BSE SENSEX
29,921
S&P CNX
9,314
Parag Milk Foods
CMP: INR239
TP: INR250 (+5% )
Neutral
Spate of new launches planned in a tough environment
High RM costs continue exerting pressure on earnings
We met management of Parag Milk Foods (PARAG) to get updates on its business
and future plans.
Procuremen cost still up, expected to come down by July-August:
Raw milk
prices are still high, increasing 3% between December 2016 and April 2017
(+20% YoY). The company is also facing shortage of milk, albeit manageable, as
aggregators have also started supplying to other players. PARAG follows a milk
procurement arrangement, wherein 80% is sourced directly and 20% from
aggregators. The company took a price hike of 8% across its portfolio in mid-
January (peers also took hikes of 7-8% but with a lag). However, we note that
price increases taken so far are not adequate, which could keep margins under
pressure. In our view, further price hikes (company is in process of taking
another ~6% hike, the timing of which is not decided yet) could cushion
margins to some extent, but have an adverse initial impact on volumes in a
downbeat consumption environment, especially if competitors follow suit with
a lag .
Sales look better after price hikes by competitors:
Liquid milk sales were good
in 4QFY17, while product sales were affected due to price increases taken
ahead of peers. April, however, seems to be better with competitors also
increasing prices. Mix continues to remain weak, impacted by higher
procurement in 3Q and then product volume weakness in 4Q. Besides this,
rural demand continues to be muted.
Strategy for recently launched whey protein brand
Avvatar:
The company is
targeting gyms, modern trade, dieticians and nutritionists for offline expansion
of this brand. It has already tied up with online platforms like Amazon. The
biggest differentiator for the product is the protein content (lower cost per
protein). It has 1.5-1.9x higher protein content compared to peers like ON. The
biggest test for PARAG will be to communicate the same to its channel
partners. To boost sales of this product, the company plans to conduct
programs for gym trainers. It will also try to make gyms as retail outlets rather
than just source of information. Management also claims that
Avvatar
tastes
better than other brands. The company had invested INR1.1b in its whey plant,
where it targets production of 4MT per day. Management targets INR750m of
sales from this product.
3 May 2017
Update
| Sector:
Consumer
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
PARAG IN
84.1
357 / 202
4 /-32 /-
20.1
0.3
120
52.5
Financials Snapshot (INR b)
FY17E FY18E FY19E
Y/E MARCH
17.3
19.9
23.8
Net Sales
0.8
1.5
2.2
EBITDA (INR b)
0.1
0.6
1.0
NP
0.8
6.9
12.5
EPS
-87.9 756.4
79.4
EPS Gr (%)
81.1
88.1 100.5
BV/Share (INR)
P/E (x)
293.7
34.3
19.1
P/BV (x)
2.9
2.7
2.4
RoE (%)
1.3
8.2
13.2
RoCE (%)
3.5
7.6
11.3
Shareholding pattern (%)
As On
Mar-17
Promoter
47.5
DII
2.3
FII
24.7
Others
25.6
Dec-16
47.5
4.0
27.4
21.1
FII Includes depository receipts
Stock Performance (1-year)
Parag Milk Foods
Sensex Rebased
350
320
290
260
230
200
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.