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Please refer to important disclosures at the end of this report 1
Parag Milk Foods (PMFL) is one of the leading manufacturers and marketers of dairy-based branded foods in India. The company has well recognized brands like “Gowardhan” and “Go” in its portfolio and has a pan-India network comprising of 15 depots, 104 super stockists and over 3,000 distributors. It has also been growing in the lowly penetrated Indian cheese market (household penetration of ~5%) where it current market share stands at 32%. Going ahead, we expect PMFL to report a top-line CAGR of ~16% to ~`2,231cr and net profit CAGR of ~39% to `91cr over FY2016-18E. Shift in trend from unorganized to organized sector to drive growth: The Indian dairy industry is currently valued at ~`4,061bn and is mainly dominated by the unorganized sector which accounts for an 80% share. Industry reports indicate that the Indian dairy industry is expected to grow at a CAGR of 14.9% over FY2015-20E to ~`9,397bn and within it the organized segment is expected to grow at a faster pace, thus resulting in its share improving from 20% to ~26% in FY2020E. We believe that this shift in industry will benefit branded players like PMFL. Low consumption of cheese in India presents opportunity for PMFL: The cheese industry in the country is in its nascent stage with cheese only accounting for a fraction of the total dairy industry. India’s household penetration of cheese is also very low compared to other developed countries. Going forward, we expect consumption to increase on account of increase in home consumption due to increasing disposable incomes, faster growth expected in the Indian fast food industry, and shift in food consumption trends in tier II and III cities. Considering PMFL’s strong brands (Go Cheese) and distribution network, we believe that the company will benefit from growth in the overall cheese industry in India. Margins to improve on account of branded product sales: The company derives approximately two-thirds of its revenues from the sale of high margin branded consumer products like ghee, cheese, UHT, whey products etc. We believe the company will be able to continue its strong growth in the above products going forward on the back of its strong brands and distribution network. Outlook Valuation: PMFL is anticipated to post strong growth in value added products on back of its diversified product basket, strong brands and wide distribution network. Also PMFL would benefit from a shift in mix in favor of the organized market for dairy products. Moreover, PMFL is also reducing its debt significantly, which will enable cost savings. At the current market price, the company trades at a P/E of 21.4x its FY2018E EPS. We initiate coverage on the stock with a Buy recommendation and target price of `336, indicating an upside of ~21% from the current levels. Key financials Y/E March (` cr) FY2015 FY2016 FY2017 FY2018 Net sales 1,444 1,645 1,919 2,231 % chg 32.7 13.9 16.6 16.2 Net profit 32 47 67 91 % chg 101.7 46.9 40.6 36.9 EBITDA margin (%) 7.4 9.0 9.3 9.6 EPS (`) 4.6 6.7 9.4 12.9 P/E (x) 60.6 41.2 29.3 21.4 P/BV (x) 15.8 5.4 4.6 3.8 RoE (%) 26.2 13.1 15.5 17.5 RoCE (%) 14.4 15.2 19.4 21.3 EV/Sales (x) 1.6 1.4 1.2 1.0 EV/EBITDA (x) 22.2 15.8 12.5 10.3 Source: Company, Angel Research, Note: CMP as of July 1, 2016
BUY CMP `277 Target Price `336
Investment Period 12 Months
Stock Info
Sector
Net Debt (` cr) 382
Bloomberg Code
Shareholding Pattern (%)
Promoters 47.5
MF / Banks / Indian Fls 4.5
FII / NRIs / OCBs 25.8
Indian Public / Others 22.2
Abs. (%) 1m 1yr 3yr
Sensex 1.0 (2.8) 39.2
PMFL 17.3 - -
Dairy Products
Market Cap (` cr) 2,326
Beta 0.1
52 Week High / Low 287/ 202
Avg. Daily Volume 333,344
Face Value (`) 10
BSE Sensex 26,999
Nifty 8,287
Reuters Code PAMF.NS
PARAG:IN
3 year daily price chart
Source: Company, Angel Research
Amarjeet S Maurya
022-39357800 Ext: 6831
Noel Vaz
022-39357800 Ext: 6847
200210220230240250260270280290
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Parag Milk Foods Expanding dairy industry to unleash huge potential
Quick take
Parag Milk Foods
4 July, 2016 2
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Investment Arguments
Well established brands and diversified product portfolio
The company has well recognized brands in its portfolio that include ‘Gowardhan’ and ‘Go’. It markets dairy products (milk, ghee, paneer, butter, etc) and processed cheese blocks under the ‘Gowardhan’ brand which targets consumption at home. It has launched a wide range of cheese products, UHT, fresh cream etc, since 2008 under the ‘Go’ brand targeting the younger generation and these have gained enormous traction since their launches. ‘Gowardhan’ has been recognized by media houses and consulting agencies as most trusted brand in the food products category and ‘Go’ has been acknowledged as the “Most Promising Brand” in the FMCG category. ‘Go’ cheese especially has gained significant momentum since its launch and has been competing with products of Amul, whose name has been synonymous with cheese and butter in India for the longest period of time. Its other brands include ‘Pride of Cows‘(premium quality cow milk) and ‘Topp Up‘(beverages).
Exhibit 1: Diversified Mix of Products
Source: Company, Angel Research
Over the years, the company has introduced a range of innovative and value added products in the market to cater to retail as well as institutional customers. Its manufactured product mix is made up of fresh milk, skimmed milk powder, milk products and other products which accounted for 18%, 12%, 67%, and 2% of revenue from manufactured products respectively.
Parag Milk Foods
4 July, 2016 3
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Exhibit 2: Manufactured products revenue mix FY2016
Source: Company, Angel Research *Milk Products includes cheese, paneer UHT, whey and beverages
Integrated business model
The company has an integrated business model which is present across the entire value chain ranging from manufacturing and processing to branding and distribution of a wide variety of products. It has a robust milk procurement network with 3,400 village level collection centers that are present in 29 districts across the states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. It has built strong relationships with milk farmers through continuous engagement and its milk procurement belt lies in close proximity to its facilities at Manchar and Palamaner which have high population of dairy cows. This enables the company to procure quality milk at reasonable costs, reduce transportation time and costs, and reduce wastages.
Growing pan-India distribution network
The company has a pan-India distribution network which comprises of 15 depots, 104 super stockists and over 3,000 distributors as of February 29, 2016. Its depots are present in 13 states and union territories in India. It also has a dedicated sales and marketing team comprising 560 personnel (~35% of total workforce) based in key distribution centres. Its products with shorter life (fresh milk and milk products) are sold in the western and southern regions of India, in proximity to its manufacturing facilities. It has established a separate route-to-market to focus on the distribution of 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. Going forward, the company intends to appoint additional distributors and super stockists to increase the availability of products in smaller towns in India and introduce new low unit price products in tier 3 cities and rural areas.
12%
18%
67%
2%
Skimmed Milk Powder Fresh Milk Milk Products Other Revenues
Parag Milk Foods
4 July, 2016 4
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Exhibit 3: Pan-India presence
Source: Company, Angel Research
Projected financial performance
Going forward, we expect the company to report a top-line CAGR of 16% over FY2016-18E on the back of robust sales growth in consumer driven products like cheese/paneer and UHT. Further, we expect the company to be able to maintain its growth on the back of shift in share from unorganized market to organized market for products (branded) like ghee, paneer, curd, etc. Further, penetration in the cheese segment in India is expected to grow and we believe with its strong brand, the company will be able to report significant growth in the cheese segment. Currently the company commands a market share of 32% in the cheese segment.
On the bottom-line front, we expect the company to post a CAGR of 39% over FY2016-18 aided by improvement in operating margin with sale of higher value products like cheese/paneer, ghee, UHT, etc. Further the company is also reducing debt which will boost its profitability.
Parag Milk Foods
4 July, 2016 5
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Exhibit 4: 16% Revenue CAGR over FY2016-18E
Source: Company, Angel Research; Note: - 9MFY2016 annualised number
Exhibit 5: 39% Net Profit CAGR over FY2016-18E
Source: Company, Angel Research; Note: - 9MFY2016 annualised number
900 925 1,088
1,444 1,645
1,919
2,231
-
500
1,000
1,500
2,000
2,500
FY20
12
FY20
13
FY20
14
FY20
15
FY20
16
FY20
17E
FY20
18E
( ̀cr
)
Net Sales
19 2116
32
47
67
91
0102030405060708090
100
FY20
12
FY20
13
FY20
14
FY20
15
FY20
16
FY20
17E
FY20
18E
(`cr
)
PAT
Parag Milk Foods
4 July, 2016 6
Quick take
Outlook and Valuation
Going ahead, we expect PMFL to report a top-line CAGR of ~16% over FY2016-18E to ~`2,231cr owing to strong growth in value added product sales and shift in mix in favor of organized market in the dairy products segment. Further, the company has a diversified product basket, strong brands and wide distribution network. On the bottom-line front, we expect the company to report ~39% CAGR over FY2016-18E on account of higher margins availed from a better product mix. Further, the company is also reducing its debt significantly, which will lead to cost savings. At the current market price, PMFL trades at a P/E of 21.4x its FY2018E EPS. We initiate coverage on the stock with a Buy recommendation and target price of `336, indicating an upside of ~21% from the current levels.
Risks
Milk procurement: The company relies on procuring raw milk at competitive rates from milk farmers in the milk procurement belt. Inability to procure sufficient good quality raw milk at commercially viable prices may adversely impact the operation as milk is a key raw material for all dairy products.
Intense competition: The dairy industry is highly competitive with multiple players sourcing milk from the same region. Such competition can have an impact on raw milk prices.
Regulatory risk: The company is subject to various regulations relating to product liability, particularly relating to food safety of its products. Product contamination or similar occurrences can result in regulatory actions against the company and impact the business performance.
Threat of Patanjali: Indian and multinational FMCG companies are expected to face competition from the strongly emerging Patanjali brand. Patanjali has significant presence in the ghee segment which comprises ~20% of PMFL’s total turnover.
Parag Milk Foods
4 July, 2016 7
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Company background
PMFL is one of the leading manufacturers and marketers of dairy-based branded foods in India. The company has evolved from primarily being involved in collection and distribution of milk in 1992 to being a branded foods player now. Its presence spans across the entire dairy chain, ie from collection of milk to dairy to producing value added products like ghee and butter (marketed under ‘Gowardhan’ brand), cheese and cheese products, UHT milk, curd and fruit yogurts, etc (under its ‘Go’ brand) and premium cow milk (Pride of Cows) and flavored milks (Topp Up).
A significant portion of its product range includes long shelf-life food and beverage products that enable the company to sell its products to retail and institutional (QSR chains- Taco Bell, Domino’s, etc) customers across India. The company has a pan India network of 15 depots, 104 super stockists and over 3,000 distributors as of February 29, 2016.
Its manufacturing facilities are located at Manchar (Pune district, Maharashtra) and Palamaner (Chittoor district, Andhra Pradesh), with processing capacities of 1.2mn litres per day and 0.8mn litres per day, respectively. The company’s cheese plant at Manchar facility has raw cheese production capacity of 40MT per day, which is the largest in India as per a report by IMARC.
The company’s has a wholly owned subsidiary Bhagyalaxmi Dairy Farm, which is a fully automated cow farm housing over 2,000 Holstein breed cows with superior quality yields. The farm-to-home premium fresh milk is marketed and sold under ‘Pride of Cows’ brand in Mumbai and Pune.
Parag Milk Foods
4 July, 2016 8
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Consolidated Profit & Loss Statement
Y/E March (` cr) FY2014 FY2015 FY2016 FY2017E FY2018E
Total operating income 1,088 1,444 1,645 1,919 2,231
% chg 17.6 32.7 13.9 16.6 16.2
Total Expenditure 1,006 1,337 1,498 1,741 2,017
Raw Material 836 1,062 1,178 1,416 1,633
Employee Cost 48 57 70 84 103
Other Expenses 122 218 250 240 281
EBITDA 82 107 148 178 214
% chg (1.3) 30.2 37.7 20.9 20.0
(% of Net Sales) 7.6 7.4 9.0 9.3 9.6
Depreciation& Amortisation 28 28 33 39 46
EBIT 55 80 114 139 168
% chg (4.4) 45.4 43.4 21.8 21.1
(% of Net Sales) 5.0 5.5 6.9 7.3 7.6
Interest & other Charges 44 47 49 42 34
Other Income 1 2 2 2 2
(% of PBT) 10.1 4.5 2.4 2.0 1.5
Recurring PBT 12 34 67 99 136
% chg (35.7) 178.4 94.9 48.6 36.9
Prior Period & Extraord. Exp./(Inc.) - - - - -
PBT (reported) 12 34 67 99 136
Tax (4) 2 19 33 45
(% of PBT) - 6.0 29.2 33.0 33.0
PAT before MI & Adj. (reported) 16 32 47 67 91
Extraordinary Items - - - - -
ADJ. PAT 16 32 47 67 91
% chg (23.1) 101.7 46.9 40.6 36.9
(% of Net Sales) 1.5 2.2 2.9 3.5 4.1
Basic EPS (`) 2.3 4.6 6.7 9.4 12.9
Fully Diluted EPS (`) 2.3 4.6 6.7 9.4 12.9
% chg (23.1) 101.7 46.9 40.6 36.9
Parag Milk Foods
4 July, 2016 9
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Consolidated Balance Sheet
Y/E March (` cr) FY2014 FY2015 FY2016 FY2017E FY2018E
SOURCES OF FUNDS
Equity Share Capital 16 16 70 70 70
Reserves& Surplus 81 107 292 358 449
Equity Application Money - - - - -
Shareholders Funds 97 123 362 428 520
Minority Interest 0 - - - -
Total Loans 520 430 390 290 270
Long-term provisions 0 0 0 0 0
Other long term liabilities 11.2 16.1 16.1 16.1 16.1
Total Liabilities 633 575 775 741 812
APPLICATION OF FUNDS
Gross Block 360 437 483 595 657
Less: Acc. Depreciation 118 146 179 218 264
Net Block 242 291 304 377 393
Capital Work in Progress 37 26 26 26 26
Goodwill - - - - -
Investments 0 0 0 0 0
Current Assets 439 537 709 753 892
Inventories 190 212 273 326 391
Sundry Debtors 163 171 231 273 324
Cash 4 6 8 10 14
Loans & Advances 42 98 132 77 85
Other Assets 38 51 66 67 78
Current liabilities 190 348 332 483 568
Net Current Assets 249 190 376 270 324
Long term loans and adv. 103.0 66.5 66.5 66.5 66.5
Other Non Current Assets 1.6 1.8 1.8 1.8 1.8
Mis. Exp. not written off - - - - -
Total Assets 633 575 775 741 812
Parag Milk Foods
4 July, 2016 10
Quick take
Consolidated Cashflow Statement
Y/E March (` cr) FY2014 FY2015 FY2016 FY2017E FY2018E
Profit before tax 12 31 67 99 136
Depreciation 28 28 33 39 46
Change in Working Capital (40) (42) (184) 108 (50)
Interest / Dividend (Net) 43 46 49 42 34
Direct taxes paid (0) (1) (19) (33) (45)
Others 3 3 - - -
Cash Flow from Operations 46 66 (55) 256 121
(Inc.)/ Dec. in Fixed Assets (59) (23) (46) (83) (63)
(Inc.)/ Dec. in Investments (1) 0 - - -
Cash Flow from Investing (59) (22) (46) (83) (63)
Issue of Equity - - 191 - -
Inc./(Dec.) in loans 65 12 (40) (129) (20)
Dividend Paid (Incl. Tax) - - - - -
Interest / Dividend (Net) (50) (54) (49) (42) (34)
Cash Flow from Financing 15 (42) 103 (171) (54)
Inc./(Dec.) in Cash 2 1 2 2 4
Opening Cash balances 2 4 6 8 10
Closing Cash balances 4 6 8 10 14
Parag Milk Foods
4 July, 2016 11
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Key Ratios
Y/E March FY2014 FY2015 FY2016 FY2017E FY2018E
Valuation Ratio (x)
P/E (on FDEPS) 122.2 60.6 41.2 29.3 21.4
P/CEPS 44.8 32.7 24.2 18.4 14.3
P/BV 20.1 15.8 5.4 4.6 3.8
EV/Sales 2.3 1.6 1.4 1.2 1.0
EV/EBITDA 30.0 22.2 15.8 12.5 10.3
EV / Total Assets 3.0 2.6 2.1 1.8 1.6
Per Share Data (`)
EPS (Basic) 2.3 4.6 6.7 9.4 12.9
EPS (fully diluted) 2.3 4.6 6.7 9.4 12.9
Cash EPS 6.2 8.5 11.5 15.0 19.4
Book Value 13.8 17.5 51.4 60.8 73.8
Returns (%)
ROCE 8.9 14.4 15.2 19.4 21.3
Angel ROIC (Pre-tax) 9.5 15.3 15.9 20.4 22.5
ROE 16.4 26.2 13.1 15.5 17.5
Turnover ratios (x)
Asset Turnover (Gross Block) 3.0 3.3 3.4 3.2 3.4
Inventory / Sales (days) 64 54 61 62 64
Receivables (days) 55 43 51 52 53
Payables (days) 42 46 35 48 49
WC cycle (ex-cash) (days) 77 51 77 66 68
Parag Milk Foods
4 July, 2016 12
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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com
DISCLAIMER
Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. It is also registered as a Depository Participant with CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst.
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Disclosure of Interest Statement Parag Milk Foods
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Ratings (Based on expected returns Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) over 12 months investment period): Reduce (-5% to -15%) Sell (< -15)
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
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