Parag Milk Foods Ltd
(BSE Code: 539889) (CMP: Rs.235.90) (FV: Rs.10) (TGT: Rs.275+)
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.