Parag Milk Foods Ltd

(BSE Code: 539889) (CMP: Rs.235.90) (FV: Rs.10) (TGT: Rs.275+)

Money Times - - Stock Watch - By Amit Ku­mar Gupta

Parag Milk Foods Ltd (PMFL) pro­duces and pro­cesses milk and milk prod­ucts. It of­fers a range of prod­ucts, which in­clude cheese, ghee, whey pro­teins, pa­neer, curd, yo­ghurt, milk prod­ucts, liq­uid milk, milk-based bev­er­ages and milk pow­ders. Its brands in­clude i) ‘ Goward­han’ for tra­di­tional dairy prod­ucts such as ghee; ii) ‘Go’ for west­ern life­style dairy prod­ucts such as cheese; iii) ‘Pride of Cows’ for pre­mium milk; and iv) ‘ Topp Up’ for fla­vored milk. The com­pany has an ag­gre­gate milk pro­cess­ing ca­pac­ity of ~2 mil­lion litres per day. It has a prod­uct bas­ket com­pris­ing 150+ stock keep­ing units (SKUs). Its man­u­fac­tur­ing fa­cil­i­ties are lo­cated at Man­char (Pune district) and Pala­maner (Chit­toor district). In Q1FY18, the com­pany posted net sales growth of 7.7% YoY (est. of +6%) at Rs.4.1 bn. EBITDA de­clined 7.7% YoY (est. of -18.7%) to Rs.294 mn while PAT grew 3% YoY (est. of -24.3%) to Rs.105 mn. Sales dur­ing the quar­ter were im­pacted by de­stock­ing (ma­jorly in the last 15 days of June), farmer strike in Ma­ha­rash­tra, which 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 50 bps YoY to 29%. Higher other ex­penses (+160 bps YoY to 17.3%) and em­ployee costs (+10 bp YoY to 4.6%) led to EBITDA mar­gin con­trac­tion of 120 bps YoY to 7.1%. Lower tax rate at 8.1% led to PAT growth de­spite the EBITDA de­cline.

The com­pany with its strengths in pro­cure­ment, dis­tri­bu­tion, in­no­va­tion and man­age­ment band­width is best placed among peers. It of­fers a pan-na­tional branded dairy play with a B2C fo­cus while the rest of the listed dairy play­ers are ei­ther re­gional or have a dom­i­nant B2B po­si­tion­ing. The cru­cial fac­tor to mon­i­tor im­prove­ments in RoE 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 ex­pan­sion and lower tax rate guided for FY18.

Tech­ni­cal Out­look The stock looks very good on the daily chart for medium-term in­vest­ment. It has bro­ken out of the down­ward chan­nel trad­ing above the neck­line. The stock trades below im­por­tant DMA lev­els on the daily chart. Start ac­cu­mu­lat­ing at this level of Rs.235.90 and on dips to Rs.215 for medium-to-long-term in­vest­ment and a pos­si­ble price tar­get of Rs.275+ in the next 12 months.

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