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Quick take

Parag Milk Foods

BUY

Expanding dairy industry to unleash huge potential

CMP
Target Price

Source: Company, Angel Research, Note: CMP as of July 1, 2016

Please refer to important disclosures at the end of this report

382

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

Bloomberg Code

Shareholding Pattern (%)


Promoters

47.5

MF / Banks / Indian Fls

4.5

FII / NRIs / OCBs

25.8

Indian Public / Others

22.2

Abs. (%)
Sensex
PMFL

1m

1yr

3yr

1.0

(2.8)

39.2

17.3

3 year daily price chart


290
280
270
260
250
240
230
220
210
200

Jun-16

2,231
16.2
91
36.9
9.6
12.9
21.4
3.8
17.5
21.3
1.0
10.3

Net Debt (` cr)

Jun-16

FY2018

1,919
16.6
67
40.6
9.3
9.4
29.3
4.6
15.5
19.4
1.2
12.5

2,326

Jun-16

FY2017

1,645
13.9
47
46.9
9.0
6.7
41.2
5.4
13.1
15.2
1.4
15.8

Market Cap (` cr)

Jun-16

FY2016

1,444
32.7
32
101.7
7.4
4.6
60.6
15.8
26.2
14.4
1.6
22.2

Dairy Products

Sector

Jun-16

FY2015

12 Months

Stock Info

May-16

Y/E March (` cr)


Net sales
% chg
Net profit
% chg
EBITDA margin (%)
EPS (`)
P/E (x)
P/BV (x)
RoE (%)
RoCE (%)
EV/Sales (x)
EV/EBITDA (x)

Investment Period

May-16

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 FY201520E 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. Indias 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
PMFLs 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

`277
`336

Source: Company, Angel Research

Amarjeet S Maurya
022-39357800 Ext: 6831
amarjeet.maurya@angelbroking.com
Noel Vaz
022-39357800 Ext: 6847
noel.vaz@angelbroking.com

Quick take

Parag Milk Foods

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.

4 July, 2016

Quick take

Parag Milk Foods


Exhibit 2: Manufactured products revenue mix FY2016
2%

12%

18%

67%

Skimmed Milk Powder

Fresh Milk

Milk Products

Other Revenues

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.

4 July, 2016

Quick take

Parag Milk Foods


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.

4 July, 2016

Quick take

Parag Milk Foods

1,088

500

FY2018E

FY2017E

Net Sales

FY2016

FY2015

FY2014

FY2013

FY2012

Source: Company, Angel Research; Note: - 9MFY2016 annualised number

4 July, 2016

47
32
19

21

16

PAT

FY2018E

925

FY2017E

1,000

900

67

FY2016

1,500

1,645

91

FY2015

1,444

(` cr)

( ` cr)

2,000

100
90
80
70
60
50
40
30
20
10
0

FY2014

2,231
1,919

FY2013

2,500

Exhibit 5: 39% Net Profit CAGR over FY2016-18E

FY2012

Exhibit 4: 16% Revenue CAGR over FY2016-18E

Source: Company, Angel Research; Note: - 9MFY2016 annualised number

Quick take

Parag Milk Foods


Outlook and Valuation
Going ahead, we expect PMFL to report a top-line CAGR of ~16% over FY201618E 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 PMFLs total
turnover.

4 July, 2016

Quick take

Parag Milk Foods

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, Dominos, 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 companys 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 companys 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.

4 July, 2016

Quick take

Parag Milk Foods


Consolidated Profit & Loss Statement
Y/E March (` cr)
Total operating income
% chg
Total Expenditure
Raw Material

FY2015

FY2016

FY2017E

FY2018E

1,088

1,444

1,645

1,919

2,231

17.6

32.7

13.9

16.6

16.2

1,006

1,337

1,498

1,741

2,017

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

(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

% 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
(% of PBT)
Recurring PBT

10.1

4.5

2.4

2.0

1.5

12

34

67

99

136

(35.7)

178.4

94.9

48.6

36.9

PBT (reported)

12

34

67

99

136

Tax

(4)

19

33

45

% chg
Prior Period & Extraord. Exp./(Inc.)

(% of PBT)
PAT before MI & Adj. (reported)
Extraordinary Items
ADJ. PAT
% chg

6.0

29.2

33.0

33.0

16

32

47

67

91

16

32

47

67

91

(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

(23.1)

101.7

46.9

40.6

36.9

% chg

4 July, 2016

FY2014

Quick take

Parag Milk Foods


Consolidated Balance Sheet
Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017E

FY2018E

Equity Share Capital

16

16

70

70

70

Reserves& Surplus

81

107

292

358

449

97

123

362

428

520

SOURCES OF FUNDS

Equity Application Money


Shareholders Funds
Minority Interest
Total Loans
Long-term provisions

520

430

390

290

270

Other long term liabilities

11.2

16.1

16.1

16.1

16.1

Total Liabilities

633

575

775

741

812

Gross Block

360

437

483

595

657

Less: Acc. Depreciation

118

146

179

218

264

Net Block

242

291

304

377

393

37

26

26

26

26

APPLICATION OF FUNDS

Capital Work in Progress


Goodwill

Investments

Current Assets

439

537

709

753

892

Inventories

190

212

273

326

391

Sundry Debtors

163

171

231

273

324

Cash

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

633

575

775

741

812

Mis. Exp. not written off


Total Assets

4 July, 2016

Quick take

Parag Milk Foods


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

(40)

(42)

(184)

108

(50)

Interest / Dividend (Net)

43

46

49

42

34

Direct taxes paid

(0)

(1)

(19)

(33)

(45)

Change in Working Capital

Others
Cash Flow from Operations

46

66

(55)

256

121

(Inc.)/ Dec. in Fixed Assets

(59)

(23)

(46)

(83)

(63)

(Inc.)/ Dec. in Investments

(1)

Cash Flow from Investing

(59)

(22)

(46)

(83)

(63)

191

Issue of Equity
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

4 July, 2016

15

(42)

103

(171)

(54)

Inc./(Dec.) in Cash

Opening Cash balances

10

Closing Cash balances

10

14

10

Quick take

Parag Milk Foods


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

30.0

22.2

15.8

12.5

10.3

3.0

2.6

2.1

1.8

1.6

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

13.8

17.5

51.4

60.8

73.8

8.9

14.4

15.2

19.4

21.3

EV/EBITDA
EV / Total Assets
Per Share Data (`)

Book Value
Returns (%)
ROCE
Angel ROIC (Pre-tax)

9.5

15.3

15.9

20.4

22.5

16.4

26.2

13.1

15.5

17.5

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

ROE
Turnover ratios (x)

4 July, 2016

11

Quick take

Parag Milk Foods


Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

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.
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should
make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the
companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine
the merits and risks of such an investment.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot
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While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be
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or in connection with the use of this information.
Note: Please refer to the important Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the
latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may
have investment positions in the stocks recommended in this report.
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

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns


over 12 months investment period):
4 July, 2016

Buy (> 15%)

Accumulate (5% to 15%)


Reduce (-5% to -15%)

Neutral (-5 to 5%)


Sell (< -15)
12