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Higher SMP sales; weak core revenues

Key takeaways from Q3FY22 performance: (1) Parag’s revenue grew 13.8% YoY due to a recovery in both HoReCa as well as higher SMP sales and (2) gross and EBITDA margin improved 94bps and 169bps YoY, respectively. As the industry moves towards normalcy post-covid, the company has accelerated brand-building efforts (ad-spends up 136% YoY). HoReCA segment clocked higher than prepandemic sales during the quarter. We model Parag to report revenue and PAT CAGR of 11.8% and 35.3%, respectively, over FY21-24. Maintain HOLD with a DCFbased revised target price of Rs121 (10x FY24E EPS; earlier TP Rs135)

Q3FY22 result highlights: Parag reported revenue, EBITDA and PAT growth of 13.8%, 39.6% and 69.5% YoY, respectively. Gross and EBITDA margin improved 94bps and 169bps YoY, respectively due to (1) utilisation of low-cost inventory and (2) reduced trade spends. PAT margin was up only 116bps YoY due to higher effective tax rate.

Segment-wise performance: Milk products continued to dominate the revenue mix by contributing 74% of the company’s revenue, followed by SMP (16%) and Liquid milk (9%). While liquid milk declined 9.9% YoY, SMP and milk products registered growth of 57.3% and 4.3% YoY, respectively, in Q3FY22

Revival of HoReCa: We note sharp recovery in the HoReCa segment after large vaccination drives and economic revival as the major reason for the growth registered by the company during the quarter. The company clocked higher than precovid level sales from HoReCa segment. We believe no large lockdowns in the thirdwave as a strong signal for the returning normalcy and higher demand from the HoReCa segment going forward.

Marketing spends inching up: Parag reported 136% YoY growth in its branding investments in Q3FY22. This will likely result in higher awareness. However, we note the company has reduced the trade-spends and discounts during the quarter.

Maintain HOLD: We model Parag to report strong revenue and PAT CAGR of 11.8% and 35.3%, respectively, over FY21-24. We maintain HOLD rating on the stock with a DCF-based revised target price of Rs121 (implied 10x FY24E EPS; earlier TP: Rs135). Key risks: Any failure of new products/ irrational competition may negatively impact our estimates. Faster than expected economic revival is an upside risks to our estimates

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