Heritage Foods Limited (HERITGFOOD) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Heritage Foods Q3 and 9M FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Hiral Keniya from Dickenson World. Thank you, and over to you, sir.

Thank you, Aman. Good evening, everyone. I welcome you all to the earnings call of Heritage Foods Limited for Q3 and 9 months FY '22. Today, we have with us the management represented by: Ms. N. Brahmani, Executive Director; Dr. M. Sambasiva Rao, President; Mr. A. Prabhakara Naidu, Chief Financial Officer; Mr. Srideep M. Kesavan, Chief Executive Officer; Mr. J. Samba Murthy, Chief Operating Officer; Mr. Umakanta Barik, Company Secretary and Compliance Officer. Before we get started, I would like to remind you that the remarks today might include forward-looking statements and actual results might differ materially from those contemplated by forward-looking statements. Any statement that we make on this call today is based on our assumptions as on the date, and we have no obligations to update this statement as a result of new information or future events. I would now invite Dr. M. Sambasiva Rao from Heritage Foods to make his opening remarks. Thank you. Over to you, sir.

Thank you, Mr. Hiral. A very good evening to each one of you who join the call today to discuss financial and operating performance of quarter 3 and first 9 months of the current financial year. The results presentation has already been uploaded on the exchanges and on our website. And some of you must have got a chance to look at it. Now I'll give an overview of the financial and operational highlights of quarter 3 and first 9 months of the year. Consolidated revenue for quarter 3 grew by 10% year-on-year at INR 6,670 million with the increase in sale of milk and value-added products. EBITDA during quarter 3 stood at INR 392 million as compared to INR 773 million in previous year quarter 3. EBITDA margin stood at 5.9% as against 12.8% in quarter 3 last year on account of mainly higher raw material costs. During the quarter, tax stood at INR 208 million. Let me now take you through 9 months' numbers. Consolidated revenue for 9 months grew by 7% year-on-year at INR 19,854 million on account of again higher sale of milk and value-added products. EBITDA during 9 months stood at INR 1,550 million as compared to INR 2,204 million in 9 months of last year. EBITDA margin stood at 7.8% during 9 months of current year. Tax during 9 months stood at INR 839 million. Our wholly owned subsidiary, Heritage Nutrivet, sales stood at INR 246.7 million in quarter 3 as against INR 297.4 million during the last year same quarter. EBITDA stood at INR 11 million in the current quarter as against INR 29 million during the previous year. PBT during the current quarter is INR 0.3 million versus INR 20 million during the last year. The company has a strong balance sheet with debt-free status and cash and bank balance of INR 662 million as of 31st December 2021. Now moving on to the volume performance. The average milk procurement during quarter 3 was at 1.2 million liters per day as compared to 1.1 million liters in the quarter 3 of last year. Average milk sales during the current quarter was 1.04 million liters per day compared to 0.97 million liters per day in the last year's same quarter. Curd sales during the quarter 3 was at 271 metric per day compared to 231 metric tons per day during the last year, registering a growth of 17% year-on-year despite the extended monsoon season along with several cyclones in our markets. During the quarter, value-added product revenues surged by 21% year-on-year to INR 1,647 million. During this quarter, value-added products' contribution of the overall revenue also increased to 25% versus 23% over the last year's same quarter. Despite the challenging business environment and extended monsoon season, Heritage Foods continued to grow and expand its value-added product portfolio. The company has strengthened its balance sheet by achieving debt-free status, backed by a healthy cash balance. The company launched several products across categories, such as new pack formats of frozen dessert in various flavors and easy-to-digest A2 fresh milk in select markets during this quarter. Now the floor is open for any questions and answers. If you have any queries or feedback post this call, you may please contact us or even the Dickenson World, which is our Investor Relations agency. Thank you very much.

[Operator Instructions] First question is from the line of Aniruddha Joshi from ICICI Securities.

Sir, in terms of the profitability margins, we have seen that there is a sharp correction in profitability margin of the dairy business as well as the animal feed business, so -- and in fact, we have seen margin correction is higher than even the margin correction reported by some of the peers in South India, too. So any -- is there any one-off or something like that? Or it's a normal business correction? And we have also seen some of the peers have raised prices now post December. So how do you see the price hikes happening in the sector and for H2?

Yes, Mr. Aniruddha, thank you. It is true, margin dropped mainly because of the milk procurement prices have rebounded. They have increased significantly over the previous year. And during the quarter, we haven't passed on to consumers as it was winter quarter. Usually, the sales will be on lower side of the year. Now in this quarter, we started passing on in most of the markets to restore the margins to a better level. In terms of cattle feed, the margins dropped mainly because the raw material prices increased. They are also now trying to pass on the prices -- price increase to the consumers in this month and [ for H1 ]. Exciting overall industry trend, quarter 3 was high raw material prices. And quarter 4, the consumer price hikes are now going on.

Okay. So Heritage also raised prices and means in spite of flush season, obviously with the order of flush season base also. But in spite of flush season, is there an increase in milk procurement prices on a Q-o-Q, too?

Can you repeat? Yes, we have increased -- we have started increasing the sale prices to consumers. The second part you are saying about the flush season, I couldn't get it fully.

Sir, there is a flush season. But in spite of flush season, there is a price hike happening on a Q-o-Q basis, too? Is that the correct assumption? So do you see that probably the milk procurement prices, the cycle has turned and after a period of lower procurement prices for a period of 2 years, now the prices are expected to go? So will it be a presumption to make?

So it was more a correction issue during this quarter 3. Previous year, the prices went really low because of the COVID impact. Now they started getting corrected and coming to the normal levels.

Okay. So sir, the margin drop in Q3 is more of a one-off, we can say? Or is it a structural issue in terms of milk procurement, higher milk procurement prices now?

No, there is no structural issue. It's a lag between the increase in procurement prices and sale prices. The lag is getting corrected now as the season is changing into favorable season of sales.

Okay. Sir, and last question, can you give the performance of some of the products that we had in [indiscernible], like Alpenvie or even the cheese in retail packs that we had introduced? And even we have some variants of paneer also. So overall, how is the performance as well as the performance of the products launched in JV with Novandie? Yes, that's it from my side.

Sure. Mr. Srideep, the CEO, will take this question.

Yes. I'll address the questions regarding the products launched in the dairy business. And as far as the JV with Novandie is concerned, I request our Executive Director to comment on this. So as far as the dairy business is concerned, President gave a little bit of that in the opening statement that the growth momentum that we are seeing in value-added products is consolidating this increase. This quarter, we have seen 21 percentage growth in value-added products. And that has been the primary driver of growth for us, not just in our core markets but even in our emerging markets, whether it's in Mumbai, Delhi, et cetera. And these growths have been as designed by us primarily led by the five categories that are of focus for us. When I say categories, these are category clusters, I'd call them, curd -- driven primarily by curd, consolidated and faster growth we have had in paneer this quarter. We have had significant growth across other categories of focus, such as ghee, beverages as well as ice cream. We have had setback in terms of volumes in few weeks of the quarter due to inclement weather. You must have read about repeated cyclone attacks in the eastern coast of the country. Had it not been for that, our growth would have been even much stronger. The strategies that we have placed are put in place for driving growth in value-added products is actually paying results, and we can speak about that.

Yes. Thank you, Srideep. This is Brahmani here. I'll take the question on the JV. Despite many headwinds in the past 3 quarters since the launch of [indiscernible] as well as drinkable yogurts, we have seen some good traction in our products. We've seen that especially yogurts across all flavors have been very positively accepted across markets. We've also launched newer variants of volume drivers going forward, so just natural plain yogurt. We've also launched a product beyond the cities that we were present, across Maharashtra and Gujarat, in Hyderabad as well as the Bangalore market more recently. And we're seeing some good sales in these markets as well. In fact, I'm happy to say that Hyderabad's sales contribution has increased to 35% of our overall sales in a very short period of time. So we're really excited about the progress that we've made in the last couple of quarters, despite many external challenges, especially in Mumbai market, where the intensity of lockdowns was quite high. In terms of channels, we've actually done pretty well in modern retail format stores, which contribute about 60% of our sales today. But we are also seeing some good traction in GT, especially in Maharashtra market and now in Hyderabad and Karnataka as well. And going forward, we're just entering the season for yogurts and fermented products. And we are quite excited about the growth momentum that we're seeing going forward. And mainly, growth will come on the back of diversifying our channel mix that is continuing to grow in modern retail format stores and growing much faster in general trade stores as well, and thus improving naturalization as we see more and more higher-margin products and volume type of products, such as natural yogurts, grow. And of course, with scale comes cost optimization. And we're really excited about this. We are also involving our consumers in several engagement activities in-store as well as online. And those campaigns to influencers' interest have gone through quite positively. And we will also drive growth through increasing our throughput through existing channels as well as billing frequencies. So we're really excited about the quarters to come. And both partners are very excited about the season to come.

The next question is from the line of Binoy Jariwala from Sunidhi Securities & Finance Ltd.

Could you help me with the selling price per liter...

Yes, please. [indiscernible] per liter of milk, milk, of course, is sold in multiple variants, cow milk, buffalo milk and full cream milk and standardized milk, slim milk, double-toned milk, A2 milk. So there are multiple variants of milk, but we can try to give you an average realization.

For this quarter, Q3 selling price per liter is INR 46.71 average.

Understood. And how would be the average milk procurement price?

Procurement also we have cow milk, we have buffalo milk, different percentage of fat and total solids. But we try to give you average.

Certainly. Average procurement price of milk is INR 38.30.

INR 38.30. Okay, understood. Sir, this gross margin spread, that is the average realization on milk -- sales realization on milk less the procurement price, that spread has narrowed on a Y-o-Y and a sequential basis. What do you think -- to about INR 8, INR 8.50 per liter? What is the steady-state spread that we should redundantly target? Hello?

Yes. We'll let you understand the gross margin level has other elements of [ cost and growth ].

Gross margin for this quarter is 21.02%. Just the 9 months also, 22% as of now, 22.41%.

No, I understand the gross margin percentage, I'm not asking that. I'm trying to understand what would be the steady-state spread that we aim typically over the milk procurement price? Do we look at INR 10, INR 9, INR 8, INR 12? What is the kind of number that we generally work with in our budgeting?

So here -- this is Srideep here. I'm trying to address this question from our -- from the strategic point of view on how we look at the business. The two numbers that you read out are telling only part of the story. Because the milk realization of INR 46.71, first of all, is actually mix, which contributes to 70% of our realization. The balance of realization comes from about 26% of value-added products and 4%-plus of VAP, et cetera. So as far as we are concerned, we look at consolidated realization from our products. And more and more our value-added product contribution goes up, the naturalization that we have from our business increases. Second, even in terms of milk, the price that our CFO read out is actually only in liquid milk that we procure from our farmers. In addition to that, as to the seasonality and availability, we always have -- we use fats and solids from our stocks, which also needs to be considered. Because it is such a dynamic number, it is the reason why we look at EBITDA. And as far as EBITDA and gross margins, these are two numbers that we always track, is concerned, I think we have been historically advising that our target is to remain in the 7.5% to 8% EBITDA margin level, plus or minus 1%. This quarter has been an exception in that sense. Our EBITDA margin has dropped by over 1 percentage from where we would have wanted it to be. And that is purely because of -- as was asked by the previous investor, procurement prices during flush season went up contrary to what [indiscernible] in flush season prices should have come down. But in this flush season, actually it has gone up beginning last year. And our inability to pass on the prices to the consumer at that immediate moment because of continuous inclement weather and the longer winter season is the only reason why we are seeing this. And now that we have passed on the prices, we have taken price increase starting first week of January across our markets, hardly one or two markets remain for us. In most of our markets across all the product categories, we have taken price increase and the EBITDA level should come back to normal, the same 7.5% to 8% that we spoke for.

Fair enough. So this price increase that you have taken beginning January, what is the quantum of this price increase?

In the various product price market-to-market, approximately you can say INR 2 per liter, kind of [indiscernible]

INR 2 per liter on the liquid milk, right, sir?

On average put together, some products maybe more, some maybe less.

Fair enough. Okay. Sir, just wanted to understand your view on the milk procurement, how does it look, the supply? How does it look going forward? And the -- especially from a price point of view, so we've seen a steep jump in the farm gate prices. Now do we think that it will settle down? Or do you see continued inflation into it? Especially given that we've -- there has been torrential rains in south of India. So has that disturbed the cycle by any chance?

Yes. We have to watch out and see. It's a very, very fluctuating situation. It is a flush season where prices have gone up. And summer months, definitely, there will be fall in the production. If there's a fall in the production, demand increases and prices are bound to go up further.

Our next question is from the line of Bhargav Buddhadev from Kotak.

My first question is what would be the percentage share of curd in our overall value-added product business? And what would be the second-biggest category in the value-added product business? And how much its contribution would be?

I didn't get the second part of the question. Percentage of the curd in value-added products and what is the next important -- second important, right?

Yes. What is the next biggest product in the value-added category? And how much is the revenue contribution?

So see, the curd actually, the contribution is increasing every quarter. Currently, it stands at about 20% to 21% of the contribution that we have in terms of revenues. And the second biggest in terms of revenues for us would be ghee as far as the product contribution is concerned. We are also seeing aggressive growth in paneer. That will be a third category that is very important for us.

Okay. So now that we've launched many product categories in the value-added side, from here on, what would be your strategy? Would it be to sort of increase the acceptance of these products in the market and that's how we will take our share of value-added up? Or we would also be looking at sort of coming up with more new product launches in the coming years as well?

Sir, see, I think we have reiterated that our growth strategy depends on growing the share of value-added products in our portfolio. I wouldn't want to put a number to it. But you will see significant growth in the share and contribution of value-added products quarter-on-quarter. And this is one line item, one metric that we will continue to report as well. As far as our growth strategies are concerned, primarily we are driven by our growth algorithm, which is very simplistically if could put is based on driving availability as well as demand. Here, I'm oversimplifying it for the sake of explaining. As far as availability is concerned, at this point in time, we have multiple strategies in enhancing our availability or increasing our availability of our value-added product categories across markets. Our primary go-to-market strategy has been through our main distribution channels. But we are aggressively building other channels of distribution. For example, now we have 300-plus strong distributor network, which is building our product reach to [ A+ ] grocers and stand-alone modern trade in addition to the strong channel that we have in terms of modern trade and e-commerce. So that network is only growing month-on-month, which is enhancing the growth of our product reach. In addition to that, we are aggressively expanding the presence of our neighborhood distribution stores. And you will see this expanding. In most of our non-core markets, our growth strategy will be based on expanding the network of our [indiscernible] distribution stores. And at the same time, we are also strengthening the relationship with our customer partners in terms of whether it is national as well as regional partners in terms of modern trade accounts. We are expanding our presence in e-commerce and aggressively growing in quick commerce. Quick commerce is one channel which is seeing very fast growth. And we are significantly focusing on that to drive our growth. So that's on the availability side. And on the demand side, you will see going forward, more and more consumer-centric work coming from our side, not just in terms of product design, where we are getting our products even more sharper and closer to our consumer needs. We are working on several projects which will increase our penetration across consumption occasions through the day. While earlier we were serving two locations, we are looking at opportunities how we can serve four locations through the day for the consumers. We are looking at innovations, which will cater to consumer needs more sharply. And that starts with understanding consumer needs in terms of several studies they are doing with our consumers and understanding their needs in these occasions. And eventually, finally, a science-based approach in creating products that meet these demands in these occasions at the most affordable price. So that's on the demand side and on the availability side. So this algorithm of driving both demand as well as availability is going to be the primary driver for our growth in our value-added products.

And in terms of brand spend, are we looking to significantly up the brand spend? Because the brand spend as of now is sort of fairly low, right, as a percentage of revenue.

Srideep?

Yes. Sorry? Yes. So see, primarily, the demand, I spoke at a very high level in terms of consumer needs and product design. But of course, all of this is built on the back of effective communications reaching out to consumers and connecting with them in a more meaningful fashion. And that starts and ends with the brand. And as far as our master plan [indiscernible] is concerned, it's something that has very high equity. We are, at this point in time, also working on developing some brands for some of the categories that we are building. So definitely, there is going to be increased investment as far as connecting to the consumers and marketing is concerned.

And lastly, is there any target in the next 3 years, how much contribution you are targeting from this value-added product segment?

So currently, we are at 25%. In fact, for the quarter that past, we were at 26%. And we were -- internally, we are looking at anything upwards of 35% to 40% as a contribution that it should have in the next 3 years. In fact, at this point in time, we are concluding our 3-year plans and strategies and numbers. And we are looking at the range of value-added products contribution growing up to about 40%.

The next question is from the line of Sameer Gupta from IIFL.

Sir, my question is more of on the strategic front. So during the previous quarter, we saw a press release from the company stating that you want to foray into nondairy FMCG. So if you can elaborate a little more on this, what kind of products are we looking at? Are we also looking at creating new brands? What exactly is the right to win in a nondairy space? On these aspects, if you could elaborate.

Sure. The launch of those products are still a couple of months away. So I'll not be able to give very specifics about exactly what the nature of the product that we are going to launch. I hope you will appreciate that. But broadly if I tell, we are not -- we are -- this venture is purely in line with expanding our business within the scope of the vision laid out for the organization, which is nourishing every home and our consumers with fresh and healthy products and empowering our farmers. So the products that we have created will help us achieve this vision even more strongly, both on the consumer side in terms of offering healthy and nutritious products, at the same time, strengthening and deepening our relationships with the farmers in the regions where we are procuring our dairy. As far as the core drivers of this business is concerned, we have picked up -- we are looking at categories and product segments which will help to broaden our business, but at the same time, that help us leverage our relationships with the existing customers, so we are not going to get into any categories or we are not going to get into any product segments which will be required us to create new customer segments. Secondly, we are looking at business which helps us leverage the synergies in our supply chain even better, whether it is in the procurement side or on the sales and supply side. The third thing is, strategically, you spoke about the right to win. As far as the right to win is concerned, they are looking at categories and segments that allow us complementarity to our current portfolio of dairy nutrition. That gives us -- I spoke about very specifically building occasions through the day. So earlier, while we were with milk, liquid milk, we are just focusing on morning occasion. But with dairy foods, we are now opening multiple occasions through the day. And some of the new products that we are looking at might offer complementarity for those new occasions. And we'll be stronger in those occasions, whether it is in terms of building out our channels or building out our consumer reach. So that's primarily the strategy. But as far as growth numbers and absolute revenues are concerned for the next -- for, say, 2 or 3 years, I should say that it will be predominantly dominated by dairy.

Understood, sir. That's clear. So basically, this is not going to be a meaningful contribution in the next 3 years and maybe it is -- going to be incremental in your efforts to build on growth?

That is right, sir.

Okay. And won't eat a lot of capital also in terms of branding, communication, building a new route to market, et cetera?

Yes. And I should also be -- I think we had spoken about this earlier as well. We are looking at an asset-light model for this business. We are not looking at any capital investment. We are building this business through a network of third-party manufacturers with whom we will have strategic partnership. And yes, so from that point of view, there will not be too much of capital allocations for this business.

And margins also, it won't be dilutive to the existing business?

No, absolutely not. In fact, in terms of gross margins, I can only expect this business to contribute more.

Got it, sir. Sir, the second question, back to dairy, so you mentioned INR 38 milk procurement price. While I understand this is like more of a correction that you mentioned, but I haven't seen INR 38 milk procurement price for the past several years for Heritage. So what has changed? Is it more of a buffalo milk mix, something structural that has happened here? Are we paying more because of increasing competition? What exactly is happening here?

Sameer, also it was there. The buffalo milk mix is what is increasing. The cow milk is available at INR 38, buffalo milk is at INR 45, INR 47, INR 48. This is no different from any year.

Got it, sir. So any particular reason why the buffalo milk mix is increasing? Because my sense is that the excess fat, we are selling at a very low margin. And that is the reason why our gross margins have declined this quarter.

No. There is -- again, there is no increase in share of buffalo milk. It is more or less same like last few years.

But then INR 38, sir, the last whatever years I look at, the milk prices have been in the range of INR 30 to INR 35. So INR 38, especially in a flush quarter, seems very high. So is it just broad inflation that is catching up on milk also as a category? Or is there something structurally changing in terms of competition and hence paying more to the farmers?

None of that. It's all correction only.

The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.

If you could comment on the growth in the HoReCa segment in our key markets, what trends are we seeing currently? What is the contribution of HoReCa versus, say, 2 years ago?

The contribution in HoReCa business is insignificant, actually. In fact, we will not do any bulk selling during -- we do not have -- it's a very -- we might be -- through the retail segment, we are distributors, mostly selling into smaller restaurants and all [indiscernible]. As institutional sales, it's not at all of any significance to us.

Okay. And a couple of quarters, we had laid out a plan and a vision, we want to become a INR 6,000 crore sales company directionally. And then there was lockdown and we didn't have visibility. So is it fair to say next 4 years, assuming we get there with the focus on value-added products and at a steady-state 8% EBITDA margin, we can do a INR 500 crore EBITDA, is that the direction what we are working on? And is there enough visibility, confidence in the current scenario or this gets deferred and still inside the drawing board stage?

Yes. So it gives me -- actually, I have great confidence that the timeline can be made. I really see no reason why in 4 years, we cannot achieve that milestone. We had a setback, and not just us, the industry and several others due to COVID. But that's notwithstanding the foundational work that we have done in the last several quarters is going to help us accelerate the momentum going forward. And you should be able to see that in the next many quarters.

Okay. So next 4 years, so by FY '26, we seem to be confident of achieving that as a direction.

Internally, that's what we are working on.

Okay. And you've always maintained more like a 7.5% and 8% EBITDA is kind of a steady-state margin. Obviously, that goes up or down depending on the procurement price and product prices of dairy. With the focus now on value-added products, how does that directionally change with scale? Because you're already saying we are at 25%. So is it fair to assume this can be directionally better if we achieve that scale over a period of time with value-added products?

Would you like to take the question? Yes, so I think that -- I request Brahmani also to weigh in on that. We have expenses to fill this growth. So during the growth period, the additional incremental gains we want to use to invest the growth. And maybe after that stability, 2026, then you can harvest the gains of this effort, not during the growth phase itself.

And this is Brahmani here. I would like to add and repeat what Mr. Srideep has said earlier that most of this growth will come from consumer-centric, razor-sharp approach, which means that we will have to spend on certain resources internally, be it people, be it marketing, as mentioned by one of our participants in the past, et cetera. So I think the change in focus from just being a milk company to being a consumer-focused FMCG sort of approach will lead us to maintaining probably the same margins. However, we will strive to -- as we strive to look at higher value-added products, we will also look at better margins. But realistically speaking, in the near future at least, we could be [indiscernible] the trend.

Right. And in our endeavor to become a whole day consumption kind of a player for the consumer, these products, which are still in the pipeline, should happen, say, by the value of this year, in the next 12 months, how are we looking at new products to increase their wallet share from consumers?

Yes. So this is Srideep here. So we have -- you must have observed is that we have been launching products in every quarter. In every quarter, we have some new news. And the idea is we are not like saving a launch for a day. And we look at the sequential launch of our products. So we have a good, strong pipeline. And some of the new products that we'll be working on will start shipping in next quarter, in fact, in quarter 4. And there will be some in quarter 1 of next financial year as [indiscernible]. So there will be continuous new product launches that we'll see.

Fine. So it's an ongoing effort and that will continue. Understood.

The next question is from the line of Sandy Mehta from Value Investment Principals.

As a shareholder, I'm just saying that I'm a little concerned that in your presentation for the quarter as well as your prepared comments, there was no explanation of why the earnings and the margins were down. So your presentation for the quarter, you talked about the highlights, the positives. But with margins down quite substantially and earnings down, there was no explanation of why that was or whether it was temporary. I think you've answered a lot of those questions on the call. My question to you is you are a net cash company right now and you're generating a lot of free cash flow. What about dividends? It doesn't seem like there's a lot of CapEx requirements. Can we expect, as the cash piles up and you're generating this free cash flow, can we expect higher dividends going forward?

Yes, I can take the question. This is Brahmani. So as you must have noticed, the -- including the cash and cash equivalents, it was about INR 65 crores. What I want to clarify here is that about 80% of that cash is required from the payments in the first week of the following month itself towards our farmers and in the form of incentives and salaries for employees, so already about 15% to 20% of that, which is available, which is also required for other working capital requirements, also including purchase of some commodities, such as [indiscernible] powder, et cetera. Coming to the question on dividend policy, which is already up on our [indiscernible] side, there is a policy and the Board takes a decision on that, depending on what the results are required for growth and sustainment of the business. And that is something that the Board will review from time to time and recommend.

Yes. The dividend policy, earlier the company had debt. But now that you are in a net cash position, I understand that there are working capital requirements. But I presume that cash flow will continue to increase. So is it -- will the Board, at some point, is it likely to increase the payout ratio? What is the CEO's thoughts on that, please?

I think our Board has different options in mind. And we'll keep you posted as and when we have some decision or thoughts about it from the Board.

I think already in this year, I think interim dividend has been announced, keeping that in view.

Our next question is from the line of from [indiscernible] from Anvil Wealth Management.

Sir, when you mentioned that the procurement price is at INR 38.30 [indiscernible], so the trend of INR 38-plus is fair? Or is this corrected back to around INR 35, INR 34? And second question, I wanted to ask that at the region of INR 6,000 crores in the next 4 years and it's 40% value add, which requires us [indiscernible] of 24% then on value-added products, which is just 25% right now. It will be 22% compounded growth of VAP. In your view, is that achievable in the next 4 years as it requires a very high growth rate? And currently, we are growing at around 12% to 15%.

Yes. On the procurement prices, yes, it was more of a correction, as I explained earlier. And during this quarter, we would have typically higher share of buffalo milk compared cow milk as this is a seasonal product.

The growth of value-added products going forward, you're right, the growth in value-added products needs to be high. And we've seen high growth, north of 30%, in the past, barring the last 1.5 to 2 years because of external factors. And we are confident we will be able to achieve those growth from our star product, which is curd, and also from a more diversified set of value-added products such as paneer, ghee, beverages, drinkables, dairy foods, et cetera.

On the procurement side, sorry, I didn't get, the INR 38 should correct to INR 35 levels. Is that what you mean in Q4 onwards? Hello?

Yes, very clear. It is -- yes, go ahead.

Yes. So INR 38 per liter should correct to INR 35 per liter for Q4. Is that what you mean?

No, no, no, it was actually reverse. It moved up during the quarter 3. It moved up further in the summer. But in the future, there will be some change in the ratio of buffalo and cow. In summer months, cow milk ratio will increase, buffalo milk will come down. So that would lead to some amount of correction again.

Our next question is from the line of Shirish Pardeshi from Centrum Capital.

Two questions. The first question is, on top of my mind, 2 quarters before, I did ask the question on Novandie JV. I hope by now you have some idea how this business looks like next 2 to 3 years. And quickly back to the products, what has gone into Gujarat and Maharashtra market, what is the learning? What is the size and scale, which you can expect or if you can share some commercials around that business now?

Sure. This is Brahmani here. I sort of explained this in length in the beginning, but happy to go through it again. So as you know, the products have been launched during the sort of the peak of the second wave of COVID in the Maharashtra area. But we've seen some very good traction, especially in yogurts. And we've seen that all flavors have done well. I'm also happy to mention that we've expanded our range of yogurts into plain natural yogurts as well and bigger pack sizes as well existing pack sizes. We've also launched our products across newer markets in Hyderabad as well as Bangalore, and we've seen very good traction within a very short period of time. We are present across key modern retail format stores. We've also introduced products across e-commerce channels and e-commerce players. And now we're going through the growth phase of not just improving our distribution across these players but also a gentle pace which will lead to better margins and better growth going forward. And that's what we are really looking forward to. And since we are at the beginning of the summer season, we believe that the season will be an actual measure of our [indiscernible]. And we are quite excited about the season as well as next FY as partners in the JV.

That's helpful. Just wanted to understand, what is the quarter run rate we are expecting in the next 2 to 3 quarters?

Can you repeat, please? It's a bit blurry.

I'm asking, sir, what is the quarter revenue run rate we are expecting after 2 quarters?

Yes. I think I can share that we are able to increase our revenues by 2.5 to 3x in the next couple of quarters to come, especially because like I said, we're entering the season. And we're looking forward to growth in these new markets as well.

Understood. My second and last question is on -- in between, we were addressing that we are trying to enter into the new product categories and adjacencies. Just more curious to look around what are the adjacencies that you're looking? Is it related to dairy? Or it is nondairy, complete new value chain, which we are developing? And more importantly, if you are getting into nondairy, how are you going to build the distribution channel? And then modern trade is one of the common channels, which is very helpful. But building a different channel will take time. So that's the question which I have.

So thank you for that question. Some parts of this question we had already addressed. I'll repeat that just for the benefit of clarifying. We will have innovations both on the dairy side as well as on the nondairy side. In fact, I had mentioned that in terms of growth numbers, in terms of absolute revenue additions in the next couple of years or the foreseeable future, bulk of it will come from dairy. So it is not that the innovations are going to happen only in nondairy foods, but it will happen significantly in dairy foods as well. And in dairy side of the business, we have looked at category clusters where we have an advantage to serve our consumers as far as nutrition is concerned. And that makes business sense for us in terms of profitability. And these, if I can largely cluster them, would be good opportunities in terms of dairy-based food opportunities, like whether if it is curd, paneer or any other subsegments that make part of this, creating more occasions for consumers through the day. The other large dairy segment in which [indiscernible] category in which you will see a lot of innovation from us is in the beverage space. And beverages at this point in time, most of the dairy companies have traditional dairy beverages, whereas we may be looking at science-based, new, innovative dairy beverage formats going forward, so -- and likewise, we are looking at other categories like ice cream, frozen dessert and all that. But bulk of our dairy growth will come from food occasions as well as drinkables. Similarly, in the nondairy space, I spoke to you about categories which create complementarity as far as our dairy business is concerned, both in terms of channel exits as well as consumer occasions. So we do not see any challenge at this point in time in building out that business. I mentioned about 300-odd distributors that we have very recently appointed and aggressively growing that number in terms of getting us a reach of distribution to grow three channels, stand-alone modern trade, national [indiscernible] These are the same channels which will sell our dairy products as well as the food -- complementary food products that we're planning to enter. So we will have -- I really do not see any challenge at all in that being an additional burden on us. In fact, we are very particular that we do not want to create anything that requires any unique or special investment of focus.

[Operator Instructions] The next question is from the line of Sameer Gupta from IIFL.

Just another question from me. If you could just help me with your current geographical mix in terms of Hyderabad, rest of AP and Telangana, Northern India, rest of India, any other geographies which is gaining importance in the current mix?

We have a wide footprint. In fact, we are present with sales offices across 11 states in the country, and in fact, beyond, much more -- many more number of states through modern trade channel networks through wholesale partners. And this is primarily spread across Telangana, Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, Maharashtra, Delhi, Haryana, Punjab. So it's -- we have quite a spread-out market as well as our product presence and distribution is concerned.

My question was more on the revenue mix, sir. Like how much does it come from Hyderabad today, rest of AP and Telangana, northern India, rest of India, any other market which is of prominence?

Sameer, we'll share with you one-to-one, this is becoming an issue for us.

We have the next question from the line of Siddharth Bhattacharya from Anvil Wealth Management.

Sir, I wanted to ask about the competitive intensity on the ground? So in terms of milk procurement, how has that trend emerged post this COVID phase?

During the second wave -- sorry, first wave and second wave, there was an issue for farmers to sell their milk. Not many takers were there, so those who were organized companies like ours picked up all the milk our farmers gave. And it has created surplus scenario, and we had to convert the milk into powder and hold it. That was the first wave, second wave. But the third wave, this came in with less impact on the movement of people or movement of goods and markets. So therefore, there is no issue in terms of procurement. Our marketing challenges for the farmer is now in this third wave. So all the players, unorganized cooperatives, everyone is active and procuring well. And most of the SMB stocks got exported during -- before the commencement of the flush season. So there is a demand for milk powder also continuingly growing. Therefore, currently, there is no issue in terms of farmers for selling their milk availability and [indiscernible]. Competition is also good. All are active.

Okay. So just an associated question, so could it be that there could be increased competition in terms of offering better prices for raw milk in the coming quarters by your competitors and the cooperatives?

We will also offer -- not only competitors, we are also increasing farmer price last 2 months, 3 months. Every month, we have been increasing price to farmers. There was a lag in passing on that increase to consumers. That is also happening now. So the coming months, seeing the overall scenario, as the lactation comes down naturally from the animal by March, and from April, summer, the temperatures will increase, production will fall, demand will increase, Prices will also increase. That's a natural phenomena, all will follow, including us.

And you are not seeing any challenge in passing on the prices. It's not affecting demand for your products, right?

There was a delay in passing on. As Srideep explained, we had gone through the year, cyclones in November, rains extended into December. There was colder winter and the Omicron hit in between. So that there was some delay in passing on the increased cost. But now the season is changing. The temperatures are changing, the rains are over. So passing on started, and it will be complete by end of January or so in all the rest of the markets also.

And it will be absorbed easily if I conclude.

Sorry?

It is being absorbed easily by the consumers, as in there is no fall in volumes for you with the increased prices, right?

Sorry, it's not easily absorbing. What did you do when petrol prices went up from INR 70 to INR 110? Did you not buy petrol?

Correct, correct, correct. Got that.

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Dr. M. Sambasiva Rao for closing comments. Thank you, and over to you.

Yes. Brahmani, would you like to conclude?

Sure. Thank you so much to our valuable participants for all your discussions and questions. And I'd like to reiterate that despite harsher external conditions of monsoon, a colder season, a colder, extended winter as well as the onset of the so-called third wave of COVID, we've been able to show some interesting growth, especially on the back of the growth of value-added products. We, as a company, as Heritage Foods and management, stay committed to our stakeholders and our vision of delivering fresh and healthy products to our consumers on a daily basis and empowering our farmers. And this is coming through a specific consumer-centric approach, as mentioned during our call, and also by tightening our relationship with the farmers that we've had over the past 3 decades. During the last 1.5 to 2 years, we've continued to do -- extend service activities and roll out loaning, subsidized cattle feeds, subsidized insurance for animals, et cetera. And we haven't stopped doing all these empowerment activities with our farmers. In fact, we've also launched an app called the VET+ app, which now has 80,000-plus unique registered users. We are always open to answering questions, if you have any.

Thank you very much. We thank everyone for joining us today for this call. In case of any further questions, clarification, suggestion or feedback, you can connect with Mr. Umakanta Barik, Company Secretary and Compliance Officer, Heritage Foods or Dickenson World. Ladies and gentlemen, on behalf of Heritage Foods Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.

Thank you.

Thank you very much.