is something that the COO already addressed. Very happy to say that, actually even in this quarter, our curd revenues have grown at 18%, so curd has actually shown robust growth for us. In fact, the level at which we are operating curd at this point in time is giving us a lot of hope that we are entering the new summer season on a very strong footing.

The last question that you had raised is regarding distribution. We have a multi-model, multi-pronged distribution approach. You may recall that we had discussed that in the beginning. So we are not dependent on one channel alone for distribution. One of the strategic initiatives that we have taken-up this year was the Heritage Distribution Center, which you’re right, at this point in time is — it stands at 122 distribution centers. In this running quarter, we have made some — we had made some structural changes in the sense we had closed down some of those underperforming distribution centers and opened 20 odd new center. So there has been a churn, which is why that number looks stagnant. The strategy is — remains one of the top priorities for us. We’re not changing from that, the numbers might not show that, but we are progressing well on that initiative as well.

Resha Mehta — GreenEdge Wealth Services — Analyst

So just two follow-ups here. So, see, my question was more on that, now that we are seeing a healthy sales growth, right, we should see some improvement on the operating margin side, see, because if I look at your Q3 margins, right, your gross margins, in fact have improved by 60 bps sequentially, while EBITDA margins have declined by almost 70 bps sequentially, right. And so why aren’t we seeing that operating leverage kicking-in, as the top-line growth is healthy?

Srideep N Kesavan — Chief Executive Officer

There are couple of reasons to this, the first is the market mix that we have and our — we are pretty diversified as far as our market mix is concerned. And that is one aspect that we should remember at this point in time. So, while some of our marginal non-core markets are seeing significant growth. So our growth, let’s say, for example, if I could just break-down our growth of 20% — 20%, 23% year-to-date. The margin will grow up, marginal markets are — our non-core markets are growing anywhere between 50% to 100% range, right. Now, those markets will take some more time before the level of operational efficiencies or operational leverage that you spoke about for the operational leverage to kick-in. So while our core market have actually suffered due to increase of raw-material prices. So it’s a — it’s purely a function of mix which is actually causing or making it seem like the revenue growth has not or the operational leverage is not growing in line with the revenue growth.

Resha Mehta — GreenEdge Wealth Services — Analyst

But I would imagine your core markets would be contributing a lion’s share of your revenue, right. So it would be to the tune of 70%, 80%, 80% plus kind of a number, if I’m not wrong?

Srideep N Kesavan — Chief Executive Officer

That is right. So core markets contribute significant — contribution at this point in time is up around 70%, you’re right about that, but the core markets are also dependent on milk that comes from our side. For example, Hyderabad has dependency on other markets, other milk producing regions for its milk. And that’s — it’s purely a function of how we are structured and Hyderabad is our strongest or Telangana is our strongest market, AP is also our strong markets. And these are markets where we have had significant inflationary impact as far as raw milk is concerned. And those marginal or fringe markets where we have significantly improved does not have sufficient contribution to move the needle when the core markets get impacted with raw material price increase.

So it’s purely a function of the present mix that we have at this point in time. But what I should encourage you to look at, Resha, is that the fundamentals from the business is actually improving quarter-on-quarter. So if I can just talk about, let’s say, for example, the revenue growth itself, this is almost the sixth quarter that we are growing in the teens or high-teens or 20s, which means that we are serious consistently delivering on revenue growth quarter-on-quarter, year-on year. Secondly, we are improving our value-added product contribution even in the worst of times. So this quarter we have grown our value-added product contributions unlike most of the competition. So these are all encouraging things that help us believe that we are just about to turn a corner as far as the margin profile and potential is concerned.

Resha Mehta — GreenEdge Wealth Services — Analyst

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

Operator

Thank you. The next question is from the line of Bhargav Buddhadev from Kotak Mutual Funds. Please go-ahead.

Bhargav Buddhadev — Kotak Mutual Funds — Analyst

Yes, good afternoon team, and thank you for the opportunity. My first question is on advertising cost. Is there any increase in the advertising spend as a percentage of revenue, because other expenditure number has gone up by almost 25%?

Srideep N Kesavan — Chief Executive Officer

The advertising cost as a line-item has not increased. So just —

Bhargav Buddhadev — Kotak Mutual Funds — Analyst

Hello?

Srideep N Kesavan — Chief Executive Officer

Yes, yes, we just looked at the numbers, it’s — the cost increase is marginal at this — for this quarter it’s been at 0.6% compared to previous quarter, previous year same quarter is about 0.5%, so it’s very marginal increase.

Bhargav Buddhadev — Kotak Mutual Funds — Analyst

Okay, so is there any emphasis on boosting this number up? Because we are trying to pursue stronger growth on the value-added side?

Srideep N Kesavan — Chief Executive Officer

So, see, we have been able to deliver significant growth in value-added products, and not just one quarter, but sequentially quarter-on-quarter for the last almost two years, we’ve been growing value-added products every quarter. So we have been able to do this without significant investment in marketing, advertising spends so-far. We are coming to a stage where certain number of our markets are coming — or having critical volume and scale of distribution, as well as volumes that we are contemplating, increasing our advertising spends in the coming season.

But that said, we will be doing that judiciously and cautiously, keeping our margin profile and margin potential — margin requirement in mind. So our strategy at this point in time is to continue to grow distribution, which itself will be the biggest driver as far as value-added product contribution is concerned. And wherever required, wherever the distribution has required — reached a particular critical mass or critical number, we will be making strategic choice — strategic investments in advertising to increase the demand. So-far, we are seeing robust demand as far as the consumers are concerned and we are meeting that demand by delivering the products to our consumer.

Bhargav Buddhadev — Kotak Mutual Funds — Analyst

And in terms of milk inflation pass-through, how much price hike is yet to be done to fully pass-on the inflation in milk prices?

M. Sambasiva Rao — President

So, yes, we have to know — so yes, so just — [Indecipherable] 14% we’ve passed on to the market at about 11.5%. So at about — yes, so it is a 2%, 2.5% it will cost.

Bhargav Buddhadev — Kotak Mutual Funds — Analyst

And assuming a scenario where the milk procurement prices sort of soften maybe in the next three to six months. Is there a case where dairy companies may also cut prices and want to pass-on that softness or that will not happen, given that the profitability has been significantly hit in the last 15, 18 months?

M. Sambasiva Rao — President

Not because of the historic profitability of the current financial situation, but we haven’t seen prices coming down. I don’t think that — it’s a — at least if we look at — if we take history as a lesson, it’s a one-way street, prices just go up.

Bhargav Buddhadev — Kotak Mutual Funds — Analyst

Okay, okay. Okay sir, I’ll come back-in the queue. Thank you.

Srideep N Kesavan — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Aniruddha Joshi from ICICI Securities. Also participants are requested to please limit your question to two per participant. If time permits, you may join the queue for any follow-ups.

Mr Joshi, please go-ahead with your question.

Aniruddha Joshi — ICICI Securities — Analyst

Yes, thanks. Thanks for the opportunity. Sir, this year we have not it seen any meaningful flush season. So how do you see the milk prices remaining?

Operator

Mr. Joshi, there is some disturbance in your line, may I request you to use the handset, please.

Aniruddha Joshi — ICICI Securities — Analyst

And this is handset only. Sir, basically we have not yet seen the proper flush season. So how do you see the input prices? And also how do you see the cattle feed prices moving up and their impact on the milk prices? Secondly, what was the sale of SMP in this quarter or rather the SMP sales in this quarter versus last year same quarter? And the third question is, growth in B2B sales in this year, because probably it seems that with the opening of the economy, there is a higher sales in B2B market that is institutions or hotel, restaurant, catering, HoReCa, as well as out-of-home consumption? So, if you can indicate the growth in B2B sales? Yes, thank you.

M. Sambasiva Rao — President

Yes, just regarding this procurement prices, procurement prices already gone up by 14%. Going-forward, generally when the season sets in, then procurement price also will go up, so that is —

Operator

Sir, sorry to interrupt, may I request you to come a little more closer to the mic?

M. Sambasiva Rao — President

Yes, yes, so regarding this procurement prices, so already the procurement prices have gone up, increased by 14% and now we are entering into the season, the summer season. So once the summer season sets in, the prices also will go up. So that is the indication about the procurement prices.

Regarding the second point on the demand of HoReCa, our HoReCa contribution is negligible actually. So we won’t focus on the HoReCa segment. So that is why there is no much, no impact on the HoReCa sales.

So third is on cattle feed, yes, probably, yes we’ll —

Srideep N Kesavan — Chief Executive Officer

May we request at this time our CEO of Nutrivet Division, Mr. Upendra to take the question.

Upendra Pandey — Chief Executive Officer

So thank you, Mr. Joshi, for asking this question. Regarding the cattle feed price, for next one month or so, we expect that same price will continue, after that maybe there will be a 4% to 5% drop-in the price of cattle feed.

Aniruddha Joshi — ICICI Securities — Analyst

Okay, thank you. Thank you, sir. And last question on sale of SMP during this quarter versus last year same quarter?

M. Sambasiva Rao — President

So the question is about SMP. So, Mr. Aniruddha Joshi, if I — would you like to raise the volume? Generally, we will not sell SMP, it’s only the consumer pack sale, which is very marginal actually. And it is not, yes, we generally are into not — not into the bulk sales of SMP. So generally, whatever we produce, generally that will be for our internal consumption only. And rather we will be short of SMP than we’ll be just buying and consuming it internally.

Srideep N Kesavan — Chief Executive Officer

So in-principle, there is something that I like to add, this is Srideep here. On the question on B2B sale, SMP sale, etc., see, we are highly focused on direct consumer sale and all our business is built on consumer — selling to consumer and building our brand Heritage. We believe and this has been proven time and again that B2B business is a business which is a commoditized business, commoditized business has its ups and downs and it has — and it has its risks, and it’s not something that we engage in much. In terms of, let’s say, for example, if the commodity, so there could be situations where commodity prices are good and people might make money, but it could go south as well. Our business is steady. We believe in selling every single day-to the consumer, consumers by our brands in smaller packs, and that is what gives us the long-term earning potential.

Aniruddha Joshi — ICICI Securities — Analyst

Thank you. Thank you sir.

Operator

Thank you. The next question is from the line of Ankur Kumar from Alpha Capital. Please go-ahead.

Ankur Kumar — Alpha Capital — Analyst

Hello, sir, thank you for taking my questions. Sir, two questions. One is on this raw-material inflation, is it a global phenomenon or is it India specific, because I was looking at SMP prices globally, they seem to be falling down?

Srideep N Kesavan — Chief Executive Officer

Yes, you’re right. Global SMP prices have come down in the last three or — three to six months’ time. And primarily it is driven by sluggish demand in China. And but unfortunately, India has a tariff barrier as far as the importing of SMP is concerned. Because India, as you know, is a self-sufficient country as far as milk and milk produce products are concerned. And because of that tariff barrier, India is very well insulated from the global markets. So global markets our SMP prices did not impact much, unless situation becomes that dire or drastic. The Indian situation is quite unique to India.

Ankur Kumar — Alpha Capital — Analyst

Sure, sir. And sir, second question is on margins, so do you think current margins are the bottom that we have hit or do we think current — as in this tough situation will continue for couple of more quarters, because as you are saying, RM prices will continue to go up. So can we take on in enough price hike to improve our margins or how do you think the margin will move in the upcoming quarters?

Brahmani Nara — Executive Director

Yes, this is Brahmani here. We do see that we are entering the season, not just for generally increased procurement prices, but also a significant increase in sales of our value-added dairy products, the highest contribution or sale of value-added products starts off in Q4 and continues into Q1 of the financial year. So typically, as we said earlier and as you probably know, the EBITDA margins of these products are two times of a regular liquid milk and we’ve been showing a consistent increase in, not just the contribution, but also in terms of growth of value-added products and curd itself has microliter [Phonetic].

Srideep had mentioned we’ve seen in the low season of Q3 an 18% plus growth in terms of revenues. So having said that, what we feel is margins should strengthen going-forward on the back of growth of value-added dairy products in the coming months and quarters to come.

Ankur Kumar — Alpha Capital — Analyst

And ma’am, our long-term guidance was supposed to be 8% to 10% of EBITDA margins. So how soon do you think we can we can reach on those numbers?

Brahmani Nara — Executive Director

So I think, today, about 75%, 80% of our realization goes to paying the farmer for the raw material. However, having said that, like we said, we’re seeing tremendous growth in value-added dairy products. We are also investing into growing those product going-forward. We are targeting a contribution of VAD products towards our revenues of close to 45% to 50% in the next couple of years, which will require some investments at the same time.

So, going-forward, say this season, when it comes to raw-material volume increases at the right times of flush, etc., sort of stabilizes going-forward. We should be expecting these margins in the next couple of quarters to come. But this is heavily dependent on how the prices of raw material behaves. But internally, we are taking a lot of actions to ensure that the optimizer operations is a continuous process, and I would request Srideep to allude upon that.

Srideep N Kesavan — Chief Executive Officer

Sure, so one thing that we spoke about earlier is the gap of about 2.5% between the increase in raw-material prices and the market net realization improvement, right. So if we can capture that gap, then our EBITDA profile improves and gets closer to the 8% mark that you spoke about. But then at the same time, we are also aware that the raw milk prices may not have peaked yet and it might go up further. So it might be — there might be at least a few more months or quarters of catching-up till such time as the animal population or the milch animal population increases or the milk availability improves to a certain level that it comes down.

Usually it takes about 12 to 18 months for such structural correction to happen. So we might still have few months ahead of us, till the stability happens. Because of which to expand our margin we have taken several initiatives at our end. One is to improve or reduce or reduce the cost of milk delivered to our factories. We have taken several initiatives to improve the efficiency of our raw milk procurement operations. For example, there is something that we spoke about in the last quarter, quarterly call also. We are significantly increasing the density of clustered procurement, which means actually the productivity at the procurement unit is increasing significantly and we have made tremendous improvement on this in this quarter. For example, the milk procurement per unit has actually gone up by about 12%. This all means that the productivity at unit operating level is improving.

Second is, we have improved significantly the logistics, inward logistics of bringing the milk into the factory. We’re also looking at many other ways of reducing that cost by rightsizing the vehicle. We are using — we are leveraging technology in terms of routing using geo coordinates and all of that, which is actually helping us reduce the number of vehicles drastically and reduce the kilometer run also. So there’s a lot of efficiencies that we’re working on in terms of raw milk procurement.

Second, in terms of operating efficiencies, we feel, we believe that we can reduce our operating cost by 10%, which is the cost of converting the raw milk to milk, as well as the value-added products, 10% is the target that we have set internally for bringing in those operating efficiencies and we are well underway. Many of those efficiency measures have been taken already. The third is of course driving the net revenue, which is a direct outcome of improving sales of our value-added products, because value-added products have got higher net realization. So, all three put together should be able to help us expand the margin profile potential in addition to of course catching-up — getting the net revenue increase closer to the raw milk increase, which I think is still a catching-up game, six to nine months is the time we’ll probably need us, not just Heritage, but I think the industry will also need for that to flatten out.

Ankur Kumar — Alpha Capital — Analyst

Sure, thank you and all the best.

Srideep N Kesavan — Chief Executive Officer

Yes, thank you. Thank you very much.

Operator

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

Sameer Gupta — India Infoline — Analyst

Hi, sir. First question from me, just a bookkeeping one. Milk procurement prices and liquid milk prices for the quarter, usually you give that number.

M. Sambasiva Rao — President

So milk price actually, so it is about INR52.29 per liter and the procurement price — so the procurement price is 30 — INR43.70 per liter.

Sameer Gupta — India Infoline — Analyst

Thanks, sir, for this. Second question from me, sir, you’ve already taken a 11%, 11.5% price hike this quarter and previous quarters also we have taken price hikes. When I look at the liquid milk sales, they are up only 3% and going-forward, if milk prices are going to inflate further, is there room to take more price hikes, are you not worried that you’ll start losing consumers at some point? And if this assumption is correct, then until the next flush season, apart from the strategic levers that we are building on which probably will give back-ended returns, our margins should remains up or at least in the near-term, is that a fair assumption?

M. Sambasiva Rao — President

Yes, prices are — actually liquid milk prices are going up now, even value added prices also being corrected now in the market. So it is happening actually one — even so-far, no — the quarters to come, December also we have taken-up certain prices, that impact will come in this quarter. So prices are going up sale prices also are going up.

Srideep N Kesavan — Chief Executive Officer

Yes, if I could just add a couple of points. You’re right that it’s not like — at the end-of-the day, somebody has to pay for this. So we can’t — it’s not possible for us to keep on increasing prices without end, which is the reason why there is a gap between raw milk prices of what far — the money that’s getting paid to the farmer has gone up much more than the money we have been able to collect from the consumer. So the reason why we are going cautiously as far as the consumer price is concerned is precisely because of the point that you raised, because eventually it’s coming out-of-the pocket of the consumer.

But that said, so-far we have been able to increase prices without losing volumes. Yes, milk volume growth is slightly lower, but that is not only a function of the price increases. It is also a function of our focus on value-added products, so we are trying to convert as much of milk into value-added products and we are letting go off some of the non — not so profitable milk volumes. So, let’s say, for example, some of the large packs where our realization is much lower, we have actually de-focused on that. That is why the net growth in milk is slightly lower.

On your second question in terms of, should you expect a softer margin profile going-forward. I think the Executive Director had previously — already addressed that question. I hope that answers. If there is anything very specific, Sameer, you may please.

Sameer Gupta — India Infoline — Analyst

Yes, I get what Brahmani had said. I also stated that in my question that, apart from the strategic levers, which probably will give back-ended returns. So I mean value-added products will take it’s time to improve and the mix and the margins, they show-up over a period of time, but that addresses my question. My last question is that, our milk procurement, when I look at volumes, last four quarters, there has been a higher growth in that versus the liquid milk sales. So probably we have some buffer of lower-cost milk, should there be a breakaway inflation. I think we should be in a better position to protect margins, again, is that a fair assumption or no?

M. Sambasiva Rao — President

Okay. Yes, I think that will meet the sale requirement, whatever is sales growth plan is there. Definitely if there is a price advantage, it will help us. So our strategy is also that, see, we are working towards — we feel that the shortage in milk doesn’t stay that way for longer than nine to 12 months, because eventually when the prices are attractive enough, the farmer will start producing milk, they might have missed our — small percentage of farmers might have missed an insemination cycle. But eventually the milch animal population should come back and production should restore or catch-up with demand. This is there in any business, supply-and-demand will eventually catch-up and when that happens, we’ll be in a very strong position, yes.

Sameer Gupta — India Infoline — Analyst

Got it, sir, thanks. Thanks for addressing all my questions. Thank you, sir.

Operator

Thank you. The next question is from the line of Hitesh Sharma from Whitesky. Please go-ahead. Hitesh, your line is unmuted, please unmute your line and proceed with your question. It seems there is no response from the current participant.

We will move to our next question that is from the line of Rohit Suresh from Samatva Investments. Please go-ahead.

Rohit Suresh — Samatva Investments — Analyst

Thank you, sir, for the opportunity. A couple of questions.

Operator

Rohit, your voice is breaking. May we request you to come in network area and use an handset please.

Rohit Suresh — Samatva Investments — Analyst

Yes, am I audible now?

Operator

Yes, much better.

Rohit Suresh — Samatva Investments — Analyst

I had a question on the Lumpy Skin Disease. So in the previous call you had mentioned that in South India, there is no major issue on the Lumpy Skin part, but in your press release, you have mentioned that the flush season has — in South India has been impacted by the Lumpy Skin Disease. So just wanted some clarity on that.

My second question will be on the non-core markets. So as you mentioned earlier in the call that the non-core markets are growing at 50% to 60%. So what is your strategy going-forward for those markets. And lastly, on the curd, what are your peak volumes that you can achieve on an annual or a quarterly basis, if you could let me — give me those numbers. That’s it from my side. Thank you.

J. Samba Murthy — Chief Operating Officer

Yes. So, this is Samba Murthy here. So Lumpy Skin Disease actually, as of now, now that the diseases is subsided, there is no much impact in the field actually. So even entire country also there is no much of Lumpy Skin Disease case, actually it is subsided.

Srideep N Kesavan — Chief Executive Officer

Yes, yes, with reference to, as in if your point is like, we are — most of our procurement is in South India, it’s not the South India, I think that Maharashtra and South of Maharashtra is where we procure. But then if there is impact elsewhere in the country because of which certain companies migrate to Maharashtra to procure milk from Maharashtra to compensate for losses elsewhere, that all adds up to inflationary cost — inflationary trends in Maharashtra.

You can imagine right, as in procurement companies have moved into Maharashtra this year, more-and-more companies have moved into Maharashtra this year to procure the milk they might have lost because of Lumpy Skin Disease, maybe that it’s reference to that. As far as South India is concerned, there were few isolated cases here and there, but we are not seeing anything.

The other questions you have asked, I’ll just try to quickly address that. One, yes, our non-core markets, which is markets outside of Telangana and Andhra Pradesh are growing much faster. As far as our strategy is concerned, in these markets, it’s very clear, we have to — we are working in a very concentrated fashion rather than spreading it too thin.

We are focusing on certain suburbs of Mumbai and Pune. We are focusing on certain suburbs in Delhi NCR region and Haryana. So, in Haryana, you’ll find us in certain cities and in those cities we are actually growing to be — growing into a strong brand. So we are focused on — we are focused on Bangalore, we are focused on Chennai. So we are focused on urban markets. We are focused in a concentrated fashion, that’s something that we are working on.

Secondly, we are working on building value-added products in these markets ahead of milk. So in these — while in our core markets, we’re still milk dominated. Many of these frontier markets, we’re actually VAP-led, value-added products led, so that’s our strategy for growth. The third, as far as curd is concerned, is your question — may I clarify, is your question, what is our capacity or is it how much can we do? Is that what you asked?

Rohit Suresh — Samatva Investments — Analyst

Yes, how much the peak that we can achieve on an annual basis? The peak that we can do?

Srideep N Kesavan — Chief Executive Officer

Yes, so, see, I think that will be speculative. I think at this point in time, we have capacities to do upwards of 800 tons, but then I don’t want to give a number. We are — all I can say is that we are growing in very-high teens, 18%, 19% as far as curd is concerned. And we have not seen this growth slowdown at all for us. So we’ll continue to grow. Quarter one, for us, looking — quarter-four and quarter one is also looking very positive.

Rohit Suresh — Samatva Investments — Analyst

Great sir, thank you so much and wishing you all the very best. Thank you.

Operator

Thank you. The next question is from the line of Rajat Setiya from ithought PMS. Please go-ahead.

Rajat Setiya — ithought PMS — Analyst

Hi, thanks for the opportunity. Sir, we have mentioned our inspirations to reach INR6,000 crores in the near-future. Wanted to understand what kind of capital expenditure do we need to do to be able to achieve those sales levels?

Brahmani Nara — Executive Director

This is Brahmani here. I had mentioned earlier capex expenditure is of different types, we need to keep investing into procurement, like my colleagues had mentioned, high-density of procurement is very important for us and we’ve been a company that’s been directly procuring from the farmers. So we take this very serious. So that’s one aspect of it. The other is, on the operation — plant operation side, which basically is focused on expansions, as well as replacement capex of older machines for efficiency, etc. And thirdly, in the market, in the form of chillers, freezers for us, especially for our value-added dairy products, as well as investing into our newer channels for growth we have — where we have a more direct connect with our consumers. We expect this generally to be around INR120 crores per year on an average going-forward. However, depending on the year, it might be a little variable in the next three to five years. However, the average could be around INR120 crores per year.

Rajat Setiya — ithought PMS — Analyst

All right. Thank you so much for this. The other question once again. What kind of — so this is related to the milk procurement that we do, so to achieve those sales targets, what kind of farmer reach do we need to achieve? I think currently we are at 3,00,000 farmers in eight states. So if you can help us understand about that?

Srideep N Kesavan — Chief Executive Officer

So we have — even this year, actually we have added quite a number of farmers, close to 30,000 odd farmers have joined our ranks. But these 3,00,000 farmers may not all — not all of them will be active at all-the-time, right. It depends on the milch animals in their household at that particular point in time. So we are progressively adding farmers to cater to the growth. At this point in time, the growth in volumes that we are seeing is a mix of milk per farmer, as well as the number of farmers jointly. So if we say that we are growing in double-digits as far as many procurement is concerned, it’s a combination of both.

Rajat Setiya — ithought PMS — Analyst

All right. Okay, all right, sir, thank you so much.

Operator

Thank you. Next question is from the line of Resha Mehta from GreenEdge Wealth Services. Please go-ahead.

Resha Mehta — GreenEdge Wealth Services — Analyst

Thanks for the follow-up. So Srideep, you made a very interesting comment on improving your milk procurement density, right, that’s per center the — this has increased by around 12%, I believe that was the comment that I heard. So in this context, if you could just explain that for us, I think broadly, we’ve been at, so 3,00,000 farmers, 13 — around 13 lakh liters per day procurement. So that’s roughly four liters, right. And we’ve been thereabouts for quite some time, right. So four liters per farmer, if I were to calculate it that way, right. So how has — what steps have we taken to kind of increase this and we’ve seen this 12% increase in milk procurement per center, say, over a period of time or is it just in the last six months and what steps specifically we’ve taken?

Because I believe we were, in any case, deeply engaged with the farmers in terms of helping with their ancillary wet support, increasingly milk productivity, etc. So what is it that we specifically done that has improved the procurement per center and also if you could talk a little bit about that, typically, let’s say, when we are present in a village, how many other dairy companies are present there? What would be our market-share from — in terms of procurement from the farmers there? What would be the typical farmer attrition rate? And if you could break-up your answer into, how does it look like in your core markets of AP and Telangana and in your new markets, if you could just comment on Maharashtra?

Srideep N Kesavan — Chief Executive Officer

Yes, you’ve asked a very detailed strategic question, Resha. A lot of things are a bit confidential in the way we operate. But I’ll — if I can give you a sense of it, and if that satisfies you I’ll be glad. First of all, you’ve divided the volume that we procure by 3,00,000 farmers. As I’ve mentioned, it’s not like all 3,00,000 farmers have an animal giving milk all-the-time, right, as in the animals also go through a dry period and then they have to be inseminated, pregnancy, lactation comes back again, right. You can imagine, right? So even though we have 3,00,000 farmers who — 3,00,000 plus farmers, in fact, actually, we added 30,000 farmers this year. And but not all of them are activated in a point and time. Yes, as far as the milk production per farmer is concerned, it’ll roughly be in the range of five to six liters per farmer, if I go by the ratios that you mentioned.

In terms of how we get more density, it’s a choice we have, right. See milk — when we need milk, we can either go further and further into new — newer places and look for milk, or we can look for more — recruiting more-and-more farmers in the same village where we operate, right. So we actually choose to do the latter because it gives us more milk flow into the units that we have already existing. So that’s a — it’s a very-high level answer I know, but I hope it satisfies you. As in, we have got two options, one is we can go looking for new villages or rather we can look for new farmers in the same village. So, we go for the latter and that’s what is helping us get more milk in a — in an economical fashion.

Secondly, also in terms of, I spoke to you about, we look at routing, which are the routes, where we have poorer vehicle — optimize that vehicle utilization. So if we can increase milk in that area, it probably helps us reduce the cost in that particular area, that kind of approach is what [Ends Abruptly]