Multi Baggers

Founded by Shri N. Chandrababu Naidu, ex-Chief Minister of Andhra Pradesh, Heritage Foods India Ltd. (Heritage Foods) is engaged primarily in three businesses – Dairy, Retail and Agri.

DAIRY BUSINESS:

The company’s main Dairy plant is located at Chittor district of Andhra Pradesh. The company’s Milk procurement and processing plants are located at over 23 locations in Andhra Pradesh and Tamil Nadu; the company has Processing and Packaging stations at 23 locations and Chilling Stations at 13 locations. Heritage Foods currently sells Milk and Milk Products including Ghee, Paneer, Ice Cream, Cooking butter, Lassi, Doodhpeda, Fresh Cream, Curd etc. in various cities in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Maharashtra under “HERITAGE” brand. The company has established a strong Supply-Chain in the dairy business, which procures milk from farmers in Rural Areas, mainly in Andhra Pradesh and some parts of Karnataka, Maharashtra and Tamil Nadu. Heritage Rural Retail network has over 1800 stores with 13 distribution centers. A Typical Rural store is of 100 square feet size and is based on franchisee model to cater to village with less than 5000 population. The objective is to reach popular FMCG products and quality groceries at affordable prices to the interior villages across South India, leveraging on the milk procurement network.

RETAIL BUSINESS:

The company has around 80 retail stores in Hyderabad, Bangalore and Chennai. These operate under Heritage Fresh and are positioned as a complete daily need store with a distinct focus on fresh Fruits, Vegetables, Dairy, Bakery and Grocery.

AGRI BUSINESS:

Leveraging on strong relationship with the farmer which the company has developed over years, the company s involved in contract farming wherein Vegetables and seasonal fruits are produced through contract farmers and reach pack houses via collection centres strategically located in identified villages for washing, sorting, grading and packing and despatch to the retail stores.  Besides, the company also provides services to farmers for adopting GAP (Good Agricultural Practices), IPM (Integrated Pest Managements), INM (Integrated Nutritional Managements) & training for reduction of pre & post harvest losses.

Financials:

The latest financials of the company are given as under :-

Major Concerns:

Retail division has been a drag on the financials of the company. In the event of any delays in restructuring of retail division by way of either inducting an investor for a strategic stake or a complete buy out of the Retail Business, the financials of the company may come under strain. Our other major concern is on account of the political background of the promoter, which may be a double edged sword.

Conclusion & Investment Rationale:

Strong Milk Procurement/ Distribution Infrastructure

Heritage Foods has established a strong procurement infrastructure for milk and milk distribution. Being in existence for over a decade now, the company has established strong relationship with dairy farmers in the state of Andhra Pradesh and Karnataka and has created a good distribution network as well. Total milk procurement by the company during the year 2007-08 averaged 6.95 lakh litres per day, representing a growth of 33 percent over 5.23 lakh litres per day achieved during 2006-07.

Losses mainly on account of Retail Division

In the first 9 months of the current FY, inspite of an increase in sales by 41%, company has posted a Net Loss of Rs.15.62 crores (even though the loss is down from over Rs.24 crores for the same period last year). As per segmental revenues for 9 months ended Dec 08, the Dairy business is performing well and has posted PBIT of around Rs.28 crores. For the quarter Oct-Dec 08, the PBIT in the Dairy business is Rs.16.26 crores – which means a profit of roughly Rs.5.50 crores every month. The big drag on the financials has been the Retail Business which posted Losses of Rs.35 crores for 9 months period ended Dec 08.

Strong Possibility of Spin Off of Retail Division and Sale to/ Infusion of Strategic Investor

The company has incorporated a wholly owned subsidiary Heritage Foods Retail Ltd. (Heritage Retail) in December 08. Even though the objective or purpose of forming the subsidiary has not been stated by the management, we believe the management could transfer the Retail Division of Heritage Foods to Heritage Retail. This would give a clear focus to the company, thereby leaving Heritage Foods with the Dairy and Agri business. Thereafter, a logical step for the management would be to bring in a strategic investor to infuse cash into Heritage Retail. Complete sellout of Heritage Retail may also be an option with the management which cannot be totally ruled out. Heritage Retail with 80 Retail stores located in Hyderabad, Bangalore and Chennai could fetch a good valuation.

Heritage Foods has a strong business model – the infrastructure to procure lacs of litres of milk on a daily basis is not easy to replicate and provides strong entry barriers in the business. The products of the company are sold through over 150 exclusive ‘Heritage Parlours’ besides other retail channels.

In the event of the Retail division getting sold or moving out of the company, the company can potentially make PBIT of roughly Rs.60-70 crores every year from the Dairy business. The profit potential therefore is good given the current market cap of Rs.87 crores.

The company had made preferential allotment of 10 lakh shares to Kotak India Focus Fund in Feb 08 at Rs.350 per share and 5.4 lakh shares to promoters at Rs.256 per share in March 08. The stock is thus available at a significant discount to the price at which Equity dilutions have been done in recent past. Besides Quantum m Ltd., a hedge fund of George Soros group also holds 5.23% stake in the company.

The stock of Heritage Foods currently trades at Rs.75 and is available at a market cap of Rs.87 crores provides a good investment opportunity. Investors can choose to accumulate the stock at the current price and on declines.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

This report has been prepared solely for information purposes and the information contained herein may not be deemed to be an investment advice. Such information is impersonal and not tailored to the investment needs of any specific person. The information contained herein is not a complete analysis of every material fact representing any company, industry or security. The views expressed may change. While the information contained herein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments and should consult with and rely upon their own advisors whether and how to use such information in making any investment decision. Neither the author nor his firm accepts any liability arising out of use of the above information/ article.