Dairy Industry Sector Report - systematixgroup.in Industry... · 1 Dairy Industry Sector Report...

1

Dairy Industry Sector Report

White Gold Outlook : Positive

Parag Milk Foods Ltd- Buy CMP: Rs 263 Target price : Rs 315 Upside: 20% Prabhat Dairy Ltd– Buy CMP: Rs 110 Target price : Rs 134 Upside: 21% Kwality Ltd– Buy CMP: Rs 130 Target price : Rs 180 Upside: 38% Varsha Bang Research Analyst [email protected]

Arun Gopalan Vice President – Research [email protected]

Global Dairy Industry Global milk production grew at a CAGR of 2.3% during 2010-2014 to reach 792.0 million metric tones (MMT) in 2014, on the back of population growth, rising disposable incomes, favorable demographics, brand awareness, increasing urbanization & westernization of diets in emerging economies, particularly India and China. During the period 2015E-2020E, global production of Milk and Dairy products is expected to grow at a CAGR of 2.1% to reach 901.2 MMT by 2020E. Milk and Milk products production is expected to increase in India at a CAGR of 4.2% over the period of 2015-2020, which may resulting, India overtaking EU to become the largest producer in the milk and milk products by 2020.

Dairy Industry in India-Emerging Trends The Indian dairy market is amongst the largest and fastest growing market in the world. India has been able to maintain its numero uno position in milk production during the past 18 years and milk production during 2015-16 stands at 155.5 million MT. Milk production recorded about 4% CAGR during the last five years. The total production of milk and dairy products in India is expected to reach over 189 MMT in 2021E. The total consumption of milk and milk products in India is expected to increase from 146 MMT in FY16E to 192 MMT in FY21E, implying a CAGR growth of 5.6%. Total market size of milk and milk products in India is estimated to be Rs. 6671 bn in FY16E, growing 15% annually and it is expected to reach Rs. 11543 bn by 2020E. In India, Uttar Pradesh is the highest milk producing state. Top 10 milk producing states together accounted for close to ~75-80% of milk producing during 2014-15.

Structural shift to organized segment Organized segment grew at a CAGR of 20.4% during 2010-2014 as against unorganized sector

CAGR of 14.2% during the same period on the back of shift in consumer preferences towards

branded products. The trend is expected to continue in the coming years. During the period

2015E-2020E, organized segment is expected to grow at a CAGR of 19.6% as compared to

13.3% for the unorganized segment.

Increasing focus on Value-Added Dairy Products (VADPs) and B2C In the recent past, change in demographics and rapid urbanization have resulted in significant

demand for VADPs like cheese, condensed milk, UHT, flavored butter/milk/yoghurt, protein-based

beverages/health supplements; VADP is expected to grow at a healthy rate of 23% annually till

2020E. Currently, about 42% of the total milk produced in India is purchased by consumers

directly from milk farmers in a raw form. The remaining 58% goes for processing and is sold as

processed milk and milk products like curd, yogurt, buttermilk, lassi, butter, ghee, ice cream,

frozen desserts, cheese, paneer, SMP and WMP. The share of VADP in the milk and

milk products segment is growing currently at around 25% every year. The profitability in liquid

milk space ranges from 4-5%, whereas the profitability in VADPs ranges from 12 to 18%. the

Indian dairy industry is all set to experience high growth rates in the next eight years with demand

likely to reach 200 Mnt by 2022 from 132 Mnt in 2013. Product innovations are likely to

accelerate India's dairy market which is anticipated to improve industry margins by attaining

greater scale, higher capacity use and an increasing contribution from new milk variants.

Shift towards branded products Rising disposable incomes and increasing brand awareness especially in urban markets resulting

in strong demand for branded products, thereby organized segment; Tier-I and Tier-II cities offer

significant growth opportunities for retail. Companies are enhancing their focus on brand

building/Marketing activities with aggressive spending and expansion of their marketing & sales

team to create strong brand recall, customer retention, and reach.

http://economictimes.indiatimes.com/topic/derivatives

2

Dairy Industry

Dairy Industry Overview

Global Dairy Industry

At its core, the dairy industry’s perpetual drive to optimize production has led to a willingness to adopt new technologies that enable more to be done with less. Farmers are producing more milk per cow and dairy processors are increasing output and reducing operating costs. Due to a focus on efficiency, the dairy industry has shown steady growth the past five years despite an economy that has slowly recovered from a hard-hit decline. During this period the global demand for dairy is continuing to grow, at worth of US$ 584.8 bn in 2015, growing at a CAGR of 2.6% during 2008-2015 maintaining a stable growth of the global dairy market for the past decades. Fluid Milk, UHT Milk, Butter, Ghee, SMP, WMP, Whey Protein, Cheese, Yogurt, Ice-Cream are the key segments for the global dairy market. Currently, fluid milk represents the biggest product segment with Asia being the largest consumer. It is expected that, the total production of milk and milk products to grow at a CAGR of 2.1% to reach 901.2 MMT during the period of 2015-2020. Currently, EU, India and the USA are the largest producers of milk and milk products over the worldwide. As per the IMARC report, milk and milk products production is expected to increase in India at a CAGR of 4.2% over the period of 2015-2020, which may resulting, India overtaking EU to become the largest producer in the milk and milk products by 2020.

Global Production of Milk and Dairy Products for the year 2014

Global Milk/Milk Products Production Volumes 2015E-2020E (MMT)

810.3 828.5

846.7 864.9

883.1 901.2

750

800

850

900

950

2015E 2016E 2017E 2018E 2019E 2020E

CAGR 2.1%

Country wise top producers of milk and milk products

2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

CAGR 15-20E

EU 155624 156917 160800 163452 166148 168889 171674 174506 177384 1.6%

India 133538 138093 144860 150876 157142 163668 170465 177545 184918 4.2%

USA 90865 91210 93939 95515 97117 98746 100403 102087 103799 1.7%

China 44790 44919 45252 45485 45719 45954 46190 46428 46667 0.5%

Pakistan 37866 38560 38750 39200 39655 40115 40680 41051 41528 1.2%

Brazil 33050 33362 34397 35091 35799 36521 37258 38010 38776 2.0%

Source: IMARC Report

3

Dairy Industry

Overview of Indian Dairy Industry

The Indian dairy industry is amongst the largest and fastest growing markets in the world. India has been able to maintain its leadership position in milk production during the past 18 years and also during 2015-16, with an output of 155.5 million MT. Milk production recorded about 4% CAGR during the last five years. Strong farm gate prices and rising domestic demand for value-added dairy products are the major factors providing impetus to a steady increase in milk production. Though India is the largest milk producing country but milk yield in the country is still very less as compared to other top milk producing countries like USA, Germany, France and New Zealand. High milk production in India is attributed to large population of cattle rather than good milk yields. Cow milk yield across the world’s top milk producing countries is depicted in the chart below. India's Milk production by species in 000tons’

Source: NDDB Source: FAOSTAT

Source: Indiastat

55.6

69.1

84.4

102.6

127.9 132.4 137.7

146.3 155.5

0%

10%

20%

30%

20

40

60

80

100

120

140

160

180

Milk production (Mn Tons) Growth

In India, Uttar Pradesh is the highest milk producing state. Top 10 milk producing states together accounted for close to ~75-80% of milk producing during 2014-15.

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2019E

Buffalo Milk

Prodn in tons 56630 57895 59758 62350 65352 67675 70000 74256 78771 99747

% of total Prodn 52% 52% 51% 51% 51% 51% 52% 52% 52% 51%

Cow Milk Prodn in tons 46822 49810 52200 54903 57770 59805 60600 63666 68187 89713

% of total Prodn 43% 44% 45% 45% 45% 45% 45% 45% 45% 46%

Goat Milk Prodn in tons 4481 4478 4467 4594 4594 4594 4594 4594 4594 5594

% of total Prodn 4% 4% 4% 4% 4% 3% 3% 3% 3% 3%

Total Production in tons 107933 112183 116425 121847 127716 132074 135194 142516 151552 195054

In India, milk consumption mainly consists of buffalo milk at 52% followed by cow milk at 45% for the financial year 2014. However, cow milk is growing at a faster pace than buffalo milk

4

Dairy Industry

Structural shift to organized segment

Organized segment grew at a CAGR of 20.4% during 2010-2014 as against unorganized sector CAGR of 14.2% during the same period on the back of shift in consumer preferences towards branded products. The trend is expected to continue in the coming years. During the period 2015E-2020E, organized segment is expected to grow at a CAGR of 19.6% as compared to 13.3% for the unorganized segment.

The gradual shift from unorganized to organized sector provides ample room for cooperatives and private players to grow. However, the opportunity is particularly strong for private players, as their milk procurement prices are much lower. This is because cooperatives are weaker and do not operate under a single umbrella. In the VADP segment too, capacities and branding require substantial investments and expertise, which generally are beyond the reach of cooperatives. Savvy marketing abilities and investment in cold chain technology aids the shift towards organized and branded products. A new Shift in Indian Dairy Market

The Indian dairy industry is divided into the organized and unorganized segments. The unorganized segment consists of traditional milkmen, vendors and self-consumption at home and the organized segment consists of cooperatives and private dairies

14.2% 13.3%

20.4% 19.6%

2.0%

7.0%

12.0%

17.0%

22.0%

2010-2014 2015E-2020E

Unorganized Organized

Unorganized, 74%

Organized, 26%

Dairy Industry in India 2020E

Indian Dairy Market

Organized Dairy Market Unorganized Dairy Market

Cooperatives Private Dairies Traditional Milkmen

Self Consumption at Home

46%

54%

Self Consumption Marketable Milk Organized Unorganized

45%

55%

Private Players Cooperatives & Government

Milk Production volume break-up by Marketability

Marketable Milk Volume break-up by segment

Organized Marketable Milk volume break-up by segment

5

Dairy Industry

The dairy industry in India is still predominantly unorganized with 30% of marketable milk being routed through the organized channel. Private players account for approximately 55% of marketable surplus milk routed through the organized channel and rest 45% is procured by the cooperatives.

The Indian dairy industry was estimated at around INR 4,695 billion in 2014-15. A steep rise in farm gate prices of milk coupled with increasing consumption of value added dairy products has resulted in greater value growth than that of volume growth in the sector.

Focus on prospect of Crème Run

Currently, about 42% of the total milk produced in India is purchased by consumers directly from farmers in raw form, whereas remaining 58% is been utilized for processing and is sold in processed milk and milk products (VADP).

Rising consumption coupled with better margins in the value added dairy products are enabling the dairy players to enter into a higher growth and profitability trajectory. This shift in the dynamics of the industry proved beneficial for the manufacturers since margins in VADPs are more than double that of the liquid milk segment. The profitability in liquid milk space ranges from 4-5%, whereas the profitability in VADPs ranges from 12% to 18%, attracting private participation in the industry. As per the industry estimates, the share of VADP in the milk and milk derivatives segment is growing currently at around 25% every year and is expected to grow at the stable rate until 2019-20E.

6

Dairy Industry

Value Added Dairy Products (VADP): Nearly 55% of the milk produced in India is used for

manufacturing Value Added Dairy Products. More details on value added products are available in the table below.

Market Share of Milk and Milk Products in 2014-15

The Indian dairy industry is all set to experience high growth rates in the next eight years with demand likely to reach 200 MT by 2022 from 132 MT back in 2013. Presently, only 20% of the milk production comes from the organized sector comprising co-operatives and private dairies. The paramount factors driving the growth in the dairy sector include rising disposable incomes, advent of nuclear families and fast/instant food gaining ground in India. Other factors such as structural changes in food habits, expansion of fast food chains and popularity of pizzas and pastas aided the usage of milk variants of mozzarella cheese, processed cheese and flavored milk etc.

Category Market Size Rs in Crs CAGR in % (2008-15)

Polypack Milk 35996 16

Ghee 5275 11

Butter 2467 17

Cheese 1400 23

Baby Food 2974 12

Curd 5038 38

Icecream 2500 30

Flavoured Milk 2466 28

Cream 1454 6

Dairy Whitener 600 8

Paneer 399 15

Yoghurt based products 179 32

Trends in VADP

The Indian consumer, especially the affluent urban consumer is consuming more VADP, which bring in bigger profits for dairy companies than raw milk. The fact that the Indian cooperatives had largely stuck to basic milk, butter, processed cheese slices and ice cream for many decades, had left a gap in the market that allowed some of the new players to come in with new product offerings and the phenomenon of working couples, single men and women with high disposable income also provided the impetus to look at the category with fresh eyes. Finally, global prices of milk are dipping because of overcapacity, while the Indian market is still growing, both for basic milk as well as for value-added products.

Shift towards branded products Rising disposable incomes and increasing brand awareness especially in urban markets resulting

in strong demand for branded products, thereby organized segment; Tier-I and Tier-II cities offer

significant growth opportunities for retail. Companies are enhancing their focus on brand building

with aggressive marketing spend and expansion of their marketing & sales team to create strong

brand recall, customer retention, and reach.

The dairy industry is expected to grow at 12-13% CAGR between 2015-16 and 2017-18. This growth will be mainly driven by rise in milk prices as well as change in product mix due to more focus on value added products.

7

Dairy Industry

Our recommendations…

Parag Milk Foods Limited (PMFL) - Buy

Valuation: Strong growth story with high margin product Mix

PMFL is well focused towards maintaining its growth trajectory in milk and milk products supported by strong growth in the Indian dairy industry. The company’s persistent efforts in upgrading its existing portfolio as well as regular launch of new products, proves its commitment towards adding value to customers. With processed milk & milk product segment expected to grow at double digits in coming years led by changing lifestyle, growth in food services industry & increasing health awareness, we believe, this will augur well for company’s growth and margin expansion going ahead. PMFL has a strong milk procurement process, strong distribution model and a well diversified product mix with new innovative products. At a CMP of Rs. 263 PMFL is trading at 31x of its FY18E EPS of Rs. 8.5 per share. Considering the company’s strong fundamentals, we recommend a ‘BUY’ with a target price of Rs. 315, which implies potential upside of ~20% to the CMP, with a 1 year perspective.

Prabhat Dairy Limited – Buy

Valuation: Emerging at right time

Prabhat is well focused towards maintaining its growth trajectory in both the institutional segment and its retail segments supported by its premium product portfolio. PDL is aiming to increase its share of B2C segment from current 25% to 50% in the coming 3-5 years by focusing on its brands (Prabhat, Milk Magic and Flava) in VADP segments by increasing distribution channel in tier 2/3 towns and by capacity addition. We estimate Prabhat to clock revenue and EBITDA CAGR of 15% and 18% respectively over the period of FY16-FY19E which will aid by better earning mix, increase in VADP products and sales and increasing share of B2C segment. We initiate BUY rating on PDL. At a current CMP of Rs. 110, PDL, is currently trading at 22x of its FY18E EPS of Rs. 5 per share. Considering the company’s strong fundamentals, we recommend ‘BUY’ with a target price of Rs. 134, which implies potential upside of ~21% to the CMP from 1 year perspective.

Kwality Limited – Buy

Valuation: Transforming B2C player at reasonable valuation

Over the last five years i.e. from FY11 to FY16, Kwality revenue and profitability has grown at CAGR of 32% and 31% respectively. Also, during the same period, EBITDA has grown at CAGR of 31%. Business model transmission, margins expansion in VADP products, reduction in debt and declining in working capital cycle, will aid Kwality to net earnings to grow at a CAGR of 23% during the period from FY16-FY19E. With an improvement in revenue mix towards the retail segment, Kwality intends to reduce its receivables days from 93 to 75 days over the period of FY16-FY19E. ROCE will improve significantly from 15.6% in FY16 to 21.2% in FY19E, largely attributable to margin expansion through VADP segment. At CMP of Rs. 130 the stock is trading at 13x of its FY18E EPS of Rs. 10 per share. We recommend investors to BUY the stock with a target of Rs 180 (38% appreciation) in twelve months time.

Valuation Summary

Company Name CMP (Rs.)

Target Price (Rs.)

Upside (%)

Market Cap (Rs.

Cr.)

PAT (Rs. Cr.) EPS (Rs.) PE (x)

FY17E FY18E FY17E FY18E FY17E FY18E

Parag Milk Foods Ltd. 263 315 20% 2210 53.2 71.5 6.3 8.5 41.5 30.9

Prabhat Dairy Ltd. 110 134 21% 1077 30.4 48.5 3.1 5.0 35.4 22.2

Kwality Ltd. 130 180 38% 3080 233.4 320.1 9.9 13.6 18.0 13.2

8

Dairy Industry

Parag Milk Foods Ltd. Stock Idea

Dairy Rating: BUY

Date January 5, 2017

CMP (Rs.) 263

Target (Rs.) 315

Potential Upside 20%

BSE Sensex 26878

NSE Nifty 8274

Scrip Code

Bloomberg PARAG IN

Reuters NA

BSE Group B

BSE Code 539889

NSE Symbol PARAGMILK

Market Data

Market Cap.(Rs. Cr) 2210

Equity Sh. Cap. (Rs Cr) 84.1

52 Wk High/Low 357/202

Avg. Quarterly Volume 167912

Face Value (Rs.) 10

Shareholding Pattern (Jun-16)

Comparative Price Chart

Parag Milk Foods Ltd. (PMFL) is one of the leading manufacturers and marketers of Dairy-based branded foods in India. It is moving fast towards the high growth and high margin VADP segment with its new product innovation and diversified product portfolio with well established brands like “Gowardhan”, “Go”, “Pride of cows” and “Topp Up”, which have become household names among consumers. With new innovation in the VADP segment, mix improvement, high revenue growth and improvement in return ratios with better capacity utilization, PMFL would be able to improve its margins. We expect PMFL to report revenue CAGR of 13% over FY16-FY19E with strong brand recognition and with new product in VADP with competitive prices.

Focus on VADP segment- to improve overall margins

PFML manufactures a diverse range of products which includes fresh milk, ghee, cheese, butter,

paneer, yoghurt and other dairy milk based beverages and powders under the Umbrella of four

flagship brands “ Gowardhan”, “Go”, “Topp Up” and “Pride of Cows”. The company has over the

years innovated and improved its product portfolio so as to command pricing premium in the

market. Innovation backed by advertisement exposure to help improve growth and margins. PMFL

is strongly focusing on VADP product line with cheese and whey protein which will be the driving

force. PMFL is setting up whey processing facility in current fiscal year to cater the demand of its

retail consumers in the form of branded health supplement foods and beverages. Currently, PMFL

sells whey only to its B2B segments includes Nestle and UTH Beverage Factory Private Limited

and whey powders to bakeries and confectionaries.

Integrated business model: Unlocking the value chain

PMFL has an integrated business model that encompasses the entire value chain of the dairy

based food and beverages business and includes a range of activities including manufacturing and

processing to branding and distributing a wide variety of products. PMFL has established a strong

relationship with farmers to procure raw milk at very competitive prices. It has a robust milk

procurement base with 3400 village level collection centers that have presence in 29 districts across

the states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. Further, the strategic

location of its manufacturing facilities (Manchar facility in Pune and Palamaner facility in Chittoor,

Andhra Pradesh) enables PMFL to procure quality of milk at very reasonable price from farmers, it

also helps to reduce the time and cost of the transportation and handling of raw milk, without

wastage or any substantive loss of quality or nutritional value. Over the years PMFL has diversified

and shaped its product portfolio, consisting a range of products including fresh milk and premium

Milk products such as UHT milk, ghee, cheese, whey proteins, curd, Paneer, shrikhand etc.

Robust distribution network

Parag has built a robust distribution model over the years, which has provided depth for its products

in urban market and width in the rural market. PMFL has extensive presence in pan India sales and

distribution network which covers 15 depots, 104 super stockists and over 3000 distributors spread

across the states. On account of their short shelf life, fresh milk and fresh milk products are largely

sold in the western and southern regions of India, in proximity to our manufacturing facilities at

Manchar and Palamaner. PMFL has established a separate route-to-market to focus on the

distribution of our low unit price products including ghee, flavoured milk, UHT milk, dairy whiteners

and gulab jamun mix in Tier 3 cities and rural areas in India. Company also caters to institutional

customers, hotels, restaurants and caterers directly and through distributors appointed by them.

Valuation: Strong growth story with high margin product Mix

PMFL is focused on maintaining its growth trajectory in milk and milk products supported by strong growth in the Indian dairy industry. The company’s persistent efforts in upgrading its existing portfolio as well as creating new products every now and then, proves its commitment towards customers. With processed milk & milk product segment is expected to grow at double digit in coming years led by changing lifestyle, growth in food services industry & increasing health awareness, we believe, this will augur well for the company’s growth and margin expansion. PMFL has a strong procurement process, a strong distribution model, a diversified product mix with new innovative products. At the CMP of Rs. 263, PMFL is trading at 31x of its FY18E EPS of Rs. 8.5 per share. Considering the company’s strong fundamentals, we recommend a ‘BUY’ with a target price of Rs. 315, which implies potential upside of 20% to the CMP with a 1 year perspective.

Year Sales (Rs.cr) Growth (%) EBITDA (Rs.cr) Margin (%) PAT (Rs.cr) Margin (%) Adj EPS (Rs) P/E (x) EV/EBITDA ROE%

FY16 1645.1 13.9% 147.6 9.0% 47.3 2.9% 6.7 39.1 15.1 13.1

FY17E 1794.2 9.1% 145.2 8.1% 53.2 3.0% 6.3 41.5 16.7 7.4

FY18E 2049.9 14.3% 175.9 8.6% 71.5 3.5% 8.5 30.9 14.0 9.1

FY19E 2376.6 15.9% 221.5 9.3% 102.0 4.3% 12.1 21.7 11.0 11.5

Source: Company, Systematix Research

Promoter, 47.5

FII, 27.1

DII, 3.9

Others, 21.5

40

60

80

100

120

140

160

20-May-16 20-Aug-16 20-Nov-16

PMFL BSE Sensex

9

Dairy Industry

Focus on VADP segment- to improve overall margins The difference between PMFL and many of its Competitors is its ability to create a strong brand image in the industry with new innovative products and sustain its goodwill. PFML manufactures a diverse range of products which includes fresh milk, ghee, cheese, butter, paneer, yoghurt and other dairy milk based beverages and powders under the Umbrella of four flagship brands “ Gowardhan”, “Go”, “Topp Up” and “Pride of Cows”

The company has over the last 3-4 years made several innovations in its product portfolio in all facets such as pricing, packaging and entry into new segments. Innovation has been a focus area, with a view to strengthening the base of health and nutrition. The company has over the years revamped its product portfolio so as to command pricing premium in the market. Innovation backed by advertisement exposure has helped improve growth and margins. With the largest manufacturing facility in India (40MT per day) and a market share of 32% (2nd largest players) in the Cheese segment, PMFL is now looking to expand its product basket by adding 10MT per day capacity in the cheese segment, new flavoured milk, UHT milk and Whey proteins to drive growth in VADP. Growth in Fast Food service outlets and changing food habits has triggered demand for cheese in India. In Cheese segment is dominated by organized market by 95% and is the second fastest growing segment of VADP with 31.5% projected CAGR between 2015 & 2020 and reach value of Rs 59bn by 20220 from Rs 15bn in 2015. Top 4 players command 89% of India cheese market and there is scope for more players.

Whey Protein is a high margin product in the VADP segment of PMFL. It’s a component of milk protein and by product of cheese which is further processed and refined which is to be sold as a branded product. The Company’s current range of whey products include whey protein concentrates, whey permeate and demineralised whey powders. It sells whey proteins to institutional customers including Nestle India Limited and UTH Beverage Factory Private Limited and whey powders to bakeries and confectionaries. PMFL is setting up whey processing facility in current fiscal year to cater the demand of its retail consumers in the form of branded health supplement foods and beverages. This product will act as a gross margin driver going forward as it margins ranges between 20-35%

VADP commands an EBITDA margin (14-16%) which is almost double of what is fetched by liquid milk (6-7%). In FY16, of the total turnover of Rs 1645.1 Crs, VADP contributed close to Rs 1307.4 crs, i.e 79%. Cheese and Ghee is the major contributor of VADP segment with 26% and 27% respectively. We expect VADP sales to grow at CAGR of 14.4% during the period of FY16-FY19E to reach Rs 1681.5 crs by FY19E led by Cheese, Ghee and Whey protein contribution. Company is actively striving to enhance the contribution of VADP to total Dairy sales to ~71% by FY19E (Rs 1681.5 crs). Increasing Proportion of VADP in total dairy sales should lead to improvement in operating margin of dairy division.

Integrated business model: Unlocking the value chain

PMFL has developed a strong and robust integrated business model, which encompasses the entire value chain of the dairy based food and beverages business, which includes the activities of manufacturing, processing to branding and distributing a wide range of products to the targeting various customers group. Over the years, PMFL has developed a strong relationship with farmers in the vicinity of its facilities and consistently procure raw milk at a competitive price. PMFL has a strong supply chain network to procure cow milk from 29 districts across Maharashtra, Andhra Pardesh, Karnataka, and Tamil Nadu. The company has aggregate milk processing capacity of 2mn litres per day, with manufacturing facilities are strategically located at a high dairy cow population areas of Manchar, Maharashtra with milk processing capacity of 1.2 mn litres per day and Palamaner, Andhra Pradesh with milk processing capacity of 0.8 mn litres per day.

10

Dairy Industry

Capacity utilization at Manchar and Palamaner Facility

Capacity Utilzation % Manchar Palamaner

Product FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16

Milk Processing capacity (Litres per day) 61 55 77 74 32 39 50 66

Milk Powders (metric tons per day) 68 62 79 65 19 55 67 86

Liquid milk in pouches (Litres per day) 54 70 82 62 76 50 34 41

Flavored milk (packs per day) 2 28 29 28 0 0 0 16

UHT products (Litres per day) 0 0 0 0 9 18 18 33

Cheese/Paneer (metric tons per day) 44 47 67 81 0 0 0 0

Ghee (metric tons per day) 49 45 39 72 8 5 10 13

Butter (metric tons per day) 18 6 17 17 13 30 62 81

Curd (metric tons per day) 55 48 27 42 48 63 51 75

Capacity utilization levels for its major product varies from 40% to 80%, however, PMFL is increasing its capacity of Cheese, UHT and Whey protein by using its IPO proceeds. This capacity addition will cater the demand for the next five years. Production capacity of Parag facilities

Product Manchar Palamaner Current Total

Expansion

Milk Processing capacity (Litres per day) 1200000 800000 2000000 1400000

Milk Powders (metric tons per day) 70 40 110

Liquid milk in pouches (Litres per day) 200000 175000 375000 150000

Flavored milk (packs per day) 30000 70000 100000 30000

*UHT products (Litres per day) 0 165000 165000 80000

Cheese/Paneer (metric tons per day) 40

40 20Cheese

Ghee (metric tons per day) 40 30 70

Butter (metric tons per day) 50 25 75

Curd (metric tons per day) 20 40 60 20

Whey Processing (Litres per day) 400000

400000 600000

*Includes Lassi and Butter Milk

PMFL procures around 1 mn litres per day with the help of 4300 villages level collection centers, reaching more than 250000 farmers across the catchment areas and 114 chilling centers and bulk coolers across both the facilities. It also propose to purchase new 75 bulk milk coolers and 100 automated milk collection systems thereby further increasing milk procurement base. PMFL has set up Bhagyalaxmi Dairy farm at Manchar, to educate farmers about the best practices of breeding, feeding, animal management and improving productivity. This farms is fully automated rotary milking parlor to milk cows without human intervention and ensure does not exposed to any impurities in the environment. The farm has over 2000 Holstein breed cows with higher yields of 25 Litres per day as compared to the Indian cows average is 5-6 litres per day. The premium product which directly comes from farms is sold to around 15000 customers in Mumbai and Pune under the brand of “pride of cows”. The company is planning to increase the daily procurement through setting up new collection centers and bulk coolers with strengthening the relationship with farmers. Parag has built a robust distribution model over the years, which has provided depth for its products in urban market and width in the rural market. PMFL has extensive presence in pan India sales and distribution network which cobvers 15 depots, 104 super stockists and over 3000 distributors spread across the states.

11

Dairy Industry

Region wise distribution network in India: table to be paste

Region Depots Super Stockists Distributors

Mumbai 1 2 250

North 5 31 450

East 2 17 300

West 4 28 800

South 3 26 1200

Total 15 104 3000

Pride of cows distribution models

City Depots Delivery Routes No of Customers

Mumbai 8 134 10058

Pune 4 50 2897

Total 12 184 12955

In a business where the freshness of milk is an important sales driver, the Company has selected to create milk collection centres within rich catchment areas.

Brand Building:

Indian dairy company focusing on building leadership positions in branded and value added markets across the dairy segment with innovation in products and competitive prices. PMFL has consistently invested in the creation of branded dairy products, which represent nutritive value, convenience, lifestyles and product integrity. Over the last five years leading to 2015-16, the Company had invested an aggregate Rs.75 crs in brand building. In addition to brand spending, PMFL demonstrated capabilities in brand building, reflected in the creation of distinctive brands (Gowardhan, Go, Topp Up and Pride of Cows) that address diverse consumers, lifestyles and age profiles. It is the Company’s conviction that progressive branding and packaging will help evolve consumers from products manufactured by the unorganized sector, a national trend that appears irreversible. Financial: Slow and steady Improvement in margins

Demonstrating a healthy performance, PMFL has witnessed revenue CAGR of 21% over the period of FY13-FY16 led by factors like increase in milk prices, increased depth in distribution, and diversify of revenue portfolio. With increase in share of VADP, increasing the distribution channels and introducing of innovative products, we except PMFL to generate a 13% of revenue CAGR over FY16-19E. EBITDA margin improved on back of innovative products in VADP segments and favorable milk prices in India. 75% of revenue is coming from B2C segment whereas 25% of revenue is generating from B2B with its prestigious clients like Pizza Hut, Dominos etc. Going forward, we might see a EBITDA margin in the range of 8-9.5% on back of better product mix and launched of new high gross margin products like Whey protein etc. on back of higher revenue growth and Improvement in EBITDA margins, will led to improve the bottom line of the company by CAGR growth of 29% over the period of FY16-FY19E.

12

Dairy Industry

Company background

Parag Milk Foods Ltd (PMFL) is one of the leading manufacturers and marketers of dairy-based branded foods in India. It was incorporated in 1992 with collection and distribution of milk and have now developed into a dairy-based branded consumer products company with an integrated business model, manufacturing a diverse range of products including cheese, ghee (clarified butter), fresh milk, whey proteins, paneer, curd, yoghurt, milk powders and dairy based beverages products that enable it to sell its products to retail and institutional clients across India. It derives all of its products only from cow’s milk. Its manufacturing facilities are located at Manchar in the Pune district of Maharashtra and Palamaner in the Chittoor district of Andhra Pradesh with processing capacities of 1.2mn litres per day and 0.8mn litres per day, respectively.

Brand wise Product categories of PARAG

Gowardhan

Gowardhan brand is targeted at house-hold consumption and to be used as cooking ingredients. The products under this brand include fresh milk, curd products (curd, trim curd and buttermilk), ghee, paneer, butter, milk powders, whey proteins, gulab jamun mix and shrikhand.

Go

Targeted at children and the youth generation, primarily for direct consumption. The products under this brand include cheese products, UHT milk (go milk, go slim milk and go supremo milk), and fresh milk: go kidz, fruit yoghurts in six flavours, fresh cream and beverages (lassi and buttermilk in two flavours).

Pride of Cows

Farm-to-home concept of milk, directly delivered from the farm to a consumer's door-step, through a subscription model. Targeted at household consumers seeking premium quality cow's milk.

Topp Up

Targeted at the youth generation and travelers as a source of instant nourishment. The products under this brand include flavored milk in six flavours.

Key Management Personnel:

Mr.Devendra Shah Chairman

He founded the company in 1992 and taken to new heights under his leaderships. Apart from promoting one of India’s largest cow farm called Bhagyalaxmi Dairy farm, he also holds reputed positions in various ventures like Director- Bhimashankar Sahakari Sakhar Karkhana, Pargaon, Secretary of National centre for Rural Development, Chairman, Sharad Sahakari Bank and Director, NDRI.

Mr. Pritam Shah Managing Director

He has 23 years of experience in the industry. He has strong understanding in procurement and distribution channels

Mr. Bharat Shah

CFO He is a member of the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India. He holds a bachelor's degree in commerce from Ranchi University. He has been the CFO at Parag Milk Foods Limited since January 2, 2015. Mr. Kedia holds experience in the finance field. He served as Assistant Manager of Accounts Department at Goodlass Nerolac Paints Private Limited. He served as a Finance Manager at Farvane Overseas Consultants Limited for a period of two years.

Brands

Products

Target Customer Group

Fresh Milk Curd Ghee Paneer Butter Milk Powder Whey proteins

Cheese Products UHT milk Fruit Yoghurts Curd Fresh Cream Lassi, Butter Milk, Badam milk

Premium Cow Milk

Flavoured Milk

Targeted at house-hold consumption for traditional Indian recopies and to be used as cooking ingredients

Targeted at children and the youth generation, primarily for direct consumption

Targeted at household consumers seeking premium quality cow’s milk.

Targeted at youth generation & travellers as source of instant nourishment

13

Dairy Industry

Financials

Profit and Loss (Rs. Cr) FY16 FY17E FY18E FY19E Balance Sheet (Rs. Cr) FY16 FY17E FY18E FY19E

Net sales 1645.1 1794.2 2049.9 2376.6 Share Capital 70.4 84.1 84.1 84.1

% Growth 13.9% 9.1% 14.3% 15.9% Reserve & Surplus 292.2 631.7 703.3 805.2

Operating Expenses 1,497.5 1,648.9 1,874.0 2,155.2 Networth 362.6 715.8 787.4 889.4

EBITDA 147.6 145.2 175.9 221.5 Net deffered tax Liab 11.0 11.0 11.0 11.0

EBITDA Margin 9.0% 8.1% 8.6% 9.3% Long term Borrowings 124.8 94.8 79.8 64.8

Depn & Amort 33.4 41.4 49.4 55.2 Long term Liabilities 17.4 19.9 21.9 24.1

Other Income 1.6 1.6 1.6 1.6 Long term Provision 0.6 0.7 0.7 0.8

Interest 49.0 30.3 27.1 24.0 Total Loans 142.8 115.4 102.5 89.7

Loss on FC 0.00 0.00 0.00 0.00 Trade payable 167.8 177.3 201.9 226.4

PBT 66.8 75.2 101.0 143.9 Provisions 4.2 4.6 5.2 6.0

Tax 19.5 21.9 29.4 42.0 Current Liab 274.8 210.7 202.1 195.2

Adj PAT 47.3 53.2 71.5 102.0 Short term Borr 27.8 27.8 27.8 27.8

PAT Margin 2.9% 3.0% 3.5% 4.3% Other Long term Liab 0.0 0.0 0.0 0.0

Shares o/s ( No.in Cr.) 7.0 8.4 8.4 8.4 Capital Deployed 991.0 1262.5 1337.7 1445.5

Adj EPS 6.7 6.3 8.5 12.1 Net Fixed Assets 349.3 425.3 492.7 469.6

Cash EPS 11.5 11.3 14.4 18.7 Capital Work In progress 23.3 75.0 50.0 50.0

Qterly (Rs. Cr) Q3FY16 Q4FY16 Q1FY17 Q2FY17 LT Loans & Adv 15.7 17.3 19.0 20.9

Revenue 381.7 408.3 377.3 464.7 Other Non Curr assets 1.11 1.221 1.3431 1.47741

EBITDA 37.0 43.0 33.7 37.2 Cash & Bank 7.7 74.5 11.5 7.9

Depn & Amort 7.8 9.3 9.4 11.1 Inventories 272.4 301.2 342.7 396.0

Other Income 0.9 0.3 0.8 2.3 Debtors 236.0 255.6 292.0 345.1

Loss on FC 0.0 0.0 0.0 0.0 Loans & Advances 45.5 49.6 56.6 83.2

EBIT 30.1 34.0 25.1 28.4 Other Current assets 40.0 62.8 71.7 71.3

Interest 11.2 11.8 9.1 6.3 Capital Employed 991.0 1,262.5 1,337.7 1,445.5

PBT 18.9 22.2 16.0 22.2 Cash Flow FY16 FY17E FY18E FY19E

Tax 4.8 2.5 4.1 6.8 PBT 66.8 75.2 101.0 143.9

PAT 14.1 19.7 11.9 15.4 Add:Depreciation 33.4 41.4 49.4 55.2

EPS 2.2 2.8 1.4 1.8 Add:Interest 49.0 30.3 27.1 24.0

Performance Ratio FY16 FY17E FY18E FY19E Less: Other Income (1.6) (1.6) (1.6) (1.6)

EBITDA Margin (%) 9.0% 8.1% 8.6% 9.3% Change in WC 4.0 (61.1) (64.0) (100.7)

PAT Margin (%) 2.9% 3.0% 3.5% 4.3% Tax (19.5) (21.9) (29.4) (42.0)

ROE (%) 13.1 7.4 9.1 11.5 CF from Operations 132.1 62.2 82.5 78.8

ROCE (%) 22.4 12.5 14.2 17.0 CAPEX (91.2) (115.0) (115.0) (30.0)

Sales Growth (%) 13.9% 9.1% 14.3% 15.9% WIP 0.6 (51.7) 25.0 -

PAT Growth (%) 46.9% 12.5% 34.4% 42.5% Others Income 1.6 1.6 1.6 1.6

Per Share Data FY16 FY17E FY18E FY19E CF from Investing (89.0) (165.1) (88.4) (28.4)

BV Per Share 51.4 85.1 93.6 105.7 Change in equity capital 224.8 300.0 - -

Cash Per Share 1.1 8.9 1.4 0.9 Change in borrowings (156.2) (100.0) (30.0) (30.0)

Dividend Per Share - - - - Interest paid (49.0) (30.3) (27.1) (24.0)

Valuation Ratio FY16 FY17E FY18E FY19E Others (60.4) - - -

Price Earnings (x) 39.1 41.5 30.9 21.7 CF from Financing (40.8) 169.7 (57.1) (54.0)

EV/EBITDA (x) 15.1 16.7 14.0 11.0 Net Chg in cash 2.4 66.8 (63.0) (3.6)

Price/BV (x) 5.1 3.1 2.8 2.5 Cash at beginning 5.3 7.7 74.5 11.5

Mkt cap/Sales (x) 1.1 1.2 1.1 0.9 Cash at end 7.7 74.5 11.5 7.9

EV/Sales (x) 1.4 1.4 1.2 1.0 Turnover Ratio (x) FY16 FY17E FY18E FY19E

Valuation Ratio FY16 FY17E FY18E FY19E Debtors Months 52.4 52.0 52.0 53.0

D/E (x) 1.1 0.3 0.3 0.2 Creditors Months 52.0 50.0 50.0 49.0

Interest Coverage (X) 2.4 3.5 4.7 7.0 Inventory Months 66.4 66.7 66.7 67.1

14

Dairy Industry

Prabhat Dairy Milk Ltd. Stock Idea

Dairy Rating: BUY


CMP (Rs.) 110

Target (Rs.) 134


BSE Sensex 26878

NSE Nifty 8274

Scrip Code

Bloomberg PRABHAT IN

Reuters NA

BSE Group B

BSE Code 539351

NSE Symbol PRABHAT

Market Data





Face Value (Rs.) 10



Prabhat Dairy Limited (PDL) is an integrated milk and dairy products company in India

catering to institutional as well as retail customers. PDL procures ~65% of its milk

requirement directly from milk farmers and registered milk vendors with 70-80 Kms of its

plant location. Direct procurement has enabled the company to reduce logistics costs, while

providing access to quality raw milk on a consistent basis. Institutional business account

for 75% of its sales and the rest is consumer retail with strong processes and quality

enabling them to have double digit margins, above the industry average. PDL is aiming to

increase its share of B2C segment from current 25% to 50% in the coming 3-5 years by

focusing on its brands (Prabhat, Milk Magic and Flava) in VADP segments by increasing

distribution channel in tier 2/3 towns and by capacity addition. Overall revenue and profit

growth should accelerate given by reducing debt of Rs. 250 crs and also by better capacity

utilization. We estimate consolidated revenue to post 15% CAGR over FY16-19E, resulting in

EBITDA margin expansion of 75bps and EPS CAGR of 53%.

Strong B2B model, Evolving B2C model with expansion in product portfolio.

Since last 15 years, PDL has established a strong relationship with its MNC/ Indian institutional customers which has contributed 70% of revenue in FY16. Basically, PDL is a B2B player in the dairy segment and now rapidly moving towards on brand building and increasing it retail sales under its brands like Prabhat, Milk Magic and Flava. Prabhat targets to increase the proportion of B2C revenues from 30% currently to 50% of total revenues by 2020. It intends to achieve this target by focusing on the HORECA segment, expanding its distribution reach and enhancing its VADP. PDL is planning to penetrate in tier II and III cities where the presence of brand dairy product is low. The company has seen strong growth in B2C markets in pouch milk, curd and ghee. The retail consumer products attract higher gross margins, while the operating margins are similar to institutional products. With increasing share from retail consumer products, we expect operating margins to improve over the period and thus expect better profitability.

Timely capacity expansion will aid to growth in VADP segments

In order to capture the huge business opportunity in high growth and VADP segment, PDL has invested Rs. 275 crs over the period of FY14-16. The company has enhanced its capacity in VADP segment like in Cheese 30 MT dpd, Panner and shrikhand capacity at 5MT dpd. PDL’s Shrirampur cheese plant is the third largest in the country and is currently ramping up to institutional players (pizza/ burger chains) for regular supplies. Currently, overall capacity utilization in milk segment is 68% wherein in VADP segment the capacity is underutilized in FY16, though we expect 16% CAGR growth during the period of FY16-FY19E which will be led by 85% capacity utilization. The capital expenditure should help PDL to grow revenue at 15% and margins at 18% by FY19E led by rising share in VADP, increasing share of B2C and spurt in capacity utilization.

Deepening Pan India expansion and distribution model

PDL has a well-entrenched distribution network of more than 50000 retail outlets for its milk and milk products, through 700 distributors and 100 minis stockiest, served by more than 25 sales professionals. PDL is planning to expand its reach to 100,000 retail outlets in next 2 years. For shorter shelf life products like curd the company has an alternative distribution model, known as raftar, it directly distributes products through a network of specially insulated and refrigerated vehicles ,this distribution platform helps in catering to 6,500 outlets. In the next 2 years the company plans on expanding 15,000 outlets. PDL plants are located within 70-80kms of its plant location, thereby, helping to save on logistics cost. To further enhance its distribution reach, the company is increasing its penetration into the tier 2/3 cities and rural areas by entering into B2C model.

Valuation: Emerging at right time

Prabhat is well focused towards maintaining its growth trajectory in both the institutional segment and its retail segments supported by its premium product portfolio. We estimate Prabhat to clock revenue and EBITDA CAGR of 15% and 18% respectively over the period of FY16-FY19E which will aid by better earning mix, increase in VADP products and sales and increasing share of B2C segment. We initiate BUY rating on PDL. At a current CMP of Rs. 110, PDL is currently trading at 22x of its FY18E EPS of Rs. 5 per share. Considering the company’s strong fundamentals, we recommend ‘BUY’ with a target price of Rs. 134, which implies potential upside of 21% to the CMP from 1 year perspective.


FY16 1170.5 16.7% 119.2 10.2% 24.5 2.1% 2.5 43.9 10.3 3.7

FY17E 1264.3 8.0% 113.1 8.9% 30.4 2.4% 3.1 35.4 11.1 4.5

FY18E 1470.7 16.3% 140.2 9.5% 48.5 3.3% 5.0 22.2 8.7 6.7

FY19E 1793.5 21.9% 196.1 10.9% 87.0 4.9% 8.9 12.4 6.1 10.8


Promoter,

44.4

FII, 26.5

DII, 3.3

Others, 25.8

20

40

60

80

100

120

140

8-Jan-16 8-Apr-16 8-Jul-16 8-Oct-16

PDL BSE Sensex

15

Dairy Industry

Strong B2B model, Evolving B2C model with expansion in product portfolio.

After establishing strong institutional business in SMP and CMP (73% of revenue in FY16), Prabhat has significantly moved towards the retail business as well as planning to enhance its contribution of the B2C business foraying into VADP segments and trying to scale up direct milk procurement. In an aid to provide a boost to its revenue-base, PDL has launched high growth products in VADP segments like Panner, Cheese, Dahi and Lassi in last year which has created impact on its revenue-base in B2B and B2C segments. PDL enjoys highest EBITDA margin in B2B segment due to the scale of condensed milk and SMP to its institutional clients.

Brands Products

Prabhat Pasteurized milk, clarified butter, dairy whitener, SMP, WMP, curd, lassi and chass

Milk Magic Sweetened condensed milk

Flava Flavoured Milk

PDL has been a supplier of dairy products and ingredients to many leading players in the domestic market. The company supplies specialty ingredients products such as baby food to Abbot Healthcare and sweetened condensed milk to Mondelez India. Institutional customers for speciality ingredients

Speciality Ingredients products Customers

Partially skimmed milk sugar concentrate, skim milk powder, skimmed milk preparations, full cream milk powder

Mondelez India Food

Specialty milk powder for baby foods Abbot Healthcare

Specialty milk powder and sweetened condensed milk Other MNC and Indian Cos

It also supplies co-manufactured products including specialty milk powder, curd, clarified butter (ghee), dairy whiteners, yogurts, processed and condensed milk and ice creams to various institutional customers including Britannia, Mother Dairy and Heritage Foods. Institutional customers for co-manufactured products

In Q2FY16, PDL has commissioned its Cheese plant with a capacity of 30tpd, third largest capacity in India, currently focused on the HORECA (Hotel, Restaurants and Café) and B2B players to impel cheese sales. PDL has planning to expand its footprint network to cater the HORECA and B2C segment for its VADP products wherein margins are higher than B2B segment. As per the blueprint of Management, after establishing strong foothold in B2B segment and PDL is enhancing the scale towards the HORECA and B2C segment with product gains steady traction with its competitors. PDL B2C business is in a nascent stage, the demand for its product will grow only gradually. PDL is further scaling up with sales of Other VADP products such as panner, Curd, Ghee UHT milk, ice cream and flavored milk and aims to capture this demand. It sells its products under the brand name of Prabhat and Flava. PDL is planning to penetrate in tier II and III cities where the presence of brand dairy product is low. The company has seen strong growth in B2C markets in pouch milk, curd and ghee.

Currently, B2B segment contributes 70% of revenue in FY16 for PDL. As per the management, PDL operates in a cost plus model with its institutional clients, which help company to generate the fixed profit margin despite the volatility in raw material prices. However, company is planning to increase it retail consumer products from 30% to 50% by FY20E which will help PDL to improve its share to the revenue and also by expanding its distribution network and intensive marketing of its branded products. The management aims for 50:50 ratio from institutional segment and retail consumer segment by FY20E. The retail consumer products attract higher gross margins, while the operating margins are similar to institutional products. With increasing share from retail consumer products, we expect operating margins to improve over the period and thus expect better profitability.

Products Customers

Dairy Whitener, Curd, Butter Milk Heritage foods

Curd Britannia Industries, Nandini Brand

Ghee Britannia Dairy

Ice Cream Mother Dairy Fruit and Vegetable Pvt Ltd

Pouch Milk Nandini Brand

16

Dairy Industry

Timely capacity expansion will aid to growth in VADP segments

In order to capture the huge business opportunity in high growth and VADP segment, PDL has invested Rs. 275 crs over the period of FY14-16. The company has enhanced its capacity in VADP segment like in Cheese 30 MT dpd, Panner and shrikhand capacity at 5MT dpd. Currently, overall capacity utilization in milk segment is 68% wherein in VADP segment the capacity is underutilized in FY16, though we expect 16% CAGR growth during the period of FY16-FY19E which will be led by 85% capacity utilization. The capital expenditure should help PDL to grow revenue at 15% and margins at 18% by FY19E led by rising share in VADP, increasing share of B2C and spurt in capacity utilization.

Prabhat currently has an aggregate milk processing capacity of 1.5mn lpd across both its plants at Shrirampur and Navi Mumbai. The current capacity utilization stands at 60-70% and management expects to attain ~80-85% capacity utilization over the next few years. For the cheese plant, Prabhat expects 10-15% utilization in FY17 and 70-75 by FY20E.

Product Shrirampur

Facility Navi Mumbai

Facility Total

Milk processing capacity (Litres/day) 1100000 400000 1500000

Pasteurized and Pouch Milk (Litres/day) 200000 300000 500000

Milk Powders (SMP, WMP, DW) (Kg/day) 36000 36000

Condensed Milk (Kg/day) 180000 180000

Ghee (Kg/day) 20000 20000

Butter (Kg/day) 2500 2500

Flavored Milk (Litres/day) 15000 15000

Ice Cream (Litres/day) 10000 10000

Curd (Kg/day) 40000 40000

UHT Milk (Litres/day) 40000 40000

Cheese 20000 20000

Paneer (Kg/day) 5000 5000

Shrikhand (Kg/day) 5000 5000

Deepening Pan India expansion and distribution model

PDL has a well-entrenched distribution network of more than 50000 retail outlets for its milk and milk products, through 700 distributors and 100 minis stockiest, served by more than 25 sales professionals. PDL is planning to expand its reach to 100,000 retail outlets in next 2 years. PDL has created strong relations with the institutional clients like Mondelez India foods pvt ltd, Abbot Healthcare Pvt Ltd, Mcdonalds, Dominos, Pizza hut etc. PDL enjoys moderate pricing power due to its diversified product mix, prominent brands and extensive distribution network.

For shorter shelf life products like curd the company has an alternative distribution model, known as “Raftar”, it directly distributes products through a network of specially insulated and refrigerated vehicles ,this distribution platform helps in catering to 6,500 outlets. In the next 2 years the company plans to expand to 15,000 outlets. PDL procures bulk of its milk requirement directly from the farmers and has around 450 milk collection centres with 100 bulk coolers and 30 chilling plants which help it to save on agent’s commission. PDL plants are located within 70-80kms of its plant location, thereby, helping to save on logistics cost.

To further enhance its distribution reach, the company is increasing its penetration into the tier 2/3 cities and rural areas by entering into B2C model. These markets are less penetrated and give immense opportunity to grow with mere competition with top Dairy players.

Growth set to surge with expansion in VADP segment and B2C

With evolution in consumer segment (B2C) and improvement in capacity utilization, we expect PDL to witness a revenue CAGR growth of 15% during the period of FY16-FY19E. VADP is the key growth driver in the dairy segment; the segment is expected to register a growth of 16% between FY16-FY19E compared to 12% growth registered by milk segment during the same period. With an increase in VADP proportion in overall revenue mix from 53% to 81% over FY13-FY19E and rise in contribution of B2C segment from 12% to 40% during the same period.

EBITDA margins of PDL is always above industry average of mid single digit margins stands at 10%-10.5% PDL always enjoy high margin due to sale of high margin product condensed milk to its institutional clients, which ensures steady growth and margins. We expect operating margin is all set to improve by ~75 bps between FY16-FY19E on back of increasing contribution from its institutional clients, retail consumers and rising share in VADP segment.

17

Dairy Industry

Company Background

Incorporated in 1998, Prabhat Dairy Limited (PDL) has evolved from being an established specialty dairy ingredients company to emerging milk and dairy products. It’s an integrated milk and dairy products company in India catering to institutional and co manufactured products to a number of institutional and multinational companies as well as retail customers. Over the years, PDL sells wide range of VADP under strong and appealing brand name of “Prabhat”, “Milk Magic”, and “Flava”. It produce fresh, dry, frozen, cultured and fermented dairy products, including pasteurized milk, flavoured milk, sweetened condensed milk, ultra-pasteurised or ultra-high temperature (UHT) milk, yoghurt, dairy whitener, clarified butter (ghee), milk powder, ingredients for baby foods, lassi and chaas. PDL has integrated business model encompasses almost all aspects of the dairy industry value chain, including cattle feed supply, engaging with farmers on cattle health and milk production, procurement of raw milk, state of the art manufacturing, fast expanding distribution model and brand presence. PDL has set up an automated production facilities at Shrirampur (Ahmednagar) and at Turbhe (Navi Mumbai), which is strategically located within proximity of their milk procurement region as well as target market with an aggregate milk processing capacity of 1.5 mn lpd.PDL procure majority of raw milk directly from farmers and remaining with registered milk vendor in Ahmednagar, Pune , Nashik and adjoining districts in Maharashtra. Key Management Personnel:

Mr. Sarangdhar R Nirmal Chariman and Manging Director

He holds a Bachelor’s degree in Commerce from the University of Poona and a Master’s degree in Business Administration from the University of Poona. He has approximately 16 years of professional experience in the dairy industry.

Mr. Vivek S Nirmal Joint Managing Director

He holds a Bachelor’s degree in Commerce from University of Pune. He was instrumental in the incorporation of SAIPL on January 22, 2007, which later became a subsidiary of our Company and is currently the Managing Director of SAIPL. He has approximately 7 years of professional experience in the dairy industry.

18

Dairy Industry

Financials







Depn & Amort 39.9 47.4 51.0 52.0 Long term Provision 1.4 1.5 1.6 1.7

Other Income 1.5 1.3 1.3 1.3 Total Loans 40.3 40.3 35.4 30.5

Interest 42.7 23.6 19.2 15.4 Trade payable 52.1 50.2 57.7 69.0

Loss on FC 0.00 0.00 0.00 0.00 Provisions 7.9 12.6 14.7 17.9

PBT 38.1 43.5 71.3 129.9 Current Liab 11.8 13.0 15.1 18.3

Tax 13.6 13.0 22.8 42.9 Short term Borr 119.3 149.3 119.3 95.3

Adj PAT 24.5 30.4 48.5 87.0 Capital Deployed 909.9 969.8 990.2 1060.3

PAT Margin 2.1% 2.4% 3.3% 4.9% Net Fixed Assets 429.8 422.4 383.8 344.3

Shares o/s ( No.in Cr.) 9.8 9.8 9.8 9.8 Capital Work In progress 24.5 30.0 30.0 30.0

Adj EPS 2.5 3.1 5.0 8.9 Investments 0.0 0.0 0.0 0.0

Cash EPS 6.6 8.0 10.2 14.2 LT Loans & Adv 46.6 51.3 56.4 62.0

Qterly (Rs. Cr) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Other Non Curr assets 0.58 0.58 0.58 0.58

Revenue 279.8 253.8 235.1 261.7 Cash & Bank 12.0 12.2 9.2 11.3

EBITDA 11.0 9.3 10.4 11.0 Inventories 87.9 98.3 113.0 135.3

Depn & Amort 3.8 3.8 3.9 4.2 Debtors 226.5 260.2 288.0 351.2

Other Income 0.0 0.1 3.5 3.7 Loans & Advances 80.8 92.9 106.9 122.9

Loss on FC 0.0 0.0 0.0 0.0 Other Current assets 1.2 1.9 2.2 2.7

EBIT 7.2 5.6 10.0 10.5 Capital Employed 909.9 969.8 990.2 1,060.3

Interest 3.3 3.2 4.2 3.3 Cash Flow FY16 FY17E FY18E FY19E

PBT 3.9 2.4 5.8 7.2 PBT 38.1 43.5 71.3 129.9

Tax 1.5 0.8 -0.1 0.0 Add:Depreciation 39.9 47.4 51.0 52.0

PAT 2.4 1.6 5.9 7.2 Add:Interest 42.7 23.6 19.2 15.4

EPS 0.3 0.2 0.6 0.7 Less: Other Income (1.5) (1.3) (1.3) (1.3)

Performance Ratio FY16 FY17E FY18E FY19E Change in WC (76.0) (57.4) (50.3) (89.8)

EBITDA Margin (%) 10.2% 8.9% 9.5% 10.9% Tax (13.6) (13.0) (22.8) (42.9)

PAT Margin (%) 2.1% 2.4% 3.3% 4.9% CF from Operations 29.6 42.8 67.2 63.4

ROE (%) 3.7 4.5 6.7 10.8 CAPEX (163.2) (40.0) (12.5) (12.5)

ROCE (%) 11.2 9.0 11.6 16.9 WIP 134.6 (5.5) - -

Sales Growth (%) 16.7% 8.0% 16.3% 21.9% Others Income 1.5 1.3 1.3 1.3

PAT Growth (%) -5.7% 24.1% 59.4% 79.5% CF from Investing (27.2) (44.3) (11.2) (11.2)

Per Share Data FY16 FY17E FY18E FY19E Change in equity capital 283.4 - - -

BV Per Share 67.0 69.7 74.2 82.6 Change in borrowings (253.2) 30.0 (35.0) (30.0)

Cash Per Share 1.2 1.2 0.9 1.2 Dividend paid (4.70) (4.70) (4.70) (4.70)

Dividend Per Share 0.4 0.4 0.4 0.4 Interest paid (42.7) (23.6) (19.2) (15.4)

Valuation Ratio FY16 FY17E FY18E FY19E Others 5.2 - - -

Price Earnings (x) 43.9 35.4 22.2 12.4 CF from Financing (12.0) 1.7 (58.9) (50.1)

EV/EBITDA (x) 10.3 11.1 8.7 6.1 Net Chg in cash (9.6) 0.2 (3.0) 2.0




Valuation Ratio FY16 FY17E FY18E FY19E Debtors Months 2.3 2.5 2.4 2.4

D/E (x) 0.2 0.3 0.2 0.1 Creditors Months 0.7 0.6 0.6 0.6

Interest Coverage (X) 1.9 2.8 4.7 9.4 Inventory Months 1.0 1.0 1.0 1.0

19

Dairy Industry

Kwality Ltd. Stock Idea

Dairy Rating: BUY


CMP (Rs.) 131

Target (Rs.) 180


BSE Sensex 26878

NSE Nifty 8274

Scrip Code

Bloomberg KWALITY IN

Reuters KDAI.BO

BSE Group B

BSE Code 531882

NSE Symbol KWALITY

Market Data





Face Value (Rs.) 1



Kwality is one of the fastest growing private sector dairy companies with a new range of innovative products and enjoys a large presence in Northern India. The company has six processing plants across the states of Haryana, Uttar Pradesh and Rajasthan and procures ~78% from milk aggregators and the remaining ~22% from farmers. To transform from a B2B player to B2C player, Kwality intends to increase its retail consumer presence from 31% to 70% by FY20E by adding capacity expansion will be done for high margin VADP products which will be marketed under its umbrella brand “Kwality” and “Dairy Best”. Recently, the company has won the legal battle of “Kwality” Brand. We expect new capacity addition in VADP products will aid EBITDA and Gross margin expansion and debt repayment will drive earnings for the Kwality over the next few years. With Superior growth and deleveraging its balance sheet, ROCE and ROE will enhanced by 21.2% and 20.2% respectively over the next 2-3 years. We expect, revenue to grow at CAGR of 8% over the FY16-FY19E, on back of improving product mix from institutional clients to retail customers as well shift towards high margin products of value added dairy products.

Strengthening its backward integration network

Kwality has created a strong network of farmers and vendors to procure raw milk on a consistent basis. It procures milk from three ways i) is directly from farmers ii) from local contractors and iii) is from hybrid procurement channel. About 78% of milk is been procure from the local contractors and hybrid procurement and remaining 22% of milk is been collected from farmers (direct procurement), directly from 325000 farmers spread across 4500 villages through 22 Milk Chilling centers (MCC) in the state of Rajasthan, Haryana and Uttar Pradesh. Kwality is planning to increase its milk direct procurement from farmers to 50% from 22% over the next 3-4 years, in line with product portfolio expansion with VADP segment. Kwality is planning to investment Rs. 120-125 crs towards building milk procurement infrastructure.

Transformation towards retail presence through VADP

Kwality is moving from traditional B2B business model to B2C business model with strong focus on direct milk procurement infrastructure, high-margin branded VADP and brand building. In FY16, company has generates 69% of revenue from its Institutional customers while rest from the retail (fresh milk products) in north markets. To transform from a B2B player to B2C player, Kwality intends to increase its retail consumer presence from 31% to 70% by FY20E by adding capacity expansion will be done for high margin value added product such as cheese, paneer, table butters, tetra-packs, flavoured milk, cream, yoghurt amongst others. The Company plans to launch 10-12 variants over next 12-18 months. We expect that Kwality business model is moving from low margin business to high margin by introducing VADP product into retail segment which will inch the EBITDA margin over the next 2-3 years.

Focusing on Brand Building “Kwality” and “Dairy Best”

Kwality is at a critical stage of growth where they are focusing on building a modern and youthful brand, with transforming their business model from B2B player to one of the consumer oriented. Engaged with gobal advertising and marketing agencies including McCann, Zenith Optimedia and Digital Quotient will help the company in its brand building initiatives. The company has roped in Bollywood actor Akshay Kumar as a Brand Ambassador to promote an entire range of dairy products (VADP) and gain consumer mindshare under the brand name “Kwality”. Retail segment with high targeted market will drive revenue growth and expansion in operating margin during the year FY16-FY20E for Kwality.

Valuation: Transforming B2C player at reasonable valuation

Over the last five years i.e. from FY11 to FY16, Kwality revenue and profitability has grown at CAGR of 32% and 31% respectively. Also, during the same period, EBITDA has grown at CAGR of 31%. Business model transmission, margins expansion in VADP products, reduction in debt and declining in working capital cycle, will aid Kwality to net earnings to grow at a CAGR of 23% during the period from FY16-FY19E. With an improvement in revenue mix towards the retail segment, Kwality intends to reduce its receivables days from 93 to 75 days over the period of FY16-FY19E. ROCE will improve significantly from 15.6% in FY16 to 21.2% in FY19E, largely attributable to margin expansion through VADP segment. At CMP of Rs. 130 the stock is trading at 13x of its FY18E EPS of Rs. 10 per share. We recommend investors to BUY the stock with a target of Rs 180 (38% appreciation) in twelve months time.


FY16 6414.1 9.1% 388.7 6.1% 173.6 2.7% 7.9 16.8 11.1 20.1

FY17E 6805.6 6.1% 450.0 6.6% 170.8 2.5% 7.6 18.0 9.8 16.5

FY18E 7350.0 8.0% 540.6 7.4% 233.4 3.2% 9.9 13.2 7.8 18.5

FY19E 8085.0 10.0% 660.1 8.2% 320.1 4.0% 13.6 9.6 6.2 20.2


Strengthening its backward integration network

Promoter, 64.5

FII, 2.1

DII, 0.0

Others,

33.4

40.0

60.0

80.0

100.0

120.0

140.0

8-Jan-16 8-Apr-16 8-Jul-16 8-Oct-16

Kwality BSE Sensex

20

Dairy Industry

Kwality has created a strong network of farmers and vendors to procure raw milk on a consistent basis. It procures milk from three ways i) is directly from farmers ii) from local contractors and iii) is from hybrid procurement channel. About 78% of milk is been procure from the local contractors and hybrid procurement and remaining 22% of milk is been collected from farmers (direct procurement), directly from 325000 farmers spread across 4500 villages through 22 Milk Chilling centers (MCC) in the state of Rajasthan, Haryana and Uttar Pradesh. This MCC are strategically located near its manufacturing facilities ensuring the quality protection and delivery on time. This model enables kwality with consistent quality and taste of milk and key parameters to maintain quality in VADP. Kwality is planning to increase its milk direct procurement from farmers to 50% from 22% over the next 3-4 years, in line with product portfolio expansion with VADP segment. Kwality is planning to investment Rs. 120-125 crs towards building milk procurement infrastructure. Currently, kwality has a processing capacity of 3.4 mn lpd and planning to increase processing capacity by 9.0 lakhs lpd for VADP segment. Transformation towards retail presence through VADP

Kwality is moving from traditional B2B business model to B2C business model with a strong focus on direct milk procurement infrastructure, high-margin branded VADP and brand building. In FY16, company has generates 69% of revenue from its Institutional customers while rest from the retail (fresh milk products) in north markets. As part of a change in its business strategy, Kwality is revamping all business functions across the value chain including procurement, changing product mix to cater to evolving needs of customers and ensure high quality, brand building, building an extensive distribution network to boost retail presence, set up robust IT infrastructure for process integration, and improve managerial competencies. To transform from a B2B player to B2C player, Kwality intends to increase its retail consumer presence from 31% to 70% by FY20E by adding capacity expansion will be done for high margin value added product such as cheese, paneer, table butters, tetra-packs, flavoured milk, cream, yoghurt amongst others. The Company plans to launch 10-12 variants over next 12-18 months. We expect that Kwality business model is moving from low margin business to high margin by introducing VADP product into retail segment which will inch the EBITDA margin over the years.

Kwality is expanding up it capacities (at existing facilities) to produce VADP and also undertaken an expansion plan at its plant at Softa, Haryana with total CAPEX of Rs. 400 crs in a phased manner along with Rs. 120crs to building up procurement infrastructure. This enhancement in production is aimed at primarily for value-added products such as flavoured milk, variants of cheese, UHT milk, table butter, paneer, yoghurts, and cream.

Focusing on Brand Building “Kwality” and “Dairy Best”

Kwality is at a critical stage of growth where they are focusing on building a modern and youthful brand, with transforming their business model from B2B player to one of the consumer oriented. Engaged with gobal advertising and marketing agencies including McCann, Zenith Optimedia and Digital Quotient will help the company in its brand building initiatives. The company has roped in Bollywood actor Akshay Kumar as a Brand Ambassador to promote an entire range of dairy products (VADP) and gain consumer mindshare under the brand name “Kwality”. Retail segment with high targeted market will drive revenue growth and expansion in operating margin during the year FY16-FY20E for Kwality. A strong regional brand supported by a wide distribution network.

B2C

Expansion

21

Dairy Industry

Kwality is strongly positioned near the highest dairy consumption market of the India (northern India), offering wide range of market to cater and creating brand awareness. Kwality is increasing their reach by strengthening the trade channels to reach to their customer base across the northern pockets of the country. The Kwality and Dairy Best brand is supported by 1900 distributor’s access to 45,000 points of sale across Northern India; continuous efforts underway to further expand into new and existing markets. The company will promoted his product through general and modern trade channels to cover the target market share. Kwality is aiming to enhance their presence by increasing 1,00,000 point of sale in the northern region over the period of next 3-4 years. Kwality has created a presence across the continents of Asia, Africa and Australia, with export to over 28 countries. Growing Retail Network

Kwality aim is to increase their product penetration to their target market, to achieve this, Kwality has applied a SBU (Strategic Business Unit) based approach to generate high growth and profit in below of three divisions.

Fresh Product Division (For Pouch Milk, Dahi and Chaas)

Consumer Product division (for flavoured milk, ghee, panner, cheese, yoghurts etc)i.e VADP

Institutional/B2B division (for SMP/WMP, dairy whiteners, bulk milk etc) Each division is headed by profit managers who are the responsible for their performance. Financial Prospectus

Kwality has delivered robust revenue growth of 32% CAGR during the FY11-FY16, with gross margin of 8.5%-9.5% range. We expect, revenue to grow at CAGR of 8% over the FY16-FY19E, on back of improving product mix from institutional clients to retail customers as well shift towards high margin products of value added dairy products. With the shift in VADP segment and making presence in retail segment is likely to support the Gross and EBITDA margins of the company. We expect EBITDA margin is all set to improve by 210 bps to 8.2% between FY16-FY19E. We expect, Kwality to report a 23% CAGR growth in net earnings over the period of FY16-FY19E Due to greater contribution from institutional clients, receivable days for KLD are on the higher side. But with an improving client mix in favour of the retail segment, the company intends to reduce the working capital days in the next 2-3 years. The company will use free cash flows to reduce balance sheet leverage. Debt/Equity ratio will be reducing from 1.6x to 0.6x between FY16 to FY19E. We expect new capacity addition in VADP, EBITDA and Gross margin expansion and debt repayment will drive earnings for the Kwality over the next few years. With Superior growth and deleveraging its balance sheet, ROCE and ROE will enhanced by 21% and 20% respectively over the period of FY16-FY19E.

Company Background

22

Dairy Industry

Kwality Ltd. (Kwality) was incorporated in 1992 as Kwality Dairy (India) Ltd. The company was set up as a backward integration unit of Kwality Ice Creams India Ltd and was acquired by Dhingra Family in 2002. Kwality is one of the fastest growing private sector dairy companies with a new range of innovative products and enjoys a large presence in Northern India. Kwality is one of India’s largest manufacturers and processers of dairy products in the private sector, with a processing capacity of ~3.4 mn litres of milk/ day. The company has six processing plants across the states of Haryana, Uttar Pradesh and Rajasthan and procures ~78% from milk aggregators and the remaining ~22% from farmers. The Company has 22 Milk Chilling Centre (MCC) strategically located close to its manufacturing facilities ensuring quality protection and delivery. Presently, the Company has developed strong relationships with over ca. 3,25,000 farmers spread across ca. 4,500 villages in largest production states of India i.e. UP, Haryana, and Rajasthan. Manufacturing Facilities

Location

Type of Products

Softa, Haryana Operational Pouch Milk, Milk Powder, Ghee, Butter, Chaas

Dibai, UP Operational Milk Powder, Ghee

Sharanpur, UP Operational Pouch Milk, Milk Powder, Ghee

Agra, UP Operational Milk Powder

Sitapur, UP Operational Milk Powder

Ajmer, Rajasthan Operational Pouch Milk, Ghee

Softa, Haryana Q4FY17E VADP Products

Key Management Personnel:

Dr. Rattan Sagar Khanna Chairman

He is a B.V.Sc & AH- Punjab Agri University, M.Sc (Hons) - Punjab Agri University. Over 35 years, he has worked at senior positions in Dairy, Farming and in Agriculture Sector in the areas of manufacturing, consulting and marketing. He has joined the Board of “Kwality Limited” in May 2010

Mr. Sanjay Dhingra Managing Director

He has rich experience over two decades in diversified activities such as Manufacturing, Trading & International Marketing in the FMCG sector. He was felicitated by, the then, Hon’ble Union Finance Minister Mr. Pranab Mukherjee for being a successful self industrialist and for his immense contribution to the Dairy sector. He is also a member of the National Dairy Committee of CII

Financials

23

Dairy Industry







Depn & Amort 23.4 34.9 44.9 54.9 Long term Liabilities 0.0 0.0 0.0 0.0

Other Income 29.8 12.0 13.2 14.5 Long term Provision 1.8 2.0 2.2 2.5

Interest 157.4 172.1 160.6 141.9 Total Loans 257.8 233.0 158.2 83.5

Loss on FC 0.00 0.00 0.00 0.00 Trade payable 52.1 55.0 58.9 64.2

PBT 237.7 255.0 348.4 477.8 Provisions 48.0 55.2 59.8 65.9

Tax 64.1 84.1 115.0 157.7 Current Liab 114.6 117.8 123.2 130.4

Adj PAT 173.6 170.8 233.4 320.1 Short term Borr 1214.6 1189.6 1114.6 1014.6

PAT Margin 2.7% 2.5% 3.2% 4.0% Capital Deployed 2538.8 2671.6 2766.2 2927.4

Shares o/s ( No.in Cr.) 21.9 22.4 23.6 23.6 Net Fixed Assets 72.4 232.5 287.6 332.6

Adj EPS 7.9 7.6 9.9 13.6 Capital Work In progress 195.0 100.0 100.0 50.0

Cash EPS 9.0 9.2 11.8 15.9 LT Loans & Adv 179.1 215.0 258.0 309.6

Qterly (Stan) (Rs. Cr) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Other Non Curr assets 0.725 0.87 1.044 1.2528

Revenue 1441.2 1439.0 1473.6 1540.3 Cash & Bank 86.2 91.4 108.8 91.0

EBITDA 92.6 78.2 95.7 103.3 Inventories 170.6 197.6 213.6 233.3

Depn & Amort 5.8 5.4 3.0 3.0 Debtors 1,655.4 1,644.7 1,592.5 1,684.4

Other Income 4.8 15.7 8.9 1.9 Loans & Advances 177.2 187.2 202.2 222.4

Loss on FC 0.0 0.0 0.0 0.0 Other Current assets 2.2 2.4 2.6 2.9

EBIT 91.6 88.5 101.6 102.2 Capital Employed 2,538.8 2,671.6 2,766.2 2,927.4

Interest 38.7 31.3 38.1 38.6 Cash Flow FY16 FY17E FY18E FY19E

PBT 52.9 57.2 63.5 63.6 PBT 237.7 255.0 348.4 477.8

Tax 15.5 23.8 21.3 21.5 Add:Depreciation 23.4 34.9 44.9 54.9

PAT 37.4 33.4 42.2 42.1 Add:Interest 157.4 172.1 160.6 141.9

EPS 1.7 1.5 1.8 1.8 Less: Other Income (29.8) (12.0) (13.2) (14.5)

Performance Ratio FY16 FY17E FY18E FY19E Change in WC (307.6) (49.0) (8.1) (165.0)

EBITDA Margin (%) 6.1% 6.6% 7.4% 8.2% Tax (64.1) (84.1) (115.0) (157.7)

PAT Margin (%) 2.7% 2.5% 3.2% 4.0% CF from Operations 17.0 316.8 417.5 337.4

ROE (%) 20.1 16.5 18.5 20.2 CAPEX (28.0) (195.0) (100.0) (100.0)

ROCE (%) 15.6 16.0 18.4 21.2 WIP (76.6) 95.0 - 50.0

Sales Growth (%) 9.1% 6.1% 8.0% 10.0% Others Income 29.8 12.0 13.2 14.5

PAT Growth (%) 4.6% -1.6% 36.6% 37.2% CF from Investing (74.8) (88.0) (86.8) (35.5)

Per Share Data FY16 FY17E FY18E FY19E Change in equity capital 0.5 1.2 - -

BV Per Share 38.6 43.8 53.5 67.0 Change in borrowings 233.9 (50.0) (150.0) (175.0)

Cash Per Share 38.5 38.7 46.1 38.5 Dividend paid -2.82 -2.82 -2.82 -2.82

Dividend Per Share 0.1 0.1 0.1 0.1 Interest paid (157.4) (172.1) (160.6) (141.9)

Valuation Ratio FY16 FY17E FY18E FY19E Others 18.2 - - -

Price Earnings (x) 16.8 18.0 13.2 9.6 CF from Financing 92.4 (223.6) (313.4) (319.7)

EV/EBITDA (x) 11.1 9.8 7.8 6.2 Net Chg in cash 34.6 5.2 17.4 (17.8)




Valuation Ratio FY16 FY17E FY18E FY19E Debtors Days 3.1 2.9 2.6 2.5

D/E (x) 1.6 1.3 0.9 0.6 Creditors Days 0.1 0.1 0.1 0.1

Interest Coverage (X) 2.5 2.5 3.2 4.4 Inventory Days 0.5 0.6 0.6 0.6

DISCLOSURES/ APPENDIX

I. ANALYST CERTIFICATION We, Varsha Bang and Arun Gopalan, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report, (2) No part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Disclosure of Interest Statement Response

Analyst holding in the stock No

Served as an officer, director or employee No

II. ISSUER SPECIFIC REGULATORY DISCLOSURES, UNLESS SPECIFICALLY MENTIONED IN POINT NO. 9 BELOW:

1. The Research Analyst(s), Systematix Shares & Stocks(I) Limited (SSSIL), Associate of Analyst or his relative does not have any financial interest in the company(ies) covered in this report. 2. The Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies) covered in this report as of the end of

the month immediately preceding the distribution of the research report. 3. The Research Analyst, his associate, his relative and SSSIL do not have any other material conflict of interest at the time of publication of this research report. 4. The Research Analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the

company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, SSSIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report. 6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report. 7. The Research Analyst has not served as an Officer, Director or employee of the company (ies) covered in the Research report. 8. The Research Analyst and SSSIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details SSSIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. No.

Particulars Yes / No.

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by SSSIL No

2 Whether Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report No

3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the Research report No

4 SSSIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report No

5 Research Analyst, his associate, SSSIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve month

No

10. There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities. 11. Systematix Shares & Stocks (I) Limited is in a process of seeking registration under SEBI (Research Analyst) Regulations, 2014.

EXPLANATION TO RATINGS: BUY: TP>15%; ACCUMULATE: 5%<TP<15%; HOLD: -5%<TP<5%; REDUCE: -15%<TP<-5%; SELL: TP<-15%

III. DISCLAIMER The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy completeness or correctness.

This document is for information purposes only. This report is based on information that we consider reliable, but we do not represent that it is accurate or complete, and one should exercise due caution while acting on it. Descriptions of any company or companies or their securities mentioned herein are not complete and this document is not, and should not be construed as an offer or solicitation of an offer to buy or sell any securities or other financial instruments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. All opinions, projections and estimates constitute the judgment of the author as on the date of the report and these, plus any other information contained in the report, are subject to change without notice. Prices and availabili ty of financial instruments also are subject to change without notice.

This report is not directed to or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject to SSSIL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. Any unauthorized use, duplication, redistribution or disclosure of this report including, but not limited to, redistribution by electronic mail, posting of the report on a website or page, and/or providing to a third party a link , is prohibited by law and will result in prosecution. The information contained in the Report is intended solely for the recipient and may not be further distributed by the recipient to any third party.

SSSIL generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, SSSIL generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein. Our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. The views expressed in this research report reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The compensation of the analyst who prepared this document is determined exclusively by SSSIL however, compensation may relate to the revenues of the Systematix Group as a whole, of which investment banking, sales and trading are a part. Research analysts and sales persons of SSSIL may provide important inputs to its affiliated company(ies).

Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addit ion, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. SSSIL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report including but not restricted to fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.

SSSIL and its affiliates, officers, directors, and employees subject to the information given in the disclosures may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation (financial interest) or act as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential material conflict of interest with respect to any recommendation and related information and opinions. The views expressed are those of the analyst and the Company may or may not subscribe to the views expressed therein.

SSSIL, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall SSSIL, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. The Company accepts no liability whatsoever for the actions of third parties. The Report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the Report refers to website material of the Company, the Company has not reviewed the linked site. Accessing such website or following such link through the report or the website of the Company shall be at your own risk and the Company shall have no liability arising out of, or in connection with, any such referenced website

SSSIL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any technical glitch to present the data. In no event shall the SSSIL be liable for any damages, including without limitation, direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by SSSIL through this presentation.

Neither SSSIL, nor any of its other group companies or associates, shall be responsible for any decisions taken on the basis of this report. Investors are advised to consult their Investment and Tax consultants before taking any investment decisions based on this report. Systematix Shares & Stocks (I) Ltd. CIN: U65993TN1995PLC031285 : SEBI Regn. No.: BSE: INB/F011132736 Member Code: 182 | NSE: INB/F/E231132730 Member Code : 11327 | MCX-SX: INB/F261132733 Member Code: 17560 | PMS SEBI Reg No. : INP000002692 | Depository Participant: IN-DP-CDSL-246-2004 | AMFI: ARN No. 64917 Corporate Office Address: A 603-606 , The Capital, BKC, Bandra (E), Mumbai, India - 400051

Dairy Industry Sector Report - systematixgroup.in Industry... · 1 Dairy Industry Sector Report...

Documents

Transcript of Dairy Industry Sector Report - systematixgroup.in Industry... · 1 Dairy Industry Sector Report...