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Lower HoReCa sales impacted revenues

Key reasons for weak Q4FY21 performance: (1) Steep decline in HoReCa sales resulted in sharp 18.8% revenue decline. Lower sales to Modern trade also resulted in decline in liquid milk revenues and (2) While Gross margin was flat YoY, negative operating leverage resulted in 320bps lower EBITDA margin. We model (1) the revenues of core products (paneer, cheese, ghee etc.) to gradually recover in FY22-23 due to recovery in economy and favourable base, (2) off-take from HoReCa segment is also expected to recover in H2FY22 and (3) post equity infusion, the Balance Sheet will strengthen with reduction in debt and interest cost. Maintain HOLD with a DCF based revised target price of Rs140 (11x FY23E EPS; earlier TP Rs108).

Steep decline in B2B sales impacted revenues:

Parag reported revenue decline of 18.8% YoY due to (1) decline in demand from HoReCa segment and (2) lower demand from institutions. The liquid milk is largely distributed through Modern trade and closure of Modern trade due to localised lockdowns impacted consumer off-take. SMP sales were impacted due to lockdown related disruptions.

EBITDA margin impacted negative operating leverage:

While gross margin was flat YoY, EBITDA margin declined 320bps YoY. With 19% revenue decline, the negative operating leverage impacted margins. Normalised PAT declined 195% due to weak operating performance as well as higher tax rate.

Fund raising to strengthen Balance Sheet and reduce interest cost:

The company has raised equity funds of Rs1.25bn from IFC and Sixth Sense Ventures. The promoters have subscribed to convertible share warrants and will infuse Rs1.11bn in the company. We believe equity funding will help the company to reduce the additional debt burden and interest cost over FY22-23.

Expect recovery in FY22-23:

With gradual re-opening of markets, the demand for consumer products like ghee, cheese, paneer and UHT is improving. Also, demand from HoReCa segment is expected to revive gradually in the coming quarters. The company will continue to enjoy benefit of lower input prices even in H1FY22.

Maintain HOLD:

We model Parag to report strong revenue and PAT recovery in FY22-23 with reducing impact of lockdowns imposed after second covid wave. We maintain HOLD rating on the stock with DCF-based revised target price of Rs140 (11x FY23E EPS; earlier TP Rs108).

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