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Revenue decline attributable to lower B2B sales

Key reasons for weak Q2FY21 performance: (1) Steep decline in sales to B2B segment (i.e. HoReCa and institutions) due to localised lockdown. However, there was recovery in in-home consumption, (2) Gross margin was up 130bps but EBITDA margin declined 30bps due to negative operating leverage. We expect the (1) revenues of core products (paneer, cheese, ghee etc.) to gradually recover H2FY21 onwards, (2) With opening up of the economy, there will be recovery in HoReCa segment and (3) with reduction in milk procurement prices, EBITDA margin is likely to expand to 9.6% in FY22 from 8.7% in FY20. Maintain HOLD with a DCF based revised target price of Rs108 (8x FY22E EPS; earlier TP Rs104).

* Steep decline in B2B sales impacted revenues: Parag reported revenue decline of 22.2% YoY due to decline in demand from (1) HoReCa segment and (2) lower demand from institutions. However, there was some increase in in-homeconsumption of products like ghee, cheese, paneer and UHT milk. With opening up of the economy, we expect there will be uptick in B2B sales in coming quarters.

* Segment-wise performance: Milk products reported revenue decline of 20.3% YoY. SMP sales were up 29.7%, YoY. Fresh milk sales were down 60.3% YoY. The company focussed more on its core business categories such as cheese, ghee, paneer and curd in Q2FY21. It also launched Gowardhan Star cup dahi during the quarter. It also introduced ghee and curd under the brand Pride of cows.

* Gross margin expanded due to lower procurement prices: Gross margin expanded 130bps YoY due to lower procurement prices. However, EBITDA margin declined 30bps due to negative operating leverage. Company initiated cost savings measures in H1FY21 and we believe some costs saving measures are structural in nature. PAT decline was 44.2% YoY.

* Expect recovery with festive season in Q3FY21: 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 H2FY21.

* Maintain HOLD: We model Parag to report revenue and PAT CAGR of 2.2% and 8.3%, respectively over FY20-FY22E. We maintain HOLD rating on the stock with DCF-based revised target price of Rs108 (8x FY22E EPS; earlier TP Rs104).

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