Creating Entrepreneurs

Heritage Foods (HFL) with annual turnover of Rs 2642.89 crore is foraying into north India. It aims to ride its recent all-equity acquisition of Reliance Retail dairy products and hopes organic growth to reach Rs 6000 cr revenue by 2022. The company founded by Andhra Pradesh Chief Minister N Chandrababu Naidu in 1992 has grown in leaps and bounds. It has seen a 34 per cent growth in the first two quarters of the fiscal. Heritage Foods executive director Nara Brahmani spoke to Sudeshna Banerjee about the company’s positioning, mission and vision during its 25th year, chalking out a well-crafted growth plan

Q: Please talk about your journey and share your mission

We are a transparent listed company, started in 1992 by the honorable chief minister of Andhra Pradesh Shri N Chandrababu Naidu and it was started for the cause of the farmers. Hailing from Chitoor district, known for very high quality milk procurement, he found the farmers were struggling with issues where they would get paid once in 6 months or a year and the quality of milk was never measured properly. He started Heritage Group as an initiative to help his own people. Those were the days when dairy business was small and several sectors were opening up to privatisation. It was an interesting opportunity from a social point of view. We started with 2000 litres of milk procurement in our first processing facility in Chitoor. Ever since, we have been growing. Today we have 15 processing units. We handle around 15 lakh litres of milk per day. In 1994 Heritage Foods got listed to raise funds and the response was overwhelming. It got oversubscribed – some 54 times. It has been a very interesting journey for us in Heritage Foods. Till recently we used to be a player in South India but with the acquisition of Reliance Retail (RRL) we have started operating a pan-India dairy procurement, processing and distribution platform under Dairy Life and Dairy Pure brands, which offer a wide variety of products like packaged milk, curd, sweetners and skimmed milk powder. We are now present in 15 states. We are not just present in milk but in value added milk products like curd, flavoured milk, lassi, butter milk, yogurt, desserts, ghee and butter.

We are India’s largest private dairy company when it comes to curd. Today about 25 per cent of our revenue comes from value added dairy products and the idea is to attain a 5-year goal of becoming a 6000 crore company by 2022. In order to do that, we need to increase our value added product portfolio contribution to about 40 per cent.

We directly procure from the farmers across all geographies. We run cooperative trusts, owned and managed by the farmers. Part of the contribution comes from the company and the trust uses it to improve their business. We run a large scale accidental insurance programme for the farmers where they are covered upto Rs 2 lakh in case of accidental death and a benefit of Rs 50,000 in case of hospitalisation. We run a lot of veterinary services where we run 6 mobile clinics/ vans that visit villages on a daily basis and conduct free check up camps not just for Heritage Foods’ farmers but all farmers of the village. We manufacture our own cattle feed and pass the benefits on to the farmers through subsidies.

Heritage Foods facilitates loans to farmers up to Rs 100 cr through banks and non-banking financial companies.
Q: Heritage Foods acquired 100 per cent equity in Vaman Milk Foods after the acquisition of Reliance Retail’s dairy business. How do you plan to leverage on it?

With the acquisition of Reliance Retail’s dairy business we managed volumes of about 1.5 lakh litres in terms of milk/ milk shed. Our go-to-market strategy is very unique. Apart from procuring milk directly from farmers we process milk in our own facilities near our market to offer freshness. One of the erstwhile co-packers of Reliance dairy business is being moved from there to Vaman Foods and acquisition was to mainly serve the Ludhiana-Chandigarh belt. In a couple of weeks we shall start our operations as well. Vaman Foods is just an asset acquisition. We did not procure volumes or any distribution from them. In fact they were also doing co-packing for other companies.

For Hyderabad we acquired a plant in Shyamalpet to cater to the growing market. This plant was doing co-packing for Amul and we acquired the assets exclusively for Heritage Foods for Hyderabad. We control our own processing and milk packaging.

Q: Why are you aggressively expanding in North India? You already have a good presence in South India for last 25 years?

It’s in line with our 5-year vision to be Rs 6000 cr by 2022. We decided to grow not just organically but also inorganically and the idea is to be a nationally recognized brand. This means we have to improve our reach from 3.5 lakh farmers to 6 lakh farmers in next 5 years. North India is a very important market for its unique value proposition. Delhi/ NCR is a huge market, worth 70-80 lakh litres a day in terms of milk consumption. We want to capture this market. We decided to procure and process locally and distribute within 5 kilometres periphery. We believe our unique go-to-market strategy supplements our growth in providing high quality fresh milk. We are in Punjab, Haryana, Rajasthan, Delhi NCR, UP, HP and will continue to focus on these markets only for the next couple of years, without going beyond.

Q: How much are you investing in these markets?

Broadly on a 5-year basis, every year we are looking at a capital expenditure of Rs 100 crore and this is to fund our future growth both in existing and new markets. Recently, we acquired Vaman Foods and we have to invest more into processing unit in the north to be able to move from co-packers to our own processing.

Q: In southern markets you have a brand presence. With Amul, Mother Dairy, Parag, Paras and so many others ruling the market how are planning to promote Heritage Foods in the northern belt?

We have two brands – Heritage as a brand and Dairy Life as part of our acquisition of Reliance’s dairy business, which has a strong presence in certain regions. We already have a foothold. It’s not milk that comes through intermediaries from other states, where quality is compromised. We have full control over our entire value chain.

We recently signed a JV with a French dairy company Novandie for manufacturing flavoured yogurt and desserts. The joint venture will set up a Greenfield plant with a capacity of 20 tons per day at an investment of Rs 16 crore for the first plant, which is expected to be operational by 2018. There’s a lot of learning about branding and support.

This is the 25th year of the company and the focus is on rebranding ourselves. We changed our logo a bit and completely changed our packaging design for milk and brought in a lot more vibrancy. We want to connect the last two and a half decades with the next two and a half decades as we emerge more as a value added product brand.

In terms of marketing spend we are looking at about half a per cent to one per cent of our revenue for all markets together. It would hard to categorise, based on every single market simply for the dynamics. We will take quarterly decisions on that.

Q: What has been your distribution policy?

We have a very unique distribution model of Heritage parlours - a franchise model wherein Heritage funds about 50 per cent of the franchise and gives certain handholding support till they become viable. These are exclusive 150-200 sq ft outlets. There are 1300 such outlets through which we sell Heritage products and certain certified non-compete products. We are converting our distribution to successful product trials.

Q: Heritage Retail Undertaking was sold off to Future Group. With a wide distribution network why did you choose to do so?

Heritage Retail Undertaking got consolidated into Future Group as an all-equity transaction. We haven’t sold it but partnered with Future Group. It was a board decision. We wanted to focus on our core business - dairy. Modern retail, food and groceries require scale. We believe Future Retail will bring in back-end and front-end scale and operational efficiencies. They are a profitable company and the largest retailer in the country and we have a very good relation with Future Group. We want to leverage on it to emerge as a national brand. It’s a great opportunity for us to place our products in their stores across the country. Our board felt it would make a good sense to focus on core dairy business instead.

Q: Your market cap has gone up in the last eight months beginning March from Rs 2,500 cr to over Rs Rs 3,800 crore. Your comments. 

Investors need to talk about that. We have been growing and in the first two quarters we have grown by 34 per cent. We hadn’t grown so much in the last three years. We are focusing more on our core business and value added products and our balance sheet is also looking strong in terms of return ratio, return on capital employed, debt equity etc. So those are some of the parameters the investor could look at.

We have been focusing on branding a lot. Till very recently we used to ride on our distribution but now we are communicating with our consumers through above the line and below the line advertising and we are talking about our unique value proposition towards the farmer and how that translates into better quality products. The acquisition of Reliance dairy business has added about 10-15 per cent of our volumes in new markets. I would say, 50 per cent of the growth has come from Reliance dairy acquisition and 50 per cent has come from organic growth.

Q: What has been your initiative in renewable energy ?

We have just received the national energy conservation award and we won the second prize this year for our plant in Tirupati for saving energy units and the renewable energy unit is strictly for captive usage of Heritage Foods processing facilities. We want to be a green company and reduce our carbon footprint and number two its cost effective for us. We have been saving a lot of money. This will be expanded only on need basis for captive usage.

Q: Succession policy for family-run businesses has been a crucial issue. Your comments:

It’s a very important aspect of family business and it’s a known fact less than 50 per cent of family businesses survive the third or fourth generation. I cannot speak for others but what we have done in Heritage Foods is that went through a very professional process of the board looking into the matter and making the decision. We have an independently run board with two independent directors. The chairman of the board is an independent member who does not belong to the promoter family. We have ensured merit for family members. Personally I have a bachelor’s in engineering from Santa Clara and worked for venture capital in Singapore for two years, nothing connected to the family business. I got my MBA From Stanford School of Business before I decided to join the company. We do not join the company by default. My mother in law who is the vice chairman and managing director was also the co-founder. We have professional CEO/ CFO making decision on a day-to-day basis. We are also a listed company that compels us to be transparent and clear about decision making. For last two years we have been bagging the Golden Peacock Award for corporate governance competing with global businesses.

Q: Any plans to delve into politics?

I have absolutely no interest in politics. I have a brilliant opportunity to work with so many farmers and that’s what makes me very satisfied as a person. Today I work with 3.5 lakh farmers, in five years it would be 6 lakh farmers. In the years ahead I shall be working with millions of farmers. I am very passionate about health and nutrition as a person and I have that unique opportunity again. It keeps me so much excited.   

Columnist: 
Sudeshna Banerjee