HERITAGE FOODS - BUY

The Heritage Group, founded in 1992 by Sri Nara Chandra Babu Naidu (former Chief Minister of Andhra Pradesh) operates three-business divisions viz., dairy, retail and agri under its flagship company Heritage Foods (India) Ltd (HFIL). Presently Heritage's milk products have market presence in Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Maharashtra and has its retail stores across Bangalore, Chennai and Hyderabad. Its integrated agri operations are in Chittoor and Medak districts of Andhra Pradesh. Heritage Foods has its headquarters in Hyderabad, Andhra Pradesh

The company is listed on the BSE and NSE and falls in the T group category of BSE.

The BSE stock price trend of the scrip (BSE code: 519552) from 19.01.2007 to 19.12.2008 is as shown:

Closing Price Source: BSE

The scrip was Rs.272.85 on 19 Jan 07, reached the periodic high of Rs.444.05 on 06 Fec 07 and was Rs.73.25 on 19 Dec 08. The sudden spike during December 2007-January 2008 is due to the buying pressure during the bull run then. A trend line has been inserted to track the general periodic trend.



As on 31 Mar 2008, Total Income has risen by 80.73%, but PAT has dropped by 45.34% y/y. 2006, 2007 and 2008 have shown a falling trend for RoNW, which indicates decreasing profitability with the help of shareholders' funds. The rising Long Term Debt to Equity ratio indicates increasing dependence of debt as a source of financing. A plunge in PAT, PAT to Total Income ratio, RONW and EPS is seen between 2006 and 2007 because the company commenced retail business operations at the end of 2006 and incurred substantial start-up expenses.

Source: Company annual report 2007-08

The following factors appear favourable for the company:

· The company is expanding itself rapidly. 22 new units have been commissioned with procurement capacity of 2.51 lac litres per day (LLPD) in Andhra Pradesh and Maharashtra and 3 milk packing stations have been added totalling to 1.2 LLPD capacity in Andhra Pradesh and Karnataka. It also plans to spend 2.3 crores on expanding its dairy business further.

· The Indian retail market is expected to reach USD 427 billion by 2010. In the sway, the company plans to launch 30 more stores to the existing 70, thus aggregating to a total of 100 stores by the end of FY 2008-09. According to industry studies, people in South India have taken the supermarket-style of shopping very keenly. Hence, the company has a spread of more than 30 stores each in Hyderabad, Chennai and Bangalore.

· In order to distinguish itself from the competitors, HFIL has chalked out two strategies - Urban and Rural. The Urban strategy includes a home-delivery based model of retail goods as well as rewards and schemes for its customers. The Rural strategy includes deploying company representatives to sell FMCG products into rural areas. The company is confident that these strategies will help it win over its competitors in terms of market share.

· On 29 April 08, the Union Commerce and Industry Minister Kamal Nath assured that no foreign direct investment would be allowed in the retail sector. Hence, the company is relieved that there is no immediate threat of a foreign competitor entering India

Some risks pertaining to the company are as follows:

· The company has accepted that it is still considered as a regional and niche player in terms of expansion plans and geographical spread. This has led to hindrances in its recruitment policies, thus hampering the quality and quantity of manpower.

· As per the company's annual report, the company's size and scale of operations are small as compared to its competitors. It also faces a threat from future entrants.

· Since most cities in India are undergoing rapid urbanisation, the property and rental costs are rising sky high. This has a direct bearing on the company's profitability as its rentals payable are rising.

The following table analyses the current returns to an investor, if the stock was purchased at different periods of time.



The P/E ratio of HFIL is highest amongst its peers. This is one of the indicators of faith of the investors in the company. The stock is currently trading at its life-time low. To increase the revenue share from products, HFIL is establishing as well as increasing the production capacities for value added products such as ice cream, paneer, cooking butter, curd etc. This will help in its overall growth. Further, the above given positive factors seem to outweigh the risks, making the stock attractive. So, we conclude that the scrip is a good pick in the recent bearish markets.

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