Parag Milk Foods Limited: Favourable Valuations and Strategic Priorities Should Provide Growth Opportunities
- To enhance product reach, Parag Milk Foods Limited plans to strengthen distributor & stockists base to target higher retail penetration.
- Parag Milk Foods Limited plans to increase Ad spend on various channels like television, newsprint, digital media to strengthen its brands
- Target of increasing value-added product portfolio should be achieved by focusing on health and nutritional aspect in development of premium products
Overview on Parag Milk Foods Ltd
Established in 1992, Parag Milk Foods Limited is largest private dairy FMCG Company, which has pan-India presence. It has its own manufacturing facilities with in-house technology which are strategically located at Manchar in Maharashtra, Palamner in Andhra Pradesh and Sonipat in Haryana. Its goal is to be a largest dairy FMCG Company, emphasizing on health and nutrition to consumers through innovation.
Growth Enablers of Parag Milk Foods Ltd
- 2Q21 Numbers Exhibit Confidence: Parag Milk Foods Limited saw revenues of INR4,982 million in 2Q21, exhibiting an uptick of 14.4% on quarter-over-quarter basis as its revenues in 1Q21 were INR4,356 million. It ensured uninterrupted milk procurement from its farmer network. In domestic markets, there were ease in restrictions, resulting in early signs of demand revival. The company saw increase in home consumption of its core categories, ghee, butter, paneer and cheese in pandemic period.
- HORECA Business Should See Steady Improvement: Parag Milk Foods Limited’s HORECA business saw brunt of lockdown in India. Unprecedented disruption was seen in HORECA segment. In 2Q21, there has been slight uptick, and business should now improve. Parag Milk Foods Limited’s release emphasized on the fact that due to ease of restrictions, HORECA segment should see gradual improvement. Gross profit for 2Q21 was INR1,346 million, exhibiting quarter-over-quarter growth of 19.9% to INR1,123 million. Gross margins were 27.0% in 2Q21 and this was highest in last six quarters. 2Q21 EBITDA was INR415 million, exhibiting quarter-over-quarter growth of 39.6%. Expansion of 150 basis points was seen in EBITDA margins in 2Q21 to 8.3%. In 1Q21, EBITDA margins were 6.8%. Its focus was on cost rationalization and productivity enhancement measures and the company should continue to do so.
- India’s Favourable Dynamics Should Provide Growth Opportunities: Parag Milk Foods Limited should seek support from favourable sectoral dynamics as middle-class households should grow from 255 million in 2015 to 586 million in 2025. Consumption of milk & dairy products should be benefited from rising disposable income. India should see its urban population to grow from 31.2% in 2011 to 34.5% in 2021 and organised dairy industry should get some help from preference for clean, hygienic & ready-to-eat milk & dairy products. Milk is an important source of vital nutrients specially for vegetarians and consumers are shifting away from cereals to milk and dairy products. Continuous demand for milk & dairy products is ensured given that 31% of Indian population is vegetarian.
- Focus on Enhancing Product Reach and Strengthen Brands: Parag Milk Foods Limited has its focus on value creation by leveraging operational efficiencies and increasing milk procurement. The company plans to leverage in-house technological and R&D capabilities to maintain strict operational controls and develop customised systems & processes. It also plans to strengthen its existing farmer relations and offer quality & quantity-based incentives. Sales volume should see an increase as the company identifies specific states and regions in India.
- Strategic Priorities Should Help Achieve Growth: The company has its focus on operational efficiencies and technology should help in achieving this. It continues to ensure greater technology adoption and automation. Parag Milk Foods Limited plans to expand its portfolio and achieve depth in distribution. Its annual report emphasises that distribution reach spans across ~3.5 Lakh outlets. It will focus on achieving depth into categories it caters to. It is growing and strengthening association with stockists and distributors so that greater penetration can be achieved. Technology is backbone of the company’s processes. It believes in maintaining futuristic approach to stay relevant. Parag Milk Foods Limited has integrated advanced technology across all verticals.
- Ease of Restrictions Should Support Revenue Growth: In 3Q21, Parag Milk Foods Limited should see its revenues getting improved as compared to 2Q21 as economic activities are getting back on track due to ease in restrictions. Due to COVID-19 pandemic, consumers are becoming health-conscious and they favour trusted brands during these uncertain times. The company’s EBITDA should get some help from efficient cost management and enhancement of productivity.
Absurdly Cheap Valuations Means Going Long
Parag Milk Foods Limited has compounded its revenues at ~10.3%, EBITDA at ~9.2% and PAT at ~18.6% over FY16-FY20. The company’s profitability measures should be supported by strong distribution network and cost rationalization measures. Even though milk consumption has been increasing, per capita consumption is still meagre, when compared with other developed markets such as US and EU, and markets like Russia and Brazil. India is a milk drinking nation. Society values dairy products as they are an important source of protein and nation is home to largest population of vegetarians. All these points hint for large headroom which is available for growth. Indian dairy industry is seeing large-scale changes due to consumer behaviour. The company’s presence across various consumer distribution channels and collaborations with channel partners should support it to foster a stronger connect and respond to unique needs.
Parag Milk Foods Limited has a total market cap of ~INR94,881.25 lakhs and has a free float market cap of ~INR45,280.56 lakhs. At current price of INR112.80, its stock trades at ~10.07x of FY20 EPS which is at a deep discount to sectoral average of 15.75x, hinting that long position should be considered at its current price.
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