Parag Milk Foods
BSE SENSEX
27,860
S&P CNX
8,592
11 August 2016
Q1FY17 Results Update | Sector: Consumer
CMP: INR326
TP: INR340(+4%)
Neutral
Motilal Oswal values your support in
the Asiamoney Brokers Poll 2016 for
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request your ballot.
Long term growth drivers in place
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
PARAG IN
84.4
27.5 / 0.4
357 / 202
-2/-/-
257
52.5
Financials & Valuations (INR b)
Y/E Mar
2016 2017E 2018E
Net Sales
16.5
18.4
22.8
EBITDA
1.5
1.8
2.3
PAT
0.5
0.8
1.1
EPS (INR)
6.7
9.3
12.8
Gr. (%)
-66.7 38.2
37.9
BV/Sh (INR)
51.4
89.4 102.2
RoE (%)
19.5
14.1
13.4
RoCE (%)
12.4
11.1
11.7
P/E (x)
48.5
35.1
25.4
P/BV (x)
6.3
3.6
3.2
Estimate change
TP change
Rating change
PARAG’s 1QFY17
consolidated sales grew 3% YoY to INR3.8b led by Fresh milk
growth of 25% and Milk products sales growth of 5% (with around 4% volume
growth). SMP sales declined 14% YoY and others segment sales declined by
79%. EBITDA grew 16% YoY to INR330m while PAT grew 54% YoY to INR108m.
Sharp gross margin expansion:
Gross margins expanded sharply by 420bp YoY
to 29.9% aided by improving product mix and utilization of lower cost raw
materials of the previous quarter. Increase in employee costs (up 90bp YoY to
4.6%) and higher other expenses (up 230bp YoY to 16.7%) led to EBITDA
margin expansion of 100bp YoY to 8.6%. EBITDA thus grew 16% YoY to
INR330m.
Debt reduction:
Interest costs declined 17% YoY as debt levels reduced to INR
3b after repayment of loans worth INR1b. Tax rate increased 720bp YoY off a
low base. Full year tax rate is likely to be around 30%, same as last year.
Key concall highlights:
(1) 1st quarter sales and margins are the lowest in
terms of full year performance; summers are also low in terms of sale of milk
and milk products. (2) Price increases were taken at the back end of quarter so
the entire growth for 1QFY17 is mostly due to volume growth. (3) Management
is aiming for 5% PAT margin in FY19 led by price increase, product mix,
economies of scale, cost efficiencies and lower interest cost.
Valuation and view:
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 in nature or
have dominant B2B positioning, Parag offers a pan-national branded dairy play
with B2C focus. While we are positive on the long term investment story, the
stock has appreciated by 51% since its IPO three months ago, capping the near
term upside at 4%. Maintain Neutral rating and target price of INR 340 (25x
June 2015 EPS). From a medium term perspective, Parag offers a compelling
three year play with potential 23% CAGR returns.
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 2239804261
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +912239825428/Gautam
Duggad
(Gautam.Duggad@motilaloswal.com); +912261291522
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.

Parag Milk Foods
Key quarterly charts
Exhibit 1: Consol. sales grew 2.6% YoY
Sales (INR b)
4.7
3.7
3.9
4.1
3.8
25.7
31.4
26.8
Exhibit 2: Gross margins expanded 420bp YoY
Gross profit (INR b)
Gross margin (%)
31.4
29.9
29.8
3.5
1.1
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
4QFY15
1.0
1QFY16
1.3
2QFY16
1.2
3QFY16
1.3
4QFY16
1.1
1QFY17
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: EBITDA margins expanded 100bp YoY
EBITDA (INR b)
EBITDA margin (%)
9.8
8.3
7.6
0.3
4QFY15
0.3
1QFY16
0.4
2QFY16
0.4
3QFY16
0.4
4QFY16
0.3
1QFY17
8.8
9.6
8.6
Exhibit 4: Consol. PAT grew 54% YoY
PAT (INR b)
4.6
3.7
1.9
2.1
3.9
2.8
PAT margin (%)
0.16
4QFY15
0.07
1QFY16
0.10
2QFY16
0.15
3QFY16
0.16
4QFY16
0.11
1QFY17
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Product wise revenue breakup
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
4QFY16
12
19
66
2
100
4QFY16
-40.4
8.8
54.5
-9.6
19.6
1QFY17
13
24
62
1
100
1QFY17
-14.1
24.9
4.9
-78.7
2.6
Source: Company, MOSL
11 August 2016
2

Parag Milk Foods
Exhibit 6: Launched Go Cheese Wedges and..
Exhibit 7: ..Go Badam Milk Instant Mix in 1QFY17
Source: Company, MOSL
Source: Company, MOSL
Parag’s 1QFY17 conference call highlights
Key business highlights
1st quarter sales and margins are the lowest in terms of full year performance;
summers are also low in terms of sale of milk and milk products.
Segment wise growth:
Fresh milk 25%, SMP -14%, Milk products 5% and others
-79%.
Increase in share of fresh milk as well as growth due to volume growth and price
realization.
Decline in milk products due to sluggish demand in the market.
Exports doubled in 1QFY17; lower base as well addition of new markets led to
good growth in exports business. Paneer, cheese and ghee, UHT and milk based
beverages are sold in exports market.
Operating margins increase due to improved revenue mix, increase sale of fresh
milk and decrease in SMP.
Saving in finance cost due to repayment of working capital debt.
NWC days breakup:
Inventory days- 90; debtor 45-50 days; 35-40 creditor days;
therefore 21-23 working capital cycle
Debt level:
repaid 100cr; 300cr remains (150cr in nature of working capital and
rest long term debt)
Price increase taken at the back end of quarter so the entire growth for 1QFY17
is mostly due to volume growth.
SMP selling price declining YoY; dependence on SMP going down; price
realization 6-7% lower YoY and flat QoQ.
HoReCa:
New players are coming but don’t see any pressures.
Distribution:
Reach has increased; benefit to be seen in 2Q and 3Q.
Milk procurement and prices
Milk procurement volumes grew to 1.07 mn liters for the quarter (3.3% growth).
80% capacity utilization for cheese.
Project for Whey will take 2-3 months; on commissioning stage.
Guidance
3-4 new products lunch planned in 2QFY17.
Tax rate for FY17 will be 30%.
11 August 2016
3

Parag Milk Foods
Aiming for 5% PAT margin in FY19 led by price increase, product mix, full
utilization of AP facility therefore economies of scale, cost efficiencies and lower
interest cost.
2 new depots in the northern and southern regions in the coming quarter.
Valuation & view
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 in nature or have dominant B2B
positioning, Parag offers a pan-national branded dairy play with B2C focus.
While we are positive on the long term investment story, the stock has
appreciated by 51% since its IPO three months ago, capping the near term
upside at 4%.
Maintain Neutral rating and target price of INR 340 (25x June 2015 EPS). From a
medium term perspective, Parag offers a compelling three year play with
potential 23% CAGR returns.
Exhibit 8: Revise estimates upwards by 8.8%
New
Net Sales
EBITDA
Adjusted PAT
FY17E
18,363
1,779
784
FY18E
22,806
2,256
1,082
FY17E
19,249
1,802
801
Old
FY18E
23,094
2,225
1,061
% Change
FY17E
FY18E
-5%
-1%
-1%
1%
-2%
2%
Source: Company, MOSL
Exhibit 1: 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 Spirits
Retail
Jubilant Foodworks
Shopper's Stop
Titan Company
Reco
Neutral
Buy
Buy
Neutral
Buy
Neutral
Neutral
Neutral
Buy
Buy
Neutral
Neutral
Buy
Neutral
Buy
Buy
Buy
Buy
Buy
Neutral
Neutral
Price
(INR)
1,144
3,225
961
294
1,123
1,509
6,350
933
251
285
295
6,828
14,215
326
711
6,846
90
2,252
1,171
381
401
Mkt Cap
(USD M)
16,426
5,788
3,911
7,736
3,813
7,688
3,996
30,213
45,362
773
5,695
9,850
2,372
343
5,454
3,325
178
4,898
1,149
468
5,329
EPS Growth YoY (%)
FY16 FY17E FY18E
25.0
46.3
8.7
17.5
17.7
24.4
20.7
12.9
-3.5
24.2
26.1
-7.3
18.7
-66.7
46.6
19.8
-2.6
LP
-6.0
19.3
-13.4
20.1
12.5
2.2
12.3
10.0
22.9
4.6
7.1
17.9
-6.7
14.6
-5.5
28.2
38.2
23.0
12.0
14.7
21.1
54.0
48.9
11.4
16.3
25.0
31.1
15.5
23.9
25.8
9.9
12.8
15.6
12.4
22.8
25.5
37.0
37.9
18.2
19.7
21.0
50.8
46.1
30.9
21.0
P/E (x)
EV/EBITDA (x)
ROE (%) Div. (%)
FY16 FY17E FY18E FY16 FY17E FY18E FY16
FY16
61.7
46.0
43.0
41.2
44.6
45.5
37.9
49.0
32.6
32.7
52.6
57.0
68.1
48.5
47.9
53.7
13.9
72.8
73.5
65.3
49.9
51.4
40.9
42.1
36.7
40.5
37.0
36.3
45.8
27.6
35.0
45.9
60.3
53.2
35.1
38.9
47.9
12.1
60.1
47.8
43.9
44.8
44.2
32.8
32.1
31.8
32.7
29.4
33.0
40.6
23.9
31.2
37.4
48.0
38.8
25.4
33.0
40.0
10.0
39.9
32.7
33.5
37.0
41.3 34.2 29.4
32.9 29.0 22.7
27.3 25.3 19.5
33.2 29.6 25.6
38.1 31.5 26.1
33.8 28.4 23.4
27.9 26.5 23.5
34.3 31.8 28.2
20.7 18.3 15.7
25.2 22.4 19.8
36.2 32.0 26.2
40.2 35.0 27.9
42.2 34.1 25.2
157.9 155.7 122.9
30.2 25.2 21.1
36.0 30.9 25.1
9.9
8.6
7.3
33.7 31.7 23.8
27.3
15.6
41.3
19.9
12.9
34.0
14.7
10.6
27.8
34.4
55.9
67.9
33.2
43.4
23.4
30.7
82.4
29.3
19.2
36.9
40.9
46.0
19.5
30.4
31.2
9.3
36.7
14.1
6.3
21.3
0.8
0.6
1.1
0.7
0.7
0.6
1.0
1.7
2.7
1.4
1.1
0.7
0.6
0.0
0.6
0.9
1.1
0.0
0.2
0.0
0.6
Note: For Nestle FY16 means CY15
Source: Company, MOSL
11 August 2016
4

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
14,442
32.7
10,616
3,826
26.5
2,753
1,072
30.2
7.4
275
469
15
343
177.9
2.4
21
6.0
322
101.5
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
94.7
4.1
195
29.2
473
46.7
2.9
2017E
18,363
11.6
12,966
5,396
29.4
3,617
1,779
20.5
9.7
383
294
18
1,120
67.7
6.1
336
30.0
784
65.7
4.3
(INR Million)
2018E
2019E
22,806
27,501
24.2
20.6
15,989
19,226
6,817
8,275
29.9
4,561
2,256
26.8
9.9
456
252
20
1,568
39.9
6.9
486
31.0
1,082
37.9
4.7
30.1
5,500
2,775
23.0
10.1
494
234
22
2,069
32.0
7.5
662
32.0
1,407
30.1
5.1
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
844
6,699
0
7,543
2,609
110
10,262
6,379
2,172
4,207
286
0
7,758
3,011
2,369
567
500
811
500
1,989
1,340
601
48
5,770
10,262
(INR Million)
2018E
2019E
844
844
7,781
9,188
0
0
8,625
10,032
2,433
2,258
110
110
11,168
12,400
7,129
2,628
4,500
286
0
9,128
4,112
3,005
190
550
971
300
2,747
2,159
541
48
6,381
11,167
7,479
3,122
4,357
286
0
10,050
4,779
3,023
80
605
1,164
400
2,294
1,759
487
48
7,757
12,400
11 August 2016
5

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
37.5
77.6
2016
6.7
44.9
51.4
2017E
9.3
64.9
89.4
2018E
12.8
85.5
102.2
2019E
16.7
105.7
118.8
27.3
12.4
6.1
66.5
4.7
25.1
11.1
6.0
66.3
2.5
32.5
12.0
5.2
68.4
2.4
16.1
8.7
3.9
52.5
4.2
48.5
7.3
14.2
157.9
6.3
35.1
5.0
15.1
155.7
3.6
25.4
3.8
12.2
122.9
3.2
19.5
3.1
10.1
99.9
2.7
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
14.1
11.1
12.0
47
1.8
13.4
11.7
12.5
43
2.0
15.1
13.3
13.8
40
2.2
6.8
5.7
5.9
3.3
1.0
0.3
0.3
0.2
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
2,347
-679
1,668
0
-679
-1,255
40
0
-442
-1,657
11
42
53
2016
1,476
-195
-1,256
26
-866
-840
3
-863
1,907
-622
0
-425
860
23
53
76
2017E
1,779
-336
-1,489
-46
-1,150
-1,196
0
-1,150
3,140
-1,178
0
-275
1,687
491
77
567
(INR Million)
2018E
2019E
2,256
2,775
-486
-662
-988
-1,486
782
627
-750
32
0
-750
0
-176
0
-233
-409
-377
567
190
-350
277
0
-350
0
-175
0
-213
-388
-110
190
80
11 August 2016
6

Parag Milk Foods
NOTES
11 August 2016
7

Disclosures
Parag Milk Foods
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11 August 2016
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