Parag Milk Foods – Milking value-added portfolio for growth

News Release

Edelweiss Research | September, 2018

Parag Milk Foods – Milking value-added portfolio for growth

We met Parag Milk Foods’ (Parag) Chairman Mr. Devendra Shah and CFO Mr. Vimal Agarwal to gain insights into its business.
Key highlights: 1) Management expects the strong momentum in value-added products (VAP) such as cheese (25%-plus growth), paneer (>50%) and ghee (~20%) to sustain and added that health & nutrition is being scaled up. 2) With Vector Consulting on board, supply chain is being fine-tuned, which is already generating higher same store sales, and distribution footprint is widening. 3) In FY19, the company expects to generate free cash flow (FCF) with stable working capital and declining capex (~INR0.6bn). Given robust demand for VAP and a favourable milk price scenario, we estimate Parag’s sales will expand at a CAGR of about 18% to INR27.3bn (lower end of the INR27–30bn guidance) and PAT at a CAGR of ~32% over FY19–20E. Maintain ‘BUY’ with TP of INR434 based on 24x FY20E EPS.


Robust growth likely to sustain; pilot projects to be scaled up

In the wake of a 33% YoY jump in Q1FY19 revenue on the back of ~41% YoY surge in milk products, management reiterated its guidance for healthy growth ahead. Cheese is growing at 25%-plus led by robust demand and SKU launches such as cubes (additional 3% growth). Paneer is on track to be scaled up from ~130MT/month in FY18 to ~220MT/month in FY19, implying >50% growth. The health & nutrition segment too is being scaled up and is expected to generate sales of INR0.4–0.5bn in FY19 and INR1.2bn in FY20 led by Avvatar and Go protein. Management expects the segment’s contribution to rise from 2% in FY18 to 7% by FY20. Besides, pilot projects under Vector Consultants’ supervision to weed out supply-chain inefficiency has yielded impressive results with a 53% jump in average daily sales; this will be replicated across Mumbai in the next three months. Retail coverage in Mumbai will be increased from 15,000 in FY18 to 40,000 by FY19. Furthermore, the launch of fresh cow milk in north India from the Sonipat plant would rack up top line by INR1.2–1.3bn (~INR1bn from milk and the rest from curd) by FY20. Management reiterated the overall sales guidance of INR27–30bn, implying ~21% CAGR over FY18–20E and EBITDA margin of 11–12% by FY20.

Outlook and valuations: Positive

We build in a sales CAGR of 18% for FY18–20E in light of healthy demand growth, robust portfolio of VAP and product launches. This along with a favourable milk price scenario drives our ~32% PAT CAGR for FY19–20E. Furthermore, we expect FCF of INR0.7bn in FY19 on lower capex and stable working capital.

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