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Sales uptick; margins better

Parag Milk Foods (Parag) posted a revenue uptick of 7% YoY in Q2FY22 off a low base (-22% YoY) as core categories reverted to pre-pandemic levels, up 23% YoY in H1. EBITDA grew 28% YoY (18% above estimate) on lower procurement prices while gross margins expanded 101bps.

With normalcy returning, Parag outlined its Vision 2.0 encompassing a 6C framework: Cows, Consumers, Cash, Cost, Corporate Governance and Community. Management hence announced expansion across milk and distribution along with focus on strengthening core, balance sheet and ESG. Given better-than-expected margins, we are raising FY22/23E EPS by 30/9% and upgrading Parag to ‘BUY’ with a TP of INR158 (INR127 earlier), valuing the stock at 15x FY23E.

Procurement prices dip improves profitability

Sales were up 7% YoY on a base quarter decline of 22% YoY. This was led by growth of 9% YoY and 13% YoY in sales of value-added products and skimmed milk powder, respectively, while liquid milk sales dipped 1% YoY. Core categories grew 23% in H1FY22. Procurement prices remained soft during Q2FY22, while realisation largely remained the same, leading to gross margin expansion of 101bps YoY. Consequently, EBITDA shot up 28% YoY, and with Q2FY22 margin expanding to 10%. The company expects EBIDTA margin to sustain at 9–10% as sales and procurement pick up.

New vision to aid growth pickup

During Q2FY22, management saw a pickup as HORECA displayed growth from prepandemic levels. With reversion to normalcy, management announced the new Vision 2.0 covering expansion across procurement: This involves setting up the largest dairy farm in South East Asia increasing the number of cows to 6x, milk production to 140,000 liters and focusing on core categories, along with improvement in efficiencies and modernisation to lower costs. Improved profitability should result in strengthening of balance sheet as cash flows expand. Hence, management envisages a 15% revenue CAGR over coming years with growth of 20% in core categories of ghee, cheese, paneer and proteins.

Outlook and valuation: Growth uptick; upgrade to ‘BUY’

With Parag announcing Vision 2.0 outlining long-term targets, and margin improvement being stronger than expected, we are raising FY22/23E EPS by 30/9% and upgrading the stock to ‘BUY’ with a revised TP of INR158, valuing it at 15x FY23E (17% discount to Heritage Foods’ 18x). The stock is trading at 19x FY22E/13x FY23E.

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