Heritage Foods Ltd
NSE:HERITGFOOD
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Heritage Foods Ltd
Earnings Call Analysis
Summary
Q3-2024
The company moved from its Heritage TUCH app, facing uninstallations, to a WhatsApp commerce model with over 1,000 subscriptions, a promising shift due to the app's 98% retention rate. Revenue from e-commerce and modern trade channels grew to 11%, with expansion across states and deeper penetration in Tamil Nadu over the last quarter. Despite challenges with fat losses totaling INR 33 crores, a strategy of maintaining merely 2 months of stock supports a more predictable model. Notably, consumer pack sales for products like table butter and ghee are up significantly, with butter seeing a 60% growth and ghee 25%. This volume growth accounts for 19% of the 23% revenue growth seen in value-added products.
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Ladies and gentlemen, good day, and welcome to the Heritage Foods Q3 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Anuj Sonpal. Thank you, and over to you, Mr. Sonpal.
Thank you. Good morning, everyone. A very warm welcome to you all. My name is Anuj Sonpal, from Valorem Advisors. We represent the Investor Relations of Heritage Foods Limited. On behalf of the company, I'd like to thank you all for participating in the company's earnings call for the third quarter and 9 months ended of financial year 2024. Before we begin, let me mention a short cautionary statement.
Some of the statements made in today's earnings call may be forward-looking in nature. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions.
The purpose of today's earnings call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Let me now introduce you to the management participating with us in today's earnings call and hand it over to them for opening remarks.
We have with us, Mr. N. Brahmani, Executive Director; Dr. M. Sambasiva Rao, President; Mr. Srideep, N Kesavan, Chief Executive Officer; Mr. A Prabhakara Naidu, Chief Financial ; Mr. J. Samba Murthy, Chief Operating Officer; Mr. Upendra Pandey, CEO of Heritage Nutrivet Limited; and Mr. Umakanta Barik, Company Secretary and Compliance Officer. Without any further delay, I request Mr. President, Dr. M. Sambasiva Rao to make his opening remarks. Thank you, and over to you, sir.
Thank you, Anuj. Good morning to everyone joining us today on this call. We are pleased to welcome you all to this earnings call for the third quarter and 9 months ended for the financial year 2024. The financial results and earnings presentations -- presentation have been uploaded on exchanges, and I hope you must have had a chance to look at them.
Let me take you through the financial performance on a consolidated basis, followed by the operational highlights. For the third quarter under review, Heritage Foods registered a revenue of INR 941 crores, representing a growth of 20% year-on-year. This was driven by strong volume growth in value-added products due to higher rate of consumer acquisition and retention, continued market expansion and availability improvement.
EBITDA for the quarter was INR 52 crores, which grew by around 60% year-on-year. EBITDA margins were reported at 5.52%, which is an improvement of 70 basis points compared to Q2 of this year as we were able to take advantage of a good flush season, accompanied by softening of raw milk prices. Similarly, net profit for the quarter was INR 27 crores, which grew by 96% year-on-year, with PAT margins reported at 2.86%.
For the 9 months ended for the financial year 2024, our revenues grew by 17% year-on-year to INR 2,843 crores. EBITDA was INR 139 crores, representing a strong growth of 45%, with EBITDA margins improving to 4.9%. Net profit for the 9 months was INR 66 crores, which has seen a significant improvement of 65% on a year-on-year basis, with PAT margins improving to 2.32%.
Now moving on to operational performance. Our milk volume sales registered an improvement -- improving trend of year-on-year growth with volumes growing by 25,000 liters per day, which is 2.32% over the previous year same period.
The consumer price increases we took in Q1 and Q2 resulted in average mill selling price increase of to INR 2.71 per liter, taking it to INR 55 per liter in this quarter.
In terms of milk procurement, we continued our strong growth, with a 14.3% year-on-year growth, reaching an average of 1.63 million liters per day. The average milk procurement prices reduced by INR 0.57 per liter to INR 43.09 per liter in this period. The value-added products portfolio continued on its strong growth momentum of 23% year-on-year amounting to INR 245 crores with the growth across all product clusters.
The overall contribution of value-added products to our revenue stood at 26.5% for the quarter. To further boost milk sales and revenue, we introduced new variants of Super Gold a mid-high-fat variant and Gaadha Doodh, mid-fat variants. Now we open the floor for question-and-answer session. Thank you.
[Operator Instructions] The first question is from the line of Sameer Gupta from India Infoline.
Just one actually. So I see there is still a large component of fat sales in this quarter. And last quarter, there was an indication that large part of our bulk fat, which was procured in the previous flush season, has been liquidated. So just wondering if this is a new normal wherein our fat percentage in overall sales has actually increased now for the next few years? Or -- and also if you could help me with the element of fat losses, which have been booked in 3Q and also year-to-date.
Thank you, Sameer, for that question. On the specific usage of the word, new normal, I wouldn't use that word at all. We had a very strong flush season, which has resulted in milk procurement growth, which has been very strong for us. And that resulted, which means that the milk procurement has grown much faster than the sales volume growth. And that has resulted in bulk fat accumulation. And as a policy of the company, as we did not take a speculative view and we have liquidated the fat at market prices. That does not mean it will remain like that forever because the moment we are -- we come off the flush, the milk procurement will normalize and it will match with our sales volumes and the return to normal would happen.
In terms of the specific question on the losses -- the losses that are specific to bulk fat disposal this quarter, we had INR 15.5 crores of losses on account of bulk fat disposal, which was roughly about a 2% of our earnings. So without bulk fat disposal, you can presume that our EBITDA and profit margin would have been 2% higher.
Sir, just a clarification on this. This is basically when you're assuming that the gross margin is 0 on this product because if you're buying and selling in the same quarter, I'm assuming there is not going to be a lot of price fluctuation in the buying price and selling price?
There won't be much price fluctuations, but there is always a price difference. The reason is that the price at which you will sell a commodity is not the same as the price at which you sell a branded consumer product. So our realizations in consumer product sale is much higher compared to our commodity sales. And especially in a flush season where there is a lot of fat available, which is bulk butter available in the market, obviously, the prices also would be softer. But we would rather not take a speculative view and liquidate it and keep our inventory clean than speculate and keep it for the future. I hope you will appreciate that.
Just 1 follow-up, sir. So when you say INR 15.5 crores losses, basically, this is more of an accounting allocation rather than actual losses. Is that understanding correct?
No, we have actually sold this quarter.
That's an actual loss.
We do not have this butter anymore. Yes, our inventory is clean. You can look at the...
Next question is from the line of Vandit Dharamshi from Alpha Invesco.
Congratulations, sir, on a great set of numbers. I have 2, 3 questions. One, want to start with, if you can speak about how do you intend to scale up the Heritage TUCH app I think we have the tap and a lot of other competitors are really scaling up their app delivery-based subscription-based model. So we, as a company, do we intend to focus on Heritage TUCH app per se? Or what are -- how do you see that going forward? That's the first question.
We have had great learning in working with Heritage TUCH app, while it was an amazing tool in terms of creating a direct-to-consumer connect as well as building subscription base. What we also realized was there is a plethora of mobile applications that are there. And a large number of consumers were uninstalling this. So we've figured out a better and more effective way of building a direct-to-commerce business. We are at the early stage of doing this. And this is leveraging the WhatsApp commerce model. And we are at a very early stage on this. We have done a very successful pilot in Bangalore, and now we are extending that in Hyderabad and many other markets.
We already have more than 1,000-plus subscriptions that we have acquired through this, and we intend to scale it manyfold.
Okay. So if you can just speak more about the WhatsApp commerce model in terms of how are we reaching to the customer? What would be the customer acquisition cost, if any?
Yes. The customer acquisition costs roughly would be around INR 400, but these are -- so the model that we have implemented has got a very high retention rate. It's upwards of 98% which means that it's actually a very profitable model for us. But we are -- like I said, we have just done some pilots, and we are in the process of scaling up. WhatsApp is an app I hope that nobody will uninstall from the phone. So that's far more secure way of reaching a direct-to-consumer compared to our own application.
Understood, understood, sir. And second question, sir, if you can speak about how are we placing ourselves in the modern trade channel? I think last time when you spoke, we did around 10% of our sales from modern trade channels. So this quarter, what is the sales number? And how do we place ourselves? Because I think in a few states, I think our products are -- were not available when I happened to check. So in the state of Tamil Nadu to say so. But how are we placing ourselves in moderate trade channels?
Yes. So I presume when you say modern trade, you mean to say e-commerce in modern trade, right? As in we've never spoken about. Right. So roughly, our contribution is about 11 percentage from e-commerce in modern trade in terms of revenue. And the mix would be different in different states, like you rightly said. Will be slightly higher in our core markets, will be slightly lower in other markets. But the good news is that in every market that we are present, including Maharashtra and Delhi NCR, we are growing our presence in modern trade channels. In -- sorry in Tamil Nadu also. In the last 1 quarter, we have made significant progress in terms of rest of Tamil Nadu. Chennai, we always had a good presence in modern trade channels, but in rest of Tamil Nadu also we have deepened our presence, and this will only continue to improve.
Okay. Sir, the last question from my end. It's a bookkeeping question. If you can just give a state-wise revenue split for this quarter versus last year?
It's more or less same like last year to this year, there's no change, and we are sharing this on a one-to-one basis. We can perhaps get back to you.
Next question is from the line of Mansi from Abacus Asset Managers.
Hi. Am i audible?
Yes, ma'am you are.
Sir, I was just wondering, is the promoter looking to sell stake in the company?
I don't know why you have this impression. This is Brahmani here, Executive Director as a promoter family, we have site to the company and in fact, given the feasibility of resources, et cetera. If anything, it would be the opposite as the promoter family.
Next question is from the line of Resha Mehta from GreenEdge Wealth Services.
so 1 is again on the fat losses, so for 9 months total, we have booked around INR 27 crores of fat losses. Is that number correct? Or is that a little bit on the higher side?
It's close to INR 33 crores. It's INR 32.62 crores. So you may recall that in the last quarter, I said about INR 17.5 crores and this quarter is about INR 15.5 crores or roughly around INR 33 crores.
INR 33 crores. And how much more are we looking at from a Q4 standpoint, any directional...
Resha, we do not -- Yes. Resha, last quarter itself, we explained the principle in which we go. we are -- if the incoming fat is more than the outgoing fat, what we are doing is that we are keeping only 2 months of stock, whatever is required for our current business, of current quarter operations and the rest we are liquidating at spot prices. Because the prices could go up or go down. As far as investors are concerned, this is a far cleaner model because this is more what you call it like there's no speculation involved, right? As in it's a more predictable model.
So going by the same principle, at this point in time, we are holding only about 2 months of stock, which means that we don't have -- it's not like we are sitting on a stock that we need to liquidate at a price or something like that. And we are coming off the flush. So basically, by about mid of February, the flush -- the volumes would come down, and we've already seen that coming down, which means that the input and output should more or less match, which means that the surplus that we generate, which will come down, and it's already coming down.
So it's a gradual process. And this happens every year. Last year, you may not have seen this because we did not have flush. And the contrary of not having a flush was that the raw milk prices had shot up. This year, even though we had the problem of a surplus fat, the good news is that the raw milk prices came down, which actually helped despite the bulk fat losses -- despite the losses that we have booked in the bulk fat sale, we were able to improve our margins.
And there's also something that I'd like to talk about, but our consumer sale, consumer pack sale of fat products, whether it is ghee or table butter are all registering strong growth. For example, table butter is growing 60%, ghee is growing at about 25%, 26%. So which means that as we grow our consumer pack sale over a period in time, we will become net -- we'll be on net deficit as far as fats are concerned. Over a long period of time, that's how we intend to solve this problem.
Understood. So 2 months stock is what you are working with. Fair. The second question is basically on -- see, value-added products is something that has been driving our top line growth as well right? But here -- and we've done very well on the top line growth, right, over the last several quarters. But value-added products, clearly, the margins were just a tad bit higher like to 250, 300 bps higher versus the liquid milk like at around 8-odd percent or so. right? While ideally they are supposed to be double of liquid milk products, but we have the strategy of driving top line growth for value-added products.
So can we see a scenario now that maybe, let's say, instead of growing at 20% top line, why not we grow at, let's say, 15%, but with the aim of trying to get higher margins to the tune of, let's say, 7-odd percent or so. And maybe value-added products margins going up will be a contributor to the overall company margin. So what are your thoughts on basically the balance between top line growth and margins?
So Resha, I think we have had this discussion when we met previously also. We are working on fall up towards the interest of long-term shareholders. And when we think about long-term shareholder wealth creation, we have to build a robust business model that will deliver consistently and predictably over a longer period in time, right?
If I look at value-added products, while 23% is the revenue growth that you are seeing, 19% of that has come on account of volume growth, 19%. That's quite significant volume growth that we have been able to register on value-added products in Q3. Only 4% has come on account of prices. We could have increased the prices in line with, but in is milk, we have increased prices by 8.5%.
So if we had taken value-added products prices along the same line as milk and taken it up to 8.5%, my volume growth would have come down. But what is sustainable for the company is that, today, I have got a much wider consumer base than I had in the same period last year. And I have experienced and we have data that shows us that we have got a much higher consumer retention, the frequency of purchase of our products across many of the channels wherever we are able to procure data especially from the modern trade channels and all of that, we -- it was a frequency of purchases have gone up. We have gained market share and significant market share gains for our value-added products in cities like Bangalore and Chennai. These are all things that we can always enchase at any point in time.
Right. So I understand we've put more focus on market share versus the bottom line, at least as far as value-added products are concerned. But also on the flip side, how do we think about like, let's say, when you actually owned the stock focusing on bottom line on value-added products and increase the prices of value-added products in line with the industry, how would the consumers react? Because they've been used to, let's say, maybe a slightly discounted value-added product from Heritage versus the market? Or is my understanding not correct here?
No, no, no, no. Sorry, you got the -- sorry, the understanding is slightly wrong. We're only comparing ourselves to ourselves. So when I said 4.5% -- 4% price increase, we are talking about last year, our prices compared to last year's same period. In any market, for any product, Heritage always sells at a premium compared to any of the competition. So especially the cooperatives or the large national brand. You can check it online wherever you are on BigBasket or Swiggy or which other apps that we have. Our prices are always higher compared to our competition.
And yes, we are gaining market share. So it's just a timing issue. We can -- we shall take the right decision at the right time to take the prices up. So we are not saying that we're going to keep the prices constant or artificially low for a longer period in time. This year, summer actually was a washout. As you may recall from the Q1 earnings call, we had mentioned that this first quarter, summer was washed out due to excessive rains and cold weather which prevailed over North India.
And that's the reason why we did not increase prices during summer. And most of our value-added products are -- some are dependent. So usually, summer is the time when we take the prices up.
So there is an opportunity this summer, which will come up. The only difference is that we are sitting on a much wider consumer base compared to last year.
So the net incremental gain that we'll have will be much bigger had we instead compared to -- had we taken the prices in the off season.
[Operator Instructions] The next part is in is Alisha Mahawla from Envision Capital.
Stretching forward what the previous participant was asking, why do you said that currently the focus for value-added products is more on market share? Then what are the other levers we had to reach the aspiration of 7%,8% margins that we've been calling out since last couple of quarters?
Right. So we had mentioned a couple of levers that we are working on. One is the value-added products growth. Value-added products growth increasing in contribution by about 10%, reaching our 40% mark is something -- is an ambition that we are working with, which should help us improve our steady-state bottom line by about 1%.
Second thing is there are lots of value-creation opportunities or energy-saving initiatives that we are working on, which helps us reduce our operating costs and increase the margin spread. These are 2 things that we are working on, which will help us structurally improve the performance of the company, in addition to, of course, the ups and downs, which are driven by the volatility of the commodities.
Got it. Sure. And for the bulk fat losses, which is INR 15 crores for this quarter, this is largely the butter [indiscernible] or the losses for butter inventory is a smaller component now?
Sorry. I don't think I understood. The 15 -- could you please repeat the question?
The bulk fat losses for the quarter of INR 15 crores. This is all -- we were liquidating our butter inventory since the start of this year. Is this all that relation to back only?
No. So let me just clarify the difference of incoming fats from the raw milk that we procure and the outgoing fats is resulting in surplus fat generation, which is getting liquidated as bulk butter. And so what we usually do is we convert them into butter and keeping -- after keeping 2 months of inventory, whatever we require for our internal use, the rest of which we are liquidating as bulk commodities.
Just to explain, there was an option of holding it for some time. Butter's shelf life is more than a year. It can be maintained in the cold stores for next 6 months, 9 months, 1 year and sell when the prices move upwards. That is an option. Or sell it off from the spot prices during the quarter without any element of speculation. So we have almost sold out all the surplus generated in the 9 months.
We only have a couple of month's internal required stock and some more gets generated in this quarter, maybe for the first 6 weeks or 7 weeks in this quarter. Second half of the quarter, we expect procurement volumes and sales volumes to match without leaving any surplus generation. So the surplus fat generation is gradually coming down as demand is increasing and procurement volumes are coming down.
So we ended the year with limited butter stock available for the consumption in the coming months. Hope this is clear.
Got it. Understood. And just 1 last question. We have aspiration to reach INR 786,000 crores. So when do we expect to touch this target?
See, I think what we should look at is that we have -- you can look at our performance in the last several quarters and not just this quarter, In fact, you can look at our steady performance post-COVID as well in high teens. So you can do the extrapolation yourself. You can also do the [indiscernible]. It looks likely in the next 2 or 3 years.
Next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas.
Yes. Thanks for giving me the opportunity my question is on the milk prices. So your thoughts on the same, and if there is any stability should we expect even the milk volume to gradually pick up in the quarters of this quarter?
Yes. See One is the industry availability, right? Industry availability, you can say, will influence 3% to 4% in terms of plus or minus 3% or 4% on either side, which is the difference between a bad year and a good year, right? Last year, at the same time, was a very exceptionally bad year where the industry volumes have shrunk.
This year it's a normal year, I won't say an exceptional year, but a normal year where there was sufficient milk available. So industry volumes definitely impact our ability to procure. But on top of it, we have been consistently building our procurement network. Every quarter, we have been telling you about the procurement network expansion, which is now standing at close to about 11,000 villages, 198 chilling centers, et cetera, which is also helping us expand our capacity to procure volume. So we don't see that procuring the volume that is required for our business is a challenge.
Okay. And in terms of the overall milk as a product for you, when can we see the growth rate improving over there?
Are you talking about milk volume growth?
Yes. Yes.
Yes. So milk volume growth, see, as I mentioned, in quarter 1, we had taken price increases in milk because of the exceptionally high raw milk prices and the resultant losses. And those significant price increases that we have done taken in Q1 had pushed milk to statin levels or even a small degrowth. You may recall from our Q1 earnings call that we mentioned milk was at minus 1% in terms of volume growth, which steadily improved to plus 1% in Q2, and now we are trying about 2.4%. And so -- and these are quarterly averages. So you can imagine that month-on-month, we are seeing steady growth in terms of milk volume performance as well.
Next question is from the line of Sunil Kothari from Unique BMS.
Congratulations for quarter-on-quarter improvement in the efforts we are taking. Sir, my question is a little broader. As you said, for a long-term value investors and to create a sustainable value. We have some strategy and that's why we are increasing our continuous volume procurement. And over time, we want to match them with milk sell and value-added products. But in between this fat is being challenged. So do you have any solution or maybe a little longer time frame what is the solution to this -- because every year, we are losing INR 30 crores, INR 40 crores because of this. So a little bit more acceleration on this will be really helpful.
Yes. So this is something that we are working on, right? And this is a challenge in the dairy industry, the material balance, which is balancing the input versus output. And for us, the solution lies not in controlling the input, but actually changing the mix of the output Currently, the mix of the output for us is, let's say, milk, value-added products and consumer fats on one side, and then you have the bulk fats. So we are working on an effective strategy, which will increase the output through the consumer products, whether it is milk, value-added products or consumer fats, whether it is, ghee or, let's say, table butter and what not.
And I have -- I think we have been consistently reporting for the last many quarters and over many calls that our value-added products, including consumer fat, ghee and all are registering strong growth, right? So we roughly liquidate -- we roughly sell about 300 tons of ghee every month. Now if the 300 tons of ghee, if instead of that, if it becomes 600 tons of ghee, then we will become net deficit in terms of butter is concerned. So we are solely working on changing the mix of that. We are actually in a deficit scenario and not a surplus scenario. But the surplus is also a function of make availability. And this has been an exceptionally good year as far as the milk availability is concerned, which resulted in surplus milk and hence surplus butter.
This may not be the case all the time. Like last year, we were not in the situation where we did not have actually surplus at all.
Sure. So sir, broadly, I think you've been in the industry, you must be observing other players also. That procurement cost is slightly -- not slightly, far lower compared to ours. So are we changing our some strategy or maybe from buffalo milk to caw milk, how that shift is happening? When that will be reflected in our procurement cost being lower? Because that is also hurting us more or less very highly.
Yes. So see, the procurement prices that we pay is very similar to any of our nearest competitor. We cannot go to a village and procure milk if we are paying less or higher than -- of course, we can procure a lot of milk if we pay higher than competitor, but that's not warranted, right? So most of the procurement happens on parity pricing. But that said, there is a difference in the mix by region. For example, all of us, whether in the peer group, we must know all the companies that are there.
We are all procuring from 6 or 7 or 8 states. And the mix, or the ratio of mix would be different for different companies. Like we have a certain percentage of milk coming from Andhra Pradesh, certain percentage coming from Maharashtra, Telangana, Tamil Nadu, et cetera, and the prices in each of these states are different. And the weighted average price would look a little different compared to our competitors.
Secondly, the prices that we declare as far as our raw milk procurement prices are delivered to our plants, which involves freight and incentives and all. Whereas I think some of the -- some of our competitors might be reporting farm prices. So there also we will find INR 1.5 to INR 2 difference. But otherwise, at a farm level, in the same region, the procurement prices are all comparable.
Just to supplement that, Sunil, our share of cow milk is growing over a period of time. That would bring down the average cost of milk. Secondly, the price fluctuations in different states happen at different points in time in a particular state, where we have high volume, the price may be higher in 1 season, lower in another season. So this average will be constant over a period of 2, 3 years, if you see. One year Maharashtra price went as high as INR 40 a liter for cow milk, and it came down to as low as INR 25. So in that year, if a particular company is procuring more in Maharashtra, the INR 40 per liter would influence the average cost. In other years, when other season, when it comes down to INR 30, it would be showing for the same company a lower average cost. So the mix of cow and buffalo ratio and the mix of milk coming from different states in different seasons will give you different signals.
So we all have to -- this is not overnight shift is not possible because you have a relationship with farmers, you have infrastructure built. So we gradually balance the mixes both from cow milk -- cow and buffalo, also from territories. The territories are not very stable, it keeps fluctuating. So it's a seasonal scenario, every season, 1 ratio will be different from other.
Sir, last question is on, we have some our objective of reaching some size of procurement of million litters per day whatever number. So already, we are really growing well across 16 lakh liter per day or so. So sir, or a time we'll be moving more towards cow milk that is certain?
Yes. We are expanding mostly in the cow milk areas now, enhancing the ratio of cow milk in our mix.
The next question is from the line of Amit [indiscernible] from Nirma Capital Private Limited.
First, my first question is regarding the volume growth. After we started in a similar region for 3, 4 years, last couple of years has been very good for us as far as milk procurement is concerned. In your view, if our company has to grow 13%, 14% or even 12%, 13% volume growth over the next 2 to 3 years, what are the key strategic things you need to do as a firm to make that happen? Everything will fall into place if you get this procurement piece right.
Yes. So see, we should -- Amit, thanks for that question. Let me solve the chicken and egg for you because we all think that it's procurement that leads the sales, it's the other way round. Actually, it's sales that lead procurement because we procure the milk that is required for our sales purpose, right? And procurement expansion happens by adding more village level collection centers, VLCCs in the regions of interest.
And each average village level collection center usually brings about 25-odd farmers and roughly around 200 liters of milk. So suppose, let's say, for example, my strategy next year is I need to increase my procurement by about 10% or about 1 lakh litter, which means that I need to add as many village level centers to get me the milk. So I hope I'm able to explain that if I had 500 to 600 village level collection centers, I would be able to get the 1, 1.2 lakh liters of milk. And that's -- this we are able to do strategically because we have -- as we were explaining earlier, different states have got different price scenarios and different states have got a different ratio of cow milk and buffalo milk.
So if the company's interest or other objective is to grow the procurement network in, let's say, cow-milk-dominated areas and where prices are lower, we will go and set up these village level collection centers in those regions, and we'll procure that.
And to give you some statistics, in the last 2 years alone, we have added about 2,200 village level collection centers, which means that we have established our -- and this village level collection center is going to remain forever, which means that we have permanently added our ability to procure 4 to 5 lakh liters of milk, right? And next year, depending on the requirement that have, we will add as many village level collection centers that are required to get this milk.
Second, sir, if my understanding is right, if I just add this INR 15 crore fat loss that you had, we are doing already at like almost 7%, 7.5%, not 7.5%, but close to 7% EBITDA margin for our company. Assuming we are not satisfied with this we will keep having some losses? Is it fair to assume that at this level of sales, we are between 6.5% to 7% steady state EBITDA margin over a normalized quarter without fat losses?
You're right. Your first number was correct. We are at 7.5% EBITDA margin at this point in time without bulk fats. Even though bulk fat losses will come down in Q4, it may not become 0, right? But yes, your assumption is right. But that said, Amit, I should tell you that this is at this level of raw milk prices. Raw milk prices could change over a period in time. So our work is not done. We still need to increase our value-added product contribution. We still need to take up the prices that Resha was alluding to in value-added products. So we still have that 4% or 5% pricing opportunity in value-added products, which we'll realize during summer. We still have to reduce our cost of operations. We still have a long way to go.
Next question is from the line of Sameer Gupta from India line.
Two follow-ups from me. Firstly, this process of selling all the extra fat that we have procured except for keeping 2 months of inventory, is this a process change that we have done in recent times? Or is it something, a practice that we always used to follow and maybe during COVID and exceptional years, we have changed? So the reason why I'm asking is that if there is such a situation, we can expect much more margin stability in the future versus the past?
Yes, we had this problem, but the size was smaller in the earlier years, size of surplus fat was smaller because our volume of sales and volume of procurement was closer to each other. This last financial year, we have accumulated anticipating the shortages in this year, but this year has become a normal year. So some of the fat was available the opening on the financial year on 1st April, we have significant, 2,000 tons of stock at the -- opening stock for the financial year. That got impacted significantly this year besides the higher procurement volume during this quarter when the demand was low.
So this is a combination or convergence of 2 years fat happened in 1 year, so main part of the last year and this year also something happened. So that's why it looks significantly high during the current year. Next year onwards, as we are entering into, again, the season of sales, summer season, balancing should be achieved sooner. And we have to see how the flush pans out in the third quarter again. And third quarter this coming year will not have opening stock burden of last year kind of scenario.
And if I could just add to specific question, Sameer, regards to policy. So the company always maintained this policy of carrying only 2 or 3 months of stock. Last month -- last year was the only aberration because last year, the volumes have shrunk so much that we were not very sure, and you're all aware of how the procurement prices went up, shot up. So it was a safety -- call for safety that wanted us to keep some stocks, which actually resulted -- we never had these kind of extreme swings from a year of shortage to a year of surplus kind of thing. And that's what has cost us. But the policy has always been for the company to liquidate extra stock.
Got it.
The excess was not [indiscernible] that's the reason. It's visible significantly because of accumulation of last year's stock added into this financial year.
Got it, sir. That's very clear. And another follow-up, the fat products sales that you report in the presentation, does it only pertain to the bulk fat? Or it also includes the branded fat that is ghee and table butter that you sell under Heritage brand?
Butter and ghee.
[indiscernible] I think this that includes everything because yes, this includes everything. But if I were to call out only consumer fat sales -- what's the number that we on the investor [indiscernible]. Let me just call out currently, currently, in the quarter that we just closed, our consumer fats were close to about INR 93 crores.
INR 93 crores is the consumer...
INR 93 crores is the consumer -- sorry I'll come back to you. I'm just looking at the numbers here. Just give me a minute.
Yes, please, go ahead.
That consumer pack sale during the quarter, it is INR 41 crores. And 9 months, it is INR 108 crores.
Yes. So correction there, thanks a lot Samba Murthy for stepping in. The INR 93 crores is the cumulative sale, out of which INR 41 crores is consumer sale and INR 52 crores is bulk commodity sale.
Next follow-up question is from the line of Vandit Dharamshi from Alfa Invesco.
Sir, in the previous comments, you said that going ahead, our cow milk mix will move slightly higher and that should improve our procurement price. So I mean, if you can just speak -- I mean what percentage improvement can we see in the procurement price over the next 2 years, 3 years, whenever as the cow milk -- sales of the cow milk mix reaches to a certain level? So if you can give the level where we are today and where we will reach and what will be the improvement in the procurement price?
Yes. So see, we are seeing 2% to 3% shift from Buffalo milk contribution to cow milk contribution year-on-year. So you can -- if this is expected to continue, you could probably say, currently, we are about 80-20 in terms of [indiscernible]. Yes, full year, okay. So if you take 9 months, we'll be more like 70-30 or 72-28 or whatever. If -- and the difference in prices between cow milk and buffalo milk is roughly around INR 15 a liter. And if you have a 10% swing from one to the other, that will impact about INR 1, INR 1.5 per liter. So that's the kind of impact that could be there over 2 or 3 year's time frame.
Next question is from the line of Shreyansh Jain from Swan Investments.
Can you hear me?
Sir, can you please little louder?
Hello. Are you able to hear me now?
Yes, sir, go ahead.
I have a very basic question. So from what I understand, sir, the shelf life of fat or SMP, as you call it, is only about 15 to 18-odd months, so I'm just trying to understand why do we then every quarter sell at prices which is below our cost, can we not like -- because we understand these go through a business cycle. So I'm just trying to understand, can you not hold this stock for about 12, 15-odd months? And then accordingly sell it. You can obviously sell it as a WAP or then if it does not get sold then sell it by commodity rather than selling and distress prices every quarter?
See, like any product butter also, stored in bulk, starts to deteriorate. Even though it might have a shelf life of 12 months, the quality of the butter deteriorates as the time goes. Secondly, there is a carrying cost, right? Carrying cost is -- and these are -- like when it sits in an inventory, it's hundreds of crores, right? There's a working capital that is involved. There is a cold store room that we need to keep running electricity consumption and all of that. And all of this is speculative in nature because we really don't know where it is going.
So we are dealing with -- dealing with an industry which produces close to 200 million tons of milk and we are -- contribution of our share in this play is very small. Even the largest dairy brand in the country only has 10% share. So the forces that we have to face as far as the volatility of commodity prices are huge. And there is also global volatility that we have to deal with. I don't think it is really worth the effort or time. We are not in the business of speculation. And if, let's say, tomorrow, if our value-added products go up and we really need this butter, it's always available in the market, and we can buy them. Because eventually what we want to build is a business, which is dependent on sales requirement and we B2C is more predictable in the sense we'll be able to explain to you that this is a sale price and this is the prices of the commodities that we have purchased to produce those sales.
Sir, my second question is, if I look at your business, what portion of our business will be non-South right now versus 5 years back?
Non-South. I could say about 10% is non-South.
And what were these numbers 5 years back?
We'll have to come back to you on that. But I can tell you that all our -- see, like for our business, value-added products are growing faster than milk. Within value-added products, non-curd products are growing faster than curd. Similarly, our non-core market.
[Technical Difficulty], [Operator Instructions] Sir sorry we had lost your line, can you please repeat the answer once again?
So I think I already answered. I mentioned that non-South would be about 10% I just added further saying that non-South is growing faster than south.
okay. Okay. And sir, just to get a sense on the non-South market. So for -- to get incremental sales in the non-South market, do you have to -- I'm just trying to understand what kind of additional spend that you're requiring to do to get those sales?
Can we request you to repeat the question because.
Voice is fluctuating high-end low, actually. And we are using handsets.
Can you hear me?
No, sir. If you could just send your question to Valorem, we'll get back to you.
Next question is from the line of Avinash from [ Novast ] Management.
Hello. Am I audible?
Yes.
Congrats on a good set of numbers. So I can see that the value-added products has grown year-on-year. But could you just give us the margin -- how is the margins reflected for value-added products for this quarter, previous quarter and the same quarter last year?
EBITDA margin for the current quarter Q3 is run rate production is 9.9%. Corresponding year, 9.37%.
9.3%.
[indiscernible] Last year.
Sir, 1 follow-up question. So are we expecting -- do you have any target margin that we have in mind for value-added products? How do we progress from here? Are we seeing mid-teens? So what do we have in mind?
So see, I believe the value-added products still have a pricing opportunity of 3% to 4% from the current level of current level of [indiscernible]. Yes. So that should give us upside in the coming quarters.
Next question is from the line of Ramesh Sota, Individual Investor.
So I have a couple of questions. [indiscernible], can you just tell me what is your current growth in Q3?
Growth is 15%.
Okay. Is it all volume growth or some -- since we have taken multiple pricing in last year, this 15%, does it have [indiscernible] on it?
No, this is volume growth, value growth is 18%.
Okay. So I know [indiscernible] fat losses. One small question on fat losses. How much tonnage of fat did we liquidate in the current quarter?
[indiscernible]
No, not including ghee, which is all but better, which is we sell.
600 metric tons [indiscernible].
1,700 tons bulk sales.
[indiscernible] sir, total consumer fats share is around INR 93 crores in quarter. Does it include this bulk butter sale or is it excluding that bulk butter sale?
No, no i correct it. INR 93 crores inclusive of everything. The consumer product sale is INR 41 crores, roughly half of it.
Okay. INR 93 crore is complete butter fats sale in the current quarter.
Half of it is consumer and half of it is bulk. Roughly.
Okay. And 1 futuristic question. So what is our outlook on next season, Q4 season being our season for fat, curd and all. Last quarter, Q1, we were having investor slowdown, which already has already told in Q1 investor call. So what is our outlook for next season? Are we going to have a 20%, 25% growth in that as we have in this quarter? Is it like that or there'll be a slowdown in the market?
See, the only thing which is outside of our control is how will milk production happens, right? Because the sales is mostly in our hands and growing that steadily. So you can expect -- continue to expect steady growth of our volumes and revenues going into next year. As far as the milk supply is concerned, supply side at this point in time, the indications are that it will be a normal growth. So we are not expecting terrible shortage or a huge price increases. But then it has to be seen.
So are we targeting our next year some 15% to 20% growth in overall revenue or the milk volumes currently are growing at 2% to 2.5% for you. Is it -- are we continuing targeting 2.5% to 3% next year also?
See, this year, you are probably comparing volume growth with revenue growth. Because 2.5% of volume growth, yes.
Milk volume growth. So...
So sir, are you talking about volume growth or revenue growth?
So mainly the value growth...
Revenue is a function of price increases plus volume growth, right? It's a function of growth happening. So there could be years when volume growth is slightly muted, but the pricing growth is higher. There could be years when pricing growth is slightly muted, but volume growth will be higher irrespective what we are committed to is keeping the top line growing at a steady pace.
Okay. So my question was slightly different. Since the current year, we have not taken much price increases unline last year since we had a milk shortage and we were...
[indiscernible] there is a slight disturbance on the line, can you please speak through the handset?
Usually actually I'm using handset. I will just go over the [indiscernible]...
Sorry to intervene. But just to save time, I think there is a little bit misunderstanding of the context. This year see, there are 2 pricing we are talking about. One is raw milk pricing, which is actually the input commodity for our business. And the second is market pricing, which is actually all our -- whether it is milk or value-added products, there were a lot of discussions around value-added pricing, milk pricing and all of that. So maybe that's been a little bit confusing.
Just to give a context, last financial year was a year when India faced a severe shortage of milk, which resulted in raw milk prices going up, which actually put a strain on profitability of not just Heritage, but many other dairy companies as well. And this, we are speaking about 3 to 4 quarters back. And this prompted us, these high prices of raw milk or input material, prompted us to increase market prices of milk in quarter 1 of this year. In fact, we had started increasing prices from March of last -- March of this year, which was Q4 of last financial year itself.
And we continue to take prices across markets from March of 2023 till about June, July of 2023, which is actually Q1 and Q2 were quarters where we took market prices up. Primarily, we took prices up in milk, and we took nominal price increases in value-added products. Subsequently, in quarter 3, what we have seen is that we had a regular flush season, which means that supply side improved significantly compared to the same period last year. That resulted in raw material prices coming down. So we are in a situation where we took up market milk prices higher to compensate for raw milk prices, price increases earlier. So we are at a higher market milk price situation. with lower raw milk price input. I hope this is clear.
[indiscernible]
[indiscernible] Next financial year could be a situation where we may not take too much of market milk price increases because we are already at a higher price as far as the consumers are concerned. And some of the previous people were asking about the outlook in terms of raw milk prices. We hope raw milk prices hold steady or we'll have nominal increases as we get into a lean season.
Got it. And 1 last question. So I attended the last call of today [indiscernible]. So they were entering a greenfield project in Maharashtra. Does it have any impact on Heritage volumes in Maharashtra?
No, there is a competition always [indiscernible] people keep coming joining, and everyone procures milk, everyone offers the same price. I don't see any specific reason for impacting only Heritage.
The next question is from the line of Babu Raju Individual Investor.
Am I audible?
Yes, sir, you are.
Congratulations on good set of numbers. So I would like to check, I know the long-term target is 8%, the margin. So currently, we are at like 5.5% and when you -- when you will be able to achieve that number?
I think it was well explained during the call earlier by Srideep. We are already around 7-plus without the fat losses. So we try to achieve as early as possible, but won't put a time line because it is influenced by multiple factors, and it may not be fair to put numbers and time lines in the -- in anticipation, but our aspiration is to reach there as soon as possible.
As there are no further questions, I would now like to hand the conference over to Dr. Rao for closing comments.
Thank you very much for all of you all your participation and interesting questions. We look forward to see your continued engagement with Heritage Foods. Thank you once again.
Thank you very much. On behalf of Heritage Foods Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.