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Parag Milk Foods' Q4FY19 results (Outperformer) - Revenue traction strong, adverse mix impacts margins

Q4Y19 result highlights

• Net sales increased by 30% yoy to Rs6.7bn (est: Rs5.8bn), EBITDA decreased by 21% yoy to Rs437m (est: Rs613m), PAT increased by 20% yoy to Rs313m (estRs289m)
• Milk products grew by ~22% yoy, while SMP sales grew by ~70%+ & Liquid milk grew by 9% yoy. SMP sales were high as company did higher exports due as prices were higher during the quarter and also to take benefit of export subsidy.
• Gross margins declined by 240bps yoy to 29.6% impacted by adverse mix on account of higher sales in low margin SMP segment.
• Staff cost and other expenses increased by 25% yoy & 44% yoy respectively.. Other expenses were higher on account of investments behind brands & one time provisions of Rs160-170m. Resultant EBITDA margins declined by 410bps yoy to 6.5%.
• Depreciation expense was down 24% yoy, interest cost down 19% yoy & other income increased by 46% yoy respectively, PBT declined 12% yoy, however lower tax rate resulted in PAT growth of 20% yoy.

Key positives: Healthy revenue growth in value added milk products

Key negatives: Higher other overheads.

Impact on financials: We have increased 20E estimates by 6%. Introduce FY21E

Valuations & view

Parag Milk Foods reported strong revenue growth led by continued traction in the value added products, however, adverse mix, milk inflation & one off provisions resulted weaker operational performance for the quarter. We expect revenue trajectory to remain buoyant led by value added segment coupled with internal initiatives (distribution expansion, investment behind brands) as well as increasing contribution from North/East region with scale up in Sonipat facility. While milk prices are expected to remain firm and some inflation is likely going forward, gross margin expansion could be lower, however, mix led improvement with traction in value added products, cost control measures and leverage benefit will aid overall EBITDA growth.  We are factoring revenue/ earnings CAGR of 16% /29% over FY19-21E, which coupled with continued improvement in working capital levels should aid overall return profile for the company. Maintain Outperformer.