Parag Milk Foods
BSE SENSEX
25,400
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm/ Vol m
Free float (%)
S&P CNX
7,783
PARAG IN
84.1
17.9 / 0.3
357 / 202
-/-/-
123
52.5
15 February 2017
3QFY17 Results Update | Sector: Consumer
CMP: INR213
n
TP: INR215(+1%)
Neutral
Significant underperformance; near-term margin pressure remains
3QFY17 consol. sales grew 15.1% YoY to INR4.5b,
with fresh milk growing by
15% and milk products by 5%, primarily driven by volume growth. SMP grew
sharply by 273% YoY, while others segment sales declined by 61%. The
company took an 8% price hike in the consumer business in January 2017 to
partially counter the increase in raw milk prices. EBITDA declined 137.8% YoY
to a loss of INR145m. Adj. PAT loss stood at INR268m.
Gross margin contracted 770bp YoY to 22.1%
due to higher milk prices (+20%
YoY, 14% QoQ) and a weak product mix (excess milk in 3QFY17 was converted
and sold as SMP). Higher other expenses (+540bp YoY to 20.6% of sales) led to
a significant EBITDA margin contraction. Increase in other expenses was likely
led by higher ad and promotion spends. EBITDA thus posted a loss of INR145m
(v/s profit of INR383m in 3QFY16).
At the net level, PARAG reported a loss of INR268m
(v/s profit of INR145m in
3QFY16) after adjusting for VAT tax liability of INR165m.
Key concall highlights:
1) Price hike of 8% taken in consumer products in
January; some price hike in institutional business. 2) Some impact of
demonetization and price increase is likely to be witnessed in 4QFY17. 3) Full-
year ad spend target maintained, even though it was significantly higher in 3Q.
Valuation and view:
Given the big disappointment in 3QFY17, we cut PAT for
FY18E/FY19E sharply by 37%/15%. There is no clarity yet on where
procurement costs will settle. Also, while management has taken a price
increase in 4QFY17, it is not adequate, and even that will have an adverse
initial impact on volumes in a downbeat consumption environment. Intense
quarterly volatility is a negative surprise that was revealed for the first time in
the brief listing history of the company. We reduce target multiple from 22x to
20x Dec’2018 EPS (35% discount to FMCG sector multiple given low RoE and
high volatility). Maintain
Neutral.
Financials & Valuations (INR b)
n
Y/E Mar
2016 2017E 2018E
16.5
17.1
19.7
Net Sales
1.5
0.8
1.5
EBITDA
0.5
0.1
0.6
PAT
6.7
0.9
6.7
EPS (INR)
-66.7 -86.5 631.5
Gr. (%)
51.4
81.2
87.9
BV/Sh (INR)
n
19.5
1.5
7.9
RoE (%)
12.4
2.6
7.4
RoCE (%)
31.7 234.5
32.1
n
P/E (x)
4.1
2.6
2.4
P/BV (x)
Estimate change
TP change
Rating change
n
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428

Parag Milk Foods
Key quarterly charts
Exhibit 1: Consol. sales grew by 15.1% YoY
Sales (INR b)
4.7
3.7
3.9
4.1
3.8
25.7
4.7
4.5
31.4
26.8
22.1
1.1
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q15
1.0
1Q16
1.3
2Q16
1.2
3Q16
1.3
4Q16
1.1
1Q17
1.4
2Q17
1.0
3Q17
Exhibit 2: Gross margins contracted sharply by 770bp YoY
Gross profit (INR b)
31.4
29.8
Gross margin (%)
29.9
30.5
3.5
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: EBITDA margins contracted 1310bp YoY
EBITDA (INR b)
8.3
7.6
8.8
9.9
9.6
EBITDA margin (%)
8.6
8.0
Exhibit 4: Consol. PAT posted loss of INR268m
PAT (INR b)
4.6
1.9
0.2
0.1
2.1
0.1
0.1
0.2
3.7
3.9
PAT margin (%)
2.8
0.1
3.0
0.1
-0.3
-0.1
0.3
0.3
0.4
0.4
0.4
0.3
0.4
-3.2
3Q17
-6.0
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Operating margins were down mostly due to increase in ad spends, selling &
distribution expenses and factory o/h’s which led to increase in other expenses by
540bp YoY
Employee costs as a % of sales
Other expenses as a % of sales
18.2
14.3
4.8
4Q15
14.0
15.4
17.2
16.7
18.2
20.6
3.7
1Q16
4.0
2Q16
4.7
3Q16
4.7
4Q16
4.6
1Q17
4.4
2Q17
4.7
3Q17
Source: Company, MOSL
20 May 2016
2

Parag Milk Foods
Exhibit 6: Product wise revenue breakup
Consol. revenue breakup (INR m)
Skimmed Milk Powder
Fresh Milk
Milk Products
Other Revenues
Total
Consol. revenue breakup (% share)
Skimmed Milk Powder
Fresh Milk
Milk Products
Other Revenues
Total
Consol. revenue breakup (% growth)
Skimmed Milk Powder
Fresh Milk
Milk Products
Other Revenues
Total
4Q16
517
805
2,754
66
4,142
4Q16
12
19
66
2
100
4Q16
-40.4
8.8
54.5
-9.6
19.6
1Q17
481
932
2,389
33
3,835
1Q17
13
24
62
1
100
1Q17
-14.1
24.9
4.9
-78.7
2.6
2Q17
440
970
3,262
56
4,728
2Q17
9
21
69
1
100
2Q17
-30.6
12.5
5.1
-41.1
0.7
3Q17
545
917
2,955
46
4,462
3Q17
12
21
66
1
100
3Q17
273.0
15.0
5.0
-61.0
15.1
Source: Company, MOSL
Parag’s 3QFY17 conference call highlights
Reasons why gross margins decreased steeply; Steps taken by the company
n
Raw milk prices have gone up 20% YoY and 14% QoQ in 3QFY17. Prices usually
go down after Diwali but went up taking them by surprise.
n
SMP prices moved in line or ahead of RM costs in the quarter.
n
Management did not take a price increase in 3QFY17.
n
8% price increases in the Consumer business in mid-January so far is not
enough. May take price increase in 3 phases. Also working on cost savings
wherever possible.
n
Further price increase may also be dependent on ability of market to absorb the
increase and on the strategy followed by competitors.
n
Cooperatives have not passed on price increase in pouched milk so far.
n
The company has taken price increases in institutional business as well but there
could be some reaction from customers which could affect volumes for a few
days to weeks. Institutional investment is ~10% of sales.
n
In Ghee no one else has taken a price increase and management expects
competitors to increase prices soon.
n
In Cheese both institutional and well as retail, they have taken the lead on price
increase. In Institutional part of cheese business others are likely to follow suit
while in retail business competitors have already taken price increase albeit not
to the same extent as Parag.
n
Inventory is higher because value is higher due to higher procurement costs.
20 May 2016
3

Parag Milk Foods
n
n
n
Gross margin in SMP is 1% to 5%. Consumer business gross margins are from
26%-40%. Therefore the mix change from 4% of sales coming from SMP in
3QFY16 to 12% of sales coming from SMP in 3QFY17 affected overall gross
margin adversely
Annual Adspend to sales at level will be in line with earlier guidance at 2%
(excluding promotions) for the full year. This was over 3% of sales in 3QFY17 due
to festive season spend.
Other expenses increase was witnessed in 3 components. These were in A&P,
Selling and distribution (scale up without consequent increase in sales as of now
as they expand, usually around 4-5% of sales) and factory overheads (spare
capacity used for job work stopped).
Demonetization impact going forward
n
December was in line with normal sales so not much sales impact of
demonetization is likely to be witnessed in 4QFY17
Whey protein launch and other new products
n
Whey protein brand ‘Avataar’ was launched in 4QFY17- .9kg INR3200, 2.2kg INR
7000. Price comparable to peers. However cost per gram of protein is 20%
cheaper than international brands. Quality of protein is also better. Competitors
have 4% sugar while Avatar is Sugar free.
n
‘Avataar’ is being rolled out initially in top 7 cities in India (35-40% of demand in
the country). Also launched in Ecommerce which is 35-40% of sales for this
product.
n
Gym trainers, nutritional shops and online are the channels of distributors
n
Will spend on A&P on this product only after distribution roll out. Majority of
the spends in this category will be below the line anyway.
n
Pride of Cows brand is expanding into yogurt as well.
Capex
n
Spent INR 250m on capex so far. 3 year target at the time of IPO was INR 1.5b.
The targeted spread across 3 years was INR850m, INR500m and INR 150m in
FY17, FY18 and FY19 respectively. So capex has been lower than expected in
Year1.
VAT issue
n
In 18 states own depots rest is through super stockists
n
In the remaining states the chain is company-super stockists-distributor retailer.
Some super stockists did not pay sales tax due in their respective state. Ultimate
responsibility is with company. When they recover from super stockists
(difficult) these provisions will be written back.
n
Management does not believe there will be more write offs. These issues were
with preceding years. They believe that now their processes and systems are
stronger.
20 May 2016
4

Parag Milk Foods
Valuation & view
n
n
n
Opportunity size in Dairy is huge and in-turn offers strong growth visibility for
branded players. PARAG with its strengths on procurement, distribution,
innovation and management bandwidth is best placed among peers. While rest
of the listed dairy players are either regional or have dominant B2B positioning,
PARAG offers a pan-national branded dairy play with B2C focus.
Subsequent to the startlingly bad results we have cut our PAT estimates for
FY18/FY19 sharply by 37% and 15% respectively. There is no clarity yet on where
procurement costs will settle and while management has taken a price increase
in 4QFY17, it is not adequate and even that will have an adverse initial impact
on volumes in a downbeat consumption environment. Intense quarterly
volatility is a negative surprise that was revealed for the first time in the brief
listing history of the company.
We have reduced our target multiple from 22x to 20x Dec’2018 EPS (35%
discount to FMCG sector multiple given low ROE and high volatility). Maintain
Neutral.
Exhibit 7: We have cut our PAT estimates for FY18/FY19 sharply by 37% and 15% respectively for significant miss in 3QFY17
FY17E
17,092
813
76
New
FY18E
19,660
1,481
559
FY19E
23,536
2,166
1,017
FY17E
17,118
1,568
662
Old
FY18E
20,036
1,985
892
FY19E
24,040
2,445
1,196
FY17E
0%
-48%
-88%
Change
FY18E
-2%
-25%
-37%
FY19E
-2%
-11%
-15%
Sales
EBITDA
PAT
Source: Company, MOSL
Exhibit 8: Valuation Matrix of coverage universe
Company
Consumer
Asian Paints
Britannia
Colgate
Dabur*
Emami*
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Jyothy Labs
Marico*
Nestle
Page Industries
Parag Milk Foods
Pidilite Inds.
P&G Hygiene
Radico Khaitan
United Breweries
United Spirits
Retail
Jubilant Foodworks
Shopper's Stop
Titan Company
Reco
Neutral
Buy
Buy
Neutral
Buy
Neutral
Neutral
Neutral
Buy
Neutral
Buy
Neutral
Buy
Neutral
Neutral
Buy
Not Rated
Buy
Buy
Neutral
Neutral
Neutral
Price
(INR)
981
3,195
882
265
1,098
1,610
5,115
849
273
356
265
6,174
14,219
213
668
7,015
120
784
2,313
973
318
412
Mkt Cap
(USD M)
14,065
5,725
3,584
6,971
3,722
8,189
3,214
27,442
49,310
962
5,102
8,894
2,370
268
5,114
3,402
238
3,095
5,023
957
390
5,471
EPS Growth YoY (%)
FY16 FY17E FY18E
26.3
46.3
10.4
17.2
17.7
24.4
20.4
12.9
-3.5
-41.7
26.1
-7.3
18.7
-66.7
47.3
22.0
3.9
14.7
LP
-11.7
19.3
-13.4
8.1
2.6
-4.4
2.6
-2.9
11.0
-5.6
1.1
8.6
84.7
8.3
-7.0
12.9
-86.5
12.7
12.1
-6.5
-5.4
71.2
-14.3
-29.8
15.0
P/E (x)
EV/EBITDA (x)
ROE (%) Div. (%)
FY16 FY17E FY18E FY16 FY17E FY18E FY16
FY16
33.2
32.6
25.0
29.8
37.2
35.9
19.9
31.1
22.6
31.0
32.4
36.2
42.2
12.7
27.5
35.8
11.7
30.7
42.9
23.8
13.1
42.5
30.6
32.6
24.6
29.7
32.9
32.2
22.3
30.5
21.5
26.2
30.3
32.8
38.5
23.9
26.8
31.1
11.2
30.4
38.5
24.6
18.2
32.1
27.5
27.9
20.5
26.1
28.6
28.5
19.3
27.6
18.7
23.1
26.2
26.1
29.6
13.7
23.7
26.6
11.5
24.8
28.7
16.7
13.4
30.1
34.7
55.9
68.9
33.3
43.4
23.4
30.8
82.4
29.3
9.1
36.9
40.9
46.0
19.5
29.9
30.8
10.3
15.1
19.8
13.4
6.3
21.3
0.9
0.6
1.2
0.8
0.7
0.6
1.1
1.9
2.5
1.1
1.3
0.8
0.6
0.0
0.6
0.5
0.6
0.1
0.0
0.3
0.0
0.6
13.3 52.4 48.5 42.8
15.5 45.6 44.4 38.5
18.9 38.9 40.7 34.2
13.8 37.2 36.3 31.9
22.0 43.6 44.9 36.8
16.2 48.5 43.7 37.6
13.4 30.6 32.4 28.6
11.7 44.6 44.1 39.5
13.5 35.4 32.6 28.8
18.6 86.8 47.0 39.6
16.5 47.2 43.6 37.4
24.8 51.5 55.3 44.4
29.5 68.2 60.4 46.6
631.5 31.7 234.5 32.1
9.9
45.3 40.2 36.5
15.0 54.0 48.1 41.8
2.6
17.5 18.7 18.2
44.0 69.5 73.4 51.0
64.1 138.3 80.8 49.2
74.6
95.8
4.6
65.1
54.5
51.3
75.9
77.6
44.6
43.5
39.6
42.7
Note: For Nestle FY16 means CY15
Source: Company, MOSL
20 May 2016
5

Parag Milk Foods
Financials and Valuations
Income Statement
Y/E March
Total Income
Growth (%)
COGS
Gross Profit
Gross Margin (%)
Operating expenses
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Financial Other Income
Profit before Taxes
Change (%)
Margin (%)
Tax
Tax Rate (%)
Adjusted PAT
Change (%)
Margin (%)
2012
8,998
36.7
7,006
1,992
22.1
1,169
823
64.1
9.1
225
400
8
205
110.1
2.3
16
7.9
189
LTP
2.1
2013
9,250
2.8
6,907
2,343
25.3
1,509
834
1.4
9.0
261
403
21
191
-6.8
2.1
-16
-8.6
208
9.8
2.2
2014
10,883
17.7
8,359
2,524
23.2
1,701
823
-1.2
7.6
275
437
12
123
-35.4
1.1
-37
-29.6
160
-22.9
1.5
2015
14,441
32.7
10,616
3,825
26.5
2,753
1,072
30.2
7.4
275
469
15
343
177.6
2.4
21
6.0
322
101.2
2.2
2016
16,451
13.9
11,776
4,676
28.4
3,200
1,476
37.7
9.0
334
490
16
668
94.9
4.1
195
29.2
473
46.9
2.9
2017E
17,092
3.9
12,408
4,684
27.4
3,871
813
-44.9
4.8
420
293
53
153
-77.1
0.9
76
50.0
76
-83.8
0.4
(INR Million)
2018E
19,660
15.0
14,247
5,413
27.5
3,932
1,481
82.2
7.5
456
260
59
823
437.8
4.2
263
32.0
559
631.5
2.8
2019E
23,536
19.7
16,687
6,849
29.1
4,684
2,166
46.3
9.2
494
240
65
1,496
81.9
6.4
479
32.0
1,017
81.9
4.3
Balance Sheet
Y/E March
Share Capital
Reserves
CCD's
Net Worth
Loans
Deferred Liability
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets, L&A
Inventory
Account Receivables
Cash & Bank
Loans & Advances
Others
Long term advances
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2012
158
394
550
1,102
3,220
100
4,422
3,180
718
2,462
70
7
3,485
1,394
1,187
18
86
230
570
1,602
850
562
189
1,883
4,422
2013
160
638
1,250
2,048
3,314
75
5,437
3,348
914
2,434
62
13
4,393
1,395
1,473
22
215
351
938
1,464
922
528
14
2,928
5,437
2014
160
761
1,250
2,171
4,369
52
6,592
3,600
1,181
2,419
371
3
5,408
1,903
1,673
42
437
335
1,019
1,614
1,254
349
10
3,795
6,592
2015
160
1,079
0
1,239
4,409
60
5,708
4,367
1,456
2,911
283
3
6,043
2,119
1,709
53
974
522
665
3,531
1,931
1,591
9
2,511
5,708
2016
704
2,915
0
3,619
3,787
110
7,516
5,229
1,789
3,439
286
0
6,184
2,724
2,360
77
455
411
157
2,394
1,678
668
48
3,790
7,516
2017E
841
5,991
0
6,832
2,848
95
9,775
6,179
2,210
3,969
230
0
7,473
2,708
2,136
1,377
437
602
213
1,898
1,131
689
78
5,575
9,775
(INR Million)
2018E
841
6,551
0
7,392
2,769
95
10,256
7,129
2,666
4,463
230
0
8,145
3,540
2,712
391
481
720
300
2,583
1,885
620
78
5,562
10,256
2019E
841
7,568
0
8,409
2,553
95
11,056
7,479
3,159
4,319
230
0
8,611
4,069
2,447
304
529
862
400
2,104
1,468
558
78
6,507
11,056
20 May 2016
6

Parag Milk Foods
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Return Ratios (%)
RoE
RoCE (post-tax)
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2012
12.0
26.2
69.7
2013
13.0
29.4
128.3
2014
10.0
27.3
135.9
2015
20.2
37.4
77.6
2016
6.7
11.5
51.4
2017E
0.9
5.9
81.2
(INR Million)
2018E
6.7
12.1
87.9
2019E
12.1
18.0
100.0
17.8
8.1
0.7
8.0
3.1
16.4
7.3
0.7
8.0
1.7
21.3
7.8
0.7
9.4
1.6
10.6
5.7
0.5
7.2
2.7
31.7
18.6
1.1
12.7
4.1
234.5
36.1
1.1
23.9
2.6
32.1
17.7
1.0
13.7
2.4
17.6
11.9
0.9
9.3
2.1
17.1
25.2
25.8
48
2.0
13.2
13.1
13.3
52
1.7
7.6
12.1
12.6
53
1.7
18.9
12.4
13.2
43
2.5
19.5
12.4
13.1
45
2.2
1.5
2.6
2.9
48
1.7
7.9
7.4
8.3
45
1.9
12.9
11.1
11.7
40
2.1
6.8
5.7
5.9
3.3
1.0
0.4
0.4
0.3
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Direct Taxes Paid
(Incr)/Decr in WC
CF from Operations
(Incr)/Decr in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Invest.
Change in Equity
(Incr)/Decr in Debt
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
2012
823
-16
-1,865
-1,059
-2,758
-3,816
-7
-2,765
913
3,220
0
-292
3,841
18
0
18
2013
834
16
-1,041
-191
-225
-416
-6
-230
738
94
0
-407
426
4
18
22
2014
823
37
-846
14
-570
-556
10
-560
-37
1,055
0
-451
567
20
22
42
2015
1,072
-21
1,295
2,346
-679
1,667
0
-679
-1,254
40
0
-442
-1,656
11
42
53
2016
1,476
-195
-1,256
26
-866
-840
3
-863
1,907
-622
0
-425
860
23
53
76
2017E
813
-76
-484
252
-894
-642
0
-894
3,137
-940
0
-255
1,942
1,300
77
1,377
(INR Million)
2018E
1,481
-263
-973
244
-950
-706
0
-950
0
-79
0
-202
-281
-986
1,377
391
2019E
2,166
-479
-1,031
655
-350
305
0
-350
0
-217
0
-176
-393
-87
391
304
20 May 2016
7

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Parag Milk Foods
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PaARAG MILK FOODS
No
No
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