Published on 28/05/2019 10:38:07 AM | Source: SPA Securities Ltd

Buy Parag Milk Foods Ltd For The Target Rs. 342 - SPA Securities

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Parag Milk Foods (PMF) reported net sales of INR 6,722mn in 4Q FY19 (29.8% jump over INR 5,178mnYoY) and a PAT of INR 313mn (20% jump over INR 262mnYoY).Revenue from Value Added Products (VAPs) rose 25% YoY to INR 4227mn.Gross margins fell236 bps YoYled by increase in contribution of Skimmed Milk Powder (SMP) by 500 bps to 19.3% as well as lag effect in passing milk price increase to consumers. In April'19 Company has taken price hike of 1%.EBITDAM (excluding other income) dropped by a substantial 419 bps YoY as Marketing & Logistics spend towards improving reach and range witnessed marked increase.


Revenue rose by a robust 30% YoY with 25% increase in VAPs

Net Sales rose by a robust 30% YoY to INR 6,722mn. Revenue from VAPs rose 25% driven by a slew of new product launches and 75% growth in SMP sales as company reduced inventory during the quarter. The recent acquisition of Danone's plant in Sonepat, Haryana contributed 120 mn to top line in this quarter. The contribution of Health& Nutrition Products (part of VAPs) increased to 3.5% of revenue as compared to 2.5% in FY'18


EBITDA margins witnesses fall led by higher marketing spends & one-offs

EBITDAM (excluding other income) dropped by a substantial 419 bps YoY as fall in gross margins percolated down and Marketing & Logistics spend towards improving reach and range witnessed marked increase. One-off provisions to the tune of INR 15 crores also put a dent in EBITDA margin. Increase in contribution of SMP to revenue as well as lag in passing on milk price increase to consumers led to drop in gross margins. Advertising spend increased to 3.5% of revenue compared to 2.6% during corresponding quarter last year. With commencement of production at Danone's Haryana plant and launching of new VAP, Parag is incurring higher logistic costs to focus on penetrating East and North regions. The staff costs are also on rise as company starts hiring at Haryana.


Conference call Highlights :

* There has been a substantial expansion of the company's distribution network with retail reach increasing to 3.8 lac outlets currently compared to 2.5 lac outlets at FY'18 end.

* InFY'19, company has incurred a capital expenditure to the tune of INR 800mn and has guided for INR 600-650mn each for FY'20 and FY21.

* Working capital cycle improved to 68 days at the end of FY'19 compared to 72 days in FY'18.

* Debt on BS has reduced by INR 500 mn to 2150 mn over the last 12 months.

* During FY'19, Milk processing volume remained at an average of 1.4 to 1.5mn litres per day, an increase of 25/26% YoY. Towards the end of Q4FY'19, milk procurement prices were on the rise and crossed INR 26/litre for the company.

* It has launched the premium liquid milk under 'Pride of Cow' brand in Delhi, NCR region which was till now available in only 3 cities ( Mumbai, Pune & Surat ).

* Tax rate for Q4FY'19 dropped substantially to 5% due to provision write backs related to earlier years. Management has guided for tax rate to be in the range of 24 to 25% going forward.


Outlook and Valuation

In the backdrop of increasing milk procurement prices, we are fine tuning our revenue and profitability estimates. We expect Parag to post Revenue CAGR at 22% during FY19-21 compared to 21% earlier. Going forward, aggressive expansion of distribution network & inorganic growth is expected to aid revenue growth (acquisition of Danone India's dairy plant at Sonepat, Haryana in FY'18). EBITDAM is estimated to take a knock of 150 bps to 9.5% for FY'20 as well as FY'21 as company needs to spend aggressively behind advertising and sales promotion to grow its health and nutrition business. EPS is estimated to compound 30% annually during FY'19 -'21 compared to earlier estimated 34%. At CMP of 235, the stock is trading at 10.3x FY'21E EPS. We maintain BUY with a revised target of INR 342(from earlier 453 ) at which stock will trade at 15x FY'21E EPS.


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