Parag Milk Foods' Q3FY18 results (Neutral) - Recovery in milk products drives earnings
Q3FY18 result highlights
- Parag Milk Foods 3QFY18 net sales increased by 16.4% yoy to Rs5.2bn(est: Rs4.9bn), EBITDA came in at Rs588m (est: Rs460m) versus loss of Rs183m in base quarter, Reported PAT came in at Rs 255m (est: Rs187m) vs loss of Rs411m in 3QFY17.
- Fresh milk sales increased by 1% yoy while Milk product sales were up 16% yoy. SMP sales increased 34% yoy during the quarter.
- Gross margins improved by 1005bps (up 260bps QoQ) to 30.7%, aided by moderation in milk prices and better realisations, albeit on a low base (3QFY17 margins were impacted by higher milk prices, postponement of price hikes in milk products and poor mix due to higher SMP sales and moderate milk product sales).
- Staff cost grew by a moderate 3.5% yoy and other expenses declined by 9.8% yoy (base quarter had high advertising & distribution spends), resulting in EBITDA margin of 11.3% (up 140bps qoq) versus EBITDA loss in the base quarter.
- Depreciation and interest cost increased by 25% and 29% yoy respectively while other income declined by 19% yoy. Resultant PAT came in at Rs255m vs Adjusted loss of Rs246m(adj for Rs 165m VAT liability) in base quarter
Key positives: Healthy revenues, sequential improvement in margins
Key negatives: Weak liquid milk sales
Impact on financials: Factoring improvement in margins, we have increased our FY18/19/20E estimate by 19%/15%/11%.
Valuations & view
PMF results were ahead of estimates led by recovery in milk product sales and higher growth in SMP. We are factoring in continued recovery in revenues as well as a return to peak EBITDA margins over the next 24 months for the company given the benefit of likely stable input costs and higher operating leverage. However, given the continued volatility in growth for the consumer products business and likely increase in competitive intensity with lower input costs, we believe earnings visibility remains low. Given that, we believe valuations at 27xFY19E earnings are fair. Maintain Neutral.
Parag Milk Foods Ltd. Parag Milk Foods Limited is engaged in manufacturing and processing of milk and milk products. The Company offers a range of products, which include cheese, ghee, whey proteins, paneer, curd, yoghurt, milk products, liquid milk, milk-based beverages and milk powders. The Company's brands include Gowardhan, under which traditional dairy products, such as ghee, are marketed; Go, under which western lifestyle dairy products, such as cheese, are marketed; Pride of Cows, under which premium milk is sold, and Topp Up, under which flavored milk is marketed. The Company has an aggregate milk processing capacity of approximately two million liters per day. The Company has a product basket comprising over 150 stock keeping units (SKUs). Its manufacturing facilities are located in Manchar (Pune district) and Palamaner (Chittoor district).
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