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Heritage Foods Ltd

| Q3 FY26 Earnings Conference Call

NEUTRAL SENTIMENT

Report Source

⬤31st Jan 26

Summary : Heritage Foods faced Q3 margin pressure from high milk costs but expects normalization through value-added product growth, new capacity, and strategic investments despite ongoing industry challenges.

Management Perspective neutral : Management acknowledged significant challenges like cost pressures and supply shortages. They expressed confidence in future margin normalization and VAP growth, highlighting ongoing efforts to mitigate external factors and strategic investments.

Concall Report Analysis & Insights

Business Overview

  1. Q3 FY26 consolidated revenue grew 8% year-on-year to INR11,192 million.
  2. Milk sales volume increased 2.1% year-on-year, with net realizations at INR57.31 per liter.
  3. Value-added product (VAP) revenues grew 22.6% year-on-year, contributing 38% of total revenue.
  4. EBITDA stood at INR629 million and PAT at INR346 million.
  5. Margin compression was driven by a 9% year-on-year increase in milk procurement prices.

Future Growth Prospects

  1. Hyderabad ice cream plant and flavored milk plant expected to commission in current quarter.
  2. Ice cream plant has potential for INR500-600 crores revenue over 6-7 years.
  3. Flavored milk plant targets INR100 crore revenue in 4-5 years.
  4. Company aims for 20-22% CAGR in value-added products over 7 years.
  5. Focus on expanding distribution footprint and improving farmer productivity.

Management Insights

  1. Margins are expected to progressively normalize with improving supply and VAP contribution.
  2. Prioritizing timely payments, feed support, and farmer engagement ensures supply continuity.
  3. Company is doubling down and going deeper in core markets, expanding retail footprint.
  4. Investing in marketing to build brand stickiness and retention in organized trade.
  5. Working to de-seasonalize the business through functional products like probiotics and fortified milk.

Signs of Skepticism

  1. Management expects margins to bottom out and improve, despite anticipating short-term procurement price hardening.
  2. Reliance on the 'mini flush' season and competitors eventually raising prices to ease cost pressures.
  3. Operating leverage benefits are contingent on achieving higher volume growth, which has been soft.

Risk Factors

  1. Elevated raw material and milk procurement costs continue to impact profitability.
  2. Industry-wide butter tightness and significant butter exports from India.
  3. Excessive rainfall and lower temperatures impacted consumption and milk productivity.
  4. Climate change impact is palpable in the dairy industry.
  5. Competitors not raising prices could impact market share.

Good To Know

  1. Mrs. Brahmani Nara received 'Most Powerful Women in Business Awards 2025'.
  2. Heritage Foods recognized among India's top 50 manufacturing companies.
  3. Launched Nourish+ paneer (60g protein) and Nourish+ milk, with positive e-commerce offtake.
  4. Company is focusing on fortification and probiotics to enhance product functionality.
  5. Q3 employee benefit expense increased by INR27.78 million due to new labor codes.

Key Drivers

  1. New ice cream plant commissioning soon.
  2. Flavored milk plant commissioning soon.
  3. Increased value-added product contribution.
  4. Improved farmer productivity initiatives.

Key Analyst Discussions

Competitive Environment

  1. Some private dairies and cooperatives have not taken price hikes.
  2. Industry-wide costs have increased, suggesting others will eventually raise prices.
  3. Heritage Foods passed on some costs to consumers through price increases.

Market Trends & Consumer Behavior

  1. Excessive rainfall and lower temperatures impacted weather-dependent VAP categories.
  2. Strong consumer demand for VAP, especially curd, paneer, drinkables, ghee, and ice cream.
  3. Packaged curd penetration is low (25% in Andhra Pradesh, 40% in Hyderabad), indicating growth headroom.

Financial Highlights

  1. Q3 EBITDA margin was 5.9% (standalone) and 6.3% (consolidated).
  2. Raw milk prices increased 8.9% YoY, while market milk prices increased 4.9%.
  3. Logistics costs rose from 2.7% to 2.9% of revenue, impacting EBITDA.
  4. Marketing investments increased from 1.2% to 1.8% of revenue in Q3 YoY.
  5. Ineligible GST impact of INR1.2 crores affected gross margins for paneer.

Product Composition

  1. Value-added product volumes grew 6.8% YoY in Q3.
  2. Curd growth was 10%, drinkables 16%, and paneer grew about 30%.
  3. Ice cream growth was 21% in Q4, with strong summer season expectations.
  4. Ghee volumes grew 45%, with overall revenue growth of 69% in consumer fat.

Strategic Considerations

  1. Shamirpet ice cream plant expects 40-45% capacity utilization in first year.
  2. New plants are expected to capture incremental demand in fast-growing categories.
  3. Capital investments are incremental to maintain high plant utilization for VAP.
  4. Focus on farmer productivity to increase milk yield per day from 10 to 12-13 liters.