Parag Milk Foods
BSE SENSEX
31,214
S&P CNX
9,711
11 August 2017
1QFY18 Results Update | Sector: Consumer
CMP: INR236
TP: INR245(+4%)
Neutral
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Sales in-line; Medium-term target unchanged
PARAG reported net sales growth of 7.7% YoY (est. of +6%) to INR4.1b
in
1QFY18. EBITDA declined 7.7% YoY (est. of -18.7%) to INR294m, while adj. PAT
grew 3% YoY (est. of -24.3%) to INR105m. Sales in 1QFY18 were impacted by
destocking (majorly in the last 15 days of June), farmer strike in Maharashtra
(affected liquid milk sales in May/June), and impact on the cheese business
from low exports (hardening of INR) and price hikes to institutional players.
Gross margin expanded 50bp YoY to 29%.
Higher other expenses (+160bp YoY
to 17.3%) and employee costs (+10bp YoY to 4.6%) led to EBITDA margin
contraction of 120bp YoY to 7.1%. Lower tax rate at 8.1% led to adj. PAT
growth, despite the EBITDA decline.
Key concall highlights:
(1) RM prices higher YoY, but no change QoQ. Expect
milk prices to come down 3QFY18 onward, but not sharply. (2) GST benefits
will be neutral-to-positive for PARAG; will take one quarter to know the exact
impact. (3) Target remains unchanged: 14-15% revenue CAGR with 5% net
margin over next 2-3 years; margin target does not take into account GST-led
benefits.
Valuation and view:
Opportunity size in Dairy is huge, and in turn, offers strong
growth visibility for branded players. PARAG, with its strengths in 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 a B2C focus. The crucial factor to monitor remains RoE improvements over
the medium term. Until RoE improves, target multiples would not be more
than 20x, even if earnings momentum is strong. We have revised FY18E EPS
upward by 23% due to margin beat and lower tax rate guided for FY18. We
maintain
Neutral
with a target price of INR245 (18x June‘19 EPS).
(INR Million)
FY17
2Q
4,728
0.7
1,444
30.5
1,067
377
-8.9
8.0
115
64
23
222
78
35.4
143
47.8
3.0
3Q
4,461
15.1
987
22.1
1,131
-145
-137.8
-3.2
109
89
20
-322
-54
16.8
-268
-284.5
-6.0
4Q
4,283
3.4
1,390
32.4
871
519
29.6
12.1
168
88
59
322
3
0.9
319
98.4
7.5
1Q
4,129
7.7
1,199
29.0
905
294
-7.7
7.1
116
79
15
115
9
8.1
105
3.0
2.5
FY18
2QE
3QE
5,580
4,996
18.0
12.0
1,649
1,355
29.5
27.1
1,203
1,017
445
338
18.0
LP
8.0
6.8
115
109
64
62
23
20
290
187
78
51
27.0
27.0
211
137
47.6
LP
3.8
2.7
FY17
4QE
5,131
19.8
1,563
30.5
940
623
20.2
12.1
123
51
24
473
160
33.8
313
-2.0
6.1
17,307
5.2
4,916
28.4
3,846
1,070
-27.8
6.2
490
336
118
362
65
18.0
297
-37.2
1.7
FY18E
19,835
14.6
5,766
29.1
18,135
1,700
58.9
8.6
462
256
82
1,064
298
28.0
766
157.9
3.9
FY18
1QE
4,065
6.0
1,093
26.9
825
268
-18.7
6.6
88
74
11
117
35
30.0
82
-24.3
2.0
Var.
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm/ Vol m
Free float (%)
PARAG IN
84.1
19.8 / 0.3
354 / 203
2/-28/-40
75
51.8
Financials & Valuations (INR b)
Y/E Mar
2017 2018E 2019E
Net Sales
17.3
19.8
23.1
EBITDA
1.1
1.7
2.1
PAT
0.3
0.8
1.0
EPS (INR)
3.6
9.1
12.5
Gr. (%)
-46.4 152.6
37.0
BV/Sh (INR)
78.2
87.3
99.7
RoE (%)
6.0
11.0
13.3
RoCE (%)
6.9
10.1
12.0
P/E (x)
65.3
25.9
18.9
EV/EBITDA (x)
19.7
12.1
9.9
Estimate change
TP change
Rating change
Consolidated - Quarterly Earning Model
Y/E March
Net Sales
YoY Cha nge (%)
Gross Profit
Ma rgi n (%)
Tota l Expendi ture
EBITDA
YoY Cha nge (%)
Ma rgi ns (%)
Depreci a ti on
Interes t
Other Income
PBT
Ta x
Ra te (%)
Adj PAT
YoY Cha nge (%)
Ma rgi ns (%)
E: MOSL Es ti ma tes
1Q
3,835
2.6
1,095
28.6
777
318
11.8
8.3
98
96
16
140
38
27.2
102
45.5
2.7
(%)
1.6
9.7
9.6
-2.1
28.6
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 – Research Analyst
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
Krishnan Sambamoorthy – Research Analyst
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428

Parag Milk Foods
Key quarterly charts
Exhibit 1: 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
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
4Q17
1Q18
544
770
514
918
889
975
2,953
2,475
2,577
45
149
61
4,460
4,283
4,127
3Q17
4Q17
1Q18
12
18
12
21
21
24
66
58
62
1
3
1
100
100
100
3Q17
4Q17
1Q18
272.6
48.9
6.9
15.2
10.4
4.6
4.9
(10.1)
7.9
(61.9)
125.8
84.8
15.1
3.4
7.6
Source: Company, MOSL
Exhibit 2: Consol. sales grew by 7.7% YoY
Sales (INR b)
19.6
15.1
7.7
2.6
0.7
4.7
2Q17
4.5
3Q17
3.4
Growth (%)
Exhibit 3: Gross margins expanded by 50bp YoY
Gross profit (INR b)
30.1
28.6
30.5
Gross margin (%)
32.4
29.0
22.1
4.1
4Q16
3.8
1Q17
4.3
4Q17
4.1
1Q18
1.2
4Q16
1.1
1Q17
1.4
2Q17
1.0
3Q17
1.4
4Q17
1.2
1Q18
Source: Company, MOSL
Source: Company, MOSL
Exhibit 4: EBITDA margins contracted 120bp YoY
EBITDA (INR b)
9.7
8.3
8.0
EBITDA margin (%)
12.1
7.1
Exhibit 5: Consol. Adj. PAT grew 3% YoY to INR105m
PAT (INR b)
PAT margin (%)
7.5
2.5
0.3
-0.3
(6.0)
0.1
3.9
0.2
2.7
0.1
3.0
0.1
(3.2)
0.4
0.3
0.4
-0.1
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
0.5
0.3
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
Source: Company, MOSL
Source: Company, MOSL
11 August 2017
2

Parag Milk Foods
Exhibit 6: Employee cost were up 10bp YoY and other expenses were up 160bp YoY
Employee costs as a % of sales
Other expenses as a % of sales
16.0
15.7
18.2
20.6
15.1
17.3
4.4
4Q16
4.5
1Q17
4.4
2Q17
4.7
3Q17
5.2
4Q17
4.6
1Q18
Source: Company, MOSL
1QFY18 conference call highlights
Sales impacted by destocking (majorly in last 15 days of June month), farmer
strike in Maharashtra (affected liquid milk sales in the month of May & June)
and cheese business affected by low exports (hardening of INR) and price hike
to institutional players. Cheese sales to institutional players have come back to
normal now.
RM prices higher YoY but no change QoQ. Expect milk prices to come down from
3QFY18, but not sharply.
Sales of ghee impacted due to destocking as the GST rate came in higher
compared to earlier rate.
Procurement in this quarter was 5% lower YoY; 12llpd is the average
procurement, with total capacity of 20llpd.
No new brands will be launched for next couple of years; sub-brands can be
introduced to get into new categories.
Cheese capacity running at 60-65% utilization levels after the capacity expansion
(i.e. 85% of 60MT).
12-13% price realization during the quarter in the milk products portfolio. No
plans to do any price correction as of now.
Vector consulting: Supply chain and distribution expansion are the key benefits
to be derived from the consultant. Fixed+Variable fees for the consultant. How
to double HoReCa direct customers is one of the aims.
55% capacity utilization of UHT plant in Palamner. Introduction of “Slurp” was
one of the ways to increase the utilization levels. Will look to enter east and
south of India for increasing distribution of UHT products.
GST benefits will be neutral to positive for the company. Will take one or two
quarters to know the exact impact.
Target remains unchanged with 14-15% topline CAGR with 5% net margin over
next 2-3 years. The margin target does not take into account GST-led benefits.
3 year capex plan of INR1.7b.
20-25% tax rate for FY18.
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
3
11 August 2017

Parag Milk Foods
of the listed dairy players are either regional or have dominant B2B positioning,
PARAG offers a pan-national branded dairy play with B2C focus.
The crucial factor to monitor remains ROE improvements over the medium
term. Until ROE improves, target multiples won’t be more than 20x even if
earnings momentum is strong.
We have revised our FY18 EPS upwards by 23% due to margin beat and lower
tax rate guided for FY18. We maintain Neutral rating with a target price of
INR245 (18x June‘19 EPS).
Exhibit 7: We have changed our FY18 EPS numbers upwards by 23%
New
Sales
EBITDA
PAT
FY18E
19,835
1,700
766
FY19E
23,145
2,147
1,049
FY18E
19,835
1,561
625
Old
FY19E
23,145
2,147
1,030
Change
FY18E
FY19E
0.0%
0.0%
8.9%
0.0%
22.5%
1.8%
Source: Company, MOSL
Exhibit 1: Valuation Matrix
Company
Consumer
Asian Paints
Britannia Inds.
Colgate-Palm.
Dabur India
Emami
Godrej Cons.
GlaxoSmith C H L
Hind. Unilever
ITC
Jyothy Lab.
Marico
Nestle India
P & G Hygiene
Page Industries
Parag Milk
Pidilite Inds.
United Breweries
United Spirits
Retail
Jubilant Food.
Titan Company
Reco
CMP
(INR)
Neutral
Buy
Buy
Neutral
Buy
Neutral
Sell
Buy
Neutral
Neutral
Neutral
Sell
Buy
Buy
Neutral
Neutral
Neutral
Neutral
Sell
Neutral
1,144
4,100
1,048
303
1,073
903
5,328
1,153
272
375
320
6,536
7,932
15,949
236
789
786
2,417
1,297
607
Target Price
(INR)
1,200
4,660
1,285
315
1,310
995
4,500
1,285
280
395
355
5,740
9,082
19,600
245
810
850
2,525
850
565
Mkt Cap
EPS Growth YoY (%)
FY17 FY18E FY19E FY17
8.7
7.3
-5.7
1.9
4.5
12.4
0.9
1.9
9.4
175.7
12.1
-1.6
11.5
15.0
-46.4
6.7
-23.0
87.1
-32.1
18.5
5.6
15.8
15.2
6.7
1.4
14.0
6.5
16.8
10.4
-20.6
8.5
-2.5
7.5
23.4
152.6
7.9
11.6
29.1
48.0
17.6
19.5
22.6
21.7
18.3
23.1
14.6
9.3
19.2
11.4
23.8
20.9
16.2
16.6
35.2
37.0
14.0
51.9
49.3
40.0
18.2
54.4
55.6
49.4
41.8
40.5
47.8
34.1
58.7
32.3
33.4
50.9
55.4
54.7
66.8
65.3
47.1
90.4
90.4
129.6
67.3
P/E (x)
FY18E FY19E
51.6
48.1
42.9
39.1
39.9
41.9
32.0
50.2
29.3
42.1
46.9
56.8
50.9
54.1
25.9
43.7
81.1
70.1
87.5
57.2
43.2
39.2
35.2
33.1
32.4
36.6
29.3
42.2
26.3
34.0
38.8
48.9
43.7
40.0
18.9
38.3
53.4
46.9
62.5
48.4
RoE
(%)
FY17
28.5
36.9
50.4
28.4
35.8
24.6
22.2
65.6
23.5
21.1
36.7
39.0
45.3
40.0
6.0
28.2
10.4
21.3
8.2
20.6
Div.
(%)
FY17
0.8
0.0
1.0
0.8
0.8
0.7
1.0
1.5
2.0
1.6
0.9
1.0
4.6
0.5
0.0
0.6
0.1
0.0
0.2
0.4
Upside
(INR B) (USD B)
(%)
5
14
23
4
22
10
-16
11
3
5
11
-12
14
23
4
3
8
4
-34
-7
1,105
494
286
539
247
614
227
2,535
3,317
69
414
639
260
181
19
407
218
362
86
541
17.2
7.7
4.5
8.4
3.9
9.6
3.5
39.5
51.7
1.1
6.4
10.0
4.0
2.8
0.3
6.4
3.4
5.6
1.3
8.4
Source: Company, MOSL
11 August 2017
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 (%)
Non-rec. (Exp)/Income
Reported PAT
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
0
322
2016
16,452
13.9
12,030
4,422
26.9
2,940
1,482
38.3
9.0
334
496
15
668
94.9
4.1
195
29.2
473
46.9
2.9
0
473
2017
17,307
5.2
12,588
4,719
27.3
3,637
1,082
-27.0
6.3
490
333
110
369
-44.7
2.1
66
17.9
303
-35.9
1.8
-132
171
2018E
19,835
14.6
14,069
5,766
29.1
4,066
1,700
57.2
8.6
462
256
82
1,064
188.1
5.4
298
28.0
766
152.6
3.9
0
766
2019E
23,145
16.7
16,323
6,822
29.5
4,675
2,147
26.3
9.3
486
244
82
1,499
40.9
6.5
450
30.0
1,049
37.0
4.5
0
1,049
(INR Million)
2020E
26,777
15.7
18,694
8,083
30.2
5,382
2,701
25.8
10.1
537
220
82
2,026
35.1
7.6
608
30.0
1,418
35.1
5.3
0
1,418
(INR Million)
2020E
841
8,966
9,807
1,955
99
11,861
7,900
3,748
4,152
207
0
10,804
3,340
3,537
1,752
1,168
807
200
3,302
2,568
712
21
7,502
11,861
Balance Sheet
Y/E March
Share Capital
Reserves
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
2015
160
1,079
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
3,619
3,787
110
7,516
5,279
1,832
3,447
278
0
6,184
2,724
2,360
77
455
411
157
2,394
1,678
668
48
3,790
7,516
2017
841
5,733
6,574
2,499
99
9,172
5,850
2,262
3,588
207
0
9,504
4,285
2,150
1,008
878
475
708
4,127
3,119
977
31
5,378
9,172
2018E
841
6,499
7,340
2,283
99
9,722
6,800
2,724
4,075
207
0
8,112
2,019
2,741
1,521
966
566
300
2,673
1,772
879
21
5,439
9,721
2019E
841
7,548
8,389
2,168
99
10,656
7,150
3,211
3,939
207
0
10,624
5,464
2,332
690
1,062
676
400
4,113
3,301
791
21
6,510
10,656
11 August 2017
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)
2015
20.2
37.4
77.6
2016
6.7
11.5
51.4
2017
3.6
9.4
78.2
2018E
9.1
14.6
87.3
2019E
12.5
18.3
99.7
(INR Million)
2020E
16.9
108.7
116.6
11.7
6.3
0.6
7.6
3.0
35.1
20.6
1.2
13.7
4.6
65.3
25.0
1.2
19.7
3.0
25.9
16.1
1.0
12.1
2.7
18.9
12.9
0.9
9.9
2.4
14.0
2.2
7.4
73.4
2.0
18.9
12.4
13.2
43
2.5
19.5
12.5
13.2
45
2.2
6.0
6.9
7.6
48
1.9
11.0
10.1
11.9
45
2.0
13.3
12.0
13.7
40
2.2
15.6
14.0
16.0
40
2.3
3.3
1.0
0.4
0.3
0.2
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
2015
1,072
-21
1,295
2,346
-679
1,667
0
-679
-1,254
40
0
-442
-1,656
11
42
53
2016
1,482
-195
-1,256
32
-866
-834
3
-863
1,907
-622
0
-431
854
23
53
76
2017
1,082
-66
-656
360
-558
-199
0
-558
2,652
-1,288
0
-234
1,130
931
77
1,008
2018E
1,700
-298
451
1,853
-950
903
0
-950
0
-217
0
-174
-391
513
1,008
1,521
2019E
2,147
-450
-1,902
-205
-350
-555
0
-350
0
-115
0
-161
-276
-831
1,521
690
(INR Million)
2020E
2,701
-608
70
2,163
-750
1,413
0
-750
0
-213
0
-138
-351
1,062
690
1,752
11 August 2017
6

Parag Milk Foods
Corporate profile
Company description
Exhibit 1: Sensex rebased
Parag Milk Foods is a leading manufacturer and
marketer of branded dairy foods and beverages in
India. It started off with collection and distribution of
milk in 1992; over the years, it has developed a
portfolio of dairy products under its four flagship
brands Gowardhan, Go, Topp Up & Pride of Cows.
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Promoter
DII
FII
Others
Jun-17
48.2
8.7
21.5
21.6
Mar-17
47.5
2.3
24.7
25.6
Jun-16
47.5
4.3
27.3
21.0
Exhibit 3: Top holders
Holder Name
IDFC TRUSTEE CO. LTD A/C IDFC
INFRASTRUCTURE FUND
NOMURA INDIA INVESTMENT FUND
MOTHER FUND
GOLDMAN SACHS INDIA LIMITED
NEW HORIZON OPPORTUNITIES MASTER
FUND
% Holding
6.0
3.5
2.9
2.9
Source: Capitaline
Note: FII Includes depository receipts
Source: Capitaline
Exhibit 4: Top management
Name
Devendra Shah
Pritam Shah
B M Vyas
Rachana Sanganeria
Designation
Executive Chairman
Managing Director
Director
Company Secretary
Exhibit 5: Directors
Name
B M Vyas
Narendra Ambwani
Nitin Dhavalikar
Name
Radhika C Pereira
Ramesh Chandak
Sunil Badriprasad Goyal
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Haribhakti & Co LLP
Harshad S Deshpande & Associates
KPMG
N L Bhatia & Associates
Type
Statutory
Cost Auditor
Internal
Secretarial Audit
Source: Capitaline
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY18
FY19
FY20
MOSL
forecast
9.1
12.5
16.9
Consensus
forecast
6.8
9.8
-
Variation (%)
33.4
27.6
-
Source: Bloomberg
11 August 2017
7

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Parag Milk Foods
Disclosure of Interest Statement
Analyst ownership of the stock
Parag Milk Foods
No
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11 August 2017
8