What Makes Heritage Foods CEO Bullish On Dairy Foods & Drinkables? | NDTV Profit
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00:00First off, we have Sridip Kesavan, CEO of Heritage Foods, to talk to us about the new expansion plans that they have.
00:06Welcome to NDTV Profits, sir.
00:09Of course, Heritage Foods is getting into the ice cream business now.
00:13Plenty of plans with regard to growth as well.
00:16Sridip, just talk to us about how the business will start or kickstart.
00:22What should one expect in terms of the new venture?
00:27Thanks a lot for having me on your show.
00:30Just a small correction while I take this question.
00:33First of all, we are not new in ice cream.
00:36We entered the ice cream space in 2009, so we've been in this space for about 15 years.
00:41And the reason why we have gone in for this capital investment is that our current facility is almost run out of capacity.
00:47And as it seems, we have seen an inflection point during COVID and we have seen tremendous growth.
00:56And the industry as such, not just Heritage Foods, industry as such has seen tremendous growth in ice cream in the last three or four years,
01:03which is why we have run out of capacity and now we are expanding the capacity.
01:07Mr. Kesavani, Mahima also joining in.
01:10I want to understand that since you mentioned that you're already running out of capacity when it comes to the ice cream business in the plan that you already have.
01:19So that suggests that there's a lot of demand for ice creams in the market.
01:23But I want to understand that at present, what is the kind of revenue share of ice cream in the business?
01:29And going forward, where will it go to and overall impact on your revenues and margins?
01:34Thank you, Mahima.
01:36Value-added dairy is a focus area for the company.
01:40In the first quarter, we had about 38% of our revenue coming from value-added dairy.
01:44At Heritage, we look at our business in three buckets.
01:47One is milk, which is a large part of our business.
01:50Then we have value-added dairy, which was about 38% in quarter one.
01:54And then we have what we call is consumer fats, which is ghee and butter, which contributes about 4% to 5% of our business.
02:01And in this 38% of value-added dairy contribution, ice cream would be close to about 9% or 10%.
02:08And in quarter one, we did up 31 crores of revenue from ice creams, which is an annual run rate of close to about 110, 120 crores.
02:17But we see, we feel that as an industry, we have barely scratched the surface as far as ice creams are concerned.
02:25In our country, impulse category retail penetration is close to about 3.5 to 4 million outlets,
02:31whereas ice cream penetration is hardly in 3.5 to 4 lakh outlets,
02:35which is just barely 10% of the retail impulse space that has been penetrated by ice creams.
02:40The headroom to grow is tremendous.
02:43Secondly, we also have seen in advanced countries, developed countries,
02:49as well as developing countries who are slightly ahead of the game compared to India,
02:53that the moment the per capita income crosses $2,500, that's when consumers discretionary spends increase.
03:00And impulse categories like ice creams will see tremendous growth.
03:05The new capacity allows us to grow our revenue from the current 110, 120 annual run revenue rate to close to about 650 to 700 crores.
03:16That's the kind of headroom we think we'll be able to explore in the next five to six years.
03:21Right. Mr. Kesavan, how quickly does this come on stream?
03:25So we've already kick-started the project.
03:28I think the next 15 months, we should be able to commission the plan.
03:32We are looking at Q3 of 2025.
03:34You could say the months of October and November is when we will have this new line running.
03:39Pretty much all of that capacity will come on stream at once.
03:43So the full 650 odd crore, so maybe the incremental 500 odd crore will come straight up at one go?
03:51No. Of course. See, the business cannot jump from 120 crores to 500 crores in a year.
03:57Right. Exactly.
03:58We are expecting the capacity to be fully utilized over the next four or five years' time.
04:02That is when the capacity of the business would mature, at least the phase one,
04:07as we see of this particular business would mature in four to five years.
04:11And as far as the capacity is concerned, we would be doing investment in a standard phase.
04:16A large part of the investment would be completed by October and November of next year.
04:20And we would be adding certain other capabilities in the subsequent years.
04:27You know, we also expect that the line will be able to manufacture several new products or innovations,
04:35which we are not able to do in our current line.
04:37All right. And then, Mr. Kesavan, from what I understand is that margins in ice cream business is better when it comes to other milk products.
04:44So I want to understand then, you know, when you reach that 650 crore mark, where will the margins be at, blended margins?
04:52It's not just ice cream. Value added dairy as such is of great interest to us.
04:57And one of the stated objectives that we have as a company is that we are aiming to get to 6000 crores in the next three years or so.
05:06That's that that requires the business as such to grow in mid-teens.
05:11And while we get there, we wanted value added dairy to contribute about 40 percent of that revenue.
05:18Today, value added dairy is contributing on an annualized basis about 31, 32 percent.
05:23And that moving to 40 percentage would have a significant impact in terms of bottom line.
05:27Of course, ice cream will be a serious contributor to that.
05:31But then, of course, the larger categories isn't the value added dairy, whether it is dairy foods or dairy drinkables.
05:37Dairy drinkables is another exciting category that we are so bullish on.
05:41All of these are highly margin accretive.
05:44All right. And Mr. Kesavan, this this particular facility will have a capex of 204 crore, which will be both from debt and internal accrual.
05:52So I just want to understand the breakup. How much of it will be debt and how much of it will be internal accruals?
05:58That will be worked out in the due course of time.
06:01But we are comfortable as far as internal accruals are concerned.
06:04But at the same time, we will be going in for a ratio of debt as well as internal accruals.
06:09Yeah, I want to stick to margins, Mr. Kesavan. So around 650 odd crore in terms of ice cream,
06:1540 percent of 6000 crore roughly to 2500 odd crore in terms of value added product.
06:22Talk to us about where margins for value added products are today versus your current blended of higher single digit.
06:30So where are what what's the margin profile like currently?
06:34And do you think that that has scope for improvement going forward, both on a blended basis as well as on a on a value added product basis?
06:43It's a pretty loaded question. There are so many facets to it. Let me just unpack it and address it one by one.
06:49The number that you just spelled out, which is 650 crores, is something that is going to happen over the next five or six years.
06:56Whereas the 6000 crores is a goal that we are trying our best to accomplish in the next three or four years.
07:02So I don't think that ice cream business will be 600 crores at that time.
07:07That's one thing that I just wanted to call out. And as far as the EBITDA margins are concerned,
07:13we are currently holding around eight and a half percent EBITDA margin.
07:17It's our intention to push it to nine or nine and a half.
07:20And that will happen with the with the increase of value added dairy contribution in our portfolio.
07:25And value added dairy essentially on an average contributes about three to four percentage EBITDA higher than than milk.
07:35But one should remember that we are in a business.
07:37The dairying is always known for its cyclicity and a large part of our cost is actually the raw material cost, which is driven by the raw milk prices.
07:45So there will be a little bit of a cyclicity on a comparable basis.
07:49I think that we'll be able to expand the margin. But that all depends on the base price of milk at any point in time.
07:55All right. Mr. Kesavan, I also want to understand with respect to your subsidy, which is Heritage NutriVet Limited, because it did very well in Q1.
08:04So I want to understand that. How are you planning to scale that up and what's the strategy going ahead?
08:10So one of the very reasons why we got into this business is to empower our farmers.
08:17In fact, it is enshrined in our vision itself to empower our farmers.
08:21And we believe empowering farmers actually means increasing or enhancing their revenue at a farm household level or agricultural household level.
08:32And that happens when productivity of milk improves in every producing household.
08:40And towards that, we are doing a lot of initiatives. We actually work with over three lakh farmers.
08:46As of today, at any point in time, we have two lakh plus farmers who are pouring milk to us.
08:51And one of the essential ways of improving productivity of dairying animals is by improving the quality of feed that goes to these animals.
09:02And even today, the penetration of concentrated feed in India is pretty low.
09:07And we are expanding that. Today, we have increased the penetration of concentrated feed among our farmers tremendously.
09:17We are looking at expanding that even further. That is what is driving the growth of Heritage NutriVet Limited.
09:24Let me come to the traditional business, milk. Talk to us about volume growth that you're anticipating in FY25.
09:31And what's the kind of top line that you expected to contribute if in three to four years you have an aspiration of getting to six thousand, six thousand crore?
09:42Sure. See, milk is actually the base, the foundational business for us.
09:46It still contributes upwards of 60 percent of revenue.
09:49So without growing milk, obviously, we cannot grow our overall pie in mid-teens over a long period in time.
09:56So, of course, milk has to grow. But we should understand that milk as a category in metropolitan cities have got very high penetration level.
10:04For example, whether it is Hyderabad or Bangalore, you know, milk as an industry would have penetration of 90 to 95 percent.
10:12So so actually the the the category in these cities would grow at the rate of urbanization.
10:18And urbanization would be growing in the range of three to two or three percent year on year of urbanization or population or whatever you want to call it.
10:27So milk in these metropolitan cities would grow at that rate.
10:31So for us, we are expanding our horizon beyond the metropolitan cities.
10:36We are going into tier one and tier two. These are cities where milk penetration is still only in the mid 50s or at best 60 percent.
10:44We see tremendous potential in driving growth in these tier one, tier two cities.
10:47And that is what is helping us grow our milk volumes better.
10:52In quarter one, we grew our milk volumes by about four point six percent.
10:56We are working hard to take this number up higher to around six to seven percent.
11:02So that's that's what we are working towards. And you will see the steady progress as the company goes forward.
11:09All right, Mr. Kesavan, well, thank you so much for giving us those insights on Heritage Food.
11:14Lovely chatting with you. And thank you so much for taking your time and speaking with us at NDTV Profit.