Lets directly address the elephant in the room. Is Jagan Mohan Reddy going to to make Heritage history ?

Simple answer – NO !

Procurement prices of cow milk this quarter was about 30 rs a litre and buffalo milk was about 45 rupees a liter. The Andhra govt has announced a package of a 100cr i.e a subsidy of 4 rupees a liter of milk to NOT supply to Heritage. Pvt companies in the region procure over 60-70 lakh liters and this 100 cr subsidy can only subsidise 8 lakh litres or about 11-13% of all the milk procured. So there is no way the govt can afford to subsidise Jagan Mohan Reddy’s revenge.

How this is proposed to be administered will be a real sight to watch.

BJP Vendetta – CB Naidu could probably not have played a worse hand at politics this election year. That being said, there is not much of CBN left to massacre, he is aging and is probably more likely to compromise with the BJP rather than fight them. In simpler words, CBN has probably hit the worst circumstances possible and looks like it can only get better from here.

While Amul is a gold standard by almost any measure, Vijaya Dairy, the local co-operative is a completely different company. It survives on subsidy, like an Air India of sorts. Personally this threat of using Vijaya Dairy to kill Heritage is akin to using Air India to kill a Spice Jet. Yeah, i only want to laugh.

Back to Heritage : The simple funda is this – Target is to hit a 6,000 cr turnover with 2,400 cr (40%) sales in Value Added Products (VAP) by 2024 from the 2,600 cr turnover in the last 12 months trailing. Assuming a ultra conservative margin of 2%-3.5% this would yield a PAT of 120 to 210 cr. Assuming a PE of 20 as the entire business is 100% consumer facing you could look at a conservative M.Cap of 2,400-4,200 cr and if it is a bull cycle this could go close to 6,500-7,000 cr.

Heritage has 1.78 cr shares of Future Retail ltd and based on pre-agreed profit sharing agreements this could fetch at least 400-500cr in the future. Currently Amazon is after a 10 % stake in the company, and that could either change the price or atleast make the business a lot more sustainable.

Heritage also has a debt of about 220 cr and plans to invest 110-120 cr on integrated plants over each of the next 5 years, i.e an investment of about 550-600 cr.

The company has not yet taken a decision to sell the stake in Future Retail, but it is good to know that in case they do, they can pretty much fund the entire expansion as well as retire all the debt if they sell a little of it every year.

The VAP (curd-ghee-ice creams etc ) are now way over 30% of the sales this quarter. The management played a little gimmick this quarter by not passing on increase in prices of fat to the customers to gain volume/market share which has worked out pretty well.

Significantly more premium than the packaging used for Heritage Frozen Desserts

The new Branding and distinction between Frozen Dessets and Ice cream too is workign out well. Alpenvie, still has to break ground and the management has recently plugged all the loose ends with regards to supply chain problems. This summer will be intersting to observe the old ice cream players defend their market share and the new ones try to gain some.

Heritage has decided to restrict the ice-cream ads this year to AP, Telangana, Tamil Nadu and Karnataka only.

Recently Heritage has started a JV with a French dairy company called Novandie for high end yoghurts. This plant is near Mumbai and i’m guessing their primary market of launch too will be Mumbai. Watch this ad to figure out what they are upto.

While Epigamia has the backing of Danone it is doing the new players a huge service. It is creating an industry segment ! If heritage plays it right it can possible give the same product at a much cheaper price, just like what it does in the curd segment against Nestle’s A1 Dahi.

While intermittent fasting, protein based meals, gut health and probiotics continue to take a larger role in our diets, products such as these should be able to sell well.

Heritage seems to be correcting continuously and I think if you manage to get it sub 300 levels, you should simply back up the truck and load up.

This company is based on animal produce and the returns will be based on the animal spirits of the markets 🙂

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