Heritage Foods Limited — Call Transcript 2019

Nov 4, 2019

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Ref: SECT: STOC: 64 - 19

4[th ] November, 2019

'l'o 'l'he Secretary BSE Limited Phiroze Jeejeebhoy Towers, Dalal Street, Mumba - 400 001

Scrip Code: 519552

To

The Manager, Listing Department, National Stock Exchange of India Limited Exchange Plaza, C-1, G Block, Bandra-Kurla Complex, Bandra (East), Mumbai- 400 051

Scrip Code: HERITGFOOD

Dear Sir / Madam,

Sub: Transcript of Conference Call with the Investors/ Analyst

In Continuation of our letter dated October 19, 2019 the Company had organized a conference ca with the Investors/ Analysts on Friday, November 1, 2019 at 16.00 PM (1ST). A copy of Transcript of conference ca held with the Investors/ Analysts is enclosed herewith and the same has also been put up on the Company's Website at w .heritagefd$.in.

Kindly take note of the same on record.

Thanking you,

Yours Faithfully,

For HERITAGE FOODS LIMITED

UMAKANTA BARIK Company Secretary M. No: FCS-6317

. Encl: a/a

HERITAGE FOODS LIMITED

(Formerly known as M/s. Heritage Foods (India) Limited)

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CIN: L15209TG1992PLC014332

FSMS 002

AN ISO: 22000 CERTIFIED COMPANY

Regd. Off:# 6-3-541/C, Panjagutta, Hyderabad- 500 082. Telangana, INDIA. Tel.: +91-40-23391221, 23391222 Fax: 30685458 email: hfl@heritagefoods.in, website: www.heritagefoods.in

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“ Heritage Foo d s Limited Q2 FY ‘20 Earni n gs Conference Call”

November 1, 2019

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MANAGEMENT:

DR. M. SAMBASIVA RAO – PRESIDENT MR. A PRABHAKARA NAIDU – CHIEF FINANCIAL OFFICER MS. BRAHMANI NARA – EXECUTIVE DIRECTOR MR. J. SAMBA MURTHY – HEAD (DAIRY DIVISION) MR. UMAKANTA BARIK - COMPANY SECRETARY

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Heritage Foods Limited No v ember 1, 2019

Moderator:

Ladies and G entlemen, Good Day and Welcome to Heritage Foods Li m ited Q2 FY ‘20 Earnings Co n ference Call. As a reminder, all participant lines will be in the listen-only mode, and there wi l l be an opportunity for you to ask questions after the prese n tation concludes. Should you n eed assistance during the conference call, please signal an operator by pressing ‘’ and then ‘ 0’ on your touchtone phone. Please note that this conference i s being recorded. I now hand th e conference over to Dr. Sambasiva Rao – President of Herita g e Foods Limited. Thank you a n* d over to you, Sir.

Dr. Sambasiva Rao:

Thank you. G ood Afternoon, I Welcome you all for the earnings call of H eritage Foods and thank you for showing continued interest in Heritage. I would first expl a in the standalone results of th e Quarter-2 of the current financial year, which were alread y uploaded on our website and e xchange sites also. We achieved a net turnover of 666 crores a gainst 612 crores of previous y ear Quarter-2, that is, 9% growth. EBITDA 27.41 crores duri n g the current year Quarter-2 ve r sus 48.92 crores during the previous year. PBT 10.36 crores versus 33.48 crores of the last fi n ancial year. PAT 14 crores versus 19.96 crores of the previ o us financial year. Margins wer e down during this quarter compared to the last financial year m ainly because of the increase o f the raw material prices that is milk and the milk powder w hich significantly impacted the margins of the quarter. If you take six months of this financi a l year versus last year’s financ i al year, we have achieved 1376 crores versus last year’s 1247 crores with a 10% growth. EBI T DA of the current year’s first half year is 78 crores versus 9 5 crores of the last financial yea r . PBT, current first half year 44 crores versus 64 crores of t h e previous year’s first half. PA T , 35.75 crores versus 40 crores of the first half year of last yea r .

Now, I will m ove onto consolidated results of the Quarter-2. The turnov e r achieved is 680 crores versus 619 crores of the previous year’s second quarter at 10% gr o wth. EBITDA 25 crores versus 50 crores of the previous half year. PBT, previous quarter of 6.83 versus 35 crores of the second quarter last year. PAT, 10.6 crores versus 21 crores of the last year same quarter. First half year of current financial year with the last half year, current half year, first half year we have achieved 1401 crores turnover versus 1261 crores la s t year with 11% growth. EBI T DA, 74 crores first half year this year versus 98 crores of the l ast year first half. PBT 37.4 cro r es of first half year of this year compared to 66 crores of the fi r st half year of last year. PAT, 2 9 .5 crores for the first half year versus 42 crores last year. Co m ing to volumetric data, milk pr o curement during this quarter is 13.86 lakh liters per day vers u s 13.37 lakh liters per day last year. Milk sales volume 12,09,000 liters per day during t h is quarter versus 11,44,000 lit e rs per day in the second quarter of last year.

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Heritage Foods Limited No v ember 1, 2019

Value-added products, growth in the current year second quarter is 14.5 % . Contribution is 24.5% to the r evenue versus 23% last year. I will now explain the capacities of the company as on second qu a rter end. We have 20.71 lakh liters per day chilling capacity, 2 5.7 lakh liters per day processi n g capacity and 17 lakh per day milk packing capacity. W e also have 1408 franchisee pa r tners in the front end. We have incurred 28.69 crores of CAP E X during the first half year. Co m ing to debt, we have 186 crores long-term debt and 27 cror e s working capital, total of 213 c rores both long-term and working capital together. Now, I o p en the session for discussion, i n teraction, feedback, suggestions, and queries. Thank you very m uch.

Moderator:

Thank you v e ry much. We will now begin the question and answer session. The first question is from the li n e of Percy Panthaki from India Infoline. Please go ahead.

Percy Panthaki:

Sir, my first q uestion is on the milk price inflation, for the quarter we have seen about 11% inflation in m ilk price, one of the Maharashtra-based players mentioned on t heir call that they have witness e d a 23% milk price inflation, so just wanted to understand is the milk price inflation so d ifferent in different parts of the country and are we at the lo w er end or I mean what is your take, just some flavor on what you think about this, and sec o ndly, as we stand today are the milk prices lower than the Q2 average and if so by what amoun t ?

Dr. Sambasiva Rao:

You are right, milk price inflation is different in different geographies in In d ia. It is highest in the northern states of Punjab, Haryana, Rajasthan, UP side during t his quarter, and Maharashtra i s next in line where the prices have gone up high. Karnataka w o uld be low on the side even 5% to 6% because there is no competition there, it is almost one fe d eration procuring all the milk, s o some areas of Andhra Pradesh also prices have not gone up particularly in the buffalo milk areas price increase is only 4% to 5% during this quarter, s o differential price scenario exis t ed this year because of the seasonal condition, certain stat e s have prolonged summer and h igh-heat summer. This year heat was very high in the summ e r and extended to mid-July in c ertain states, so there was a production issue in certain pa r ts of the country. Maharashtra y ou may recall the numbers, last year it was around Rs. 20-22 per litre, this year it has gone to R s. 31-32 a litre of cow milk, that is the kind of increase the y have seen in that area. Similar l y, in Punjab, Haryana, and Rajasthan also it was Rs. 36-37 a li t re of buffalo milk has gone to R s. 46-47 in this year’s second quarter, so the price hike wa s very different in different stat e s depending on the availability, competition for the milk whic h is different again in different states.

The second part, the price reduction as far as this year is concerned is yet t o happen, it is just now beginni n g, there were two reasons normally in October middle of the month price drop begins, this y ear there were certain states where elections were happenin g and also Diwali came in the l ast week of October, so everyone is waiting for Diwali to go and then because Diwali time demand for milk increases significantly, so no one would like to lose that

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Heritage Foods Limited No v ember 1, 2019

opportunity so milk prices are almost same level of Quarter-2 for the mon t h of October, but now we see t h e change happening first starting with the milk powder Rs. 20 d rop has happened in the last on e week per KG. The buffalo milk powder was Rs. 310 in the l ast week and this week it has come to Rs. 290. Similarly, cow milk powder was at Rs. 290, n ow it is quoted at Rs. 270, so t h e beginning of price drop starts with milk powder and it starte d in the first week of November , so we do anticipate the season to pickup. Now the rains are al m ost over in all the states, the en t ire month of October was having rains, which is again very unl i ke in the past that also impacte d availability and the prices, so we are anticipating price drop t o happen from this week itself.

Percy Panthaki: Sir, that is th e normal seasonal price drop so if it just happens at the same qu a ntum that we saw last year bet w een Q2 and Q3, then on a YOY basis in Q3 we might still h a ve a double digit inflation, is t h at more or less likely or what is your thoughts on that? Dr. Sambasiva Rao: Most unlikel y because availability will suddenly increase any day, so it is e x pected that we go back to norm a l pricing. This aberration of Quarter-2 will not continue from n ow. Percy Panthaki: So Q3 this year versus Q3 last year, we might go back to a single digit kind o f inflation?

Dr. Sambasiva Rao: Most probabl y , yes. Percy Panthaki: Sir, in light of this kind of scenario you might have taken some amount of p rice hikes already in Q2, are yo u planning anything or have you taken anything in Q3? Dr. Sambasiva Rao: Q2 we have a lmost completed the price hikes in a phased manner. We also d id not pass on the entire increase in one shot, different markets, different timings, and some m a rkets twice, some markets once we have done. We have passed on 50% of the price hike to c onsumers and we have absorbe d 50% into margins, which gets released with the drop in the prices. We do not intend to hik e prices further in Q3.

Percy Panthaki: Sir, for Q2 f o r the quarter on an average I think there is a 5% price increase, but the exit price increase mig h t be higher because you might have taken it in a phased manne r , right?

Dr. Sambasiva Rao: The full effe c t will come in Quarter-3, you are right. Percy Panthaki: That will be e nough to restore margins at the 6% to 7% kind of levels that you are targeting? Dr. Sambasiva Rao: Coupled wit h the procurement price drop, it should be feasible, both hav e to be there. The price hike, as you said 11% to 12% increase happened on the procurement, we passed on half during the qu a rter, other half will be absorbed by the procurement price dro p and some quarter

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Heritage Foods Limited No v ember 1, 2019

impact will be there. The September price hike benefit will come in the ent i re quarter for this in Quarter-2.

Moderator:

Thank you. The next question is from the line of Viraj Mehta from Equirus Portfolio Management Services. Please go ahead.

Viraj Mehta:

Sir, if I look at the spread between your procurement of milk and selling p rice of milk, it is almost at a 12-13 quarter low at Rs. 5.9 and our average has been betwee n 6.5 and 7 in the same timefra m e, so if I look at over a slightly longer period, would it be fair t o say that we will at least be a b le to mean revert to between 6.5 and 7 with the price increas e coupled with the decrease in t h e RM prices?

Dr. Sambasiva Rao: Certainly, a c ombination of both, we have passed on certain increased cos t to consumer. We have absorbe d some amount, that gets released as the procurement prices g o down and it will equate with t h e past, that is the strategy. We did not pass on entire increas e because this year increase was v ery abnormal and they are likely to anyway come down in the month of October and Novemb e r, so with that assumption we have absorbed a part in the Q uarter-2 and that should get re l eased from now.

Viraj Mehta:

Sir, if I look a t our curd sales and curd sales as a percentage of our procure m ent, it is at one of the lowest in l ast 12 quarters, can you just throw some light why that happen e d?

Dr. Sambasiva Rao:

This year we a ther is a very, very different weather compared to past year s Quarter-2 or any quarter, starting middle of July till now there was no let up. In our market s , it is like a daily visitor eveni n g 4 o’clock or 5 o’clock rain starts. Temperature during the da y is around 23-25, the entire c i ty is looking like air-conditioned, the lower the ambien t temperature the consumption of products like curd, lassi, buttermilk, flavored milk, ice crea m all would come down that al s o has resulted in the lower sale in this quarter, absolutely att r ibuted to weather scenario, an d the second also, the curd is one item the sale of curd will increase with the auspicious d a ys in the quarter. The Quarter-2 number of auspicious days w h ere the weddings are celebrate d are lower and now they are beginning, so this quarter also h a d disadvantage of less number o f auspicious days where the congregation happen and celebrati o ns happen, that is a smaller iss u e, but bigger issue and real issue is the weather, non-stop conti n uous rains.

Viraj Mehta: Sir, our milk procurement growth is also below what we had actually guide d at the start of the year, would i t be possible still this year to do around 10% growth in procu r ement or that will be a stretch now considering that we have done low single digit growt h in the first two quarters.

Dr. Sambasiva Rao: Yeah, this se a son will begin, now procurement volumes will jump.

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Heritage Foods Limited No v ember 1, 2019 Viraj Mehta: Sir, just last q uestion on the future shares that we have, I understand that lo c k-in will get over early next ye a r by March, now there is only four months to go for that, has t he Board decided what to do w i th that money, how will you return it to shareholders includin g the majority and the minority, b ecause that is a big capital of 400 crores that is stuck there for us? Brahmani Nara: This is Brah m ani Nara here. Around mid of next year is when the lock-in is expected to be over and Bo a rd is yet to take a decision and now that they are getting cl o ser to the lock-in period gettin g done, I think now is the time that we will have to approach th e Board at think of a strategy. Moderator: Thank you. T he next question is from the line of Shiv Kumar from Unif i Capital Pvt. Ltd. Please go ah e ad. Shiv Kumar: Sir, what is t h e share of curd in the value-added products? Dr. Sambasiva Rao: It is 80% for Q uarter-2. Shiv Kumar: Higher than w hat we registered in Quarter-1 of 77%? Dr. Sambasiva Rao: It is actually because others have gone down like lassi, buttermilk, ice cre a m because of the rainy season. This share has moved up, rather it is more on other items, other value-added products. Shiv Kumar: Have you tak e n price hikes in the value-added products also, Sir? Dr. Sambasiva Rao: Yes. Shiv Kumar: Sir, coming b ack to the margin on a standalone basis, the margin of 2% sli g htly on the lower side in a sen s e that I think we need to go back eight quarters back to act u ally see a margin similar to 2 % and when I compare you with the other listed peers who also operates in the southern Indi a n market, we do not see that kind of margin erosion in case of that player, so is there anythin g specific to any particular market where you are facing challen g es? Dr. Sambasiva Rao: As I explain e d earlier in the first question came on the procurement price s , the procurement price hike is different in different states, some players who procure more in Karnataka and Tamil Nadu h ad an advantage because of the lower level of increase, wher e as we have higher increase in c e rtain states like Maharashtra, Punjab, Rajasthan, even Telanga n a, these states had a higher incr e ase because of the local weather conditions and competitio n scenario, so you may not hav e similar impact on all. Second, some of them have SMP pro d uced in their own companies d u ring the peak season last year. They would have availabili t y of SMP which helped them h igher realizations when they sell, so whoever had SMP stocks before December,

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Heritage Foods Limited No v ember 1, 2019

the cost price was low and post February, the realizations are very high, so t h ere will be certain advantage in the sale of SMP if they had stocks of the previous season, s o we did not have stocks of the previous season, we are actually consuming by buying also a p art from our own production, w e buy from market and consume for certain products, so this could be procurement price arbitrage opportunity and sale price of milk powder. These two would influence the margins of the companies operating in this geography.

Shiv Kumar:

Like you me n tioned earlier, you are saying now things have kind of come back to normalcy and you expe c t to come back to 5% or 6% margins in Q3, right Sir?

Dr. Sambasiva Rao:

Yes.

Shiv Kumar:

One last question, the price inflation in your procurement was 11%-12% wh i ch you mentioned earlier, but th e price hike in your selling price was just 5.6%, I believe you a r e the leader in the markets whe r e you operate, so why are we playing so defensive in taking p rice hikes on the selling price a lso immediately because as things stand everyone would be incurring the same price on th e procurement side, so why are we actually holding bac k the price hikes immediately?

Dr. Sambasiva Rao:

Because it is a very short-term aberration, this happened only for two mon t hs in the summer, two months i n this quarter not even three months, so if you pass on enti r e cost then when farmer prices go down you have to rollback some, there are two component s in the price hike; one is a natu r al price hike of procurement milk which we passed. This is un n atural, abnormal, once in a life t ime kind of thing happened in this quarter so much of price hi k e and we will not be able to pa s s on entire thing and it happened only in certain geographies , so the price drop expected fro m this season would nullify that, so for the sake of two months we would not like to go back an d become so expensive in the market compared to competition.

Moderator:

Thank you. T he next question is from the line of Nitin Ghosal from Invesco Mutual Fund. Please go ah e ad.

Nitin Ghosal:

Sir, two ques t ions, one is on the procurement part during the quarter, did w e witness any kind of challenges in terms of volume procurement?

Dr. Sambasiva Rao:

There is noth i ng in terms of procurement, we have got anyway our require m ent of 13.96 lakhs around 14 la k hs we have procured compared to 13.3 lakhs in the last yea r same quarter. In terms of volu m e, there was no challenge, in terms of price there were issues, too much of price hike in certai n select markets, certain select states. There we did not encour a ge more volumes to come, bu t the rest of the areas, main price challenge markets are Punjab, Haryana, Rajasthan, M aharashtra, and Telangana, these are the markets where we h ad a higher price pressure. Co m ing to Tamil Nadu, Andhra, and Karnataka, there was not muc h of issue in terms

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Heritage Foods Limited No v ember 1, 2019

of price, so t h ere actually we procured more and these areas we procured r easonably, so we had no issues. Whatever milk is required to meet the market demand, we cou l d get it.

Nitin Ghosal:

Second quest i on is with regard to the availability going forward keeping in mind this time we had a very g o od monsoon, typically in past whenever this kind of monsoon h appens, how does the availabili t y of milk, A, and how does the price behave for a period of 12 t o 24 months?

Dr. Sambasiva Rao:

Actually, thi s kind of monsoon or rainfall we have never seen in the last 10 years, in these areas there w ere two reservoirs on Krishna river, they were open, every m onth they want to release water into sea, Srisailam and Nagarjuna Sagar reservoir even Tun g abhadra, in three months more than once they have released water into sea, so much of rainfal l even today in the month of N o vember water is going into sea from these reservoirs, s o this is a very exceptionally high rainy season, but when there are good rains with three d a ys-four days gap, there is dryin g up and cattle will go out to graze and just move around. This year there was no space to mo v e, all over wet, slushy and muddy and everywhere water, so t h is has resulted in delayed arriv a l of the flush season, by now milk should have been overflowi n g everywhere but it got delaye d . Generally speaking good monsoon, availability of plenty of w ater leads to high production o f volume and low prices at the farm gate, which we antici p ate to happen in November, it should have happened in October but now it is likely to happe n in November.

Moderator:

Thank you. T he next question is from the line of Shailesh Kumar from S unidhi Securities. Please go ah e ad.

Shailesh Kumar:

Sir, you have answered this question previously, but I would request you to put more light on this. On the l i sted players who have declared results, we have seen margin c ontraction during the quarter. We believe everybody has faced some sort of price pre s sure in terms of procurement, but industry has not passed that increased price fully, has there been some concern on d e mand front because anyway other FMCG companies are fac i ng the heat, so is dairy industr y also facing the heat?

Dr. Sambasiva Rao:

Not from the consumption side, there are different players in different mar k ets. The dominant players belon g to cooperative brands in most of the markets, they would not like to pass on the price fully to the consumers, there are certain different requirements for t h ose organizations unlike us, so w e cannot unilaterally pass on entire hike which is abnormal. A normal price hike we passed o n , the abnormal element which occurred this year is not p a ssed on with an assumption t h e procurement price will anyway cool off from the flush se a son and this gets nullified, so fo r two-three months sake, no brand would like to pass on the e n tire 10% increase. It is like a R s . 40 per litre of milk, Rs. 2 consumer accepts without much r esistance, make it Rs. 5, the c o nsumer also starts thinking and there will be shift to cooper a tives or low cast unbranded m i lk, loose milk, or the lower end of the spectrum, so we do not w ant to disappoint

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Heritage Foods Limited No v ember 1, 2019

our customers, consumers, and lose them because of two months’ margi n pressure, so you absorb coupl e of months and bring normalcy in the margin as the procureme n t prices go down, this is the tho u ght process which has influenced us to take that line.

Shailesh Kumar: Now, we are expecting lower profitability at least looking at the first half, are we expecting some reducti o n in our planned CAPEX in H2?

Dr. Sambasiva Rao: CAPEX is r elated to growth and future requirements so that will n ot be influenced significantly with one month-two month issue. Our mission we want t o achieve and the profitability i ssues gets addressed, every year you will face some kind o f pressure in one month or two month and that we will absorb.

Shailesh Kumar: Sir, my third question is this RCEP negotiations which are currently in the f inal phases and it will be final o n November 4[th] , so as a significant player in dairy industry w hat do you think, dairy will be a part of this treaty or it will be excluded?

Dr. Sambasiva Rao: I do not kno w how to answer this question Shailesh, should I go back to m y old Government days and get some information because public stand you have seen, Amul h as made a public stand and all cooperatives, all private companies have openly requested G o vernment to keep dairy out of i t because it impacts lives of millions of farmers in India. Any low-cost dumping of imported g oods not only in this sector, any sector here the dairy is the l ivelihood of very small margin a l farmers who are keeping two cows or three cows, four c o ws and supplying milk to com p anies, their price will go down, any low-cost product avail a ble in the market would adver s ely impact the farmers income, farmers price, so every o ne suggested to Government a nd requested and appealed to Government not to keep dairy in RCEP, but we have to see n e xt four days we understand the meeting is starting today and e v en Prime Minister of India is pa r ticipating in this meeting, I am sure they heard us.

Shailesh Kumar: Sir, just final question to this particular thing just a hypothetical scenario, a s suming this thing is allowed s o entire cost will be borne by the farmer itself or the indust r y will also suffer because your fodder cost is not going to go down in the same proportion?

Dr. Sambasiva Rao: This is a bit s p eculative not supported by any data or any volumes, like the i n itial proposal was what came i n the media. The Commerce Ministry delegation was ent e rtaining the New Zealand prop o sal of not more than 5% of New Zealand’s exports will be se n t to Indian market and that sho u ld be at a lower customs duty, so what would be that 5% volu m e, if you convert New Zealan d ’s exports and what constitutes 5% and whether they maint a in the same price because 5% i s measured in terms of export value not quantity because mul t iple products will be there, the y cannot fix the price, so they may send cheese, they may sen d butter, they may send milk po w der, they may send whey powder, whatever they want to sen d they can send. If they underpl a y the price they can push more volume, so how much volu m e will be allowed

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Heritage Foods Limited No v ember 1, 2019

under that 5 % proposal and how much of it will eat into our local domesti c sales of different products and what happens that product and the related milk and which state will consume what, so if N e w Zealand sends only cheese, it will not impact anybody exc e pt the four metros where there a re four to five cheese companies and the cheese consumptio n is 80% is in five metros in In d ia, so the cheese and cheese producers and cheese consumers a re concerned with this. New Ze a land sends only cheese, nothing else, it has a different impa c t. If New Zealand sends milk p o wder at a lower price to India, powder making companies w ill not be able to compete wit h them if their price is allowed, it is Rs. 200 international price p er KG, in India it is Rs. 270.

If there is no duty or lower duty, the Rs. 200 powder is sent to India by N ew Zealand, what happens to t h e powder making plants, the companies who have got huge c apacities whether they can sell at Rs. 270 or they have to sell at Rs. 210, Rs. 190, Rs. 200, so this Rs. 70 who will bear, w h ether Government will subsidies like Maharashtra and Guja r at have done last year, Rs. 50 p er KG they have given in the last financial year in both stat e s. Government of India has gi v en 20% export incentive to move the stocks out of Indi a , so on one side Government h as incurred 20% of the exported value as incentive last year, w ould they like to allow import s and again extend export incentive, it is kind of a peculiar sc e nario. What New Zealand wan t to send to India, what quantities, at what price, what duty unle s s those details are exposed, you will not be able to comment on the impact, who gets impacted a t how much. As I explained, th e cheese it impacts cheese companies, if it is milk powder it im p acts milk powder companies, t h ey cannot send fresh milk anyway, it is not feasible to send f r esh milk, so fresh milk compan i es, what happens to their sales, so it depends on the fine print , detailed numbers and then we c an calculate and assess and tell, this is going to happen if imp o rts are allowed at reduced duties or no duties.

Moderator:

Thank you. T he next question is from the line of Resham Jain from DSP M u tual Fund. Please go ahead.

Resham Jain:

I just wanted to understand on the volume growth side, now we are operatin g in three different geographies, if you can just give some color on that, how the volume growth been in three geographies?

Dr. Sambasiva Rao:

You are look i ng for sales volume or procurement volume?

Resham Jain:

Yeah, whate v er you can give, just to understand how is the growth differe n t in Maharashtra, versus Punja b and Haryana versus AP and Telangana?

J Samba Murthy:

Particularly i n June for zone four, North it is at about 24% volume growt h is there in which value-added p roducts is almost doubled 107% and turnover wise also aroun d 18%. When you

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Heritage Foods Limited No v ember 1, 2019

say North, w e operate in Punjab, Rajasthan, NCR Delhi, Haryana, Uttarakh a nd, and Himachal Pradesh and p art of UP also, these are the ones. Resham Jain: Maharashtra ? J Samba Murthy: Maharashtra, volume growth, has a continuous rainy season, there is no much of growth actually but w hereas in South there is a growth of almost 9% growth is there in volume and the Value-added p roducts almost 14% to 15% in this quarter. Resham Jain: What is the m ix now, Sir, the Andhra and Telangana as a percentage of the overall sales now or South? Dr. Sambasiva Rao: Approximate l y 30, 30 both the states and around 24% in Tamil Nadu and Ka r nataka together. Resham Jain: Sir, just to u n derstand your strategy going forward next three to four years, as we look at the targets whic h we have set for, how are we looking at growth coming from a ll these regions, if you can just g ive a broader thought on the same? Dr. Sambasiva Rao: We expect h i gher rate of growth in northern states, because we have est a blished ourselves now, infrastr u cture is almost ready. We are expanding our distribution net w ork, distributors, retail outlets, marketing activities are on, so the rate of growth will be high e r on a lower base in northern s t ates and similarly Maharashtra also except this quarter we ha d abnormal rainfall and all that. O ur second plant is also getting ready near Mumbai, which w i ll be able to offer value-added p roducts. Currently one plant is there near Pune, this does no t have capacity to give value-a d ded products, so we are not able to grow on a single product m ilk unless we add the range of p roducts, so the new plant coming up maybe by summer will help us in adding range of pro d ucts in Maharashtra and additional capacity for milk also, so coupled with new plant and val u e-added products, Maharashtra rate also will be higher in the c o ming years, these are the two a r eas, Maharashtra and Delhi zone where we increase our prese n ce more in terms of volume n u mbers, but the rate of growth will be high in these two states. I n AP, Telangana, Tamil Nadu, and Karnataka, these four states will perhaps continue at 10 % to 15% rate of growth depe n ding on the seasonality etc.

Resham Jain: Sir, just a qu e stion related to this, in North are the margin similar to the com p any average or is it still signifi c antly lower than?

Dr. Sambasiva Rao: Not yet, the y are lower only because of particularly this year is a differ e nt year, the price increase is v e ry high in those states compared to the rest of India, that b eing an abnormal feature of thi s quarter, we do restore the margins in the quarter three and fo u r, but they will be lower for the next one year to one-and-a-half year till the utilization of capacities, manpower and vehicles i s improved, that is the function of volume.

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Heritage Foods Limited No v ember 1, 2019 Moderator: Thank you. T he next question is from the line of Anirudh Doshi from ICICI Securities Ltd. Please go ah e ad. Anirudh Doshi: Sir, just one question how do you see the margins panning out for full-y e ar, I guess in last quarter you h a d indicated around 6% to 6.5% kind of margin for full-year, d o we still consider that we woul d be achieving that number or you see any downside to that nu m ber for full-year, I guess Q3 c o nsidering October was also monsoon continued, so probabl y prices are still at elevated leve l and probably same thing may continue in first two weeks of N ovember also, so probably the Q 3 margins will also be lower, so where should we look at m a rgins for full-year now? Dr. Sambasiva Rao: It will be def i nitely lower than expected because of this Quarter-2 impact an d we shall wait for another one w eek to know the outcome of this Bangkok meeting also whe t her the processed products will be allowed and it will come down, that will change the sc e nario in terms of prices once a g ain, but it will be lower by 1% we can estimate lower than las t year, 1% to 1.5% impact woul d be there, but it will be more clear at the end of the Quarter-3. Anirudh Doshi: 100 to 150 B P S lower than what we achieved in FY ‘19 kind of? Dr. Sambasiva Rao: Yes, and we w ill be able to give more clarity after Quarter-3 where the price fall will be clearly visible in the next one month and this RCEP outcome also will be clear. Anirudh Doshi: Even if the o utcome like the New Zealand imports are allowed, but do y o u see that it will commence i m mediately or it may take time, so it may not probably impact FY ‘20 at all and may impact o nly H2 of FY ‘21, right? Dr. Sambasiva Rao: Yeah, if the country is behaving on the PAT yes, but perception is what is dr i ving us. Anirudh Doshi: Are we also looking at any opportunity that we straightaway import SM P itself from New Zealand, is t h ere any thought given by the company to that? Dr. Sambasiva Rao: Definitely, w h y not. We have exported till now small quantities and we wil l start importing if the window i s open and the price is advantageous to us, we have no problem with that. Moderator: Thank you. T he next question is from the line of Himanshu Nayyar from S ystematix Group. Please go ah e ad. Himanshu Nayyar: Sir, could yo u explain the working capital movement because I see tables i n creasing by seven days, which seems like a significant improvement, so what drove that?

	Heritage Foods Limited
	Nov ember 1, 2019
J Samba Murthy:	As on Septem ber 30, 2019, inventory days are 14 days, trade receivable fo ur days and trade
	payable eight days, around 10 days is the working capital cycle.
Himanshu Nayyar:	So this seems like an improvement from where we were last year, so any sp ecific reason you
	can…?
J Samba Murthy:	Last year was 16 days, now it has come to 10 days.
Himanshu Nayyar:	Given that we were facing procurement challenges in terms of high prices, how do we claim
	this improvem ent in payables, are the farmers giving us more time to pay them and that to a six
	day change th ere?
J Samba Murthy:	As on March 31, 2019, there were some exports trade receivable around 25 crores that in the
	month of Apr il we have realized that 25 crores, otherwise, trade receivable days are two days
	only on an av erage, then stocks we have liquidated in the first half of actu ally what are the
	stocks as inve ntory on March 31stwe have liquidated, this is a fast movemen t of this thing and
	fat productsa re not there, it has been liquidated. There is no surplus fat int he company as of
	now. These ar e the reasons actually to improve the working capital cycle.
Himanshu Nayyar:	Second andfi nal question on our JV with Novandie so just wanted to unde rstand what is the
	date of plantc ommissioning that you are expecting now and any outlook you can share on any
	marketing init iatives we are planning on those products?
Brahmani Nara:	Sure, basicall y works are on in full swing right now, but however, we sees ome delays in the
	constructiono f our factory which is happening very close to Mumbai again because of rains.
	There have b een many months of rains and literally no work could be done , no cranes could
	move etc., but now we are back to action and the progress has been done ont he marketing side
	concerningw hat kind of flavors, what kinds of products, what consumer isn eeded we want to
	offer, etc., an d some work has also been done on the team building side, so we have a GM in
	place now to head the project for the JV and that is progressing quite well too. At this stage,
	we are lookin g at launching the product anytime in the first quarter of then ext financial year,
	just in time fo r the summer season.
Moderator:	Thank you.T he next question is from the line of Vikrant Kashyap from Ked ia Securities Pvt.
	Ltd. Please go ahead.
Vikrant Kashyap:	Does competi tive intensity in the states you are impact the prices of procure ment for you, if a
	new player co mes into South, where you have large volumes, does it impactt he prices?
Dr. Sambasiva Rao:	All companie s pay more or less similar price of the similar quality of them ilk and let us say
	one state isK arnataka state is procuring 80 lakh liters a day. On 80 lakhl iters more or less

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Heritage Foods Limited No v ember 1, 2019

everyone pa y s the same prices, may be 10 paisa -15 paisa plus or minus or 20 paisa plus or minus. If a n e w player comes into that state and he starts paying Rs. 1 more , he will definitely get more mil k , but he cannot take 80 lakh liters.

Brahmani Nara: Also I would like to stress upon the fact that for a new player to come to pr o curement, it is not just the funct i on of price, but a function of several other things such as infra s tructure and what other benefit s the company is extending to the farmer which we do on a very big way as part of normal cours e of business, not even CSR activities, so it is really a functi o n of several other different thin g s also especially for a newer player that is entering the market. Dr. Sambasiva Rao: Establishing the trust and ability to extend the supports and payments o n punctual basis, certain value addition through the veterinary care, nutrition, financial tie - ups, there are so many other activities which all companies do at a different level, some co m panies do 100%, some compa n ies 20% to 30%, so this price alone does not drive the milk im m ediately even if it drives assum i ng, the new player cannot absorb the 60 lakh liters of milk in Tamil Nadu or 80 lakh liters o f Karnataka, there will be certain impact but definitely the n ew player cannot influence the whole market. Vikrant Kashyap: Another que s tion Sir, to the earlier participant you said the new plant ne a rby Mumbai and growth in N o rthern states will help volume growth, but do you think these steps will help in heading 3500 crores of revenue in 4.5 years that we have stated till now? Brahmani Nara: I just want t o correct that the target is to grow about 20% year-on-year goi n g forward on any normal year w here procurement prices are more normal and seasonality is m ore normal, so in fact revenue t arget would be higher than that and again to increase Value-added products to 40% contrib u tion at overall revenue which stands at about 25% of our revenues across the year.

Vikrant Kashyap: We standby 6 000 crores of revenue by 2024? Brahmani Nara: Yes, that has t o be our target. Moderator: Thank you. L adies and Gentlemen, due to time constraints that was the last q uestion for today. I will now han d the conference over to Dr. Sambasiva Rao for closing comme n ts. Dr. Sambasiva Rao: Thank you v ery much all the participants for your suggestions, queries, clarifications, and actively enga g ing with us on a continuous basis and we wish to extend Diw a li greetings to all of you. Thank y o u very much. Moderator: Thank you v e ry much. On behalf of Heritage Foods Limited, that conclu d es this conference. Thank you fo r joining and you may now disconnect your lines.