Rating Rationale
February 24, 2025 | Mumbai
Heritage Foods Limited
Rating outlook revised to 'Positive'; Short-term rating upgraded to 'Crisil A1+'
 
Rating Action
Total Bank Loan Facilities RatedRs.503.5 Crore
Long Term RatingCrisil A+/Positive (Outlook revised from 'Stable'; Rating Reaffirmed)
Short Term RatingCrisil A1+ (Upgraded from 'Crisil A1')
Note: None of the Directors on Crisil Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

Crisil Ratings has revised its outlook on the long-term bank facilities of Heritage Foods Limited (HFL; part of the Heritage group) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘Crisil A+’. The rating on the short-term bank facilities has been upgraded to ‘Crisil A1+’ from ‘Crisil A1’.

 

The revision in outlook factors in sustained improvement in the business risk profile of the Heritage group, driven by healthy growth in revenue and operating margin, along with prudent working capital management. Revenue is projected to grow at a healthy pace in fiscal 2025, from Rs 3,794 crore in fiscal 2024, with increase in demand translating into healthy volumetric growth and price realisations. Revenue is further likely to maintain the healthy growth momentum over the medium term. The group has reported revenue of Rs 3,086 crore till the third quarter of fiscal 2025 against Rs. 2,843 Crore till third quarter of fiscal 2024 registering a healthy growth of 9% Year-on-Year.

 

Operating margin is also expected to improve in fiscal 2025 (8.14% till the third quarter of fiscal 2025, as against 5.59% in fiscal 2024 and 4.90% till third quarter of fiscal 2024), supported by lower procurement prices and average selling prices remaining fairly stable. Though procurement prices may rise, the margin should remain at healthy levels over the medium term. Working capital requirement of the group is managed efficiently, as indicated by low gross current assets of 37 days as on March 31, 2024. Prudent working capital management, coupled with moderate profitability, should keep the return on capital employed healthy, over the medium term.

 

The outlook revision also factors in the strong financial risk profile, marked by healthy networth, against moderate debt, resulting in a robust capital structure and debt protection metrics. 

 

The upgrade in the short-term rating reflects improvement in liquidity of the Heritage group, with investments in liquid mutual funds and unencumbered cash balance of Rs. 352 Crore as on September 30, 2024, an unutilized working capital limit and adequate cash accrual against minimal repayment obligations.

 

The ratings continue to reflect the group’s strong market position in the dairy business, its well-established distribution network, prudent working capital management and healthy financial risk profile. These strengths are partially offset by exposure to volatility in milk prices, geographic concentration in revenue, regulatory changes and inherent epidemic-related factors.

Analytical Approach

Crisil Ratings has consolidated the financials of HFL and its subsidairy, Heritage Nutrivet Limited (HNL). These entities, collectively referred to as the Heritage group, are under the same management with significant business and financial linkages.

 

Crisil Ratings has also proportionately consolidated the joint venture (JV), Heritage Novandie Foods Private Limited (HFNPL) and associate, SKIL (Raigam) Power India Limited (SKIL), to the extent of HFL’s shareholding and extent of support that it may require to extend to these entities.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in the dairy industry in South India

HFL is one of the largest private dairy players in South India, with capacity to process 2.78 million litres of milk per day. It enjoys significant presence in Andhra Pradesh, Telangana, Maharashtra, Karnataka and Tamil Nadu. The company has a wide product portfolio, with over 418 stock-keeping units. It markets the products via distributors and exclusive Heritage distribution centres and Heritage parlours. The 32-year-long legacy of the company, coupled with experience of the promoters and their healthy relationships with customers and farmers, should continue to support the business risk profile.

 

Prudent working capital management

Working capital cycle will continue to be managed efficiently over the medium term. Gross current assets were low at 37 days as on March 31, 2024, because of modest inventory of 27 days and negligible receivables of 3 days. Inventory tends to increase towards the end of the fiscal as the company procures a large stock of skimmed milk powder (SMP), to be utilised in the first half of the subsequent fiscal.

 

Strong financial risk profile

Networth was Rs. 804.72 Crore as on March 31, 2024, led by strong accretion to reserves, and is likely to improve steadily over the medium term. Gearing and total outside liabilities to tangible networth ratios was comfortable at 0.12 time and 0.59 time, respectively, as on March 31, 2024. Despite the debt-funded capital expenditure plans, capital structure is expected to remain strong over the medium term. Debt protection metrics are also expected to remain healthy in the medium term, with interest coverage ratio and Net Cash Accruals to Adjusted Debt sustaining at healthy levels.

 

Weakness:

Exposure to volatility in milk prices and geographical concentration in revenue: 

Profitability remains susceptible to fluctuations in milk prices while realisations are further impacted by volatility in global SMP prices. Amidst the intense competition, the company has limited scope to pass on the hike in prices to customers. Though HFL is present in 17 states, it derives 90% of its revenue from four states and thus, remains exposed to high geographical concentration risk.

 

Susceptibility to regulatory changes and epidemic-related factors: 

Milk prices remain sensitive to any change in government policies and environmental conditions, and thus, have a direct impact on the operating margin of dairy product manufacturers. Dairies are also vulnerable to risks of failure in milk production owing to outbreak of cattle diseases.

Liquidity: Strong

Bank limit remained unutilized for the 12 months ended December 2024. Annual cash accruals are expected to be sufficient to cover the minimal maturing term debt obligation over the medium term. The group also has investments in liquid mutual funds and an unencumbered cash balance of Rs.352 Crore as on September 30, 2024, which give more than sufficient cushion in the liquidity. The current ratio was also healthy at 1.69 times as on March 31, 2024.

Outlook: Positive

The credit profile of the Heritage group is expected to improve over the medium term, driven by healthy revenue growth, sustenance of healthy profitability and a comfortable financial risk profile.

Rating Sensitivity Factors

Upward Factors

  • Healthy growth in revenue and sustenance of operating margin at 6.75-7%, resulting in higher-than-expected cash accrual
  • Sustenance of healthy financial risk profile and liquidity

 

Downward Factors

  • Substantial addition of debt resulting in gearing of over 0.75 time
  • Significant decline in revenue and operating margin, leading to fall in net cash accrual

About the Group

HFL was incorporated in 1992 by Mr Nara Chandra Babu Naidu. It is the parent entity of the Hyderabad-based Heritage group, which sells milk and dairy products under the Heritage brand. The group also has captive solar and wind power plants with an installed capacity of 11.70 megawatts. HFL is listed on the Bombay Stock Exchange and the National Stock Exchange.

 

HNL, a wholly owned subsidiary of HFL, was incorporated in 2008. The company manufactures and sells cattle feed. Its plants at Hindupur and Mallavalli in Andhra Pradesh have installed capacity of 200 tonne per day each.

 

SKIL is an affiliate of HFL, engaged in a hydel power project, and currently non-operational.

 

HFNPL was incorporated as a 50:50 JV between HFL and Novandie SNC, France to manufacture value-added products, particularly yogurt. It commenced operations in February 2021.

Key Financial Indicators

Consolidated

As on / for the period ended March 31

 

2024

2023

Operating income

Rs crore

3,793.90

3,240.65

Reported profit after tax

Rs crore

105.49

57.70

PAT margin

%

2.78

1.78

Adjusted debt/Adjusted networth

Times

0.12

0.19

Interest coverage

Times

22.40

24.55

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
Crisil Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

Crisil Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the Crisil Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name Of Instrument Date Of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Crore) Complexity Levels Rating Outstanding with Outlook
NA Bank Guarantee NA NA NA 3.60 NA Crisil A1+
NA Cash Credit NA NA NA 145.00 NA Crisil A+/Positive
NA Letter of credit & Bank Guarantee NA NA NA 8.90 NA Crisil A1+
NA Long Term Loan NA NA 31-Mar-29 120.00 NA Crisil A+/Positive
NA Long Term Loan NA NA 31-Dec-29 29.00 NA Crisil A+/Positive
NA Long Term Loan NA NA 31-Mar-32 134.00 NA Crisil A+/Positive
NA Proposed Long Term Bank Loan Facility NA NA NA 63.00 NA Crisil A+/Positive

Annexure - List of Entities Consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

Heritage Foods Limited

Full

Parent

Heritage Nutrivet Limited

Full

Subsidiary of HFL

Heritage Foods Novandie Private Limited

Proportionate

50% JV

SKIL (Raigam) Power India Ltd

Proportionate

Associate of HFL

Annexure - Rating History for last 3 Years
  Current 2025 (History) 2024  2023  2022  Start of 2022
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 491.0 Crisil A+/Positive   --   -- 27-11-23 Crisil A+/Stable   -- Crisil A/Positive
      --   --   -- 09-01-23 Crisil A+/Stable   -- --
      --   --   -- 06-01-23 Crisil A+/Stable   -- --
Non-Fund Based Facilities ST 12.5 Crisil A1+   --   -- 27-11-23 Crisil A1   -- Crisil A1
      --   --   -- 09-01-23 Crisil A1   -- Crisil A1
      --   --   -- 06-01-23 Crisil A1   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 3.6 Kotak Mahindra Bank Limited Crisil A1+
Cash Credit 10 Kotak Mahindra Bank Limited Crisil A+/Positive
Cash Credit 40 Bank of Baroda Crisil A+/Positive
Cash Credit 25 Union Bank of India Crisil A+/Positive
Cash Credit 35 ICICI Bank Limited Crisil A+/Positive
Cash Credit 35 HDFC Bank Limited Crisil A+/Positive
Letter of credit & Bank Guarantee 5 Bank of Baroda Crisil A1+
Letter of credit & Bank Guarantee 3.9 HDFC Bank Limited Crisil A1+
Long Term Loan 120 ICICI Bank Limited Crisil A+/Positive
Long Term Loan 29 Bank of Baroda Crisil A+/Positive
Long Term Loan 134 HDFC Bank Limited Crisil A+/Positive
Proposed Long Term Bank Loan Facility 63 Not Applicable Crisil A+/Positive
Criteria Details
Links to related criteria
Basics of Ratings (including default recognition, assessing information adequacy)
Criteria for manufacturing, trading and corporate services sector (including approach for financial ratios)
Criteria for consolidation

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