Heritage Foods: VAP Revenue Surges 40%, but Margins?

Heritage Foods (NSE: HERITAGE) runs an integrated farm-to-consumer dairy model, collecting milk from over 300,000 farmers across 9 states. Its product range spans liquid milk, curd, paneer, lassi, buttermilk, ice cream and flavoured milk, along with ghee and butter. What happened: In Q1FY27, value-added products (curd, paneer, lassi, buttermilk, ice cream and flavoured milk) grew 40% YoY to Rs 563.6 crore, accounting for 42.1% of revenue. Curd rose 26%, paneer 33%, buttermilk 60%, lassi 98% and ice cream 65%. Total revenue grew 17.7% YoY to Rs 1,338.1 crore. Heritage is deploying Rs 250 crore capex in FY27 on new paneer and ghee processing facilities. Why it matters: Despite revenue growth, EBITDA fell 16.2% to Rs 61.9 crore as margins compressed from 6.5% to 4.6%. Net profit declined 38.3% to Rs 25 crore, hit by raw material inflation, a 42% rise in depreciation and plant startup costs. The broader VAP category, including ghee and butter, reached 47.2% of revenue. Management targets a 50% VAP revenue share by FY30 and 16-17% annual net revenue growth. What I am watching: The ice cream plant reached only 40% capacity utilisation in Q1FY27. As new paneer and ghee plants come online, startup costs will keep margins under pressure in the near term. The path to a recovery runs through volume ramp-up across these facilities. ROCE at 14.8% is healthy, and the stock trades at 32.4x earnings, a steep discount to its 5-year median of 87.9x. My stance: The VAP transition is real and gathering pace, but the margin story is going the wrong way for now. Watching whether Q2 and Q3 show the improvement management expects as raw milk costs normalise and new plants stabilise. I do not hold a position in Heritage Foods at the time of writing. This is not investment advice.