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Engro Foods (EFOODS): Earnings revised downward 'Maintain Sell'

• We revise down our earnings estimates for Engro Foods (EFOODS) after tweaking our assumptions post 3Q2018 result, which fell short of our expectations. We maintain our ‘Sell’ call on EFOODS.
• We trim down our EFOODS’ sales forecasts for 2018E/2019F/2020F by 21/28/2% with revised EPS estimates of Rs0.7/1.1/1.6 (previously Rs0.9/1.5/1.6) on account of lower sales in 9Q2018.
• The company posted breakeven profits in 3Q2018 with lower than anticipated sales on the back of slowdown in its dairy segment, we believe.
• EFOODS’ dairy segment has been under duress from heated competition as the company’s flagship tea-whitener Tarang lost grounds against brands like Dostea, Tea Max, Everyday, etc. 
• The company’s Tarang, which used to be a market leader in Tea Whitener and had around 45% contribution to EFOODS’ dairy sales, now contributes only ~15% to dairy segment, as per our channel checks.
• Besides Tarang, which is a tea-whitener, Olpers and Omung are drinking milk where Olpers is full cream milk while Omung is consumed in drinking, tea creaming and desert making. The company’s Dairy segment constitutes around 90% to the company sales.
• In Dec 2016, FrieslandCampina (2017 revenues of EURO 12.1bn), one of the largest dairy producers in the world, in partnership with the International Finance Corporation (IFC) of the World Bank and the Dutch development bank FMO, acquired EFOODS’ 51% controlling stake from Engro Corporation (ENGRO).
• EFOODS can take advantage of the vast experience and network of FrieslandCampina that produces and sells consumer products, ranging from dairy-based beverages, infant nutrition to cheese and desserts. FrieslandCampina has footprints in many European countries as well as in Asia and in Africa through its own subsidiaries.
• Though EFOODS now has access to market knowledge and expertise of world’s sixth largest dairy producer, we believe that EFOODS will take some time to regain its positioning in the dairy industry. The company is planning to introduce new products in future though details are not available as yet.
• We flag, 1) rising competition 2) decline in processed milk consumption, 3) any unanticipated regulatory change and 4) volatility in international raw milk prices as key risks for EFOODS.