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MOSL: PARAG MILK FOODS (Neutral)-Sales in-line-EBITDA margin expands 250bp YoY led by subsidiary turnaround

​Parag Milk Foods: Sales in-line; EBITDA margin expands 250bp YoY led by subsidiary turnaround

(parag IN, Mkt Cap USD0.3b, CMP INR238, TP INR245, 3% Upside, Neutral)

• PARAG reported net sales growth of 3.4% YoY (est. of +2.5%) to INR4.3b in 4QFY17. Healthy EBITDA margin versus low expectations after the disastrous 3QFY17 meant that EBITDA grew by 29.6% YoY (est. of -42%) to INR519m, and adj. PAT by 98% YoY to INR319m (est. of INR84m).
  
• Gross margin expanded 240bp YoY to 32.4%. Higher employee costs (+80bp YoY to 5.2%) were offset by lower other expenses (-90bp to 15.1%). Higher other income (due to reversal of INR71m impairment losses taken earlier) and a lower tax rate aided strong PAT growth.
  
• FY17 performance: Sales, EBITDA and adj. PAT grew by 5.2%, -27% and -36% YoY, respectively. EBITDA margin contracted 280bp YoY to 6.2%.
  
• Key concall highlights: (1) Company took 8% price increase in January. Competitors followed 30-45 days later, leading to weak volumes for PARAG. (2) Further price hike is required to protect margins. The company will now take a decision on price increase in June after taking into account revised GST rates. (3) Reason for high depreciation: a) Half of IPO spends capitalized and b) INR0.53b catch-up cost due to Ind-AS (correction of historical accounting).