Parag Edel IC
Parag Edel IC
Parag Edel IC
Coverage Stock: Parag Milk Foods Ltd CMP INR 225 Target INR 300
Parag is the dominant player in the value-added milk segment with milk processing capacity of 2 mn litres per day. Over the years, the company Sangeeta Tripathi
has successfully created a strong brand portfolio and is consistently innovating and introducing new products in the market. It is the sole integrated Research Analyst
dairy player across the value chain from dairy farming, to milk procurement, processing, distribution as well as branding, lending it an inherent sangeeta.tripathi@edelweissfin.com
benefit of secure and steady raw material supply along with enhanced reach on branding & distribution. We believe, Parag, being an integrated
dairy player with focus on value-added dairy products, is in a unique position to reap dual benefits of a dairy company coupled with a FMCG play Praveen Sahay
in the long run. Parag is likely to trade at premium valuations akin to FMCG players. Currently, the stock is trading at 23.5x FY19E earnings. We Research Analyst
initiate with ‘BUY’ and price target of Rs 300, assigning 31x PER for FY19E EPS of Rs 9.6. praveen.sahay@edelweissfin.com
Largest private value-added player with vibrant product portfolio: Parag is a dominant player in the value-added business with cheese, ghee, Bloomberg: PARAG: IN
flavoured milk, etc., contirbuting around 65-67% to revenue from 53% in FY14. These categories, growing in strong double digits (20-25%), present
robust opportunity for Parag to cash in on. Moreover, the company boasts of a diversified product portfolio with 140 plus SKUs spread across 7 52-week range (INR): 355 / 202
brands—Gowardhan, Go, Pride of Cows, Avvatar, Slurp, Milkrich and Topp up. On the distribution front, it has 17 depots, 140 super stockists and
Share in issue (cr): 8.41
over 3,000 distributors. Its products are also available across all modern retail stores.
M cap (INR cr): 1,895
Sole integrated player; innovative offerings, premiumisation strategy to boost realisation: Parag is the only dairy player which is integrated across
the value chain from dairy farming to milk procurement, processing, distribution as well as branding. Thus, we believe, the company has an Avg. Daily Vol.
inherent benefit of secure and steady raw material supply along with enhanced reach on branding & distribution. Also, in order to maintain interest 361
BSE/NSE :(‘000):
of existing consumers and to tap additional consumers, Parag has steadily introduced multiple new products. It also entered new segments in FY17
with Avvatar (whey protein) and Slurp (mango beverage with a dash of milk). In the long term, we believe this strategy will provide it an edge over
other dairy players, which are focusing only on fresh milk products. Apart from expanding its cheese portfolio, the company is also developing
premiumisation strategy for its cheese products. As consumer preferences evolve, the company will be able to cater to a larger set of consumers
as well as improve realization & margins
Public, 35.9
Strong proxy for changing consumption patterns; inititate with ‘BUY’ and price target of INR 300: Parag, being an integrated dairy player with focus
on value-added dairy products, is in a unique position to reap dual benefits of a dairy company coupled with a FMCG play in the long run. The
company has moved up the value chain in terms of product portfolio, which is likely to improve already stellar gross margin. Given the strong Promoter,
structural tailwinds, coupled with sharpening focus on branding, communication and reach along with a bouquet of innovative products, Parag is 64.1
likely to trade at premium valuations akin to FMCG players. Hence, we assign PER of 31x to FY19E EPS of Rs 9.6 to arrive at our price target of Rs 300.
We initiate coverage with ‘BUY’.
160
Year to March (Consol) (INR cr) FY16 FY17 FY18E FY19E FY20E
140
Revenues (INR Cr) 1,645 1,731 2,011 2,290 2,621
Rev growth (%) 13.9% 5.2% 16.2% 13.9% 14.5% 120
Jul-16
Jul-17
Nov-16
Jan-17
Sep-16
Mar-17
May-16
May-17
P/B (x) 5.2 2.9 2.7 2.4 2.1
RoACE (%) 17.4 7.1 13.0 15.4 16.6
Parag Sensex
RoAE (%) 8.7 3.7 5.4 7.2 8.2
Date: 10thAugust 2017
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Parag Milk Foods Ltd.
Parag being a focused player with strong product portfolio in the value added dairy space is likely to reap dual benefit of transition towa rds
organized, along with the changing consumption trends in the dairy industry. Company’s end to end integration, coupled with focus on b randing
and distribution is likely result in 40% earnings CAGR over FY17-20E
FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E Multiple Price Target
Total
Return of
33%
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Parag Milk Foods Ltd.
We have estimated Parag’s gross margin to improve to 30.1% by FY19 from 27.3% in FY17, leading to 280
bps margin expansion. This will be led by stable milk prices and rising share of premium products in its
Price Target INR 300 portfolio. Thus, we expect EBITDA margin to clock a sharper 370 bps improvement to 10% in FY19E from
a low of 6.2% in FY17, resulting in healthy 48.5% earnings CAGR over FY17-19E. We assign 31x FY19E to
arrive at price target of INR 300
Bull On a blue sky estimate, the company’s EBITDA margin is expected to improve from the current 6.2% to
INR 416
10.5%, resulting in PAT margin of 4% in FY19. This is expected to lead to PAT of INR 100 for FY19E.
36x Bull Case FY19E EPS
Assigning 35x FY19E, we arrive at a bull case price target of INR 416.
We have estimated Parag’s gross margin to improve to 30.1% by FY19 from 27.3% in FY17, leading to 280
Base bps margin expansion. This will be led by stable milk prices and rising share of premium products in its
INR 300
portfolio. Thus, we expect EBITDA margin to clock a sharper 370 bps improvement to 10% in FY19E from
31x Base Case FY19E EPS
a low of 6.2% in FY17, resulting in healthy 48.5% earnings CAGR over FY17-19E. We assign 31x FY19E to
arrive at price target of INR 300.
Bear Challenges in procurement and stickiness of higher milk prices, along with the company’s inability to
INR 205 pass on the same to consumers will have repercussion on margin and profitability— we estimate 7.5%
25x Bear Case FY19E bearish
EBITDA margin and 3% net margin for FY19 (PAT being inr 69 crore). We assign 25x FY19E PER to arrive at
EPS
price target of INR 205.
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Parag Milk Foods Ltd.
Average Daily Turnover (INR cr) Stock Price (CAGR) Relative to Sensex, CAGR (%)
3 months 6 months 1 year 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
1.7 1.6 1.5 -32 – – – – – – –
One of the key industries with large base of suppliers and consumers. The industry is largely regional with cooperatives enjoying
Nature of Industry
advantageous position owing to their development and non-profit nature. Amul is the largest organised player.
The Indian dairy industry is pegged at INR 6 lac crore, of which ~80% is unorganised and only 20% is organised. 90% consumption is in the
Opportunity Size traditional form of liquid milk, ghee, paneer and curd. New value-added categories like cheese, butter milk, butter, flavoured milk and
whey protein are growing 2-3x the overall industry and present strong opportunity.
Parag has, over the past 18-24 months, undertaken capex to enhance its back end as well as distribution capability. Benefits of these
Capital Allocation
are likely to reflect in the financials going ahead in terms of improved revenue and enhanced margin
Business Value Drivers
We believe, anchored by healthy product portfolio, increasing innovation and a vigorous management, Parag is poised to deliver
Predictability
strong earnings
Dairy is a consumer-led business, which requires continuous innovation in taste and consistency in quality. Hence, sustainability depends
Sustainability
on distribution footprint along with quality and innovative products. .
Transition of Indian consumers from unorganised to organised players, along with favourable demographics and rising health
Disproportionate Future
consciousness bode well for a player like Parag
Parag’s target is to become a formidable player in the value-added dairy segment encompassing the benefit of dairy integration
Business Strategy &
along with the asset light structure of a FMCG company. Going forward the company would undertake measured capex and improve
Planned Initiatives
returns
Near Term Visibility Strong visibility of 40% bottom line CAGR along with improvement in operating margin over FY17-20E.
Indian consumers are moving towards branded & packaged food and diary is a strong daily consumption requirement. Rising health
Long Term Visibility
awareness and dwindling clout of co-operatives are likely to benefit organised players
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Parag Milk Foods Ltd.
Integrated play with presence across the category Strong & Innovative product portfolio makes it akin
Parag- a milk product play
makes Parag unique to FMCG
Brands Portfolio Pricing power and Positioning
FY17
Value Pan India
Procurement Processing Brands
added B2C distribution
X++
Hatsun Yes Yes Arun 25 Niche
Job work,
2.0 Yes NO Marginally X
Traditional
70 16.6
230000 15.4
60
190000 Curd 13.0
50 Liquid
pouch
ROCE (%)
152000 40 milk
(%)
121000 30 UHT milk
7.1
20 Cheese
88000 Ghee
61000 10 Butter
0
0 3 6 9 12 15 18 21
-10
EBITDA margin (%) FY17 FY18E FY19E FY20E
FY12 FY13 FY14 FY15 FY16 FY17
Size of the bubble denotes the category size Source: Company, Edelweiss Investment Research
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Parag Milk Foods Ltd.
1,000
1,000
500
- -
FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17
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Parag Milk Foods Ltd.
The domestic dairy industry is polarised. On one hand, there are players which are strong in procurement leveraging their relationships with farmers, giving them
access to a steady supply of fresh milk. On the other, there are players with strong brands and distribution reach, but sans sourcing or procurement arrangement,
restricting them on the freshness and quality aspect.
Parag is the sole dairy player which is integrated across the value chain from dairy farming, to milk procurement, processing, distribution as well as branding.
Thus, we believe, the company has an inherent benefit of secure and steady raw material supply along with enhanced reach on branding & distribution.
Yes NO Marginally
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Parag Milk Foods Ltd.
Parag- Integrated branded dairy play from procurement to distribution makes it agile & akin to FMCG play
2 dairy plants at Manchar (West), Palamaner Pan-India presence through both traditional &
100% cow milk (South) modern trade channels
Milk procurement in 29 districts Installed milk processing capacity of 2 million litres A network comprising of
across Maharashtra, Andhra per day 17 depots; over 100 Super Stockist; over 3,000
Pradesh, Karnataka, Tamil Nadu
distributors2
Largest raw cheese producing capacity in India –
Tie-up with - 3,400 village level
60 MT per day Exports of products to several countries
collection centres
Average daily procurement of
Sales team of 800+ people2
1.2 million litres.2
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Parag Milk Foods Ltd.
III. Innovative product portfolio with smart segmentation differentiates Parag from other milk plays
Parag has developed a complete portfolio of value-added milk products including ghee, buttermilk, dahi (yogurt), lassi, flavoured milk, cheese, dairy whitener
and whey protein. The company has also entered the whey protein segment under brand- “Avvatar”and introuced a fruit beverages under the “Slurp” brand.
Sub-segmentation strategy across products: Parag has steadily developed a portfolio of products around its core brands. After introducing cheese, it has
launched a slew of cheese variants. After introducing yogurt, it has introduced fruit-flavoured yogurt. In order to attract South Indian consumers, it has
introduced buttermilk with southern spices, apart from introducing regular buttermilk. The company has also introduced multiple variants of milk. This strategy is
expected to differentiate it among peers and help attract and retain consumers.
Premiumisation strategy: Apart from expanding its cheese portfolio, Parag is also developing premiumisation strategy for its cheese products. Most products are
priced at a premium to the base cheese product range. As consumer preferences evolve, the company will be able to cater to a larger set of consumers as well
as improve realisation & margins.
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Parag Milk Foods Ltd.
Premium quality cow Go “Cheezooz” Wide & innovative Pioneering and Leading Avvatar – India’s first
milk - “farm-to-home” awarded the variety of cheese player in India to market company to launch a
concept through “Best Children‘s Dairy including gourmet fresh paneer in retail sports nutrition protein
Subscription model Product” in the product cheese, jalapeno stores with a shelf life of powder
innovation category cheese spread, herb 75 days
cheese cubes
Emmental cheese New flavours in Topp- Whey proteins Spice-up Flavoured Milk Rich - Milk
up of pistachio and cheese slices whitener
Consumer packs of Sachet packs of ghee
mozzarella cheese Butterscotch Curd 10kg Bucket Avvatar - Whey
Buttermilk in southern
protein
Yogurt in three new Cheese sandwich spices variant Badam Milk Instant
flavours of saffron, slices Mix Slurp-Mango
Go Badam Milk
pink guava and beverage
Cheese toppings for Cheese Wedges –
vanilla Go Almette Creamed
pizzas Herbs and spices
Cottage Cheese in
Topp-up in four
Spiced buttermilk in two flavours
flavours
UHT
Go Chutney cheese
Cheese spread in six
Fresh cream in UHT slices
flavours
Spiced buttermilk in
Parmesan cheese
Fino pack
Cheezlets
Vital milk in all markets
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Parag Milk Foods Ltd.
• Targeted at household
consumers seeking premium
X++ quality cow’s milk
Niche
• Targeted for health enthusiasts
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Parag Milk Foods Ltd.
Small Packs For Rural Consumption • Going forward, with the revival in the macro environment, and
increasing transition towards western cuisines, the cheese segment is
likely to grow at double digit, thus it is expected that the market
would grow at 26% CAGR over FY17-20E from INR17 bn in FY17 to INR
34 bn in FY20E
• Key players in the organised cheese segment are Amul, Parag and
Britannia accounting for 42%, 32% and 9%, respectively. While Amul
New Products Launched in FY17 dominates the retail segment, Parag is the leader in the institutional
segment.
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Parag Milk Foods Ltd.
27.5 48
41
21.2
34 35
33
17.0
15.0 15.8 28
24
12.0 21
19
9.0 16
8.0
6.0
5.0
2010 2011 2012 2013 2014 2015 2016P 2017P 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015 2016P 2017P 2018E 2019E 2020E
13 GWM
Parag Milk Foods Ltd.
With 32% market share and innovative product pipeline Parag to post stellar utilisation level at around 65% going forward with improving utilisation with
growth in cheese no commensurate capex, revenue and earnings are likely to improve
In the cheese segment, Parag has a market share of 32%, which puts it in the further.
second position after Amul. Major players in the cheese market such as Amul
Product wise asset turnover (x)
and Britannia have not introduced new products over the past 3 years. We Cheese has lowest asset turnover
believe, Parag scrores high on innovation the front.
13.2
Go
Processed, Product wise working capital intensity (No of days)
Go Go Cheese Go Cheese Go Emmanetal,
Parag
Go Go Pizza
Cheese slices with slices with
Go Cheese Cheese
Cheese
Go
Gouda,
And demands high working capital days
Cheese Cheese spread creamy Cheezooz
slices herbs chutney Sauce Mozzarella, 95 95 65
spread
Cheddar, Colby
9 15 10
Cheese accounts for 20% of Parag’s top line and has posted CAGR of 24% Liquid pouch Ghee Curd Cheese Butter UHT milk
milk
over FY14-17. The company’s cheese plant at Manchar currently has a
capacity of 60mt/day, up from 40 mt/day in FY16. The plant is capable to Cheese has lowest asset turns and high working capital making it capital
producing cheese in 75 stock-keeping units under a wide range, including intensive, thus offers higher margins and would continue to be organized.
cheddar, mozzarella, processed and gourmet cheese. The cheese facility is Parag has created a mark for itself in Cheese, and hence via innovation
running at 60% capacity. and branding commanding higher realization and margins in the
Expansion in cheese is in line with Parag’s strategy of focusing on value- category.
added and higher-margin products. While the company has a strong Driven by improvement in utilisation resulting in volume and realisation
presence in the institutional segment (supplies to McCainFoods, Jubilant growth, we estimate Parag’s cheese revenue to post CAGR of 19% over
Foodworks, Yum Foods, Sam’s Pizza, MTR Foods, Mother Dairy, etc), network FY17-20E
expansion and increase in advertisement & promotional expenses should
improve retail share of cheese products as well. Of the total cheese Cheese Revenue 569
481
revenue, around 50% comes from institutions and 50% from retail. The 406
343
company has also roped in Chef Ranveer Brar for brand communication 295
(INR cr)
245
related to cheese to gain further traction in the growing market. 192
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Parag Milk Foods Ltd.
B) Indian ghee market: Traditional and unorganised moving towards organised; Parag is the pioneer in the cow ghee segment and also the biggest
Parag’s product offerings & brand pull render it preferred choice player. Other major players include Amul, Patanjali, KMF
The Indian ghee market posted CAGR of 15.2% over 2010-17, reaching a Cooperative and Dynamix Dairies.
value of INR 927 bn. Ghee is the second most consumed product of the
Ghee constitutes around 20% of Parag’s revenue and has posted
Indian dairy industry. The market is dominated by the unorganised segment,
CAGR of 14.5% over FY14-17. Parag has created a unique brand
accounting for 80% of total ghee sales; the organised segment accounts for
positioning for its ghee on the basis of being 100% derived from
20%.
cow’s milk and on purity. Thus, going forward, we believe the
Indian Ghee Market (INR bn)
company’s unique positioning around purity coupled with its strong
brand image and rising shift towards organised players are likley to
1600 25
21 21 propel higher growth for the category. We estimate the category for
1400 20 20
18 18 19 Parag to post revenue CAGR of 12.4% over FY17-20.
17 20
1200 16 17
16
1000
Ghee Revenue (INR cr)
15
448
(%)
800
399
600 10
355
400 316
5 299
275
200
0 - 211
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e
In the organised market, the bulk segment, which consists of ghee in 10-15
kg packs, currently accounts for around 45% of total ghee sold in the FY14 FY15 FY16 FY17 FY18e FY19e FY20e
South India represents the largest market for ghee in India accounting for
26.6%, followed by North India (26.5%), East India (24.3%) and West India
(22.6%).
Pure cow ghee currently accounts for less than 10% of the total ghee
market. The segment is currently growing faster than the overall ghee
market and has higher margins.
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Parag Milk Foods Ltd.
(C) Other innovative & premium products: Pride Of Cows Driving innovation by converting waste into useful marketable products-
Parag sells premium milk through its subsidiary Bhagyalaxmi Dairy under the Focus on new initiatives such as biosciences
brand Pride of Cows. Thus, in a basic commodity market of milk, the company Apart from selling premium milk under the brand “Pride of Cow”, the
has successfully created an ultra premium brand with pricing being 2x the company has now created a special bio science division, and has
normal price. Parag has set up a dairy farm with ~ 2,000 holstein cows in introduced certified organic fertilizers through the commercialization of
Manchar. Thus, the product is truly integrated right from the farm till branding. cow manure and cow urine into value added products. These products
The farm is fully automated with best practices of breeding and feeding are marketed and sold under the brand –
animals, which enables the company to generate extremely high quality milk.
(a) Bhagyalaxmi MICRO RICH- Liquid plant growth fertilizer
(b) BhagyaLaxmi Agrifeed- Farm Yard Manure
(c) Bhagyalaxmi Gold mine- Phosphate rich manure
(d) Bhagyalaxmi Nutricane- sugar crop manure
All these products are 100% organic, made out of waste of cows (which
the company has on its farm) used as manure or fertilizer to improve
productivity and develop resistance towards disease and pests.
The brand is currently being serviced in Mumbai, Thane, Navi Mumbai, Pimpri-
Chinchwad, and Pune, with an active customer base of over 15,000+
households.
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Parag Milk Foods Ltd.
The manufacture of these products does not entail any additional raw material According to Euro Monitor, the sports protein powder category is
cost, but mere innovation in technology and marketing, which the company is pegged at INR 700 crore, reporting 18% CAGR over FY11-16. The
successfully undertaking. We believe, with the introduction of these innovative category is estimated to post CAGR of 13% over the next 4 years to
products, profitability and margin of the subsidiary is bound to improve going INR 1220 crore by 2021.
ahead.
Currently, the market is dominated by imported brands that
constitute around 80-90% of the overall pie. There is no domestic
(D) Various new and promising product rollouts & Future rollouts – To reflect on
brand in the market. Thus, with introduction of Avvatar, Parag has
financials ahead
entered into a high growth, high margin product.
(a) Whey protein under Avvatar brand
Whey is a component of milk protein. It is generated as a by-product during The product will be distributed via tie ups with premium sports gyms,
the manufacture of cheese. nutrition outlets and e-portals.
1 kg cheese generates 50% (i.e 500 gms) of whey. This is a very good source
of protein and is most sought after protein drink in the sports nutrition
category.
Till now, the company was selling whey in crude form to the institutional
segment. However, it has recently launched whey protein in retail under the
Avvatar brand, which is sold directly to end consumers. Thus, Parag has
entered a new and promising product category of sports nutrition.
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Parag Milk Foods Ltd.
(a) Entry into mango based fruit juice market with introduction of brand “
Sports Nutrition Industru
Slurp
CAGR 2016-21 11% 13%
CAGR 2011-16 22% 18%
1,422
1,221
830
677
Entry into Consumer whey further expands Parag’s portfolio providing fillip to
margins and earnings
• The entry into the category would result in expansion of company’s market (b) Likely foray into mass protein products & Likely introduction of new
presence through the introduction of new route to market channels high immunity booster product called “Colostrum ”
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Parag Milk Foods Ltd.
Case Study: Global Giant Glanbia with focus on health and nutirition Glanbia Performance Nutrition
Glanbia is a global nutrition company grounded in science and nature and Revenue & EBITDA EBITDA Margin
dedicated to providing better nutrition for every step in life’s journey.
€ 1,100 € 200 16.1%
14.7%
The company has an annual turnover of €3.6 billion. Its major production 12.0%
facilities are located in Ireland, the US, the UK, Germany and China. It has four € 900 € 150
(EBITDA)
segments; Glanbia Performance Nutrition, Global Ingredients, Dairy Ireland and
(Revenue)
Joint Ventures & Associates. Its shares are listed on the Irish and London Stock € 700 € 100
Exchanges (symbol: GLB).
GN Capability Overview € 500 € 50
2016 Revenue 2014 2015 2016
Revenue EBITDA 2014 2015 2016
Micro
Nutrient Source: Company, Edelweiss Investment Research
Premix and
Bioactive
Ingredients Joint Ventures and Associates
Diary &
Plant Based In 2016 Glanbia share of
3 scale partners in
Proteins revenue from JV’s and
dairy processing
Nutritional Associates was
US
Solutions,
Cheese, €
736
€ 488 Glanbia Ingredients Ireland
Largest dairy process in Ireland
(40% partner)
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Parag Milk Foods Ltd.
(IV) Improving and expanding distribution reach with focus on 1) Fresh milk Products – Fresh products like Milk, Dahi, which have limited
shelf life are distributed in Maharastra and Mumbai from the Manchar
optimization to enhance brand presence and lower selling cost
plant, while in the south these are distributed from the Palamner plant
Parag has expanded its distribution network from covering 61,000 retail touch 2) Cold storage value added products- Cheese, Paneer and other
points in FY12 to over 2,30,000 by FY17 end and in the next three years the value added products like butter are distributed and are sold Pan
company expects to reach over 3.5 lac retail touchpoints. Parag distributes its India through distributors and transported via chilled vans.
products broadly in three ways:
3) High shelf products – High shelf products that do not require
refrigeration and are shelf stable products like ghee, dairy whitener
Increasing Retail Touch Points (nos)
are sold pan India via distributors.
230000
190000
152000
121000
88000
61000
Institutions
Regionwise Distribution Network in India
Fresh Milk Products Bulk Business
Business
Depots Super Distributors
Stockists
20 GWM
Parag Milk Foods Ltd.
Distribution and selling cost optimisation via appointment of Vector Consulting Vector consultants framework
Group
In order to expand its distribution reach, reduce stock outs along with eyeing Reduced Inventory, Increase in sales Increase in sales by
inventory rationalisation at he distributors’&company level, Parag has improved from additional plugging loss sales
availability, loss range and reach at retail point
appointed Vector Consultants to drive the company’s distribution model. sales plugged
Growth in Profits
Time
We believe, this effort is likely to improve the depth and width of Parag’s
distribution, enabling higher presence, reach and also aid inventory TOC Replenishment TOC Sales Process TOC Replenishment
optimisation.
Currently, Parag’s selling & distribution along with advertising costs stand at 6- Produce to availability
Improve ROI of
Extend replenishment
dealers to increase
7%, of which pure selling cost is around 4.0-4.5%. With improvement in and replenish to
range and reach of
between dealers and
consumption retailers
distribution reach and depth, along with increase in sales, we believe leverage products
is likely to play on selling and distribution cost, which will benefit margins going
ahead
Strategy Roadmap for Improved Profitability
Further with under the theory, you do not produce what you do not sell, your
non-moving inventory dips drastically and cash does not get blocked in what is
termed bad inventory. This is likely to aid/ help in case of inventory
management and revenue improvement.
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Parag Milk Foods Ltd.
Vector Consultants & Theory of Constrains: What’s it and how it helps Benefits
Improving reach and enhanced distribution.
Leading consultant; engaged with renowed group: The Vector Consulting Making the right product avaliable at the right time.
Group is a leading consulting firm in the space of Theory of Constraints Rationalisation of inventory.
Consulting in India. It engages with organisations to help them gain market Improvement of RoI at distributors and the company level.
share by building unique supply chain capabilities that provide a competitive
edge in the market. The Group is engaged with India’s most renowned industrial
houses such as Tata, Godrej, Bajaj Electricals, Cummins Group, Raymonds,
among others.
Production is linked to sales. So, if the company sells one piece, procution is
also one piece. It’s linked from the front to the back end. So, the forecast for
a new brand happens once sales kick in, typically in two months’ time
which is the usual norm. Production happens on the basis of sales.
Whichever brand is doing well, will be produced more. It’s a system-
generated model in terms of identifying the right products that are selling.
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Parag Milk Foods Ltd.
Over the past 2 years, Parag has increased capacity on various counts: (a) increased milk handling & processing capacity from 2.0 mn litres per day to 2.4 mn
litres per day; (b) increased cheese capacity from 40 tonnes per day to 60 tonnes per day; (c) created a seperate paneer manufacturing faclility with capacity
of 20 tons per day; and (d) undertook capex to upgrade the whey facility to manufacture consumer whey. Currently, its plants are running at 55-60% utilisation
levels, which is likely to take care of the near term capex. The company has around INR 65 crore fund from IPO proceeds, which would be used for enhancing
procurement and chilling infrastructure going ahead. With relaively low capex requirement, improvement in working capital needs and likely growth in key
categories, we expect Parag’s margins and return ratios to improve.
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Parag Milk Foods Ltd.
Valuation
Parag, being an integrated dairy player with focus on value-added dairy products (65-70% of overall portfolio), is in a unique position to reap dual benefits of a
dairy company coupled with a FMCG play in the long run .
The company has moved up the value chain in terms of product portfolio, which is likely to improve gross margin. Already Parag has one of the highest grosss
margins in the industry.
Given the strong structural tailwinds, coupled with explemary focus on branding, communication and reach along with a bouquet of innovative products, Parag
is lilkey to trade at premium valuations akin to FMCG players. Hence, we assign PER of 31x to FY19E EPS of Rs 9.6 to arrive at our price target of Rs 300.
24 GWM
Parag Milk Foods Ltd.
Financial performance
Revenue expected to post 14.8% CAGR over FY17-20 driven by growth in value-added segment: Parag has reported healthy revenue growth of 16.7% over
FY14-17 driven by robust growth in the value-added portfolio (a combination of product and SKU expansion). We estimate the company to post CAGR of 14.8%
over FY17-20, driven by healthy growth in the key value-added product categories like cheese, ghee along with new product introduction—whey, Slurrp—along
with expansion in distribution footprint.
2,621
1,731
1,645
2,290
1,444
2,011
1,731
1,088
900 925
658
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY17 FY18E FY19E FY20E
Thus, going forward, led by stable milk prices coupled with its premiumisation drive, we expect an overall 280 bps improvement in overall gross margins. Thus, the
gross margin is estimated to improve from 27.3% in FY17 to 30.1% in FY19.
25 GWM
Parag Milk Foods Ltd.
27.3
23.2
EBITDA to clock 35% CAGR over FY17-20E; combination of gross margin expansion along with operating leverage playing out: Over the past 4 years, Parag’s
EBITDA has clocked CAGR of 9.5%. Till FY16, the company’s margin expanded consistently from 7.4% in FY14 to 9.0% in FY16. FY17 was a bad year for the
company, wherein despite premiumisation, gross margin improvement was lower on account of high raw material prices (although underlying gross margin
witnessed good improvemnet) coupled with this, volumes in the value-added category did not take off as expected, resulting in EBITDA margin contraction.
4.4 4.6
4.3
4.0 4.1 7.5
3.3 6.2
5.7
2.9 5.1 4.8
4.4
4.2
3.1 3.7
2.7 2.5 3.7
1.2 2.8
2.4 2.4 2.6 3.3
1.9 1.6 2.0
26 GWM
Parag Milk Foods Ltd.
Increase in employee expenses: Building for scale, Parag has over the years expanded its bandwidth, which has resulted in increase in employee cost—
from INR 19 crore in FY11 to INR 80 crore in FY17. The overall employee cost to sales has almost doubled from 2.9% in FY11 to 4.6% in FY17.
Sharp increase in overall selling and distribution expenses: Akin to a FMCG play, to create pull and improve distribution network, Parag has over the past 4
years consistently increased spends on promotion, advertisment and distribution reach. Overall absolute spends on selling and distirbution reach has grown
4x from INR 36 crore in FY11 to INR 130 crore in FY17.
As a fallout of these overhead expeneses, Parag’s EBITDA margin expansion was lower than gross margin expansion. Its EBITDA margin has declined from 7.6% in
FY11 to 6.2% in FY17.
Going forward, with improvement in sales, along with premiumisation drive and leverage on the fixed costs (employee and selli ng & distribution) coming to play,
we believe EBITDA margin expansion will be healthy.
We are factoring 400 bps EBITDA margin improvement for Parag from 6.2% in FY17 to 10.2% by FY20.
EBITDA Margins
9.0%
7.6% 10.0% 10.2%
7.4% 9.0%
6.2%
6.2%
EBITDA margin to improve from 6.2% to 10.2% aided by gross margin improvement and reduction in other cost
0.3
0.60
10.2
3.0
6.2
FY17 EBITDA Gross Margin Employee cost Other cost FY19 EBITDA
improvement
27 GWM
Parag Milk Foods Ltd.
Net earnings to post 40% CAGR over FY17-20E: Led by healthy improvement in EBITDA ( we estimate 35.2% CAGR over FY17-20), coupled with financial leverage
playing out (finance and depreciation expense expected to clock lower CAGR of 16.5% and 9.5% over FY17-20E), we estimate Parag’s net earnings to register
a robust 40% CAGR over FY17-20. We expect Parag to post net earnings of INR 100 crore by FY20E from adjusted earnings of INR 37 crore in FY17.
(INR cr)
(INR cr)
(%)
60 2.0
(%)
30 1.5
1.5
1.0 1.0 1.5
20 40
1.0 1.0
10 20
0.5 0.5
- - - -
FY14 FY15 FY16 FY17 FY17 FY18E FY19E FY20E
Adjusted PAT Net profit margins Adjusted PAT Net profit margins
Source: Company, Edelweiss Investment Research
Margin improvement and higher asset turns to result in healthy improvement in return ratios: Led by margin improvement coupled wih improving asset turns, we
estimate RoCE to improve significantly from current 7.0% to 16.6% in FY20
RoCE
Asset Turnover (x) 16.6
3.3 15.4
13.0
3.1
(%)
3.0 7.1
3.0
28 GWM
Parag Milk Foods Ltd.
Peer comparison
30
(INR cr)
60
73
(%)
6,871
100 100 100
4,200
2,643 1,731 1,410 70
40
Amul Kwality Hatsun Heritage Parag Prabhat
27
Retail Institution
Direct Procurement reach of key players (% to total procurement) Processing Capacity of key players (mnlitres/day)
18
100 100 100 100
(mnlitres/day)
65
(%)
6.3
22 4.3
3 2.8
1.53 2 1.5
29 GWM
Parag Milk Foods Ltd.
30 GWM
Parag Milk Foods Ltd.
Key risks
Increase in the procurement prices
High capex intensity
31 GWM
Parag Milk Foods Ltd.
Business Overview
Company Brief
Parag Milk Foods is a
The company is a value added milk player with an integrated business model from farming, procuring, processing to branding and distribution.
Business Model
Milk based value added products constitutes around 65-70% to the overall revenue.
The company is the only private value added player with clear focus on new value added and nutritional offerings. Over the years the company
Strategic Positioning
has created a pan India distribution reach for the products, and now has a retail touch points over 2.3 lac retailers.
Value added player, with strong and innovative product portfolio made from 100% Cow’s milk. Over the years has created a Pan India
Competitive Edge
distribution reach
The company is focusing on further improving its product portfolio with premiumization drive to improve gross margins, and also increasingly
Financial Structure
focusing on driving EBITDA margin performance with better distribution, and lower leads
Strong transition from unorganized to organized play; along with increasing preference to value added milk based dairy product consumption to
Industry Revenue Drivers
drive revenue for the company
Shareholder Value The company will likely record an EPS of INR 9.6 for FY19. At valuation of 31x its FY10, we arrive at a price target of INR 300 which offers an upside
Proposition of 33% from the current levels.
32 GWM
Parag Milk Foods Ltd.
Parag Milk Foods assigns creative mandate Association for Go Cheese with popular
to JWT for our flagship products Celebrity Chef – ‘Ranveer Brar’ and new New products launched during FY16-17
‘Gowardhan’ Ghee and ‘GO’ Cheese campaign for Go Spice-up with ‘Vir Das’
Focused marketing campaign for ‘Cow Ranveer Brar using Go cheese chutney Products launched during FY17
Ghee’ with new slogan – ‘Pyar ka Rang slice on his show ‘Good to Go’ Go “Cheese Wedges – Herbs and Spices”
Sunhera’ Vir Das promoting Peri Peri cheese slice of Go "Badam Milk Instant Mix”
Spice up box “Spice up” box in 5 New Flavoured Cheese Slices
Milkrich – Dairy Whitener
Avvatar – Whey Protein powder
Slurp - Mango drink with dash of milk
33 GWM
Parag Milk Foods Ltd.
Journey So Far
1998
The year witnessed the birth of
Bhagyalaxmi Dairy Farm - India’s
most modern dairy farm with the
1992 finest international equipments
Parag Milk Foods Limited started
in 1992 to help farmers by 2005
collecting milk on milk holidays We commissioned our Manchar
during Operation Flood. Back then, plant and began manufacturing
Parag was primarily involved traditional products like Butter and
in the distribution and collection Ghee under the brand, Gowardhan’
of milk
2008 2011
The year saw the birth of ‘Pride of
Commissioned “Go Cheese World” -
Cows’, a first-of-its-kind premium
India’s largest cheese manufacturing
farm-to-home milk brand
plant with a capacity of 40 MT per
day
2014
On realising the needs of our
institutional clients, we launched
B2B whey protein
2017
Entered into the Juice drink market
by launching a mango drink with a
dash of milk
2010
The Palamaner plant was stablished
Launched a 100% Whey protein, first-
with a world-class UHT facility
of-its-kind manufactured in India.
From our farm to your shaker cup,
2012 fresh and pure
The concept of Dairy Tourism was 2015
brought to life for the first time in Remodelled the brand Parag
India by us with a new identity
2016
We got listed on the bourses, thus
becoming a publicly branded and
owned entity
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Parag Milk Foods Ltd.
Financials
Income Statement (INR cr) Balance sheet Ratios
Year to March FY16 FY17 FY18E FY19E FY20E As on 31st March FY16 FY17 FY18E FY19E FY20E Year to March FY16 FY17 FY18E FY19E FY20E
Income from operations 1,645 1,731 2,011 2,290 2,621 Share Capital 70 84 84 84 84 ROAE (%) 19.7 7.2 8.2 10.7 11.8
Direct costs 1,203 1,259 1,415 1,601 1,827 Reserv es And Surplus 291 573 630 710 810 ROACE (%) 17.4 7.1 13.0 15.4 16.6
Employee costs 67.1 79.4 90.5 91.6 104.8 Share holders fund 362 657 714 794 894 Debtors (days) 52.4 45.3 52.0 52.0 52.0
Other expenses 226.9 284.3 323.7 368.6 422.0 Total Debt 361 233 300 335 376 Current ratio 2.5 2.1 3.0 3.1 3.2
Total operating expenses 1,497 1,623 1,829 2,061 2,354 Long-Term Borrowings 125 71 71 71 71 Debt/Equity 1.0 0.4 0.4 0.4 0.4
EBITDA 148 108 181 229 267 Short-Term Borrowings 236 162 229 263 305 Inv entory (days) 60.4 90.4 60.0 60.0 60.0
Depreciation and amortisation 33.4 49.0 54.1 59.7 63.7 Other Non-Current Liabilities 30 28 26 26 26 Payable (days) 37.2 65.8 35.0 35.0 35.0
EBIT 115 59 127 169 203 Deferred Tax Liabilities (Net) 11 10 10 10 10 Cash conv ersion cycle (days) 75.6 69.9 77.0 77.0 77.0
Interest expenses 49.0 33.3 42.0 46.9 52.6 Other Long-Term Liabilities 18 17 17 17 17 Debt/EBITDA 2.4 2.2 1.7 1.5 1.4
Profit before tax 67 37 85 122 151 Long-Term Prov isions 1 2 - - - Adjusted debt/Equity 1.0 0.4 0.4 0.4 0.4
Prov ision for tax 19.5 0.4 29.0 41.5 51.3 Sources of Funds 752 919 1,040 1,155 1,296
Core profit 48 37 56 81 100 Fixed Assets 373 379 395 406 392 Valuation Parameters FY16 FY17 FY18E FY19E FY20E
Profit after tax 48 17 56 81 100 Gross Block 528 585 676 746 796 Diluted EPS (INR) 5.7 4.3 6.7 9.6 11.8
Adjusted net profit 48 17 56 81 100 Acc. D&A 183 226 280 340 404 Y-o-Y growth (%) 48.5 -23.7 54.2 43.1 23.6
Equity shares outstanding (cr) 7.0 8.4 8.4 8.4 8.4 Net Block 345 359 395 406 392 CEPS (INR) 22.2 5.3 17.9 22.2 25.7
EPS (INR) basic 6.8 2.0 6.7 9.6 11.8 Other Non-Current Assets 17 73 73 73 73 Diluted P/E (x) 39.5 51.8 33.6 23.5 19.0
Diluted shares (Cr) 8.4 8.4 8.4 8.4 8.4 Long-Term Loans And Adv ances 16 71 71 71 71 Price/BV(x) 5.2 2.9 2.7 2.4 2.1
EPS (INR) fully diluted 5.7 4.3 6.7 9.6 11.8 Other Non-Current Assets 1 2 2 2 2 EV/Sales (x) 1.3 1.1 1.0 0.9 0.8
Current Assets 602 878 864 977 1,112 EV/EBITDA (x) 14.5 17.9 11.6 9.3 7.9
Common size metrics- as % of net revenues Inv entories 272 429 331 376 431 Diluted shares O/S 8.4 8.4 8.4 8.4 8.4
Year to March FY16 FY17 FY18E FY19E FY20E Trade Receiv ables 236 215 286 326 373 Basic EPS 5.7 4.3 6.7 9.6 11.8
COGS 73.1 72.7 70.4 69.9 69.7 Cash And Bank Balances 8 101 0 19 70 Basic PE (x) 39.5 51.8 33.6 23.5 19.0
Operating expenses 91.0 93.8 91.0 90.0 89.8 Short-Term Loans And Adv ances 45 88 201 229 262
Depreciation 2.0 2.8 2.7 2.6 2.4 Other Current Assets 40 46 46 46 46
Interest expenditure 3.0 1.9 2.1 2.0 2.0 Current Liablities 239 411 292 319 351
Gross profit margin (%) 26.9 27.3 29.6 30.1 30.3 Trade Payables 168 312 193 220 251
EBITDA margins 9.0 6.2 9.0 10.0 10.2 Other Current Liabilities 67 98 98 98 98
Net profit margins 2.9 1.0 2.8 3.5 3.8 Short-Term Prov isions 4 2 2 2 2
Net Current Assets 363 467 572 658 761
Growth metrics (%) Application of Funds 752 919 1,040 1,155 1,296
Year to March FY16 FY17 FY18E FY19E FY20E
Rev enues 13.9 5.2 16.2 13.9 14.5 Cash flow statement
EBITDA 38.3 -27.1 67.7 26.0 16.9 Year to March FY16 FY17 FY18E FY19E FY20E
PBT 96.5 -45.2 131.1 43.1 23.6 Net profit 48 37 56 81 100
Net profit 48.5 -64.2 228.8 43.1 23.6 + Depreciation & Amortisation 38 43 54 60 64
EPS 48.5 -23.7 54.2 43.1 23.6 + Interest Expense 49 33 42 47 53
- Other Income (2) (11) - - -
Operating Cash Flow before W C Changes 187 44 151 187 216
Cash Flow from Operating Activ ities 9 34 (55) 100 113
Capex (89) (39) (70) (70) (50)
Free Cash Flow (80) (5) (125) 30 63
35 GWM
Parag Milk Foods Ltd.
Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200
Vinay Khattar
Head Research
vinay.khattar@edelweissfin.com
Rating Expected to
Mar-17
Mar-17
May-17
Jul-16
Sep-16
Sep-16
Nov-16
Nov-16
Jul-17
Dec-16
Jan-17
Jan-17
Feb-17
Jun-16
Jun-16
Jun-17
Jun-17
Oct-16
Aug-16
Apr-17
36 Aug-17 GWM
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37 GWM
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38 GWM