Indian Economy News

Heritage Foods to invest Rs170 crore over next four years

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  • February 19, 2015

Hyderabad: Heritage Foods Ltd will invest Rs.170 crore over the next four years in two of its core divisions, moving into newer markets in the dairy business and doubling the floor space of its retail business, as it bids to become a $1 billion company by 2020.

The Hyderabad-based firm, owned by family members of Andhra Pradesh chief minister N. Chandrababu Naidu, has started dairy operations in the National Capital Region (NCR), Mumbai and Pune markets, away from its stronghold in the South, and is tying up with local farmers to procure milk.

“It will pump in about Rs.30 crore annually to strengthen the backend infrastructure of its dairy business and increase the footprint in newer markets in the northern and western parts of the country, apart from the existing ones in Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Odisha,” Nara Brahmani, executive director of Heritage Foods said in an interview.

The company will set up nearly 100 more retail outlets over the next four years at an investment of Rs.50 crore taking its total retail floor space to 600,000 sq.ft., Brahmani said. Heritage currently operates 90 stores under the Heritage Fresh brand occupying 320,000 sq.ft. It expects to add another 30,000 sq.ft. of retail trading space by the end of current fiscal year.

Capital expenditure should help to grow the toplines of the dairy and retail divisions, Shailesh Kumar, research analyst at Indsec Securities and Finance Ltd. said.

Heritage, founded in Andhra Pradesh in 1992, is not keen on acquiring brands but will consider acquiring assets that can add capacity to its businesses, Brahmani said.

“Any additional channels we are looking at will require further investment. Those details should be out very soon, we are still working on the final details,” she said, without giving details.

The company recently revived a sick dairy unit it acquired in Sonipat in Haryana to cater to the national capital region (NCR) market. Earlier, it acquired a dairy plant at Sangvi in Maharashtra, which supplies Mumbai and Pune.

Demand for milk is expected to grow to 200 million tonnes by 2022 from 138 million tonnes in 2014, according to the National Dairy Development Board (NDDB). The company expects to garner a significant share of this demand by entering high volume markets such as NCR and Mumbai, and by strengthening its presence in existing markets.

Put together, NCR and Mumbai have a demand of 11 million litres of milk every day. Heritage currently supplies 50,000 litres of liquid milk a day to Mumbai and Pune, and sells 10,000 litres a day in NCR. In four years, it expects to sell about 300,000 litres a day in each of NCR and Mumbai markets.

Much of Heritage’s success in the new markets will depend on the policies of local governments and the company’s relationship with farmers, an analyst with Angel Broking Ltd said. “Establishing presence in markets like Mumbai and Delhi will take some more time. It is not going to be easy,” the analyst said, requesting anonymity because he is not an authorised spokesperson.

Yet, Heritage is banking on geographical diversification and higher sales from value added products such as ice cream, curd, butter and flavored milk (whose margins are double that of liquid milk) to grow into a $1 billion entity by 2020.

“It is a steep target,” conceded Brahmani, who’s the daughter-in-law of chief minister Naidu. “That’s why we are focusing a lot on the dairy business value added products. Industry is growing in that direction. We are no more a regional brand, we are more like a pan-India player. We want to be all across in the country—in the major markets.”

While Heritage is diversifying geographically in the dairy business, it intends to consolidate retail operations in existing markets—Hyderabad, Bengaluru and Chennai.

It has added 19 new retail outlets in the past nine months even as it renegotiated rents and relocated a few existing stores to areas with a higher footfall—in an effort to make the retail business profitable.

The loss-making retail division has been eating into the profits of the dairy business, which contributes about three-quarters of the firm’s revenues. “Heritage Fresh, the retail division of the company has been the Achilles Heel for last five years,” analyst Kumar said. “Losses in the retail division have eclipsed the profit of the dairy division.”

But, Brahmani said that’s going to change.

Heritage expects its retail division to break even on an Ebitda (earnings before interest, taxes, depreciation and amortization) level from the first quarter of next fiscal. Ebitda is a measure of profitability.

Brahmani said the retail division will be profitable on a PBT (profit before taxes) basis from financial year 2017. Once that’s achieved, the company plans to separate the retail division from the parent.

“We plan to hive off the retail business after PBT profitability is achieved,” Brahmani said, adding that retail expansion will not affect the PBT target.

“They can do it only after they are able to work out profitability on an Ebitda level. Only then they will be able to sell this particular division to some other company,” the Angel Broking analyst said. “Selling off the retail division will boost the valuation of the company.”

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.