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MOSL: PARAG MILK FOODS (Neutral)-Spate of new launches planned in a tough environment-High RM costs continue exerting pressure

​Parag Milk Foods: Spate of new launches planned in a tough environment; High RM costs continue exerting pressure on earnings

(PARAG IN, Mkt Cap USD0.3b, CMP INR239, TP INR250, 5% Upside, Neutral)

We met management of Parag Milk Foods (PARAG) to get updates on its business and future plans.

• ​Procurement cost still up, expected to come down by July-August: Raw milk prices are still high, increasing 3% between December 2016 and April 2017 (+20% YoY). The company is also facing shortage of milk, albeit manageable, as aggregators have also started supplying to other players. PARAG follows a milk procurement arrangement, wherein 80% is sourced directly and 20% from aggregators. The company took a price hike of 8% across its portfolio in mid-January (peers also took hikes of 7-8% but with a lag). However, we note that price increases taken so far are not adequate, which could keep margins under pressure. In our view, further price hikes (company is in process of taking another ~6% hike, the timing of which is not decided yet) could cushion margins to some extent, but have an adverse initial impact on volumes in a downbeat consumption environment, especially if competitors follow suit with a lag .
  
• Sales look better after price hikes by competitors: Liquid milk sales were good in 4QFY17, while product sales were affected due to price increases taken ahead of peers. April, however, seems to be better with competitors also increasing prices. Mix continues to remain weak, impacted by higher procurement in 3Q and then product volume weakness in 4Q. Besides this, rural demand continues to be muted.