MOSL: PARAG MILK FOODS (Neutral)-Growth remains muted-declining milk prices to support margins in 2HFY18

​Parag Milk Foods: Growth remains muted; declining milk prices to support margins in 2HFY18

(PARAG IN, Mkt Cap USD0.3b, CMP INR257, TP INR275, 7% Upside, Neutral)

• PARAG's net sales grew 6.7% YoY (est. of +10%) to INR5b in 2QFY18. EBITDA increased 48% YoY (est. of +10%) to INR500m. Adj. PAT grew 94.5% YoY to INR249m (est. of INR189m). This quarter's revenue also includes INR86m of mega-project incentives for two months. Milk products, Fresh milk, SMP and Others witnessed sales growth of 5.5%, 3.9%, 22.3% and 3.6%, respectively. Ghee and consumer cheese business saw good growth, while Institutional cheese and butter affected the Consumer products business.
  
• Gross margins contracted 30bp YoY to 28.1%. Lower other expenses (-330bp YoY) were slightly offset by higher employee costs (+20bp), leading to EBITDA margin expansion of 280bp YoY to 9.9%. Reduction in other expenses was led by saving on octroi, lower transportation costs, and A&P savings.
  
• Announcements: (1) Parag Milk Foods appointed Mr Vimal Agarwal as CFO with effect from 21st Dec'17 (previously worked with Pepsico, where he joined in 2004 and worked in various finance corporate roles). (2) Board has approved further expansion of whey processing capacity with capex of INR177m at the Manchar facility. This capex was earmarked for setting up a new production line of milk-based beverages at Palamaner, which PARAG has now deferred.
  
• Key concall highlights: (1) Milk procurement costs have started declining at the end of the quarter. Prices are expected to stagnate at ~INR27/liter till Mar'17 due to excess inventory of SMP in the country and availability of raw milk.