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Likely revival after two years

Takeaways from Q2FY22: (1) Revenue growth was 6.8% YoY due to recovery in both HoReCa and consumer products and (2) gross and EBITDA margin improved 101bps and 163bps YoY, respectively due to lower milk procurement prices. The company entered into milk-shake category. It has also introduced multiple differentiated products. Expansion of distribution reach is likely to drive strong off-take. With strong recovery in HoReCa segment and reduction in debt and interest cost, we model Parag to report revenue and PAT CAGR of 14.3% and 39.1%, respectively, over FY21-24. Maintain HOLD with a DCF-based revised target price of Rs135 (10x FY24E EPS; earlier TP Rs140).

* Q2FY22 result highlights: Parag reported revenue, EBITDA and PAT growth of 6.8%, 27.8% and 43.3% YoY, respectively. Gross and EBITDA margin improved 101bps and 163bps YoY, respectively due to (1) higher realisations and superior revenue mix and (2) lower other expenses. However, PAT margin was up only 109bps YoY due to higher effective tax rate.

* Steady launch of new products: The company forayed into milkshakes segment with launch of four flavours under brand Go. It targets 5% market share by May-22 of this Rs10bn market. Additionally, Parag launched Milko cheese in three SKUs. It is an affordable substitute of cheese and aims to target value conscious consumers. The company also launched single origin Paneer under its premium brand Pride of cows. We believe the company has strong distribution network which can be leveraged to roll out new products.

* Distribution expansion: In Q2FY22, the company added one new cold storage facility, two new depots and seventeen super stockists. The company has grown 8% in weighted distribution in Q2FY22. We note that acceptance of Parag’s products is increasing on e-commerce as well, sales from which grew 70% YoY.

* Recovery in FY22-23: With markets opening up, demand for consumer products like ghee, cheese, paneer and UHT is improving. Also, demand from the HoReCa segment is reviving strongly.

* Maintain HOLD: We model Parag to report revenue and PAT CAGR of 14.3% and 39.1%, respectively, over FY21-24. We maintain HOLD rating on the stock with a DCF-based revised target price of Rs135 (10x FY24E EPS; earlier TP Rs140).

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