MOSL: PARAG MILK FOODS (Buy)-Growth continues-Milk Inflation impacts operating performance
PARAG MILK FOODS: Growth continues; Milk Inflation impacts operating performance
(PARAG IN, Mkt Cap USD0.2b, CMP INR207, TP INR255, 23% Upside, Buy)
- net sales grew sharply at 14.6% to INR6.3b (v/s est. of INR6.5b). Skimmed milk powder (SMP) grew ~21%, followed by Milk products at ~16%, Fresh milk at ~7% and other segment by ~2% YoY. EBITDA declined 4.6% YoY to INR569m (v/s est. of INR598m), while adj. PAT declined 2.7% YoY to INR275m (v/s est. of INR289m).
- Gross margins contracted 360bp YoY to 26.7%, largely due to an increase in milk procurement prices. High staff costs as % of sales (up 50bp YoY to 4.2%) was offset by sharp decline in other expenses as % of sales (down 230bp YoY to 13.5%). EBITDA margin contracted -180bp YoY to 9%.
- Key concall highlights: (1) Average RM inflation for 1QFY20 was 12% QoQ, average price for the quarter stood at INR28/liter. Company does not expect further increase in RM prices. Seeing some improvement in RM prices due to good monsoons; further decrease in prices expected post season. (2) Company has taken an average price hike of 8-9% and reduced trade discounts. The full effect of this correction should come in from 2QFY20.
- Valuation and view: There is a minor cut to our EPS estimate for FY20/FY21, mainly led by the miss in 1QFY20. Raw material inflation impacted the company's performance during the quarter; however, measures taken by the company (price hike and reduction in discounts) coupled with no further inflation in raw milk prices should benefit the operating performance in the coming quarters. Company is confident of achieving its Vision 2020 target; thus, we have built in EPS CAGR of 13% over FY19-FY21E, which is still moderate for PARAG's size. We value PARAG at 12x June FY21 EPS (~65% discount to consumer staples universe) to arrive at a one-year target price of INR255. Maintain Buy with 23% upside from CMP.
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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