Heritage Foods Limited Q1 FY27 Earnings Call Summary

Event Participants

Executives

7 A Prabhakara Naidu, Brij Mohan, J Samba Murthy, M Sambasiva Rao, N Brahmani, Srideep Kesavan, Umakanta Barik

Analysts

10 Abhishek Mathur, Aditya Khandelwal, Hitaindra Pradhan, Kshitij Sowlani, Nishita Shanklesha, Parth Sodha, Pratik Kothari, Sameer Gupta, Vignesh Iyer, Viraj Mehta

Financials & KPIs

Geographic & Segment Commentary

• Liquid Milk: Sales volumes stable with average price +4% YoY to ₹58.68/liter; procurement volumes +2% to 18.10 lakh liters/day. Management flagged liquid milk volume growth as the company's "main problem to solve" — ~1 lakh liters/day was added through distribution expansion (fresh distributors, Heritage happiness points), with month-on-month growth visible from March through July.

• Value-Added Products: Record 44% revenue contribution with 40% YoY growth to ₹563.6 crores, almost entirely volume-led. Category-wise volume growth: paneer +33%, curd +26%, ice cream +25%, butter milk +60%, lassi +98%. ~80% of growth driven by distribution expansion in existing geographies; ~20% from increased consumer traction with measurable market share gains across curd, paneer, and butter milk in organized channels.

• Ice Cream: Revenue crossed ₹55 crores, growing 65% YoY; Alpenvie delivered +44% growth and Get-A-Way +196% with near-breakeven profitability. The newly commissioned facility ramped to ~40% capacity utilization, manufacturing both brands on a common platform for operating leverage and future headroom.

• Heritage Nutrivet (Animal Nutrition): Revenue of ₹72.8 crores, +37% YoY with PBT of ₹2 crores despite across-the-board ingredient cost inflation since Q3 FY26. Q2 FY27 expected to be stronger than Q1 despite continued cost pressure.

• Adjacent Growth Platforms: Heritage Novandie Foods (Livo high-protein yogurt) became a wholly-owned subsidiary; shareholding in Peanut butter and Jelly Limited increased to 71%, reflecting conviction in the better-for-you nutrition segment.

Company-Specific & Strategic Commentary

• Procurement Network Reinforcement: Added ~5,000 farmers in Q1 FY27 with another ~5,000 planned in Q2; investments in vet services, subsidized cattle feed, artificial insemination programs, and timely payments ensured uninterrupted milk availability despite supply tightness.

• Premiumization & Brand Building: Alpenvie undergoing a comprehensive brand refresh with new identity and SKU launches; Nourish+ gaining traction, particularly high-protein paneer; Livo performing well in organized retail; Sampurna A2 Curd, chef's choice curd, and organic milk building salience. Strategy targets ~2-2.5% annual improvement in VAP revenue contribution, reaching ~50% by FY30.

• Manufacturing Capacity Expansion: New ice cream facility ramped to ~40% utilization; paneer and ghee projects under construction; total FY27 capex of ~₹250 crores.

• Operating Leverage Gains: Other expenses declined from 9.64% to 9.01% of revenue YoY and employee benefits from 7.21% to 6.74%, together improving the bottom line by ~1.1% — partially offsetting a 2.54% raw material cost increase.

• Loss-Making Business Turnaround: Ghee EBITDA improved from -12% to -8.5% YoY; losses in Mumbai and North India seeded regions reduced, avoiding an additional ~₹1 crore bottom-line hit in the quarter.

Guidance & Outlook

Risks & Constraints

Q&A Highlights

Milk Procurement & Pricing Outlook

• Question: How is the summer flush shaping up? Are procurement prices easing, and what is the outlook for the October flush given El Nino risk? (Sameer Gupta)
• Answer: The expected mini flush in April-May did not materialize due to weather conditions; prices rose from March through June and are now stable, though geographies are behaving differently. The full flush is expected from October onwards; Q2 prices should be stable to slightly higher. Heritage is securing volumes by adding farmers at village level and improving throughput. (J Samba Murthy)
• Answer: ~5,000 farmers were added in Q1 and another ~5,000 are planned in Q2; work continues on subsidized cattle feed, artificial insemination programs, and animal health irrespective of external conditions. (N Brahmani)

Procurement vs. Demand Balance

• Question: Procurement has been flattish to negative for four quarters — is this a conscious choice or a supply issue? (Sameer Gupta)
• Answer: Procurement follows material balance planning; last year's weak volume growth meant lower procurement requirements, and the industry is facing supply-side shortage across the board. VAP growth is driven by solids/fats requirements, not a 1:1 milk ratio, so procurement is managed accordingly. (Srideep Kesavan)

VAP Growth: Price vs. Volume Composition

• Question: How much of the 40% VAP growth is price versus volume? (Sameer Gupta)
• Answer: Largely volume-driven — 5.12% weighted average price increase with the balance ~35% from volumes. Curd +26%, paneer +33%, butter milk +60%, yogurt ~150 tons (no base). Curd is now 68.9% of VAP, down from ~75% some time back, and will continue to decline as a share. (Srideep Kesavan)

VAP Growth Drivers & Long-Term Trajectory

• Question: What is driving the 35% volume growth, and does the earlier 20-25% VAP growth guidance change? (Abhishek Mathur)
• Answer: Q1 FY27 cycled a low base from last year's rain-affected quarter. Long-term trajectory remains 16-17% overall revenue growth, with milk at 7-8% and VAP ~25%. About 80% of growth came from distribution expansion (new points in existing geographies — no new geographies opened); ~20% from consumer traction with market share gains in organized channels. (Srideep Kesavan)
• Question: Are the market share gains from unorganized or organized players? (Abhishek Mathur)
• Answer: All branded dairy growth in the country comes from the unorganized sector; within organized channels, Heritage gained share from other branded players in curd, paneer, and butter milk. (Srideep Kesavan)

Gross Margin Decline Explained

• Question: Procurement price is flat QoQ and VAP share is higher — why did gross margin decline? (Pratik Kothari)
• Answer: The weighted average masks mix changes: cow milk rose ₹1.10 QoQ (₹42.10→₹43.20) and buffalo milk ₹4.61 (₹61.38→₹65.99), with buffalo volumes down 20%+. Higher SMP consumption at higher prices (0.5% impact) and packing material inflation (30 bps) added pressure; total gross margin decline ~2.5% YoY. (Srideep Kesavan)

Loss-Making Businesses & New Geographies

• Question: Where are consumer pack ghee and the seeded geographies (Mumbai, North India) in the journey to breakeven? (Pratik Kothari)
• Answer: Ghee EBITDA improved from -12% to -8.5% YoY; losses in the loss-making regions reduced, avoiding an additional ~₹1 crore bottom-line hit. The positive businesses declined due to delayed pass-through of raw milk increases, but negative businesses are on the right trajectory. (Srideep Kesavan)

Liquid Milk Volume Recovery

• Question: Liquid milk volumes have been range-bound — any breakthrough? (Pratik Kothari)
• Answer: This is the highest priority — volume recovery supports overhead absorption. Distribution network expansion (fresh distributors, Heritage happiness points) added ~1 lakh liters per day; month-on-month growth is visible from March through July. March-April price hikes caused temporary volume dips that were clawed back. (Srideep Kesavan / J Samba Murthy)

Pricing Actions & VAP Contribution Target

• Question: What price hikes are planned, and what is the VAP revenue share target? (Vignesh Iyer)
• Answer: Price hikes were taken at the end of Q4 FY26 and through Q1 at staggered times across markets (mid-May, early June); increases are continuous — including in the current week — for both milk and VAP. VAP contribution improves ~2-2.5% per year; from ~39% in FY26, the target is ~50% by FY30. (Srideep Kesavan)

Segment EBITDA Margins & Procurement Scenarios

• Question: What are the individual milk and VAP EBITDA margins, and the most profitable VAP product? (Kshitij Sowlani)
• Answer: Milk EBITDA margin was 3.03% and VAP EBITDA margin 8.06% for Q1 FY27; ice cream is the most profitable category. (A Prabhakara Naidu / Srideep Kesavan)
• Question: Best and worst case procurement prices post-October flush? (Kshitij Sowlani)
• Answer: Management declined to provide scenarios, citing cyclicality and weather unpredictability; conditions differ regionally and the Southern Peninsula is in rain deficit. The organization remains focused on securing volumes and growing the consumer franchise. (Srideep Kesavan / N Brahmani)

EBITDA Margin Translation & Operating Leverage

• Question: At what stage will the richer product mix translate to structurally higher EBITDA margins? (Parth Sodha)
• Answer: It is a constant work in progress. VAP EBITDA declined only 1.7% YoY versus milk's 2.8% decline, demonstrating resilience. Operating leverage is already visible: other expenses from 9.64% to 9.01% of revenue and employee benefits from 7.21% to 6.74%, together improving the bottom line by ~1.1% — offset by 2.54% higher raw material costs and new facility depreciation/finance costs. (Srideep Kesavan)

VAP Margin Seasonality in Q2/Q3

• Question: With summer tailwinds in Q1, should VAP margins hold up in Q2/Q3? (Hitaindra Pradhan)
• Answer: Mix will shift as summer products like butter milk decline in salience, but paneer (~₹52 crores quarterly revenue) is non-seasonal, ice cream growth sustains, and curd is becoming less seasonal. Pricing is moving up but raw material costs are also rising; no specific Q2 margin guidance. (Srideep Kesavan)

El Nino & Balanced Pricing Model

• Question: If El Nino disrupts the post-October flush, would more price hikes be prudent? (Hitaindra Pradhan)
• Answer: Management takes a balanced view across farmer interest, consumer pricing, and margin improvement; pricing is phased with partial absorption for a quarter before pass-through. Historically, governments have intervened via duty-free SMP imports during scarcity and export incentives during glut — the dairy ecosystem is cyclical and not isolated. (J Samba Murthy)

EBITDA Improvement Timeline

• Question: When can EBITDA return to 6-7% levels? (Nishita Shanklesha)
• Answer: Raw materials still drive three-quarters of revenue; VAP has not reached the scale to offset raw milk volatility. The target is high single-digit EBITDA, not 6%; historical median is 7%+. Raw milk price moderation will be the most significant driver. (Srideep Kesavan)

FY27 Capex

• Question: What is the planned capex for FY27? (Nishita Shanklesha)
• Answer: ~₹250 crores, comprising the paneer and ghee projects under construction plus minor raw milk procurement capex. (Srideep Kesavan)

Nutrivet Input Cost Inflation

• Question: What are the major raw materials in the feed business and the magnitude of cost inflation? (Aditya Khandelwal)
• Answer: All cattle nutrition ingredients have increased month-on-month since Q3 FY26, and Q2 FY27 also looks heavy. Ethanol industry demand for corn, slower rice milling, and packing material inflation pressure margins, alongside competition from poultry/egg industries. Prices have been partially passed on to dealers and farmers; Q2 expected stronger than Q1. (Brij Mohan)

Long-Term Margin Normalization

• Question: Is the normalized 7-8% margin view still valid 4-6 quarters out? (Viraj Mehta)
• Answer: Raw milk is ₹46.61/liter vs ₹41.38 in Q1 FY25 — an incremental ₹9.5 crores per month on 18 lakh liters; cow milk alone is up ~₹2.60 (₹5 crores per month). The long-term raw milk inflation trend is 3.5-4% annually, and the business is currently in the trough — margins will expand widely when procurement prices moderate. The strategy is to grow VAP so net revenue outpaces milk price inflation and EBITDA trends upward. (Srideep Kesavan)

Key Takeaway

Heritage Foods delivered its highest-ever quarterly revenue of ₹1,338.1 crores (+18% YoY) in Q1 FY27, with EBITDA at ₹61.9 crores (4.6% margin) and PAT at ₹15 crores (1.9% margin), as elevated milk procurement costs (+7% YoY to ₹46.61/liter) weighed on profitability. Value-added products were the primary growth engine, with revenue up 40% to ₹563.6 crores — largely volume-driven (paneer +33%, curd +26%, butter milk +60%, lassi +98%) — lifting VAP's contribution to a record 44% of revenue. Ice cream crossed ₹55 crores (+65%) and Heritage Nutrivet grew 37% to ₹72.8 crores, while Heritage Novandie Foods became a wholly-owned subsidiary and the stake in Peanut butter and Jelly Limited rose to 71%. Management targets high single-digit EBITDA margins, ~50% VAP contribution by FY30, and ~₹250 crores of FY27 capex, but the failed summer flush, El Nino risk, and continued raw milk inflation — with only a 3.03% milk EBITDA margin versus 5.8% a year ago — keep near-term margin recovery dependent on the October buffalo flush and disciplined pricing pass-through.