INSTITUTIONAL EQUITY RESEARCH Parag Milk Foods (PARAG · PDF file 2016-09-27 ·...

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Transcript of INSTITUTIONAL EQUITY RESEARCH Parag Milk Foods (PARAG · PDF file 2016-09-27 ·...

  • INSTITUTIONAL EQUITY RESEARCH

    Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

    Parag Milk Foods (PARAG IN) Moo-ving fast in the high-growth value-added dairy space

    INDIA | DAIRY | Initiating Coverage

    27 September 2016

    We initiate coverage on PARAG with a Buy rating and target price of Rs 350.

    Parag Milk Foods (PARAG) is a play on the high-growth value-added dairy products space. It has tremendous capability to innovate and create industry leading brands – in a short span, its brands ‘Go’ and ‘Gowardhan’ have become household names. Its focus on consistent product innovation and mix improvement will lead to sustained better margins, which coupled with high revenue growth would translate into sharp earnings growth. It has delivered strong 25% PAT CAGR in FY12-16, and we expect growth momentum to continue in FY17-20 (we see 30% CAGR). With capex cycle almost at completion and with capital utilizations set to improve, we estimate the free cash flows to improve substantially from FY18 onwards.

    Our key investment arguments: (1) PARAG’s sales will grow in mid-teens in the medium term led by high-margin value added products, (2) mix improvement and operating leverage will enhance margins, (3) return ratios will improve (medium term) with better capacity utilization, (4) will start generating strong free cash flows from FY18, and (5) current market valuation does not factor in strong growth expected in the medium term.

    PARAG will benefit from strong growth in the Indian dairy industry: This industry is poised to grow to Rs 9.4tn by 2020 from Rs 4.1tn in 2014 (15% CAGR), as per IMARC. Within this, the organised segment (20% value share) could see faster 20% CAGR. PARAG dominates high-margin categories (cheese, flavoured and UHT milk, flavoured yoghurts and others), which are poised to see >25% CAGR. We expect PARAG to deliver 14% sales CAGR in the medium term led by 20%+ growth in key value-added products.

    Gross margins to improve 50bps annually; EBITDA margins to edge towards 11% by FY20: PARAG’s gross margins should improve to 30.4% in FY20 from 28.4% in FY16, majorly led by mix improvement. We expect the share of skimmed milk powder to fall by 480bps during FY16-20 and share of high-margin value-added products to make up this fall. This, along with introduction of premium variants, would lead to a ~50bps gross-margin expansion every year. While operating expenses would stay high (as the company expands), we still expect EBITDA margins to move to 10.8% in FY20 from 9% in FY16.

    Return ratios to improve on better capacity utilization: As sales expand for the company in the medium term, we expect capacity utilization levels for packaged milk, UHT, ghee, and butter to improve from sub-50% levels – which in turn would improve fixed-asset turnover over the medium term and lead to an improvement in return ratios. We see RoE improving to 12.9% in FY20 from 8.3% in FY16 – a modest improvement, limited by the company’s need to invest on distribution for growth.

    Free cash flows will turn positive from FY18, as capex intensity will reduce: We believe the company would have sufficient capacity after its FY17/18 capex cycle, and would not need major capex for the succeeding five years. Fall in capex and stabilization in working-capital days (as sales expand) would lead to better cash flows. We see free cash flows turning positive from FY18 and rising substantially thereafter.

    Valuations in dairy industry: The stock of Parag Milk Foods, after rallying almost 50% since listing in May 2016, now trades at 24x our FY18 earnings (29x our FY18 recurring earnings). In comparison, its peers, Hatsun Agro/Heritage Foods/Prabhat Dairy/Kwality Dairy trade at 39/22/18/15 times our FY18 earnings. On EV/EBITDA, PARAG trades at 14 times our FY18 EBITDA vs. 14/11/7/9 times our FY18 EBITDA for the same peer-set. The PC FMCG universe (ex ITC), in comparison, currently trades at 40x one-year forward earnings.

    Initiate with BUY rating: We expect PARAG to deliver strong PAT growth (30% CAGR) during FY17-20 and value the stock at Rs 24 times our September 2018 earnings (30x our FY18 adjusted earnings – 1 PEG) at Rs 350. We initiate coverage on the stock with a BUY rating.

    BUY CMP RS 295

    TARGET RS 350 (+18%) COMPANY DATA

    O/S SHARES (MN) : 84

    MARKET CAP (RSBN) : 24.8

    MARKET CAP (USDBN) : 0.4

    52 - WK HI/LO (RS) : 357 / 897

    LIQUIDITY 3M (USDMN) : 1.7

    PAR VALUE (RS) : 10

    SHARE HOLDING PATTERN, %

    Jun 16

    PROMOTERS : 47.5

    FII / NRI : 27.0

    FI / MF : 4.3

    NON PRO : 19.9

    PUBLIC & OTHERS : 1.4

    PRICE PERFORMANCE, %

    1MTH 3MTH

    ABS -4.8 13.7

    REL TO BSE -6.7 6.5

    PRICE VS. SENSEX

    Source: Phillip Capital India Research

    KEY FINANCIALS

    Rs mn FY17 FY18E FY19E

    Net Sales 17,535 20,291 23,612

    EBIDTA 1,696 2,072 2,532

    Net Profit 795 1,031 1,334

    EPS, Rs 9.5 12.3 15.9

    PER, x 31.2 24.1 18.6

    P/BV, x 3.4 3.0 2.6

    ROE, % 10.8 12.3 13.7

    Debt/Equity (%) 40.8 35.8 30.9

    Source: PhillipCapital India Research Est.

    Jubil Jain (+ 9122 6667 9766) [email protected] Naveen Kulkarni (+ 9122 6667 9947) [email protected]

    80

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    May-16 Jun-16 Jul-16 Aug-16 Sep-16

    Parag BSE Sensex

  • Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

    PARAG MILK FOODS INITIATING COVERAGE

    Indian dairy poised to take off India is currently the largest producer and consumer of milk. In FY15, India produced 147mn tonnes and consumed 138mn tonnes of milk (~17% of global volumes). However, annual per capita consumption in India is just 97 litres as against more than 280 litres in US/Europe. We see this as a huge opportunity and we believe that with rising income levels and rising production, per capita milk consumption in India in the long term will rise and the gap with developed nations will reduce.

    India’s milk production and consumption volumes have seen consistent growth in the last five years (Quantity in Tonnes)

    Source: IMARC report, Company RHP

    …however, India’s per-capita consumption of milk is far lower than in developed markets and even compared to its emerging market peers

    Source: IMARC report, Company RHP

    100

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    FY11 FY12 FY13 FY14 FY15

    Production Consumption

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    US EU27 Russia Brazil India

    Per capita consumption (L/yr)

    While India is the largest producer and consumer of milk, annual per capita consumption in India is a fraction of that in developed world

  • Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

    PARAG MILK FOODS INITIATING COVERAGE

    Indian dairy industry to see 15% CAGR in 2014-20 says IMARC Indian dairy industry is poised to grow to Rs 9.4tn by 2020 from Rs 4.1tn in 2014 (15% CAGR), as per a report by IMARC (International Market Analysis Research and Consulting Group). High-margin categories – cheese, flavoured and UHT milk, flavoured yoghurts and lassi – in which organised players like Parag have a dominant share, are poised to see >25% CAGR in 2014-20. Key growth drivers for the sector are rising middle class and urban population, changing dietary patterns, acceptance of milk as a perfect health food, and consumer shift towards packaged milk.

    Indian dairy industry: Category-wise growth prospects

    Industry size

    in 2010 (Rs bn)

    Industry size

    in 2014 (Rs bn)

    Industry size

    in 2020E (Rs bn)

    CAGR

    2010-2014

    CAGR

    2014-2020E

    Liquid milk 1501 2,621 6,068 15% 15%

    Ghee 345 618 1,367 16% 14%

    Paneer 164 293 654 16% 14%

    Curd 124 216 493 15% 15%

    Butter *96 168 382 15% 15%

    Skimmed milk powder 28 50 113 15% 15%

    UHT milk 10 26 104 27% 26%

    Buttermilk 6 14 43 23% 21%

    Cream 7 13 30 16% 15%

    Flavoured milk 5 13 48 26% 25%

    Lassi 5 12 39 26% 21%

    Cheese 5 12 59 24% 31%

    Whey (powder) *1.5 3 10 20% 21%

    Flavoured & Frozen Yoghurt 1 2 12 23% 32%

    Total 2,298 4,061 9,397 15% 15%

    Source: IMARC report, Company RHP; * PC estimates

    Organised players to grow faster than unorganised players In 2010-14, the unorganised segment saw 14% CAGR, while organised saw a faster 21% CAGR. In 2015-20, IMARC expects a higher organised-segment CAGR of about 20% vs. 13% for the unorganised segment. As a result, the share of the organised business in the Indian dairy industry has been continuously rising.

    Value growth Value share

    Source: IMARC report,

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    10%

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    20%

    25%

    2010-14 CAGR 2015-20 CAGR

    Unorganised Organised

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    Value share (2014) Value share (2020)

    Unorganised Organised

    High-margin categories – cheese, flavored and UHT milk, flavored yoghurts, and lassi – in which organized players like Parag Milk Foods have dominant share, are poised to see >25% CAGR in 2014-20

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