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12 September 2017
Elara Securities (India) Private Limited
Shubham Maheshwari
shubham.maheshwari@elaracapital.com
+91 22 6164 8562
IIndia Dairy
Rethink Everything
Sagarika Mukherjee
sagarika.mukherjee@elaracapital.com
+91 22 6164 8594
Elara Securities (India) Private Limited
Glo
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Mar
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Elara Securities (India) Private Limited
Sagarika Mukherjee • sagarika.mukherjee@elaracapital.com • +91 22 6164 8594
Shubham Maheshwari • shubham.maheshwari@elaracapital.com • +91 22 6164 8562
Indian dairy at centre stage of the world Key premises about dairy sector were negated in 2015-17 period
"Value-added products are good only when it is good for the manufacturer as well.”
– RS Sodhi, MD, Gujarat Co-operative Milk Marketing Federation
Key premise that increase in salience of value added products (VAD) will necessarily benefit a company remains challenged as we believe not all of them have 1) the balance sheet strength to grow rapidly in VAD 2) the brand power to pass on inflation 3) VAD is working capital heavy, requires companies to fund the distribution channel as it is nascent 4) and requires milk procurement capacity to grow in multiples of volume growth thereby requiring constant capex. However, category tailwinds like low PCC (97 Ltrs/Yr), changing consumer preferences towards clean and hygienic foods & propensity to increase protein intake in diets with rising disposable income will lead to 20% CAGR for the sector going forward.
Prefer South Indian dairies over others due to low price volatility
Milk price volatility is relatively high in northern and western regions in India as they are milk surplus regions and the excess milk produced is exported as SMP (95% of powder capacity located in North and West) to SAARC and Russia. However, this introduces huge volatility in milk prices in those regions. Hence prefer South Indian dairy companies over North and Western region.
….and companies with high salience of pouch milk
Pure-play B2C dairy companies like HFL and Hatsun Agro have 61-63% of their sales coming from pouch milk which is also highly cash generative. As all dairy companies are in a high growth phase, we believe that a slow and steady but cash generative business of pouch milk is extremely critical to support the growth and development of VAD products. This principal has been followed by several companies like ITC (Cigarettes – FMCG), MRCO (PCNO-VAHO/Saffola Edible oil-Saffola Oats) in order to grow new verticals and launch brand extensions.
Valuation
We initiate on HFL with BUY rating and TP INR1804 (INR1628 for HFL +INR176/share value of FRL stake) as our preferred pick in the dairy space as it is a pure-play B2C, South based dairy company with an established brand name (Heritage) & high salience (62%) in pouch milk, which shall help in growing the VAD category. We initiate on Prabhat with BUY rating and TP INR160 as it is emerging as a low cost supplier of specialized dairy ingredients for large dairy brand owners. We value it at par with B2B players like Kwality Dairy. We initiate on Parag Milk Foods with Accumulate rating and TP INR289 as it has high salience in fast growing cheese and ghee categories. However as VAD is heavy on the balance sheet we value it at a discount to HFL/Hatsun while at a premium compared to B2B players like Prabhat and Kwality Dairy.
India | Dairy 12 September 2017
Initiating Coverage
Rethink Everything
Milk consumption in India accelerated in 2007-16 led by rising income growth
Milk Consumption Growth (%)
CAGR
2000-16 2000-07 2007-16
World 2.4 2.9 2.3
Developed Countries 0.2 0.3 0.2
Developing Countries 3.9 4.8 3.5
Asia 4.5 5.9 3.7
India 4.0 3.6 4.8
Source: FAO
PCC in India is <50% of developed economies
Source: Parag DRHP
Business model comparison
Source: Company, Elara Securities Research; Size of bubble represent % of sales from B2C
Peer Valuation
Company Rating CMP* ((INR)
TP ((INR)
EV/Sales(x) EV/EBITDA(x)
FY 18E
FY 19E
FY 20E
FY 18E
FY 19E
FY 20E
Heritage Buy 1,502 1804 1.5 1.3 1.2 21.7 16.8 14.2
Prabhat Buy 133 160 1.0 0.9 0.8 10.4 8.5 6.9
Parag Acc. 250 289 1.1 1.0 0.8 16.5 15.2 11.0
* Pricing as on 4 September 2017; Source: Elara Securities Estimate
285 281
220
156
97
24
0
100
200
300
USA
EU2
7
Russ
ian
Fe
der
atio
n
Bra
zil
Ind
ia
Ch
ina
(litr
es/y
ear)
Prabhat Dairy
Parag Milk
Heritage Foods
Hatsun Agro
Kwality Dairy
0
5
10
15
20
25
30
0
5
10
15
20
25
30
35
12
MT
EV/E
BIT
DA
(x)
Average of last 5 years ROCE(%)
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Table of Content
Executive Summary - Rethink Everything……………………………………………………………………………………………. 1
Huge untapped market in India…………………………………………………………………………………………………………… 3
Domestic self consumption story playing out……………………………………………………………………………………. 13
Changing dietary patterns in favor of packaged dairy products…………………………………………………….. 16
Prefer dairies with direct procurement and brands in fresh dairy products…………………………………… 21
Global SMP prices weigh on Indian milk prices…………………………………………………………………………………. 23
Western and Northern dairies affected by global milk prices………………………………………………………….. 27
Prefer South Indian companies over North or Western players………………………………………………………. 32
Valuation Methodology & Recommendation and Relative Valuation…………………………………………….. 37
Return ratios much better for B2C players in fresh dairy products………………………………………………….. 39
Company Section Heritage Foods - Taking measured steps to grow (Buy - TP INR 1,804)……………………………………….. 43
Taking measured steps to grow………………………………………..………………………………………………………………… 46
The only dairy with balance sheet strength to fund growth………………………………………..…………………. 49
Return ratios and cash flow from operations superior than others………………………………………..………. 55
Value of stake in Future Retail at INR176/share at CMP………………………………………..………………………… 56
50:50 JV announced with France based Novandie SNC………………………………………..………………………… 57
Valuation & Recommendation (BUY - TP INR 1,804)………………………………………..……………………………….. 58
Relative Valuation - EV/Sales & EV/ EBITDA bands………………………………………..…………………………………. 59
Prabhat Dairy - Leveraging its roots (Buy - TP INR 160)………………………………………..………………………….. 63
Rock solid foundation………………………………………..………………………….………………………………………..…………….. 66
Targeting less cluttered Tier-2/3 cities for B2C products………………………………………..…………………………. 74
Striking a fine balance: Growth and Capital………………………………………..…………………………………………….. 84
Valuation Methodology & Recommendation (Buy - TP INR 160)……………………………………….. 87
Relative Valuation - Trading at B2B valuations………………………………………..…………………………………………. 88
Parag Milk Foods - Cheese and Whey all the way! (Accumulate - TP INR 289) ……………………………. 93
Investing behind fast growing value added products……………………………………………………………………… 96
Cheese is one of the fastest growing categories in dairy products in India…………………………………… 98
Cheese was introduced into India through QSRs…………………………………………………………………………….. 99
Cheese evolved into a B2C category along the way………………………………………………………………………… 99
Foraying into a nascent category of Whey for protein shakes………………………………………………………… 101
Realizations in Whey protein in health supplements are manifold compared to infant nutrition… 103
Ghee and SMP margins highest during high inflation in global and domestic milk prices…………… 106
Valuation & Recommendation (Accumulate - TP INR 289)……………………………………………………………….. 110
Relative Valuation - Parag was de-rated due to heavy fluctuations in margins……………………………… 111
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Indian dairy industry stands to benefit from the huge untapped market India is the leading milk producer in world, producing approximately 19% of the world’s total milk. Milk production in India is growing at 5% CAGR. Indian dairy Industry has witnessed a strong growth (15% CAGR) in last decade and reached a size of INR6.2tn in FY17 led by 5-6% volume growth in the same period and higher realizations (~10% YoY in-line with CPI inflation in the same period). Value added products both in fresh dairy segment (curd, butter milk, lassi, cottage cheese) and in long shelf life products (cheese, UHT milk, Flavored milk, clarified butter) have been growing at a fast pace (~20% CAGR/ 8% vols/12% price) compared to pouch milk. During the same period, organized segment grew at a CAGR of 20% led by the increasing level of urbanization across the Indian population as urban consumers prefer clean, hygienic and ready-to-drink milk and dairy products. Studies have shown that with rising disposable income, consumers start increasing their protein intake and dairy products are the biggest beneficiaries of this trend. We expect this growth to continue for the organized dairy industry as 70% of the marketable surplus (excluding milk produced by farmers but used for self consumption, which is 46% of the total milk produced) is still unorganized and sold through traditional milkmen and bulk milk vendors. As opposed to preparing dairy products like curd, ghee, buttermilk, lassi at home, we believe that the consumer is shifting towards packaged dairy products and hence fresh dairy products are bound to grow at a fast stead.
The unorganized segment still dominates the Indian dairy industry Although the unorganized Industry dominates the dairy industry currently, it is growing at a slower pace (~15% CAGR) compared to organized dairy (~20% CAGR) and hence organized dairy is expected to become 25% of the dairy industry in value terms by 2020.
Why does unorganized market in milk exist?
Even though co-operatives provide a remunerative price to the producer, the unorganized sector plays a major role in milk marketing because of three factors:
� The first factor is the pricing policy of the co-operatives: their purchase price is based on the fat content of the milk, whereas the unorganized sector pays a flat rate per liter of milk.
� The second factor, which motivates the milk producers to sell milk to unorganized vendors, involves the type of milk animals reared by the producer. Crossbred cows yield more milk with a lower fat( Fat – 4.45%/ SNF-8.54% ) than do buffalo (Fat – 7.75%/ SNF -10.11%).
� The third factor is payment policy. The can pay their producers every day, whereas the co-operatives pay weekly or fortnightly. Producers sometimes have to fight with the co-operatives to get their payments.
Huge untapped market in India � 70% of the market is unorganized giving huge room for growth and value addition
� The unorganized segment dominates procurement and consumption both which is very rare
� Dairy companies with direct milk procurement systems highly valuable and potential partners for
tie-ups with Nestle, Britannia, ITC, Danone, Kraft, Lactalis, GSK Consumer
� Organized dairy sector will play a pivotal role in “Doubling Farmers Income”
India Diary Market
Organised Diary Market Unorganised Diary Market
Cooperatives Private Diaries Traditional Milkmen /
Vendors Self Consumption at
home
Source: IMARC Report, Elara Securities Research
Exhibit 1: Indian dairy industry structure: Large unorganized market gives huge room for growth and value addition
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Exhibit 6: Milk - Marketing Channel in India
Source: Journal of Food Distribution Research, K. Rajendran and Samarendu Mohanty
Producer
Milk Vendor
Wholesaler
Retailer
Retailer
Government
Village Coops Private
District level milk producers
cooperative union
Village level milk producers
cooperative union
Unorganized sector Organized sector
Exhibit 2: Milk production volume break-up by marketability
Exhibit 3: Marketable milk value break-up by segment
Source: IMARC Report, Elara Securities Research Source: IMARC Report, Elara Securities Research
Exhibit 4: Marketable milk volume break-up by segment
Exhibit 5: Organized marketable milk volume break-up by segment
Source: IMARC Report, Elara Securities Research Source: IMARC Report, Elara Securities Research
Self consumption
46%
Marketable Milk 54%
Organised 20%
Unorganised 80%
Organised 30%
Unorganised 70%
Private 55%
Co-operatives &
Govt 45%
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Stages in Milk Processing Step 1: Testing
Samples of milk are taken from farm vats prior to collection and from the bulk milk tanker on arrival at the factory. Samples from the bulk milk tanker are tested for antibiotic and temperature before the milk enters the factory processing area.
Step 2: Clarification and Separation
Clarification is a step in milk processing that ensures the milk will be free of bacteria and debris. Milk is put into large vats that continually spin. The spinning causes the milk to separate from debris and floating bits of bacteria. After clarification is completed, the milk is spun once again to separate heavier and lighter milks. Heavier milks might be used for butter, cream, or buttermilk, while lighter milks are reserved for the majority of table milks.
Step 3: Fortifying with vitamins
The next step in milk processing is typically fortifying with vitamins. Most of the time, vitamins A and D are pumped into the milk in carefully measured amounts.
Step 4: Pasteurization
Once the vitamins are in the milk, it is ready to be pasteurized. it involves heating every particle of milk to a specific temperature for a specified period of time and cooling it again without allowing recontamination. Pasteurization is performed for two reasons;
1. Ensure all milk products are safe for human consumption by destroying all bacteria that may be harmful to health (pathogens).
2. Improve the keeping quality of milk by killing or inactivating some undesirable enzymes and spoilage bacteria.
Step 5: Homogenization
Homogenizing is a step in milk processing that eliminates some of the remaining milk fat. This is done by using heat to reduce the size of fat particles. Without homogenization, fat particles would eventually separate from the milk and float to the top.
Final Step
The final step in milk processing is putting the milk into retail containers.
Exhibit 7: Milk Value Chain
Village Level Collection Center
Source: Journal of Food Distribution Research, K. Rajendran and Samarendu Mohanty
Chilling center Dairy Plant
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Exhibit 8: Milk Processing
Source: MarcusTech
Raw milk in from diary
Holding tank
testing
Raw milk
standardization
optional addition of vitamins A and D
Skim milk
seperation
cream for butter making
raw milk for cheese making
milk for desired fat content
packaging of milk
to additional processing into evaporated, condensed and dried milk products
homogenization
filling of bottles, cartons or plastic jugs
cream
Pasteurizationhigh-temperature heating
cooling
hot-water heating system
cold-water cooling system
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Market Structure The market structure of milk supply chain is such that power is skewed towards a few milk processors cum marketers and hence they are price makers. Milk consumers and producers being dispersed and large in number are compelled to be price takers. Hence, there is an innate tendency for the organised milk marketers to act as an oligopoly when selling (Wann and Sexton, 1992) and as an oligopsony when buying, wherein vertical restraints are used by the processors or marketers as part of their supply chain management strategy (McCorriston, 2002).
Exhibit 9: Vertical restraints used by both organized and unorganized sector in milk procurement
Comments
Organised Sector
� The primary restraint used by the organised sector is by buying milk against credit, wherein, payment for milk is made once in 7 to 15 days. This credit period can be extended by the milk purchasers unilaterally, as per their convenience.
� The second is by providing inputs like concentrate and providing in-house veterinary health and breeding cover services, on credit.
� Thirdly, they assist farmers in availing credit and insurance for dairy animals, at concessional rates
Unorganised Sector
� The primary vertical restraint used by these traders is advance payment for milk to dairy farmers. It is sometimes given even before the animal comes into milk. They also have a very flexible payment system as per the needs of the farmer and develop a personal relation with each farmer.
� They also provide cattle feed and other inputs required by the dairy farmers. Since convenience of the farmer is being met, the price at which they buy milk or the price at which they sell inputs become secondary.
� Some of the milk traders also act as market facilitators in the purchase and sale of animals of all age groups, productive and unproductive.
Source: IIM B Research Paper
Correlation of organised and unorganised sector
Interestingly, the two are not mutually exclusive. There is a grey area wherein, the unorganised sector represented by the local milk trader acts as an interface between individual dairy farmer and the organised sector, buying from the farmer and selling to the latter. The grey area exists as farmers are able to benefit from the best of organised and unorganised sectors. It may be on account of this that the unorganised sector is still able to continue sourcing 70% of the marketable surplus of milk from farmers.
Exhibit 10: Vertical restraints in unorganized sector
Source: IIM B Research Paper
Constraints in milk marketing
� The dairy sector is characterized by:
� Small-scale, scattered and Unorganized milk-animal holders
� Low productivity
� Inadequate and inappropriate animal feeding and health care
� Lack of an assured year-round remunerative producer price for milk;
� An inadequate basic infrastructure for provision of production inputs and services
� An inadequate basic infrastructure for procurement, transportation, processing and marketing of milk and lack of professional management.
Consumers
Milk from dairy farmers
Unorganized sector (70%)
Organized sector (30%)
Exhibit 11: Vertical restraints in organized Sector Vertical restraints in unorganized Sector
Source: IIM B Research Paper
Dairy animal rearing
Quality testing & collection
Processing & marketing
Retailing
Credit purchase
Health & breeding
Inputs
Credit & insurance
Dairy animal rearing
Milk collection & transport
Retailing
Cash advance towards
purchase of milk
Personal relationship
Assistance in marketing of dairy animals
Flexibility in payment
Cattle feed sale on credit
Assured price
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� Other important characteristics of the dairy sector are the predominance of mixed crop-livestock farms and the fact that most of the milk animals are fed on crop by-products and residues, which have very low opportunity costs. Milk marketing in India remains grossly primitive compared to its western counterparts.
� It begins with the largely unregulated sector, which handles the majority of the milk production, providing ample opportunity for malpractice. Some of the common forms of malpractice include false measurements in the selling of milk and adulteration of milk.
� Another major impediment to an efficient marketing system is the presence of numerous intermediaries, which take advantage of producers’ weakness. In many cases, intermediaries dictate the price by advancing a loan to the milk producers. On the other hand, it will be impossible for most producers to market their milk without the presence of these market intermediaries.
� Political and bureaucratic interference, delayed payments to the primary producers, and the decision-making power of the administrators over marketing of milk and milk products by the district-level union and the state-level federation also adversely affect the growth of dairy co-operatives.
Source: Journal of Food Distribution Research, K. Rajendran and Samarendu Mohanty
Organized dairy sector will play a pivotal role in “Doubling Farmers Income”
The Department of Animal Husbandry under the aegis of Agriculture Ministry is holding a series of discussions with private players and co-operatives with regards to doubling of farmers’ income by 2022.
Looking at the data on various contributors of farmers income over a period of 10 years (FY03 to FY13) – we
come to the conclusion that 1) the key contributor to doubling of farmers income in that period was due to income coming from non-farm activities like animal husbandry and bee-keeping. This trend is also reflected in the fact that share of income from farming of animals rose from 4.3% in FY03 to 12% in FY13.
Exhibit 13: Income growth from animal husbandry and allied sectors was the highest (FY13 vs FY03)
Source: NSSO, Elara Securities Research
2) During FY03-13, farmer’s income grew at a compounded rate of 11.75% in nominal terms and 4% in real terms; as such, nominal income doubled in 6.2 years while real income doubled in 17.7 years. Hence in order to accelerate the growth, the government has decided to shift focus towards allied sectors like dairy. Income growth has been fastest from animal husbandry. In terms of remunerative capacity, animal husbandry is found to be most profitable source of income for farmer households.
3) Dairy forms the largest portion of income for Landless and Marginal farmers
In India Milk production is dominated by small and marginal land-holding farmers and also by landless laborers and as the crop production on agricultural land still depends on rain, which is prone to both drought and floods , rendering agricultural income is very much
9.7 12.3
23.7
8.1
11.8
0
5
10
15
20
25
Wag
es
Cu
ltiva
tion
Farm
ing
of
anim
als
No
n-fa
rm
bu
sin
ess All
(CA
GR
%)
Exhibit 12: Share in farmer household income
FY03 FY13
Source: IMARC Report, Elara Securities Research Source: IMARC Report, Elara Securities Research
Wages 38.7%
Cultivation 45.8% Farming of
animals 4.3%
Non-farm business 11.2%
Wages 32%
Cultivation 48% Farming of
animals 12%
Non-farm business
8%
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uncertain for most farmers . Dairying, as a subsidiary source of income, is a real relief to most of these weaker groups in society. Often one or two milch animals enable these farmers to generate sufficient additional income to break the vicious subsistence agricultural-debt cycle.
Exhibit 14: Share of household income (%) by Source
Household Dairying Crop
HHusbandry Others Total
Landless 53.08 0.00 46.92 100
Marginal 30.14 46.55 23.30 100
Small 29.67 53.75 16.58 100
Semi-medium 26.25 58.98 14.76 100
Medium 25.33 62.77 11.91 100
All 27.28 55.36 17.36 100
Source: Journal of Food Distribution Research, K. Rajendran and Samarendu Mohanty
Exhibit 15: Livestock and allied sectors must be promoted as the variability in output is significantly lower than farming
Source: Ministry of Agriculture, Elara Securities Research
Milk production is a stable source of income even in drought years
The production of milk and eggs has helped although that of food grains fell significantly suggesting livestock can be a good bet against vagaries of Monsoon. Hence NDDB has made it one of the main objectives to promote increasing productivity of animals in order to increase the milk output. This serves two purposes at the same time since the farmer is able to have a stable source of income even in drought years, secondly, increasing milk procurement and productivity of milch cattle are key factors for Indian dairy industry in general and increasingly more farmers with surplus milk need to be linked to some village milk collection centre (MCC).
Exhibit 16: Output growth in drought years
Source: Ministry of Agriculture, Elara Securities Research
States of Rajasthan, Gujarat, Madhya Pradesh, Andhra Pradesh, Himachal Pradesh and Uttarakhand , where crop area under irrigation is less than 45% , have recorded above average(355 gms/day) per capita availability of milk. States of Punjab and Haryana are the only exception to this scenario, where 99% of the crop area is under irrigation and also have recorded highest per capita availability of milk. As income from crop production is seasonal, dairying provides a stable which is a year - round income and also an important economic incentive for the small farmer.
0
2
4
6
8
10
Milk Eggs Wool Food grain
(%)
Std deviation of output (FY87 to FY15)
(20)
(15)
(10)
(5)
0
5
10
15
1987-88 2002-03 2004-05 2009-10 2014-15
(% Y
oY)
Milk Eggs Wool Food grain
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Milk production is stable source of income even in drought years. Dairying provides a stable source of income to regions with less irrigation.
Exhibit 17: Percentage of State-Wise Irrigated area out of total crop area
Note: Map not to scale; Data collected prior to Telangana and AP split, hence Telangana’s data not available separately
Source: Directorate of Economics and Statistics, Ministry of Agriculture
TamilNadu40.9%
Karnataka19.5% Andhra
Pradesh34.3%
Maharashtra17.0%
Madhya Pradesh26.5%
Rajasthan24.3%
Gujarat32.3%
U ttar Pradesh82.3%
Punjab99.0%
Bih ar54.7%
Odisha25.3%
Jharkhand7.5% W e s t
Be nga l54.2%
Sikkim10.0%
Arunachal Pradesh
12.5%
Assam7.3%
Tripura23.3%
Meghalaya20.0%
Mizoram10.0%
Manipur25.0%
Nagaland6.4%
Goa100%
Pondicherry
Uttarakhand43.8%
Jammu&
Kashmir41.1%
H a ryana90.6%
HimachalPradesh
11.0%
D e lhi
Chhattisgarh16.7%
Kerala26.0%
Telangana
Crop area under irrigation is more than 45%
Crop area under irrigation is less than 45%
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States of Rajasthan, Gujarat, Madhya Pradesh, Andhra Pradesh, Himachal Pradesh and Uttarakhand , where crop area under irrigation is less than 45% , have recorded above average(355 gms/day) per capita availability of milk.
Exhibit 18: State wise per capita availability of Milk (gms/day)
Note: Map not to scale
Source: Department of Animal Husbandry, Dairying & Fisheries, Ministry of Agriculture and Farmers' Welfare, GoI
Tamil Nadu283
Karnataka282
Andhra Pradesh
475
Maharashtra239
Madhya Pradesh428
Rajasthan704
Gujarat545
Uttar Pradesh335
Punjab1032
Bihar219
Odisha124
Jharkhand152 West
Bengal145
Sikkim282
Arunachal Pradesh
105
Assam70
Tripura109
Meghalaya83
Mizoram57
Manipur76
Nagaland89
Goa74
Puducherry108
Uttarakhand434
Jammu&
Kashmir395
Haryana877
HimachalPradesh
505
Delhi36
Chhattisgarh133
PCA > 355
250 > PCA < 355
PCA < 250
Kerala200
Telangana
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Larger portion of the consumer price paid should trickle down to the farmer to encourage dairy
The farm gate prices offered to the dairy farmers by the state level dairy cooperatives are the benchmark prices that are generally followed by the private dairies. The dairy cooperatives generally consider factors such as increases in feed and other input costs for revising the farm gate prices. From fiscal year 2010-11 to 2015-16, fodder and oil cake prices increased at a compound annual growth rate of 11 and 8 percent respectively while milk prices increased by only 7 percent; this squeezed farmer’s profits. Reportedly, some state governments provide financial subsidies to dairy cooperatives so that they can offer higher milk prices to farmers. According to industry sources, the September 2016 average farm gate price for milk ranges between INR 40 to 45 per liter ($0.60 to $ 0.67 per liter) for water buffalo milk (six percent fat and nine percent SNF), and INR 25 to 30 per liter ($0.37 to $0.45 per liter) for cow milk (four percent fat and eight-and-a-half percent SNF)(GAIN Report-USDA). Also, a consistent if not a higher proportion of the consumer rupee to the farmer will encourage him to produce more. For example, Mysore district cooperative milk producers’ union has been able to transfer 70% to 80% of the consumer rupee to its member farmers as price of milk (Mymul, 2015). This is in contrast to less than 50% of the consumer rupee being transmitted to dairy farmers in developed countries.
From Farm to Fork distribution chain and key market participants in milk
Exhibit 19: Milk Cumulative Price (INR per liter) -Maharashtra- data as of 2014-15
Procurement price for Cow Milk (3.5% fat & 8.5% SNF) 25
Transportation charges from village to chilling center 1
VSP commission 2
Cost of capital investment 1
Procurement manpower cost 0.5
Chilling cost 0.5
Transportation cost from chilling center to plant 0.5
Processing cost + Packaging Cost 3
Dairy Profit Margin 7
Distributor Purchase Price 40.50
Distributor margin 1
Retailer Purchase Price 41.50
Retailer margin 3.50
Consumer Price 45
Source: Channel Checks – Elara Securities Research, Industry
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Indian dairy industry is at the centre stage of the world as it’s the fastest growing dairy market and the largest milk producer in the world
Indian dairy industry is at the centre stage of the world currently due to 1) India being the largest milk producer in the world – contributing 20% of the total world production and consumes most of it domestically (INR6.2tn in FY17) 2) Indian dairy industry is the fastest growing dairy Industry in the world and has strong growth prospects as rising disposable incomes will lead to higher protein intake. Consumers will shift from unbranded/ home-made products (Clarified Butter, Curd, Butter Milk, Lassi, Cottage Cheese) to branded products 3) Although India is a small player in global dairy trade Indian dairy exports accounts for 4% of the world SMP exports (largest player is Fonterra with 7% ) and the major contribution to the Indian exports has come from Amul which has also listed itself for trading on the “Global dairy trade” in 2013 to trade in dairy products and Amul is one out of the only 7 sellers on the platform along with Denmark’s Arla Foods, US-based Dairy America, Australia’s Murray Goulburn, French Euroserum and New Zealand’s Fonterra.
Milk production has grown at 5.1% p.a. in FY07-17 period
Exhibit 20: Milk production
Source: National Dairy Development Board (NDDB)
Exhibit 21: Productivity of Milk Animals
Parameter Buffalo Indigenous Cow
Crossbred CCow
Domestic milk consumption
High Moderate Moderate
Global milk consumption
Low High High
Fat content in milk
7-7.5% 3.5-4% 4.45-5%
Water content in milk
80-85% 85-90% 82-85%
SNF 10.11 9.11 8.54
Cost per animal INR 80,000-100,000
INR 60,000-70,000
INR 70,000-100,000
Yield (kg/day) 5.15 2.54 7.02
Lactation Days 200-250 150-200 300
Source: Journal of Food Distribution Research, K. Rajendran and Samarendu Mohanty, FAO, Industry, NDDB
The crossbred cow population has increased over years because of artificial insemination and improvements in management practices. Also,the proportion of milk from crossbred cows has increased from 17% to 25% between 1997-98 and 2014-15 due to higher yield and more number of lactation days. This 8% increase was coupled with proportionate decline of milk from Indigenous cows (6%) and from buffaloes (2%). As of 2014-15, 55% of total milk production was contributed by buffaloes while the remaining 45% came from cows.
Exhibit 22: Bovine Milch Population
Species Year (mn)
% Increase 2007 2012
Crossbred Cow 14.4 19.42 34.78
Indigenous Cow 48.04 48.12 .17
Buffalo 48.64 51.05 4.95
Source: Ministry of Agriculture
Exhibit 23: Proportion of Milk from 3 types of bovine animals
Year Milk ffrom ((%) Total milk quantity
(MMT) Crossbred
CCow Indigenous
cow Total CCow
Buffalo
1997-98 17 26 43 57 67.84
2014-15 25 20 45 55 146.3
Source: IIMB Research paper/Open Government Data
0
1
2
3
4
5
6
7
0
30
60
90
120
150
180
19
91
-92
19
93
-94
19
95
-96
19
97
-98
19
99
-2K
20
01
-02
20
03
-04
20
05
-06
20
07
-08
20
09
-10
20
11
-12
20
13
-14
20
15
-16
(%)
(mn
ton
nes
)
Milk production Growth YoY
Domestic self consumption story playing out � India is the largest consuming hub making it an attractive investment for overseas brands
� Growth in milk production worldwide has been driven by developing nations especially India
� Milk production has grown at 5.1% p.a. in FY07-17 period; India could soon lose its self –
sufficiency tag if milk productivity is not increased rapidly
� PCC of milk one of the lowest in the world at 97 Ltrs per year
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14 Elara Securities (India) Private Limited
Exhibit 24: Why crossbreds are profitable?
Particulars Cow Crossbred Buffalo
Purchase Price 60,000 70,000 80,000
Gestation period 283 270 310
Intake per day (Kg) 20 28 33
Cattle Feed Cost (INR/kg) 5 8 6
Cattle Feed input costs in gestation period (INR)
28,300 60,480 61,380
Lactation Cycle (Days) 200 300 250
Per Day Yield (Kgs per day) 3.9 7.1 6.2
Selling price in INR/Kg 29.1 33 37
Revenue from selling Milk (INR/Day) per cow
113.6 234 229
Revenue over the lactation period
22,718 70,290 57,184
Avg no of babies that a cow produces per pregnancy
1 1 1
No of times that a cow can re-produce
13-18 13-18 13-15
Source: Dairy Knowledge Portal
Low PCC of milk in India shows enormous possibility for future growth
India is the world‘s biggest producer and consumer of milk on a country-wise basis. However, the per capita consumption of milk at 97 litres per year (265 gms per day) is well below that of other major milk markets, except for China as illustrated in the chart below:
Exhibit 25: PCC of milk one of the lowest in the world
Source: Parag DRHP
India shall soon lose its self -sufficiency tag in dairy
Per capita availability (PCA) of milk in India has touched 355 grams per day which has recorded a CAGR of 3.9% in FY07-17 while Per capita consumption (PCC) has touched 340 grams per day (Source: Amul) in FY16. This indicates that India shall soon lose its self-sufficiency tag if milk production growth is not bolstered through productivity increase of our milch cattle.
PCA has grown at a sluggish pace of 3.9% p.a
Exhibit 27: PCA growth compared with milk production growth Growth (%) Milk production PCA
CAGR (2000-2007) 4.1 2.2
CAGR (2007-2017) 5.1 3.9
CAGR (2000-2017) 4.3 3.0
Source: NDDB
Exhibit 28: Per capita availability (PCA) has touched 355 grams per day
Source: NDDB
285 281
220
156
97
24
0
50
100
150
200
250
300
USA
EU2
7
Russ
ian
Fe
der
atio
n
Bra
zil
Ind
ia
Ch
ina
(litr
es/y
ear)
0
1
2
3
4
5
6
0
100
200
300
400
19
91
-92
19
93
-94
19
95
-96
19
97
-98
19
99
-2K
20
01
-02
20
03
-04
20
05
-06
20
07
-08
20
09
-10
20
11
-12
20
13
-14
20
15
-16
(%)
(gra
ms
per
day
)
PCC Growth YoY
Exhibit 26: Growth in milk production worldwide has been driven by developing nations especially India
Region wise growth rate (%) 2011 2012 2013 2014 2015 2016P 2017P 2018P 2019P 2020P
WORLD 1.8 2.2 1.2 2.9 1.7 2.2 1.7 1.9 1.8 1.9
Developed countries 1.3 1.4 0.6 2.5 1.4 1.5 0.7 1.1 0.9 1.1
Developing countries 2.3 3.0 1.8 3.3 2.1 3.0 2.6 2.7 2.6 2.7
Asia 4.4 3.8 1.4 4.3 2.4 3.2 3.0 3.0 2.9 2.9
Africa (0.7) 3.2 1.2 0.5 0.7 2.2 2.5 2.4 2.3 2.3
LATAM (2.5) 0.2 3.6 1.8 1.5 2.7 1.3 2.0 1.4 2.1
Production growth YoY (%) 2011 2012 2013 2014 2015 2016 2017P 2018P 2019P 2020P
India 5.0 3.5 2.4 4.5 3.0 4.2 3.9 3.8 3.8 3.6
Russia (0.6) 0.6 (3.9) 0.1 (3.0) 3.5 (0.3) (0.4) 0.0 0.2
China 1.7 2.3 (5.0) 6.2 1.5 1.7 1.3 1.2 1.2 1.3
Source: OCED-FAO Agricultural Outlook
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ry
15 Elara Securities (India) Private Limited
Exhibit 29: Milk production is almost matching consumption in India
Source: Rabo Bank
Exhibit 31: Key objective of National Dairy Plan – 1 (2012-17) is to maintain the demand supply balance
Parameter Details
Objective
Improve milk productivity of milch animals so that demand-supply balance is sustained over the long run; provide rural milk producers with greater access to the organised sector
Fund
INR22.42bn in the first phase (International Development Agency - 70% share, Government of India - 8%, NDDB and its subsidiaries - 9%, and the rest by the various end implementing agencies in every major state
Plan period 2011-12 to 2016-17 (Phase I)
Coverage 14 major milk producing states in India
Source: NDDB
122 128
132 140
147
113 119
125 130
138
80
100
120
140
160
FY11 FY12 FY13 FY14 FY15
(litr
es/d
ay)
Production Consumption
Exhibit 30: Key government schemes for dairy industry
Scheme/parameter Details
Priority lending status for banks The sector has this status since 1999
Technology upgradation 40% subsidy in general areas and 50% subsidy in difficult areas for machinery in all segments subject to a maximum of INR10m of total cost
Foreign Direct Investment (FDI) 100% FDI permitted in dairy products
Import of equipments 5% customs duty on imports of capital goods/machinery, including second-hand
Excise duty exempted products Products manufactured by SSI units (exemption limit raised to INR150m from INR10m)
National mission on food processing
State government will set up the large scale food processing units/parks, and the Centre will provide technological and logistical support. Also plans to set up various nodal agencies that will test quality of the dairy product and ensure that any food processing unit will have to register with it, in order to operate
MRTP, FEMA regulations MRTP (Monopolies & Restrictive Trade Practices Act) rules and FEMA (Foreign Exchange Management Act) are relaxed to encourage investment and expansion by large corporates
Source: NDDB
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16 Elara Securities (India) Private Limited
Developing countries show high income elasticity of demand for dairy Consumers in developing countries with relatively low per capita incomes tend to have relatively high income elasticity of demand, meaning that with increasing disposable income they will increase their consumption of dairy products disproportionately and decrease their consumption of staple foods. On the other hand, with falling per capita incomes, consumers in developing countries tend to drastically reduce their dairy consumption. Opposed to this, consumers in developed countries have very low demand elasticity for food including dairy products.
Income elasticity of demand for milk is high, especially amongst lower income levels in developing countries (Gerosa and Skoet, 2012). Expenditure elasticity for milk and milk products in India varies from 1.5 (Dastagiri, 2001) to 2.185 (Bhattacharya et al., 2014). (Kumar et al., 2011) have found that while the average income elasticity for all classes of households is 1.65, it is as high as 2.34 for poor households. Hence, as income levels rise, demand for milk and milk products will go up and if sufficient supply is not forthcoming, it would drive up food inflation.
Rising middle class and urban population provide tailwind for dairy The number of middle class households is expected to significantly increase from 255 million in 2015 to 586 million in 2025 at a CAGR of 8.7%. Also, India‘s increasing working population, aged between 15 to 64 years, is expected to increase from 826 million in 2015 to 988 million in 2030. The rise in working population and disposable incomes from the increasing number of middle class households is expected to drive growth in the dairy industry. The increasing level of urbanization across the Indian population is also expected to drive growth in the organized dairy industry as a result of urban consumers preferring clean, hygienic and ready-to-eat milk and dairy products. The proportion of urban population is expected to increase from 31.2% in 2011 to 34.5% in 2021.
Rising income level drives consumption of proteins The sustained rising income levels, growth of the Indian economy, shift in lifestyles and eating habits of Indian consumers is expected to drive the consumption of milk and dairy products. Demand for food items is increasing at a very high rate following a steady increase in per capita income. Higher disposable income has not only significantly increased the overall demand for agricultural commodities but also changed the pattern of consumption. The pressure on prices is more on protein foods like pulses, milk and milk products, egg, fish and meat and vegetables indicating the shift in consumption pattern from cereal based diets to protein based diets due to rise in income. There has been nearly threefold increase of per capita income (at constant prices) in India in the last two decades and poverty has declined from 45% in 1993-94 to 22% in 2011-12 (Source: Planning Commission Government of India, 2013). The overall demand has been further magnified by huge public expenditure of the government on a number of welfare schemes like rural employment, food security of the poor, subsidies, pension and various allowances.
Exhibit 32: Growth in disposable income has spurred changes in consumption pattern in India
Note: Adjustment factor of 1.019 used to calculate disposable income under new series
Source: Central Statistics Office (CSO)
0
5
10
15
20
25
0
20,000
40,000
60,000
80,000
100,000
120,000
20
00
2
00
1
20
02
2
00
3
20
04
2
00
5
20
06
2
00
7
20
08
2
00
9
20
10
2
01
1
20
12
2
01
3
20
14
2
01
5
20
16
2
01
7
(%)
(INR)
Per Capita Disposable Income Growth YoY
Changing dietary patterns in favor of packaged dairy products � Developing countries show high income elasticity of demand for dairy
� UHT milk, cup-curd, cheese, packaged cottage cheese, cow-ghee to grow at a fast pace
� Rising middle class and urban population – providers of tailwind for the sector
� Rising income level drives consumption of proteins
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ry
17 Elara Securities (India) Private Limited
Exhibit 33: Per capita disposable income growth accelerated in CY07-16 period
Source: Centra Statistics OFFICE
Exhibit 34: Milk consumption growth accelerated in CY07-16 period led by rising income levels
Milk Consumption GGrowth (%)
CAGR 2000-16
CAGR 2000-007
CAGR 2007-16
World 2.4 2.9 2.3
Developed Countries 0.2 0.3 0.2
Developing Countries 3.9 4.8 3.5
Asia 4.5 5.9 3.7
India 4.0 3.6 4.8
Source: FAO
Changing dietary patterns in favor of proteins
Greater per capita income and urbanization have changed food consumption patterns in Indian households, particularly from consuming lesser cereals and increasing consumption of milk and dairy products. In 2012, urban and rural households spent approximately 20.3% and 18.7%, respectively, out of total monthly expenditure on milk and dairy products.
Exhibit 35: Monthly expenditure on dairy products rises with income growth and urbanization
Source: NSSO, GoI, MOSPI
Exhibit 36: PCC of cereals has declined over the years
Source: NSSO, Elara Securities Research
Exhibit 37: PCC of pulses has increased in the same period
Source: NSSO, Elara Securities Research
Exhibit 38: Monthly consumption shows growth in milk intake
Source: NSSO, Elara Securities Research
10.9
8.6
12.8
0
2
4
6
8
10
12
14
CAGR 2000-16 CAGR 2000-07 CAGR 2007-16
(%)
11.7 14.3
15.4
18.7
14.7 17.4
18.9 20.3
0
5
10
15
20
25
FY71 FY91 FY01 FY12
Shar
e o
f mo
nth
ly fo
od
ex
pen
ditu
re
(%)
Rural Urban
8
9
10
11
12
13
14
1993-94 1999-00 2004-05 2009-10 2011-12
(kg
/mo
nth
)
Rural (kg/month) Urban (kg/month)
0.3
0.6
0.9
1.2
1993-94 1999-00 2004-05 2009-10 2011-12
(kg
/mo
nth
)
Rural (kg/month) Urban (kg/month)
(40)
(30)
(20)
(10)
0
10
Rice Wheat Jowar Bajra All pulses
Milk
(CA
GR
% F
Y05
-12
)
Rural per capita monthly consumption Urban per capita monthly consumption
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18 Elara Securities (India) Private Limited
Exhibit 39: Value added dairy products to grow in strong double digits led by 15% volume growth in the period
(INR mn) 22014 2020 CAGR 2014 -2020
Category Sales Saales of
organized ddairy
Share of oorganized
sector Sales
Sales of oorganized
dairy
Share of oorganized sector (%)
Total Market ((%)
Organized market (%)
Liquid milk 2,621,460 519,400 19.8 6,068,000 1,593,000 26.3 15.0 20.5
Ghee 618,225 110,256 17.8 1,367,212 288,912 21.1 14.1 17.4
UHT Milk 26,045 26,045 100.0 103,778 103,778 100.0 25.9 25.9
Flavored milk 12,636 12,636 100.0 47,828 47,828 100.0 24.8 24.8
Curd 216,496 12,121 5.6 492,690 35,421 7.2 14.7 19.6
Frozen yogurt 2,268 2,268 100.0 12,075 12,075 100.0 32.1 32.1
Cheese 11,721 11,721 100.0 59,388 59,388 100.0 31.1 31.1
Paneer 293,300 6,145 2.1 653,576 22,684 3.5 14.3 24.3
Whey (powder) 3,009 3,009 100.0 9,712 9,712 100 21.6 21.6
Source: IMARC
Exhibit 40: Realization increase in VAP is around 8-12% as opposed to ~5% on average led by Amul in pouch milk segment
Brand Name Price (INR/Ltr)
Fat content (%)
Pric
es a
s o
n
Mar
20
09
Pric
es a
s o
n
Mar
20
10
Pric
es a
s o
n
Mar
20
11
Pric
es a
s o
n
Au
g 2
01
1
Pric
es a
s o
n
Ap
ril 2
01
2
Pric
es a
s o
n
Ap
ril 2
01
3
Pric
es a
s o
n
Oct
-20
13
Pric
es a
s o
n
May
20
14
Pric
es a
s o
n
Jun
e 2
01
5
Pric
es a
s o
n
1st
Ap
ril
20
16
Pr
ices
as
on
2
nd
Ju
ne
20
16
Pr
ices
as
on
3
rd M
ar
20
17
CA
GR
(%)
Amul Gold Full Cream (Fat - 6%) 24 30 36 38 40 42 44 46 48 48 49 52 6
Amul Diamond Premium - ( Fat -7.5%)
45 46
51 50 52 54 4
Amul Shakti Fat - 4.5%
42 44 44 45 48 7
Amul Taaza Toned Milk (Fat -3% )
30 32 34 34 36 36 38 40 5
Amul Tea Special
48
Amul Cow Milk
44
Amul Slim and Trim Double Toned (Fat -1.5%)
26 28 30 32 34 35 36 38 6
Source: Media articles
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ry
19 Elara Securities (India) Private Limited
Exhibit 41: Creamy Total Energy 87.2 kcal
Energy from Fat 54 kcal
Total Fat 6.0 g
Carbohydrate 5.0 g
Protein 3.3 g
Calcium 120 mg
Source: Company, Elara Securities Research
Exhibit 42: UHT - Activ Total Energy 46.7 kcal
Energy from Fat 13.5 kcal
Total Fat 1.5 g
Carbohydrate 5.0 g
Protein 3.3 g
Calcium 120 mg
Source: Company, Elara Securities Research
Exhibit 43: UHT - Lite
Total Energy 58.2 kcal
Energy from Fat 27.0 kcal
Total Fat 3.0 g
Carbohydrate 4.7 g
Protein 3.1 g
Calcium 120 mg
Source: Company, Elara Securities Research
Exhibit 44: Flavored Milk
Total Energy 61.2 kcal
Energy from Fat 13.5 kcal
Total Fat 1.5 g
Carbohydrate 12.0 g
Protein 3.3 g
Cholesterol 4.0 mg
Source: Company, Elara Securities Research
Exhibit 45: Dahi Cup/ Pouch Total Energy 62.8 kcal
Energy from Fat 27 kcal
Total Fat 3.0 g
Calcium 183.0 mg
Protein 3.68 g
Carbohydrate 5.26 g
Sugar 0.0 g
Source: Company, Elara Securities Research
Exhibit 46: Lite Dahi/ Pouch
Total Energy 39 kcal
Energy from Fat 4.5 kcal
Total Fat 0.5g
Calcium 183.0 mg
Protein 4.2 g
Carbohydrate 4.5 g
Sugar 0.0 g
Source: Company, Elara Securities Research
Exhibit 47: Desi Ghee
Total Energy 897 kcal
Energy from Fat 897 kcal
Total Fat 99.7 g
Saturated Fat 58.0 g
Unsaturated Fat 28.0 g
Pufa 2.0 g
Trans Fat 3.0 g
Cholesterol 275mg
Protein 0 g
Carbohydrate 0 g
Sugar 0 g
Vitamin A 3400 IU
Vitamin D 60 IU
Vitamin E 3.5 mg
Vitamin K 8.6 mcg
Source: Company, Elara Securities Research
Exhibit 48: Paneer (Cottage Cheese)
Total Energy 311 kcal
Energy from Fat 225 kcal
Total Fat 25 g
Carbohydrate 2g
Protein 19.5 g
Calcium 485 mg
Added Sugar 0.0g
Source: Company, Elara Securities Research
Exhibit 49: Paneer (Makhni Paneer) - Super soft and made for Tandoori dishes in India
Total Energy 269 kcal
Energy from Fat 189 kcal
Total Fat 21 g
Carbohydrate 2 g
Protein 18 g
Calcium 485 mg
Added Sugar 0.0g
Source: Company, Elara Securities Research
Exhibit 50: Chaach
Total Energy 25.0 kcal
Energy from Fat 9.0 kcal
Total Fat 1.0 g
Carbohydrate 2.0 g
Protein 2.0 g
Added Sugar 0.0 g
Source: Company, Elara Securities Research
Nutritional Information per 100ml*
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Exhibit 51: Chhena Kheer Exhibit 52: Dairy Whitener
Total Energy 263 kcal
Fat 15.0 g
Protein 10.5 g
Carbohydrate 21.5 g
Sugar 8.0 g
Calcium 260 mg
Total Energy 434 Kcal
Energy from Fat 162 Kcal
Total Fat 18 g
Carbohydrate 50 g
Protein 18 g
Added Sugar 22 g
Source: Company, Elara Securities Research Source: Company, Elara Securities Research
Following is the nutritional value chart of each
Exhibit 53: Cow Ghee Exhibit 54: Buffalo Ghee
Nutritional Information per 100 g Energy 804.33 kcal From Fat 801.09 kcal
Total Fat 89.0 g
Saturated Fat 54.27 g
Monounsaturated fatty acid 22.86 g
Polyunsaturated fatty acid 1.62 g
Trans fatty acid 2.61 g
Cholesterol 199 mg
Total Carbohydrates 0.36 g
Sugar (Added) 0.0 g
Protein 0.45 g
Vitamin A 1113.31 mcg
Vitamin C 0.0 g
Calcium 9 mg
Phosphorous 1.35 mg
Nutritional Information per 100 g Energy 802.17 kcal From Fat 797.85 kcal
Total Fat 88.65 g
Saturated Fat 57.42 g
Monounsaturated fatty acid 19.53 g
Polyunsaturated fatty acid 1.53 g
Trans fatty acid 2.97 g
Cholesterol 164.7 mg
Total Carbohydrates 0.72 g
Sugar (Added) 0.0 g
Protein 0.36 g
Vitamin A 1098 mcg
Vitamin C 0.32 mg
Calcium 55 mg
Source: Chitale Dairy Source: Chitale Dairy
Cow ghee more preferred over Buffalo ghee due to higher nutritional value, lower fat and carbohydrates
Cow ghee has greater Vitamin A content (1.4% more than buffalo ghee). Cow ghee has more protein content than buffalo ghee (Cow ghee has 0.45g protein in 100 g of ghee whereas buffalo ghee has 0.36g. in 100 g) Cow ghee has phosphorus content of approximate 1.35mg which is not present in buffalo ghee. Also, the total carbohydrate content in cow ghee is half of that present in buffalo ghee. The unsaturated fats (Monounsaturated
& Polyunsaturated) help lower the bad cholesterol level instead of Saturated and Trans fats. Unsaturated fats might boost good cholesterol and can reduce heart diseases. The Unsaturated fat content in cow ghee is more than the buffalo ghee. The Saturated & Trans fat is more in buffalo ghee. Thus, the cow ghee is more nutritious when compared to buffalo ghee.
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ry
21 Elara Securities (India) Private Limited
We prefer dairies with strong brand names in fresh dairy products
While co-operatives (Amul, Mother Dairy, Karnataka Milk Marketing Federation, Verka, Tamilnadu Co-op Milk Producers’ Federation) under National Dairy Development Board (NDDB) have focused on increasing pouch milk sales under their respective brands, the private dairy players have focused on growing fresh dairy products and long shelf life products due to higher profitability (~product margin of 15% and above) in these products compared to pouch milk (margin of ~5%).
However, the working capital requirements of pouch milk and fresh dairy products is far lower (5% of sales) compared to long-shelf life and value added products due to high inventory days (cheese needs at least 45-90 days of curing), high receivables since the churn of these value added products is far lower than products like snacks, biscuits, noodles, soup, breads and bakery items etc. Hence the retailer invariably ends up asking for longer credit periods for the long shelf life dairy products or higher trade margin in order to keep these products.
Fresh dairy products (ex pouch milk) are higher margin products with short working capital cycle as stock turn is higher.
Exhibit 55: Defining dairy products by shelf life Product Shelf Life (days) Temperature
Pouch Milk 48 hrs <8
Paneer 30 -14
Lassi - 200ML cups 10 <5
Curd - 100/200/400g cups 10 <7
Chass-200ML cup/ pouch 10 <5
Source: Tetra Pak
Exhibit 56: Long shelf life products are working capital heavy due to high inventory and receivables days
Product Shelf Life
(days) Temperature
Shrikhand - 100/250/500g 60 <-18
Tetra Pack - Flavored Milk (200ML) 120 Ambient
Wholesome toned milk - Sterilized by UHT process - 200ML
90 Ambient
Wholesome toned milk - Sterilized by UHT process - 500ML
90 Ambient
Wholesome toned milk - Sterilized by UHT process - 1000ML
180 Ambient
Cheese Tins 9 months below 4
Cheese Blocks 6 months below 4
Cheese Slices 6 months below 4
Source: Tetra Pak
"Value-added products are good only when it is good for the manufacturer as well.”
– RS Sodhi, MD, Gujarat Co-operative Milk Marketing Federation
Our channel checks suggest that the biggest myth that value addition or higher MRP implies higher realization is not true since all these products sell on very high trade margins:
� The channel is very different from sales of pouch milk (fast churn and low working capital requirements) and is not completely like FMCG since the products have to be delivered in stipulated time period especially for packaged products like curd, butter milk, and in temperature controlled environment (fresh/frozen, chilled and ambient product range) for value added products, which makes it costlier to transport and the logistics is complex.
� The cost of production is also equally high.
� Value added dairy products are also taxed at 12-15 per cent while there is no tax on fresh milk sales. Value added dairy products (long shelf life products) also need brand investments in order to propel consumption and create brand visibility in order to command pricing power.
� In liquid milk, the operating margins are around five per cent, whereas it is around 15 per cent in ice creams. But, the volumes are much higher in liquid milk.
Dairies should invest in direct procurement consistently to keep growing
“The key in dairying is the link between the rural production centre and the nearest consumption centre. Milk is just like an agricultural crop — you have to sow it, nurture it, fertilize it and then harvest it. In case of an agricultural crop, this process takes three to six months. In case of milk, it takes two to three years. No corporate wants to invest in this. They want to directly start procuring milk, no one is sowing. They go to the procurement centre and offer a slightly higher pay than what the farmer is getting. The second day, someone else does the same thing. It does not work that way“
– RS Sodhi, Managing Director, GCMMF
Prefer dairies with direct procurement & brands in fresh dairy products � We prefer dairies with strong brand names in fresh dairy products
� "Value-added products are good only when it is good for the manufacturer as well.” – RS Sodhi, Amul � “Dairies should invest in direct procurement consistently to keep growing” - RS Sodhi, Amul
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22 Elara Securities (India) Private Limited
Private dairies with strong procurement network will see investments and tie-ups for outsourcing production of VAD
High growth and sheer size of the addressable market in India has attracted FDI from various global players like Schreiber Foods, Danone, Lactalis, Nestle, Kraft who have either partnered with local Indian private dairies who have strong milk procurement network or outsourced their manufacturing to smaller private dairy players who have direct procurement network to
produce high quality products like ccheese, packaged curd, UHT milk, flavored milk. We believe such investments will continue since it’s a win-win situation for both parties, as the foreign partner gets the direct milk procurement network which is difficult to build without having local influencers who belong to the village or the town and the milk processor can ramp up capacity depending on the order book and expect to fetch higher realizations for his output since the products will be marketed under a valuable brand.
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ry
23 Elara Securities (India) Private Limited
Global dairy industry went from a glut to a crunch in a jiffy leading to steep inflation
Globally the dairy industry went from a supply gut wherein we saw dairy prices fall drastically due to several reasons like 1) Russia trade embargo on EU, USA, Norway, Australia and Canada 2) slowdown in China 3) EU milk quotas being lifted in April’15. In mid-2016, a set of opposite forces like production cuts (willingly or due to erratic weather conditions prevailing in respective geographies) by key dairy exporting nations (EU, New Zealand, Australia) led to supply shortage as demand was showing a strong revival especially as China showed a comeback in terms of demand for dairy products, which lifted dairy prices across the world (up +40% from June 2016 levels) including India where SMP prices have staged a revival from INR130/Kg to INR220/kg prevailing now. We believe that due to muted production growth in key exporting nations, world dairy product prices will see an inflationary trend for another 6 months at least. We expect inflation of +20% in India as well for a large portion of CY17, as the last flush season (starting Oct 2016) has been disappointing in terms of increase in milk yield for milch cattle due to droughts in Maharashtra, Karnataka, Tamil Nadu and AP. Since India does participate in the global dairy trade primarily through selling SMP to ASEAN nations (primarily Bangladesh/Pakistan/Sri Lanka), we expect global inflation to feed into domestic dairy prices as well.
Exhibit 57: SMP prices crashed starting 1QFY15 due to supply gut
Source: Dairy.ahdb.org.UK
Exhibit 58: ……But staged a strong comeback in 2016 due to production shortage
SMP prices have risen by 40% since June 2016
Source: Dairy.ahdb.org.UK
What caused the global supply glut in 2014-15?
Prices for dairy ingredients such as milk and butter had fallen sharply till May 2016 for two years, hit by a global oversupply and slowing demand from China and import ban by Russia (imposed in Aug 2014). This led to squeeze in finances of farmers and producers globally pushing many towards consolidation in search of economies of scale.
Exhibit 59: China and Russia constitute 22% of total dairy imports
Source: Fao.org
0
1,000
2,000
3,000
4,000
5,000
Q1
FY1
1
Q3
FY1
1
Q1
FY1
2
Q3
FY1
2
Q1
FY1
3
Q3
FY1
3
Q1
FY1
4
Q3
FY1
4
Q1
FY1
5
Q3
FY1
5
Q1
FY1
6
Q3
FY1
6
Q1
FY1
7
Q3
FY1
7
Q1
FY1
8
(USD
/to
nn
e)
(60)
(40)
(20)
0
20
40
60
80
Q1
FY1
2
Q3
FY1
2
Q1
FY1
3
Q3
FY1
3
Q1
FY1
4
Q3
FY1
4
Q1
FY1
5
Q3
FY1
5
Q1
FY1
6
Q3
FY1
6
Q1
FY1
7
Q3
FY1
7
Q1
FY1
8
(%)
China 17%
Russian Federation
5%
Mexico 5%
Saudi Arabia
4%
Algeria 4%
Indonesia 4%
Malaysia 3%
Singapore 2%
Japan 3% Philippines
3% Others 50%
Imports
Global SMP prices weigh on Indian milk prices � Global dairy industry went from a glut to a crunch in a jiffy leading to steep inflation in 2HFY17
� SMP prices globally crashed starting 1QFY15 due to supply glut
� SMP Prices in India were also affected by the global supply glut
Rethink Everything
24 Elara Securities (India) Private Limited
Exhibit 61: Majority of world exports (80%) is handled by 6 countries
Source: Fao.org
Russia imposed a trade embargo on EU dairy products
Prior to the embargo, Russia was the EU’s largest export market, taking about one-third of its cheese exports and one-fourth of its butterfat shipments. In all, Russia imports from the EU were the equivalent of about 2 percent of EU milk production.
Russia trade embargo imposed in Aug 2014 reduced exports demand from EU
Imports by Russia dropped significantly after the embargo was levied
Exhibit 62: Russia - Total Imports
Import (‘000 tonnes) 2012 2013 2014 2015 2016
Packed milk 277 205 244 199 173
Butter 149 146 151 96 102
Cheese 453 440 321 208 217
WMP 27 3.6 37 34 48
SMP 96 112 95 113 133
Others 9.1 12 13 14 13
Total Imports ('000 tons) 1,011 919 861 664 686
Change YoY (%)
(9)) (6)) (23)) 3
Source: http://www.clal.it
Exhibit 63: Cheese import
(000 tons) 2012 2013 2014 2015 2016
Belarus 120 133 136 164 180
% of total cheese imports by Russia 27 30 42 79 83
EU 246 257 133 4 -
% of total cheese imports by Russia 54 58 42 2 0
Total Cheese Imports by Russia 453 440 321 208 217
Source: http://www.clal.it
Exhibit 64: Total Cheese Consumption in Russia
('000 tons) 2010 2011 2012 2013 2014 2015 2016
Russia 815 812 862 905 749 632 709
Change YoY (%)
0 6 5 (17) (16) 12
Source: OCED-FAO
Import demand from China fell 9% in volume terms in CY15
China, the world’s biggest dairy importer, 9% lower in terms of volumes of dairy products as it exhausted stockpiled milk powder and faced a macroeconomic slowdown. Hence the cut-back in imports was mainly in SMP (-21% in volume terms) and WMP (-48% in volume terms).
China: Impact of slowdown in CY15 – Cut-back on WMP/SMP imports primarily
Exhibit 65: China Dairy Product - Total Import
('000 tons)
Infant milk
formula Cheese
Whey Powder
WMP SMP Bulk &&
packaged milk
Total YoY (%)
CY12 92 39 378 406 168 80 1163
CY13 123 47 434 619 235 161 1619 39
CY14 123 66 404 671 253 287 1804 11
CY15 180 76 436 347 200 402 1641 (9)
CY16 225 97 497 420 184 549 1972 20
Source: http://www.clal.it/en/?section=stat_cina
Increased production by EU due to removal of milk quotas in April 2015
Production has increased from 150 mn tonnes in 2010 to a forecast 167 mn tonnes in 2016. The pace of increase has been uneven. Production grew by ~ 1% annually in 2011 and 2013 and by a bumper 3.8% in 2014/2.1% in 2015/ 2.3% in 2016 led by the removal of milk quotas and also as they could successfully divert their exports to other importing countries within EU and outside EU. This increase in production was associated with a
New Zealand
27%
European Union 26%
United States of America
12%
Belarus 7%
Australia 5%
Argentina 3%
Saudi Arabia
2%
Uruguay 2%
Ukraine 1%
India 0%
Others 15%
Exports
Exhibit 60: Steep increase in milk production in EU-28 led to supply glut in CY14
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20
World (mn tonnes) 725 738 754 763 785 799 817 831 847 862 878
Change YoY (%)
1.8 2.2 1.2 2.9 1.7 2.2 1.7 1.9 1.8 1.9
EU-28 (mn tonnes) 150 152 153 154 160 163 167 167 169 170 172
Change YoY (%)
1.3 0.2 0.8 3.8 2.1 2.3 0.3 1.1 0.9 0.9
Source: OCED-FAO agricultural Outlook
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Dai
ry
25 Elara Securities (India) Private Limited
gradual loosening of milk quotas. Following the Commission Communication on the Health Check and in anticipation of the final Health Check decisions, there was strong pressure in the Agriculture Council to increase production possibilities. As a result quotas were increased by 2% in April 2008. To ensure a ‘soft landing’ and to gradually erode the value of quotas to close to zero by 1 April 2015 when quotas were due to expire, quotas were increased by 1% each year from 2009/10 until 2013/14, with an additional measure (fat correction reduction) which further increased production potential. Milk prices also touched record levels in 2014 despite the steady expansion of quotas since 2008. We believe that any price depressing factor like lifting of milk quotas was more than compensated by positive price signals coming from a rapid growth in the world demand. The incentives for boosting milk production in 2014 were also heightened as input costs, which were up until 2013 were rising in-line with milk prices, actually fell in 2014 thereby increasing overall milk production.
Exhibit 66: Low input costs in 2014 led to high margins in dairy leading to increase in production
Source: OCED-FAO agricultural Outlook
Exhibit 67: SMP prices in India were also affected by the global supply glut
Source: Centre for WTO Studies,IIFT, Working Paper
SMP exports will pick up further with more inflation in global dairy prices
SMP exports from India has picked up significantly after the global dairy prices started rising from mid-2016 onwards. We believe that SMP exports will rise further as the global prices inch further; however, there will be limitation to price increase in global dairy prices as demand from China will grow in future but with not as aggressively as it is still affected by slowdown. Russia trade embargo on EU/USA/NZ/Australia continues and is unlikely to be lifted in CY17.
Exhibit 68: Sharp drop in SMP exports in FY15 and FY16 since realization fell drastically
Source: Commerece.nic.in
Exhibit 69: Total SMP exported by India in value terms (INR bn)
Source: Commerece.nic.in
Since SMP prices crashed globally, they had similar impact on Indian SMP prices as well – which fell from INR223/Kg to INR182/Kg and have risen since then to INR225/Kg
1.3
0.2
0.8
3.8
2.1 2.3
0.3
1.1 0.9 0.9
0
1
2
3
4
130
140
150
160
170
180
CY1
0
CY1
1
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7
CY1
8
CY1
9
CY2
0
(%)
Pro
du
ctio
n (
bn
to
nn
es)
EU-28 Change YoY
(60)
(40)
(20)
0
20
40
60
80
0
50
100
150
200
250
300
FY0
3
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
(%)
(IN
R/K
g)
SMP Prices Change YoY
21
,20
5
11
,63
2
11
,22
9
10
69
,63
4
12
3,9
64
27
,55
4
13
,83
8 6
3,7
67
0
30,000
60,000
90,000
120,000
150,000
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7 -
Till
Dec
(MT
ton
nes
)
3.8 1.4 1.5
0.0
10.9
26.1
6.1
2.5 2.8
0
5
10
15
20
25
30
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7 -
Till
Dec
(IN
R b
n)
Rethink Everything
26 Elara Securities (India) Private Limited
Exhibit 70: Net realization (INR/Kg) fetched on SMP exports by India
Source: Commerece.nic.in
Global supply gut in 2014 and 2015 was followed by production cuts in EU, NZ, Australia in 2HCY16
Global dairy prices have risen sharply (~50%) since July’16 since the supply and demand economics started to rebalance itself due to consistently increasing demand from developing countries and alongside sharp cuts in production in Oceania region and Europe. US is the only major exporting nation which has witnessed a growth in production as farmers are responding to favorable weather conditions and grain prices.
Exhibit 71: Milk production declined for all major exporting countries except USA in 2016
Country
Production cchange YoY (%) for 12 mmonths
Comment
New Zealand
(2)
Total New Zealand milk production in March was up 9% compared to the same month last year. The monthly volume change reflects improved growing conditions as a result of better than expected weather conditions in the latter part of the season. New Zealand production for the 2016/17 season (from 1 June 2016) is down 2% to the end of March.
Australia (8) Production for the 12 months to Feb 2017 is down 8% compared to the same period the previous year.
EU (1)
EU production decreased for the Ninth consecutive month starting June 2016, with February down -4% compared to the same month last year. Key milk producing countries contributing to this decline included the UK, down 5%, France, down 4%, and Germany, down 2%.
USA +2 Milk production in USA has been recording 2% YoY growth for the last 10 month till Mar'17
Source: Fonterra-Global Dairy
Exhibit 72: The rebalancing of world supply and demand appears to be underway
Source: Fonterra-Global Dairy
Exhibit 73: EU-28: Milk production down -2% YoY till Feb’17
Source: OCED-FAO
178
118 138
54
156
210 223
182
225
0
50
100
150
200
250 FY
09
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7 -
Till
Dec
(INR/
kg)
(800)
(600)
(400)
(200)
0
200
400
Ap
r-1
6
May
-16
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
(mn
litr
es)
New Zealand EU27 United States Australia
(6)
(4)
(2)
0
2
4
6
8
10
12
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Jan
/14
Ap
r/1
4
Au
g/1
4
Dec
/14
Ap
r/1
5
Jul/
15
No
v/15
Mar
/16
Jul/
16
No
v/16
(%)
Milk
Pro
ud
tcio
n (
mn
litr
es)
Rethink Everything
Dai
ry
27 Elara Securities (India) Private Limited
Milk procurement prices can show very divergent trends across different regions
The following factors affect the milk prices regionally:
� SMP inventory across all dairies in that region
� SMP prices in export markets
� Fodder prices in India
� Rainfall in that region during South West monsoon (for Maharashtra) and North East/Retreating monsoon (Southern states – TN, coastal AP, south interior Karnataka and Kerala)
Due to the above four factors, one could see very divergent trends in milk procurement prices. Currently, along with inflation in dairy prices globally due to the cutback in production by major exporters, Indian milk procurement prices are also witnessing 5-17% inflation across regions and around 25% in Maharashtra.
Dairies faced a dry-flush season in 2016 despite normal monsoon
There could be two reasons why milk prices are rising, even in an overall good agricultural year. The first has to do with the nature of the milk production cycle itself. In bad rainfall years, farmers rely more on milk sales to make up for lost income from their main crop. So, rather than plant cotton or groundnut, they might opt for short-duration fodder crops and invest all their resources into dairying. In the event, more milk may flow from the udders of their buffaloes and cows.
The flip side to this, however, is that farmers even in normal times accord priority in feeding to their animals already in milk. During droughts, they would tend to do this all the more. Since pregnant animals and calves are the ones that are deprived maximum of fodder, their reproduction-cum-lactation cycle suffers disruption. The impact on milk output, though, is felt not immediately, but in the succeeding year.
It could well be the case, then, that 2016-17 is when the effects of not one, but two years of drought, are manifesting themselves. That production has taken a hit is also borne out by milk procurement volumes of dairies. As per the industry sources milk procurement in Maharashtra and North is down by 27%/15% respectively, while being flat to negative in Gujarat and much of South.
Procurement in Maharashtra had fallen by 27% in the flush season of FY17 (Oct-Feb)
Dairies in Maharashtra stated that procurement had dropped by 27% in the latest flush season due to which cow milk prices (at retail level) were hiked from INR40/Ltr to INR 42/Ltr in Jan’17 as procurement cost went up by INR 3/Ltr from the farmers (Statement issued in media by Maharashtra State Milk Producers Cooperative Action Committee). Earlier in Aug’17, the state government had increased the purchase price from INR 20 to INR 22 per litre for 3.5 per cent fat 8.5 per cent solid not fat (SNF) milk. Following the decision to increase purchase price, now farmers will be paid INR 25 per litre for the same quality of milk. As against the requirement of 110 lakh litre per day in Maharashtra, at present, dairies —both cooperative and private dairies —just around 80 lakh litre of milk is being procured on a daily basis. Shortfall was a cumulative effect of drought, less fodder and demonetization. Lack of fodder in 2016 was due to drought in 2015 which led to a dip in milk production.
Exhibit 74: Milk production in Maharashtra affected by two consecutive droughts
Source: Meteorological Department of India
Milk prices in Maharashtra were at least 10% lower than any other region in 2015-16
Milk prices in Maharashtra fell much more in FY16 as dry milk powder inventory (SMP) also known as “Buffer Stock”, had gone up to 1-1.5 Lakh tonnes from the usual level of 78k tonnes as prices of SMP in export markets were lower than prices prevailing in India and the realization in export markets were lower than cost of production of SMP in India. Since milk is a perishable commodity farmers were forced to off load their produce to nearby dairy farms at low prices, which caused prices
2.7 1.6
(7.2)
5.6
(11.9) (13.8)
(2.9)
(15)
(10)
(5)
0
5
10
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Dep
artu
re fr
om
Lo
ng
Ter
m
Ave
rag
e (%
)
South West Monsoon (Rainfall deficit)
Western and Northern dairies affected by global milk prices � Milk prices vary region wise led by factors like source of milk (cow or buffalo), rainfall conditions
pasture growth and if the region is milk surplus or deficient naturally � SMP prices crashed starting 1QFY15 due to supply glut and affected SMP prices in India
� Western and Northern dairies affected by global fluctuations due to concentration of powder
capacities in those regions
Rethink Everything
28 Elara Securities (India) Private Limited
in Maharashtra to drop much more than other regions. Since mid-2016, the SMP prices globally have risen by 40% YoY while SMP stocks in India have fallen to around 50k tonnes (35% below the normal inventory levels in the country).
SMP Exports mainly concentrated in North and West India
As per the SMP exports data by origin, we understand that SMP exports are mainly done from North and West India which leads to 1) high linkage of milk procurement prices and therefore inflation with global SMP prices 2) high volatility in milk procurement and prices prevailing for regional dairies from North and West India.
Exhibit 79: State wise SMP exports (Value share)
Source: Industry
Uttar Pradesh 28.7%
Gujarat 17.1%
Maharashtra 16.7%
Haryana 15.8%
Delhi 13.6%
Tamil Nadu 4.1%
Bihar 1.7%
Kerala 1.0%
Punjab 0.7%
Karnataka 0.5%
Telangana 0.0%
Milk procurement prices in Maharashtra
Exhibit 75: Cow milk prices in Maharashtra Exhibit 76: Change in cow milk prices in Maharashtra
Source: Prabhat Dairy, Elara Securities Research Source: Prabhat Dairy, Elara Securities Research
Milk procurement price in Maharashtra compared to other states – Shows clear divergence
Exhibit 77: Cow milk prices across regions Exhibit 78: Buffalo milk prices across regions
Note: Prices as existing in Jan 2016; Source: DNAIndia.com Note: Prices as existing in Jan 2016; Source: DNAIndia.com
20
.3
22
.0
26
.3
26
.0
25
.8
25
.2
24
.8
22
.7
19
.0
20
.8
21
.3
20
.7
25
.7
25
.6
27
.2
28
.6
27
.1
0
5
10
15
20
25
30
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
Pro
ce (
INR/
Ltr)
27
14
(6) (13)
(26) (17) (14)
(9)
35
23 28
38
6
(30)
(20)
(10)
0
10
20
30
40
50
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
Ch
ang
e Yo
Y (%
)
20.0
23.0
23.3
22.4
22.7
22.0
18 20 22 24
Mumbai
Bengaluru
Jaipur
Jabalpur
Kolar
Ujjain
(INR/Ltr)
29.0
33.0
36.0
36.0
30.8
35.0
31.7
0 10 20 30 40
Mumbai
Banaskantha & Mehsana
Surat
Indore
Bhopal
Jaipur
Dharwad
(INR/Ltr)
Rethink Everything
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ry
29 Elara Securities (India) Private Limited
North East Monsoon (Retreating monsoon) has been deficient in 2016-17 period
Southern states like Tamilnadu, coastal Andhra Pradesh, south interior Karnataka and Kerala were declared drought states by January 2017 by respective state governments as the north east monsoon was 45% short of average for Oct- Dec 2016 period. This led to inflation in Southern states and especially in Tamil Nadu where the rainfall was 62% short of normal.
Exhibit 82: Northeast Monsoon Rainfall Deficit, 2011-16
Source: Meteorological Department of India
(100) (50)
0 50
100 150
Tam
ilnad
u
Co
asta
l An
dh
ra
Co
asta
l Kar
nat
aka
Ker
ala
No
rth
Inte
rio
r K
arn
atak
a
Raya
lsee
ma
Sou
th In
teri
or
Kar
nat
aka
Tela
ng
ana
(%)
2011 2012 2013 2014 2015 2016
Exhibit 80: North Indian Milk Prices Exhibit 81: Change in milk prices YoY (%)
Source: Bloomberg, Elara Securities Research Source: Bloomberg, Elara Securities Research
33 36 38 39 41
38 32 31
37 33 33 33
37 38 39 43 45
0
10
20
30
40
50
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
(IN
R/Lt
r)
17 17
0 5
1
(14) (9)
(22) (15)
6
25
46 41
29
17
(30)
(20)
(10)
0
10
20
30
40
50
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
(IN
R/Lt
r)
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30 Elara Securities (India) Private Limited
Rainfall deficiency for several years has led to depletion of water reservoirs in 4 southern states causinginflation in milk prices in Southern India.
Exhibit 83: India’s reservoirs, by state (as on 5 January 2017)
Note: Map not to scale;
Source: Maps of India
Tamil Nadu-82%
Karnataka-39%
Andhra Pradesh
-27%
Maharashtra4%
Madhya Pradesh48%
Rajasthan11%
Gujarat6%
Uttar Pradesh59%
Punjab-13%
Bihar
Odisha12%
Jharkhand20% West
Bengal17%
Sikkim
Arunachal Pradesh
Assam
Tripura
Meghalaya
Mizoram
Manipur
Nagaland
Goa
Puducherry
Uttarakhand12%
Jammu&
Kashmir
Haryana
HimachalPradesh
-25%
Delhi
Chhattisgarh14%
Kerala-37%
Telangana72%
Departure from normal (%)
-106.0 106.0
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ry
31 Elara Securities (India) Private Limited
Exhibit 84: Milk procurement price in South India (AP/ Telangana)
Exhibit 85: Change in milk procurement prices
Source: Heritage Foods, Elara Securities Research Source: Heritage Foods, Elara Securities Research
Exhibit 86: Procurement prices for Karnataka Exhibit 87: Change in procurement prices in Karnataka
Source: Karnataka Co-operative Milk Producer’s Federation Ltd. Source: Karnataka Co-operative Milk Producer’s Federation Ltd.
26 26 27 30 31 31 33 33 31 30 31 31 32 32 33 34 35
0 5
10 15 20 25 30 35 40
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
(IN
R/lit
re)
0 2
9
18 17 18 20
9
3
(2) (6) (5)
1 5 5
11 10
(10)
(5)
0
5
10
15
20
25
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
Q1
FY1
7
Q2
FY1
7
Q3
FY1
7
Q4
FY1
7
Q1
FY1
8
(% c
han
ge
YoY)
8 9 9 9 11 12 12
16 18 19
21 22 21
25
0
5
10
15
20
25
30
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
(IN
R/lit
re)
3
(1)
8
17
9
4
27
17
6
10
6
(5)
18
(10)
(5)
0
5
10
15
20
25
30
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
(% c
han
ge
YoY)
Rethink Everything
32 Elara Securities (India) Private Limited
Price volatility in Southern region is lower than North and Western region
Price volatility in milk procurement prices is lower in Southern region as that region does not have high salience of SMP exports which exposes the western and northern dairy players to global dairy price fluctuations and demand –supply mismatch leading to sharp and sudden inflation in prices in case of SMP inventory like it happened in June’16 for all western dairy companies.
We prefer South Indian Dairies over other regional players
Prefer South Based Dairies with strong presence in Fresh dairy products as private dairy sector in South India developed their business model around fast moving pouch milk while creating strong consumer brand loyalty. Given that co-operatives in Maharashtra and Gujarat are more entrenched players in pouch milk, hence the business models of Western and North India private dairy companies have evolved around manufacturing SMP (commodity) to divert the excess milk production in these regions or towards VAD products (High capex, high working capital requirements) which have far less competition from unorganized players.
Exhibit 88: Share in daily milk distribution (LLPD) of private dairies in Maharashtra has fallen from 64% to 41% indicating that they have reduced their salience in pouch milk
Year Gov. Co-Op. Private Total % procured by ppvt dairies
FY11 2.1 33.4 54.1 89.6 60
FY12 1.6 37 62.3 100.8 62
FY13 2 38.7 60.6 101.4 60
FY14 1.4 37.8 60.9 100 61
FY15 1.1 44.3 69.5 114.9 60
FY16 2.5 48.8 64.7 115.9 56
FY17 0.8 44.5 61.9 107.2 58
Source: Dairy Development Department, Maharashtra State (India), Elara Securities Research
Exhibit 89: Daily Milk Distribution (LLPD) in Maharashtra
Year Gov. Co-Op. Private Total % procured by pvt dairies
FY11 2.1 29.8 58 90 64
FY12 1.5 29.8 66.2 97.4 68
FY13 1.5 34.3 59.9 95.7 63
FY14 1.4 36.9 61.4 99.8 62
FY15 0.8 40.5 53 94.3 56
FY16 1 51.5 35.7 88.1 41
FY17 0.8 52.1 36.3 89.3 41
Source: Dairy Development Department, Maharashtra State (India), Elara Securities Research
Prefer South Indian companies over North or Western players � We prefer South Indian dairies over North or Western players due to lower milk price
volatility/linkage to global milk prices
� Dairies in fresh dairy products preferred due to low working capital requirements, steady cash
flows from operations and higher asset turn
Heritage Foods Low working capital requirements as it is mainly in fresh dairy products and pouch milk
Exhibit 90: Cash conversion cycle Exhibit 91: Liquid milk business has low working capital requirements and the products are fast moving compared to long shelf-life products
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
24
(13)
1
10
17 12 11
15 18
16 15
9 9 9
(15)
(10)
(5)
0
5
10
15
20
25
30
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
20
2
13
9
0
5
10
15
20
25
Inventory days
Receivable days
Trade payables
Cash conversion
cycle
(day
s)
Rethink Everything
Dai
ry
33 Elara Securities (India) Private Limited
Exhibit 92: Inventory days on the lower side
Source: Company, Elara Securities Estimate
Exhibit 93: Receivable days minimal
Source: Company, Elara Securities Estimate
Exhibit 94: Loans and advances days
Source: Company, Elara Securities Estimate
Exhibit 95: Creditors days in –line with payment cycle
Source: Company, Elara Securities Estimate
Exhibit 96: Fixed Asset Turnover Ratio (x) higher than other players
Source: Company, Elara Securities Estimate
Exhibit 97: Cash flows from operations
Source: Company, Elara Securities Estimate
Exhibit 98: Working capital as % of sales much lower than other players like Prabhat/Parag/Kwality
Source: Company, Elara Securities Estimate
64
45
30
42
29 32 25
31 31 28
24 20 20 20
0
10
20
30
40
50
60
70
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
5
6 5
5 5
3 3 4
4 4
2 2 2 2
0
1
2
3
4
5
6
7
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
41
33
21 20 15
10 10 10 6 6 5 5 5 5
0 5
10 15 20 25 30 35 40 45
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
…
FY1
…
FY2
…
(day
s)
45
64
34 37
17 22
17 19 17 16 10 13 13 13
0
10
20
30
40
50
60
70
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
3.3 3.5 3.4 3.2
3.6
4.2 4.5 4.4
4.7 4.9
4.4
4.8 5.0
4.7
2
3
4
5
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(x)
12
4
(12
3)
84
(88
)
32
1
51
7
60
2 97
3
74
8
51
6
1,2
49
1,4
04
1,4
46
1,6
79
1,9
69
(500)
0
500
1,000
1,500
2,000
2,500
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
5
(2)
1
2
4
3 3 3
4 4
3
2 2 2
(2)
(1)
0
1
2
3
4
5
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
Rethink Everything
34 Elara Securities (India) Private Limited
Exhibit 99: Cash Conversion Cycle is around 4.5 months
Source: Company, Elara Securities Estimate
Exhibit 100: Inventory days expected to increase further due to higher cheese production
Source: Company, Elara Securities Estimate
Exhibit 101: Receivable days expected to come down with higher B2C sales
Source: Company, Elara Securities Estimate
Exhibit 102: Loans and Advances days high due to funding farmers for buying cattle and cattle feed
Source: Company, Elara Securities Estimate
Exhibit 103: Creditor days in –line with other co-operatives in Maharashtra
Source: Company, Elara Securities Estimate
Exhibit 104: Working capital as % of sales expected to ease due to reduction in receivable days
Source: Company, Elara Securities Estimate
115 124
103 120 114
121 138 134 131
0
20
40
60
80
100
120
140
160
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
22 26 24
30 35
43 46
50 53
0
10
20
30
40
50
60
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
35
45
66 76 71 70
64 56
50
0
10
20
30
40
50
60
70
80
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
89
73
39 45
29 26
45 45 45
0
20
40
60
80
100
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
28
19
24
29
21 17 17 17 17
0
5
10
15
20
25
30
35
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
27 29
26 30 29 31
34 32 31
0
5
10
15
20
25
30
35
40
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
Prabhat Dairy Working capital requirements are high due to high receivables, loans and advances to milk suppliers and due to high SMP related inventory
Rethink Everything
Dai
ry
35 Elara Securities (India) Private Limited
Exhibit 105: Fixed Asset Turnover ratio (x) expected to increase due to higher capacity utilization
Source: Company, Elara Securities Estimate
Exhibit 106: CFO expected to increase due to lower receivables…….
Source: Company, Elara Securities Estimate
Exhibit 107: …..CFO as % of EBITDA expected to rise as a result
Source: Company, Elara Securities Estimate
2.0 2.4 2.3 2.3
2.5 2.6 2.7
0
1
2
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(x)
627 590
130 79
438 279
460
1,397
1,704
0
300
600
900
1,200
1,500
1,800
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
110
77
9 1
25 16 14
58 56
0
20
40
60
80
100
120
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
CFO as % of EBITDA
Rethink Everything
36 Elara Securities (India) Private Limited
Exhibit 108: Cash flows from operations (Parag)
Source: Company, Elara Securities Estimate
Exhibit 109: CFO as % of EBITDA
Source: Company, Elara Securities Estimate
Exhibit 110: Cash conversion cycle almost 3 months
Source: Company, Elara Securities Estimate
Exhibit 111: Working capital as % of sales
Source: Company, Elara Securities Estimate
Exhibit 112: Inventory days high due to cheese
Source: Company, Elara Securities Estimate
Exhibit 113: Receivable days high due to B2B customers
Source: Company, Elara Securities Estimate
Exhibit 114: Loans and advances are high as they fund farmers and distributors
Source: Company, Elara Securities Estimate
Exhibit 115: Payable days are high to match the loans and advances given to farmers
Source: Company, Elara Securities Estimate
118
(132) (236)
388
1,300
1,013
142
998
549
873
(400) (200)
0 200 400 600 800
1,000 1,200 1,400
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
23.5
(16.0) (28.2)
47.1
121.3
68.4
13.1
72.3
36.5 42.6
(40) (20)
0 20 40 60 80
100 120 140
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
85 89
122 125
89 88 103
94 93 92
0
20
40
60
80
100
120
140
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
23 24
33 34
24 24
28 26 26 25
10
15
20
25
30
35
40
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
83
67 74 72 69
73
102
73 73 73
40
60
80
100
120
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
47
41
52 52
42 45
48 48 48 48
20
30
40
50
60
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
22 25
48
57 53
34
46 46 46 46
10
20
30
40
50
60
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
42 38
47 47
55 55
70
55 55 55
30
40
50
60
70
80
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
Parag Milk Foods: High working capital ratios due to
1) Inventory of cheese, SMP 2) high receivables due as they cater to B2B clients 3) high loans and advances given to farmers for buying cattle, cattle feed and 4) new distributors are supported for 6 months by Parag
Rethink Everything
Dai
ry
37 Elara Securities (India) Private Limited
Valuation Methodology & Recommendation � Initiate on Heritage with Buy and TP of INR 1,804. Valuation for HFL pegged to Hatsun and
recent PE deals
� Initiate on Prabhat Dairy with Buy and TP of INR160. Valuation pegged with other B2B players
� Initiate of Parag Milk Foods with Accumulate & TP INR289 (at a discount to historical average as
we maintain a cautious stance due to limited pricing power and very low cash flow generation)
Heritage Foods: HFL has got re-rated by 3x over the period of last 3 years as they increased salience of VAD in their portfolio
Exhibit 116: 1-yr forward EV/EBITDA Band Exhibit 117: 1-yr forward rolling EV/EBITDA
Source: Bloomberg, Elara Securities Estimates Source: Bloomberg, Elara Securities Estimates
Exhibit 118: 1-yr forward EV/Sales Band Exhibit 119: 1-yr forward rolling EV/Sales
Source: Bloomberg, Elara Securities Estimates Source: Bloomberg, Elara Securities Estimates
Prabhat Dairy: Trading at 8x 1-yr forward EV/EBITDA in-line with historical average
Exhibit 120: 1-yr forward EV/EBITDA Band Exhibit 121: 1-yr forward rolling EV/EBITDA
Source: Bloomberg, Elara Securities Estimates Source: Bloomberg, Elara Securities Estimates
2x
5x
8x
11x
15x
(200) 0
200 400 600 800
1,000 1,200 1,400 1,600
Ap
r-0
8
Dec
-08
Au
g-0
9
Ap
r-1
0
Dec
-10
Au
g-1
1
Ap
r-1
2
Dec
-12
Au
g-1
3
Ap
r-1
4
Dec
-14
Au
g-1
5
Ap
r-1
6
Dec
-16
Au
g-1
7
(INR)
6.5 9.0
3.9
11.5
1.4 0
4
8
12
16
20
Ap
r-0
8
Dec
-08
Au
g-0
9
Ap
r-1
0
Dec
-10
Au
g-1
1
Ap
r-1
2
Dec
-12
Au
g-1
3
Ap
r-1
4
Dec
-14
Au
g-1
5
Ap
r-1
6
Dec
-16
Au
g-1
7
(IN
R )
Rolling 2yr fwd Ev/EBITDA Avg + 1 Std dev - 1 Std dev + 2 Std dev - 2 Std dev
0.2x
0.4x
0.6x
0.8x
1.0x
0
200
400
600
800
1,000
1,200
1,400
1,600
Ap
r-0
8
Dec
-08
Au
g-0
9
Ap
r-1
0
Dec
-10
Au
g-1
1
Ap
r-1
2
Dec
-12
Au
g-1
3
Ap
r-1
4
Dec
-14
Au
g-1
5
Ap
r-1
6
Dec
-16
Au
g-1
7
(INR)
0.4 0.6
0.1
0.8
(0.1) (0.4)
0.0
0.4
0.8
1.2
1.6
Ap
r-0
8
Dec
-08
Au
g-0
9
Ap
r-1
0
Dec
-10
Au
g-1
1
Ap
r-1
2
Dec
-12
Au
g-1
3
Ap
r-1
4
Dec
-14
Au
g-1
5
Ap
r-1
6
Dec
-16
Au
g-1
7
(IN
R )
Rolling 2yr fwd Ev/Sales Avg + 1 Std dev - 1 Std dev + 2 Std dev - 2 Std dev
50
100
150
200
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(INR)
11x
7x
8x
9x
10x
8.4 9.9
6.9 5.4
11.4
4
8
12
16
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(x)
Rolling 2yr fwd Ev/EBITDA Avg +1 Std dev -1 Std dev -2 Std dev +2 Std dev
Rethink Everything
38 Elara Securities (India) Private Limited
Prabhat Dairy
Exhibit 122: 1-yr forward EV/Sales Band Exhibit 123: 1-yr forward rolling EV/Sales
Source: Bloomberg, Elara Securities Estimates Source: Bloomberg, Elara Securities Estimates
Parag Milk Foods Trading below its historical average
� Due to recent concerns over low pricing power and
� Stiff competition in cheese as Amul tripled its cheese capacity from 40MTPD to 120MTPD
Exhibit 124: 1-yr forward EV/EBITDA Band Exhibit 125: 1-yr forward rolling EV/EBITDA
Source: Bloomberg, Elara Securities Estimates Source: Bloomberg, Elara Securities Estimates
Exhibit 126: 1-yr forward EV/Sales Band Exhibit 127: 1-yr forward rolling EV/Sales
Source: Bloomberg, Elara Securities Estimates Source: Bloomberg, Elara Securities Estimates
40
60
80
100
120
140
160
180
200
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(IN
R)
1.1x
0.6x
0.7x
0.8x
1.0x 0.8 1.0
0.7
1.1
0.6
0.4
0.6
0.8
1.0
1.2
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(x)
Rolling 2yr fwd Ev/Sales Avg +1 Std dev -1 Std dev +2 Std dev -2 Std dev
12x
14x
16x
18x
20x
150
200
250
300
350
400
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(INR)
16.3 19.1
13.6
21.9
10.8
5
10
15
20
25
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(x)
Rolling 2yr fwd Ev/EBITDA Avg +1 Std dev -1 Std dev +2 Std dev -2 Std dev
0.5x
0.7x
0.9x
1.1x
1.4x
0 50
100 150 200 250 300 350 400 450
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(INR)
1.1 1.3
0.9
1.5
0.7
0.5
0.7
0.9
1.1
1.3
1.5
1.7
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(X)
Rolling 2yr fwd Ev/Sales Avg +1 Std dev -1 Std dev +2 Std dev -2 Std dev
Rethink Everything
Dai
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39 Elara Securities (India) Private Limited
Return ratios much better for B2C players in fresh dairy products � B2B players like Prabhat and Kwality have over 100 days of working capital locked in to the
business due to high receivables and inventory of SMP.
� Western region dairies have high loans and advances as they fund farmers and distributors
� Heritage, Prabhat and Kwality have ad-spends on the lower side (<1% of sales) and is expected to
rise due to brand building in new markets (Heritage) or just started to invest in their brand
(Kwality/ Prabhat)
Exhibit 128: Dairy comparative analysis
Dairy Comparative PParameters
Prabhat Parag Heritage Hatsun Agro Kwality Dairy
Type of milk Cow Cow Both Both Buffalo
Business Model Speciality Ingredients (B2B)
Consumer brand in Ghee and Cheese. Recently entered high end retail Whey protein market
Consumer brand in pouch milk and fresh dairy products like curd, paneer lassi, butter milk
Consumer brand in pouch milk and fresh dairy products like curd, paneer, lassi, butter milk and ice cream
SMP manufacturer with growing B2C brand in pouch milk and fresh dairy products like curd, lassi, buttermilk
Procurement region Maharashtra Maharashtra, AP, Karnataka, TN
AP, Telangana, Karnataka, TN, Maharashtra, Haryana, Rajasthan, Punjab & Gujarat
TN, AP, Kerala, Goa, Karnataka, Maharashtra
UP, Rajasthan,Haryana
Direct milk procurement (%)
70 85 90 95 24
Growth in milk procurement -Last 5 year CAGR (%)
15 8 8 N/A N/A
Installed Milk processing capacity (MLPD) - Own and leased
1.5 3.4 2.29 2.8 4.3
Average milk procurement (mn litres/day)
0.9 1.2 1.26 (Including Reliance Dairy)
2.5
Milk procurement farmers (mn nos)
0.085 0.2 0.35 0.32 0.35
Employee strength (Nos)
800 1737 2522 4962 822
Retail touch points (Nos)
0.1 mn retail outlets 0.2 mn retail outlets
1.5mn households, 1200 Heritage Parlours, 2000 outlets of Reliance Retail. 500-600 outlets of Future Retail. Total outlet reach of 0.118mn
0.045 retail outlets
Revenue break--up ((FY17)
B2C 30 70 100 100 34
B2B 70 30
67
Pouch milk as % of sales (FY17)
14 22 63 61 42
Pouch milk installed capacity (LLPD)
500,000 375,000 1,135,000
1,806,000
Cheese capacity (MTPD)
30 60 N/A N/A 20
Source: Company, Elara Securities Research
Rethink Everything
40 Elara Securities (India) Private Limited
Business model comparison: B2B vs B2C and Fresh milk products vs VAD
Exhibit 131: High salience in pouch milk and B2C leads to higher ROCE (%)
Source: Elara Securities Estimate
Exhibit 132: B2B players have high Wcap requirement of ~30% of sales and lower Fixed asset turnover ratio – leading to high incidence of debt on the balance sheets
Source: Elara Securities Estimate
Prabhat Dairy Parag Milk
Heritage Foods Hatsun Agro
Kwality Dairy
0
5
10
15
20
25
30
0
5
10
15
20
25
30
35
12
MT
EV/E
BIT
DA
(x)
Average of last 5 years ROCE(%)
Prabhat Dairy
Parag Milk
Heritage Foods
Hatsun Agro
Kwality Dairy
(1)
0
1
2
3
4
5
6
(5) 0
5
10
15
20
25
30
35
40
Net
deb
t to
Eq
uity
WCap as % of sales
Exhibit 129: Margin profile and Key Cost Drivers - Last 5 years average and balance sheet strength
Prabhat Parag Heritage Hatsun Agro Kwality Dairy
Gross Margin (%) 21.1 25.8 23.0 26.0 9.0
Employee costs as % of sales 2.3 3.9 5.6 3.1 0.3
Power and fuel costs as % of sales 2.1 3.5 2.1 2.5 0.3
Ad-spends as % of sales 0.9 2.4 0.8 2.4 0.5
Freight forwarding costs (%) of sales 1.1 3.1 3.3 3.5 0.5
EBITDA Margin (%) 10.2 7.9 7.5 7.8 6.0
Wcap as % of sales 31.9 28.9 4.1 3.2 28.1
Net Debt : Equity 0.9 4.7 0.7 3.0 3.3
CFO/EBITDA (%) 40 34.3 91 85.6 Long term history of
negative CFO
RoCE (%) 10.1 11.2 24.0 20.2 19.0
Fixed asset turn (x) 2.5 1.8 5.8 4.1 37.8
Source: Elara Securities Research
Exhibit 130: Domestic Peer comparison: Heritage Foods Ltd – Strong case for further re-rating; Trading at 30% discount to Hatsun Agro on TTM basis on EV/Sales (x)
Company Ticker Rating Mcap CMP Target EV/Sales EV/EBITDA ROE (%)
(INR mn) (INR) (INR) FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E
Heritage Foods
HTFL IN Buy 34,845 1,502 1,804 1.6 1.5 1.3 1.2 26.7 21.7 16.8 14.2 24.6 25.6 23.8 22.7
Prabhat Dairy PRABHAT IN Buy 12,991 133 160 1.1 1.0 0.9 0.8 12.0 10.4 8.5 6.9 4.2 7.0 9.0 11.0
Parag Milk
PARAG IN Accumulate 21,000 250 289 1.3 1.1 1.0 0.8 20.9 16.5 15.2 11.0 6.0 5.7 6.6 10.5
Hatsun Agro
HTSMF IN Not Rated 95,456 628 - 2.5
27.2
38.6
Kwality Dairy KWALITY IN Not Rated 28,670 122 - 0.7 10.3 19.6
Note: pricing as on 4 September 2017; Source: Company, Elara Securities Estimate
Rethink Everything
Dai
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41 Elara Securities (India) Private Limited
Milky Mist in talks to fetch 4x EV/Sales due to direct milk procurement, unique cold chain distribution network for dairy products and plans to go national
About Milky Mist’s unique cold chain infrastructure
COLD CHAIN INFRASTRUCTURE, WHICH BINDS THE ORIGINAL QUALITY UP TO THE FORK!!!!
To ensure the product quality up to our primary clients and stores, we have a fleet of Reefer trucks of various capacities to take care of cold chain, which forms the most essential part to retain the products inherent properties. We provide refrigerated vehicles to the distributors to ensure the continuity of cold chain management. The entire logistics is monitored using the latest GPS technology to ensure timely service and product temperature at every stage. In order to extend the cold chain to our secondary customers like retail outlets, we are the only Dairy to provide Visi-coolers to every eligible outlet, which enhances the brand visibility and ensures product quality. We are in the process of extending this to as many stores as possible to make sure that the product reaches the end consumer in its best quality.
Exhibit 133: PE deal valuations in dairy space
Target Buyer(s) Deal Value
(UUSD mmn) Percentage Sought (%)
EV/Sales (x)
EV/EBITDA (x)
P/E (x)
Milky Mist 3 PE players (Un-announced) 46.88 20 4.0x NA NA
Dodla Dairy Ltd. The Rise Fund 50.00 27.0 1.00x 11.74x 33.06x
Gho Agro Pvt. Ltd. ASK Pravi Private Equity Opportunities Fund 7.34 NA NA NA NA
Sri Krishna Milks Pvt. Ltd. Capvent India Advisors Pvt. Ltd. 9.76 NA NA NA NA
Shreedhar Milk Foods Ltd. Omrudra International Trading LLC 3.52 4.4 0.47x 10.08x 20.85x
Neo Milk Products Pvt. Ltd. Ambit Pragma Fund II 0.69 53.3 0.54x NM NM
Neo Milk Products Pvt. Ltd. Ambit Pragma Fund II 8.73 100.0 1.05x NM NM
Dodla Dairy Ltd. Cargill Ventures 20.34 23.7 0.67x 9.63x 17.32x
Prabhat Dairy Ltd. India Agri Business Fund Ltd., Proparco SA 25.34 36.8 0.91x 22.19x NM
Parag Milk Foods Ltd. IDFC Private Equity Fund III 20.48 32.7 0.83x 8.96x 15.98x
Average 0.78x 12.52x 21.80x
Median 0.83x 10.08x 19.09x
Source: Company, Elara Securities Estimate
Rethink Everything
42 Elara Securities (India) Private Limited
Notes
Sagarika Mukherjee • sagarika.mukherjee@elaracapital.com • +91 22 6164 8594
Shubham Maheshwari • shubham.maheshwari@elaracapital.com • +91 22 6164 8562
Glo
bal
Mar
kets
Res
earc
h
Elara Securities (India) Private Limited
Taking measured steps to grow Cash flows from liquid milk business to fund expansion into VAD
We believe Heritage has a well established brand and strong presence in the generally sticky and difficult to encroach category of pouch milk in South India (80% of sales). The company has shown prudence of hiving off the loss making retail/agri/bakery divisions to divert all cash flows into expanding milk procurement and to graduate to mid-shelf life VAD. Heritage has shown financial discipline as they take a balanced approach to funding growth through a mix of debt and internal accruals from the highly cash generative pouch milk business. This approach ensures that the business does not become too leveraged while growing fast and faces cash crunch every 2-3 years at the wake of capacity expansion.
Reliance Dairy acquisition to add 16% to liquid milk procurement
RRL with milk procurement capacity of 2LLPD (16% additional to HFL) was integrated into HFL in Apr’17 and they expect to turnaround the business by Sept’17 by rationalizing sub-optimal milk routes, disposing off loss making bulk commodities, balancing the milk procurement and sales and by diverting excess milk to VAD production.
Dairy EBIT to clock 20% CAGR in FY17-20E led by high salience of VAD and acquisition of RRL
The dairy business of Heritage has clocked in a Sales/EBIT CAGR of 18% in FY06-17 period and we expect it to grow at 17%/26% CAGR respectively in FY17-20 period led by 1) 25% CAGR in VAD segment in the same period which fetches a higher margin of 15% compared to 5% in liquid milk VAD to increase salience by 300bps every year to 40% by FY22. 2) Heritage is entering new markets and also penetrating deeper into existing markets primarily in Tier II and Tier III cities. 3) Acquisition of RRL which gives access to key markets like in North and West India where HFL always wanted to expand into.
Valuation We have assigned a EV/Sales(x) multiple of 1.1x and 16.5x EV/EBITDA(x) on FY20E estimates, at a discount to Hatsun Agro as it has higher margin profile compared to HFL despite much higher ads-to-sales ratio (2.4% in Hatsun vs 0.8% in HFL). We believe HFL to get re-rated to Hatsun Agro’s valuations as the company has hived off the loss making retail venture, expanded its procurement capacity by 16% through RRL acquisition and has a strong brand in liquid milk to support capex. We have arrived at SOTP valuation of INR1,804 for HFL including the value of the stake in FRL at INR176/share.
Price performance
Source: Bloomberg
Key FFinancials YE March
Revenue ((INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)
FY17# 22,734 (4.5) 1,366 6.0 669 (4.5) 28.8 24.6 32.6 53.1 26.8
FY18E 24,238 6.6 1,675 6.9 916 6.6 39.5 26.5 54.1 38.8 21.7
FY19E 26,880 10.9 2,136 7.9 1,173 10.9 50.6 26.6 73.1 30.3 16.8
FY20E 29,954 11.4 2,495 8.3 1,352 11.4 58.3 24.2 67.5 26.3 14.2
Note: pricing as on 4 September 2017, #FY17 financials as reported post the hive off Retail, Vetca, Agri, Bakery division to HFRL - 100% owned subsidiary of HFL to be transferred to Future Retail; Source: Company, Elara Securities Estimate
India | Dairy 12 September 2017
Initiating Coverage
Heritage Foods
Rating: Buy Target Price: INR 1,804 Upside: 20% CMP: INR 1,502 (as on 4 September 2017)
Key data Bloomberg /Reuters Code HTFL IN/HEFI.BO
Current /Dil Shares O/S (mn) 23/23
Mkt Cap (INR bn/USD mn) 35/543
Daily Volume (3M NSE Avg) 3,309
Face Value (INR) 10
1 US$= INR 64.1
Note: *as on 4 September 2017; Source: Bloomberg
Price & Volume
Source: Bloomberg
Shareholding (%) Q2FY17 Q3FY17 Q4FY17 Q1FY18
Promoter 39.9 39.9 39.9 39.9
Institutional Investor 11.5 12.7 13.0 13.4
Other Investor 17.3 16.9 16.9 16.9
General Public 31.3 30.6 30.3 29.7
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 1.5 9.0 9.2
Heritage Foods 30.3 33.4 96.4
Parag Milk Foods 5.0 10.1 (25.8)
Prabhat Dairy 17.6 3.4 41.0
Source: Bloomberg
50
100
150
200
Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Reb
ased
to
10
0
Heritage Foods Sensex
0.0
0.5
1.0
1.5
150
650
1,150
1,650
Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Vol. in mn (RHS) Heritage Foods (LHS)
Heritage Foods
44 Elara Securities (India) Private Limited
Valuation trigger
Source: Bloomberg, Elara Securities Estimate
Valuation overview (FY20E) EV/Sales (x) Weightage (%) 50 Sales (INR mn) 29,954 EV/Sales (x) 1.1 EV (INR mn) 33,975 Gross Debt (INR mn) 3024 Cash (INR mn) 3,191 Net Debt (INR mn) (167) Fair Value (INR mn) 34,141 TP (INR/Share) 1,472 CMP (INR/Share) 1,530 Upside (%) (3.8) Implied P/E(x) 25.3 EV/EBITDA (x)
EBITDA (INR mn) 2,495 EV/EBITDA (x) 16.5 EV (INR mn) 41,241 Gross Debt (INR mn) 3,024 Cash (INR mn) 3,191 Net Debt (INR mn) (167) Fair Value (INR mn) 41,407 TP (INR/Share) 1,785 CMP (INR/Share) 1,530 Upside (%) 16.7 Implied P/E(x) 30.6 Weighted TP (INR) 1,628 CMP (INR) 1,530 Upside (%) 6 Implied P/E(x) on FY20 28 SOTP Valuation INR/share HFL 1,628 Value of stake in FRL 176 Target Price on FY20 1,804 Implied P/E(x) for Dairy & FRL stake 31.0 CMP 1,530 Upside (%) 18
Source: Elara Securities Estimates
Valuation driver - CFO to EBITDA
Source: Elara Securities Research
Investment summary
� Growing the milk delivery service in new markets like Mumbai to build the brand ‘Heritage’
� Company ROCE to improve due to hive off of loss making retail, agri, bakery divisions
� Accelerating capex program to grow direct milk procurement by 10% p.a. to enter Tier 2-3 towns
� Return ratios are superior than peers as it is majorly invested in fresh dairy products
Valuation trigger
1. Breakeven to be achieved by Reliance Dairy by Sept’17
2. Milk prices to sequentially start declining by Oct’2017
3. To achieve 5%/15% margin in milk and milk products for Reliance Dairy by FY19E
4. EBITDA margin of ~8% to be achieved by FY19E at company level
Key risks
� Execution risk of developing milk procurement channels in new markets
� Delay in break-even of Reliance Dairy operations
� Milk prices not cooling off in 2HFY18 can lead to delay in achieving turnaround of Reliance Dairy
Our assumptions
� Fresh Dairy products to grow at 17% CAGR in FY17-FY20 period led by 25% CAGR in VAD and inorganic growth
� VAD expected to become 40% of sales by FY22 from 23% in FY17
� Dairy EBITDA margin to expand by 80bps over FY17-20 period from 7.8% to 8.6%
� We expect Adj. PAT CAGR of 18% in FY17-20 period led by improvement in mix and inorganic growth led by Reliance Dairy acquisition
12 3 4
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-17
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
Sep
-17
Oct
-17
No
v-17
Dec
-17
Jan
-18
Feb
-18
Mar
-18
Ap
r-18
May
-18
Jun
-18
Jul-1
8
Au
g-1
8
Sep
-18
Milk prices to sequentially start
declining by Oct’2017
EBITDA margin of ~8% to be achieved
by FY19E at company level
Breakeven to be achieved by
Reliance Dairy by Sept’17
To achieve 5%/15% margin in milk and milk products for Reliance
Dairy by FY19E
63 89
46
(3)
111
51
(111)
(71)
(145)
64
139 113
94
77
62
95
103
86
79
79
(200) (150) (100)
(50) 0
50 100 150 200
FY0
1
FY0
2
FY0
3
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
Heritage Foods
Dai
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45 Elara Securities (India) Private Limited
Financials (YE March) Income Statement (INR mn) FY17# FY18E FY19E FY20E Net Revenue 22,734 24,238 26,880 29,954 EBITDA 1,366 1,675 2,136 2,495 Add Non operating income 45 45 45 45 OPBITDA 1,411 1,719 2,180 2,540 Less: Depreciation & Amortization 325 314 335 398 EBIT 1,086 1,405 1,845 2,141 Less Interest Expense 111 142 216 264 PBIT 974 1,263 1,629 1,878 Less Taxes 306 347 456 526 Minority Interests - - - - Adjusted PAT 669 916 1,173 1,352 Add or less extraordinary items - - - - Reported PAT 669 916 1,173 1,352 Balance Sheet (INR mn) FY17# FY18E FY19E FY20E Share capital 232 232 232 232 Reserves 2,803 3,637 4,729 5,999 Minority Interests - - - - Borrowings 1,524 2,024 2,524 3,024 Deferred Tax (Net) 191 191 191 191 Other long term liabilities 115 115 115 115 Total Liabilities 4,865 6,199 7,791 9,561 Gross Block 5,184 4,837 5,847 6,857 Less: Accumulated depreciation 2,389 2,703 3,038 3,436 Net Block 2,795 2,134 2,809 3,421 Add: Capital work in progress 93 93 93 93 Goodwill - - - - Investments 1,511 2,968 2,968 2,968 Cash 460 1,117 2,033 3,191 Net working capital 6 (113) (112) (112) Other assets - - - - Total Assets 4,865 6,199 7,791 9,561 Cash flow statement (INR mn) FY17# FY18E FY19E FY20E Cash profit adjusted for non-cash items 1,061 1,328 1,680 1,969 (Inc)/Dec in working capital 344 118 (0) (1) Operating cash flow 1,404 1,446 1,679 1,969 Less: Capex 12 (347) 1,010 1,010 Free cash flow 1,392 1,793 669 959 Financing cash flow 46 274 200 153 Investing cash flow (1,451) (1,066) (966) (966) Net change in cash (1) 655 914 1,156 Ratio Analysis FY17# FY18E FY19E FY20E Income sstatement Ratios (%) Revenue growth (4.5) 6.6 10.9 11.4 EBITDA growth 4.4 22.6 27.5 16.8 PAT growth 17.6 37.0 28.1 15.2 EBITDA margin 6.0 6.9 7.9 8.3 Net margin 2.9 3.8 4.4 4.5 Return and liquidity ratios Net debt/Equity (x) 0.3 0.2 0.1 (0.0) ROE (%) 24.6 26.5 26.6 24.2 ROCE (%) 32.6 54.1 73.1 67.5 Per share data and Valuation ratios Diluted EPS (INR) 28.8 39.5 50.6 58.3 EPS growth (%) 20.5 37.0 28.1 15.2 DPS (INR) 4.0 3.0 3.0 3.0 P/E (x) 53.1 38.8 30.3 26.3 EV/EBITDA (x) 26.7 21.7 16.8 14.2 EV/Sales (x) 1.6 1.5 1.3 1.2 Price/Book (x) 11.7 9.2 7.2 5.7 FCFF yield (%) 3.9 5.1 1.9 2.7 Dividend yield (%) 0.3 0.2 0.2 0.2
Note: pricing as on 4 September 2017; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Adjusted profit growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
6.0
6.9
7.9 8.3
5
6
7
8
9
15,000
20,000
25,000
30,000
35,000
FY17# FY18E FY19E FY20E
(%)
(INR
mn
)
Net Revenue EBITDA margin
17.6
37.0
28.1
15.2
0
10
20
30
40
400
600
800
1,000
1,200
1,400
1,600
FY17# FY18E FY19E FY20E
(%)
(INR
mn
)
Adjusted PAT PAT growth
24.6 26.5 26.6 24.2
32.6
54.1
73.1 67.5
0
20
40
60
80
FY17# FY18E FY19E FY20E
ROE (%) ROCE (%)
Heritage Foods
46 Elara Securities (India) Private Limited
Dairy established to benefit farmers Heritage Foods Ltd was established as a Dairy company to benefit farmers through transparent and guaranteed off-take practices. Heritage Foods Ltd was founded in 1992 with a vision to assure remunerative prices to dairy farmers who needed better marketing opportunities. The company has a milk procurement network of 3 lakh dairy farmers through 11k milk agents. The company directly procures 90% of its milk requirement (around 1.06MLPD) from its 144 chilling plants (average capacity of 11,400 LPD) and bulk coolers spread across 8 states of AP & Telangana, Tamil Nadu, Karnataka, Maharashtra, Gujarat, Rajasthan and Delhi. The company procures both cow (60% of volumes) and buffalo (40% of volumes) milk with blended fat content of 5.5%. It has a Chilling Capacity 1.73 million liters per day, Processing Capacity 1.89 million liters
per day and Packaging Capacity 1.14 million liters per day through 15 packaging stations. The company clocked revenues of INR18.7bn in dairy segment of which INR4.4bn (23% of revenues) was from value added products like curd (77% of VAD), flavoured milk and paneer etc. The company has grown it’s procurement at 8% CAGR in FY14-17 period in order to cater to the fast growing value added products segment. With acceleration in capex for increasing milk procurement infrastructure the company is poised to continue increasing its direct procurement reach, which is the most critical asset to create in order to be a value added product manufacturer. The dairy company has fairly high retail presence through Heritage retail parlours in home market AP, direct retail reach of 118k outlets and services 1.15mn households daily through its delivery service.
Taking measured steps to grow � Fully integrated operations with strong brand recall and wide retail presence
� Operations are uniquely set up very close to demand centers, thereby delivering well on fresh
dairy product sales
� Heritage Foods has one of the largest distribution networks amongst all peers
� Heritage parlor network has grown at 11% CAGR in FY14-17 period
Directly procures 1.06MLPD from 300K farmers through 11k milk agents
Exhibit 1: State wise Milk Procurement Exhibit 2: State wise milk chilling plants (Nos)
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
Heritage has very small sized milk chilling plant of 11,400LPD highlighting that there is huge room to grow milk procurement from existing network itself
Exhibit 3: State wise milk chilling capacity Exhibit 4: State wise milk processing capacity
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
0
250
500
750
1,000
1,250
FY13 FY14 FY15 FY16 9MFY17
('00
0 li
tre/
day
)
AP TL TN KA MH HR/DL RJ DL
0
40
80
120
160
FY13 FY14 FY15 FY16 9MFY17
(no
.)
AP TL TN KA MH HR/DL RJ DL
0
500
1,000
1,500
2,000
FY13 FY14 FY15 FY16 9MFY17
('00
0 li
tre/
day
)
AP TL TN KA MH HR/DL RJ DL
0
500
1,000
1,500
2,000
FY13 FY14 FY15 FY16 9MFY17
('00
0 li
tre/
day
)
AP TL TN KA MH HR/DL RJ DL
Heritage Foods
Dai
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47 Elara Securities (India) Private Limited
Exhibit 5: As per FY17, Heritage Owns 15 Processing and Packaging Plants spread across various regions
State No of Plants
Andhra Pradesh 7
Telangana 3
Tamil Nadu 1
Karnataka 2
Maharashtra 1
Haryana/Delhi 1
Source: Company
Fully integrated operations with strong brand recall and wide retail presence
The company is fully integrated in terms of procurement and processing capabilities, along with strong presence in retail channels as it has a distribution network of 118k stores and services around 1.15mn households daily primarily through selling pouch milk and curd. The company also builds its visibility through 1680 Heritage milk parlours (20% of dairy revenues), which sell only milk and fresh dairy products like curd, lassi, flavored milk and butter milk exclusively under the 'Heritage' brand name. They produce and market a full range of milk & dairy products including fresh milk, curd, butter-milk, lassi, ice-cream, paneer, table butter, milk powder, flavoured milk, UHT milk and dairy whitener. Headquartered in Hyderabad, they have a significant presence in the states of Telangana, Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, Maharashtra, Odisha, Delhi, Haryana and Rajasthan.
Exhibit 6: Farm- to- Fork Model
Source: Company
Exhibit 7: Operations spread across several states and has uniquely set up processing plants very close to demand centres, thereby delivering well on fresh dairy product sales
Source: Company
Exhibit 8: Distribution Network is widespread with presence in 118k retail outlets
No of Sales Office 31
No of Distributors/Agents 6,330
No of Outlets 118,500
No of Households Serviced on daily Basis 1.15mn
No of Vehicles (Trucks/Tankers) Servicing Heritage Everyday
1,585
Source: Company
Milk procurement
Testing Chilling Processing
Reaches the customer
Heritage Parlours & Heritage
Fresh
Distribution Packaging
Heritage Foods
48 Elara Securities (India) Private Limited
Strong brand visibility generated through 1,680 Heritage Parlors
Heritage Parlors are exclusive outlets (average size of 100sq ft) selling the whole range of Heritage products, that includes Heritage milk, milk products, ice cream, bread and other bakery products, eggs, private label products, fruits & vegetables and also products supplied/approved by Heritage Foods Ltd. It is a franchisee based business model that provides excellent business opportunities for new entrepreneurs as well as existing business owners. WWith a well established network of over 1,680 Parlours in Hyderabad, Vishkapatanam, Rajahmundry, Vijayawada, Tirupati, Chennai and Bangalore, Heritage Parlours plays a vital role in ensuring that Heritage products are available to customers at their doorstep.
Apart from producing healthy products they also help the society in various ways. They have generated employment opportunities for 5,077 People. Entrepreneurship opportunities for 11,097 procurement agents in rural areas, 5,300 sales agents and 1,680 franchisees who operate Heritage Parlours. Providing financial assistance and other support to unemployed youth to open Heritage Parlours. They also offer a diploma course to farmers children and ensuring job guarantee at Heritage on completion of the course.
Exhibit 9: Heritage Parlour – Franchisees which sell Heritage branded dairy products exclusively
Source: Company
Exhibit 10: Heritage parlor network has grown at 11% CAGR in FY14-17 period
Source: Company
Exhibit 11: Heritage Foods sells 95% of its sales through direct distribution – one of the largest direct distribution networks
Source: Company
1,000
1,200
1,400
1,600
1,800
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
(no
.) One Level Two Level Three Level
4.75 % sales
Sales Office
CFA/CA
Distributors/ Stockists
Agents/Retailers
Consumer
8.75 % sales
Sales Office
Distributors/ Stockists
Agents/Retailers
Consumer
86.50 % sales
Sales Office
Agents/Retailer/ Parlours
Consumer
Heritage Foods
Dai
ry
49 Elara Securities (India) Private Limited
Fresh Dairy products to grow at 17% CAGR in FY17-FY20 period The dairy business of Heritage has clocked in a Sales/EBIT CAGR of 18% in FY06-17 period and we expect it to grow at 17%/20% CAGR respectively in FY17-20 period led by 1) 25% CAGR in VAD segment in the same period which fetches a higher margin of 15% compared to 5% in liquid milk 2) Heritage is entering new markets and also penetrating deeper into existing markets primarily in Tier II and Tier III cities. We expect Heritage to report EBIT growth of 26% CAGR in the same period led by improvement in margins due to higher salience of VAD, addition of 2LLPD of milk processing capacity into HFL from the acquisition of Reliance Dairy which will also be selling pouch milk and fresh dairy products.
Exhibit 12: Dairy - Revenue Break-up
Source: Company, Elara Securities Research
Exhibit 13: Segment wise growth rate in FY13-17 period
Source: Company, Elara Securities Research
Exhibit 14: Heritage sells 0.86MLPD of pouch milk which has grown at 7% CAGR in FY13-17 period led by 5% of price increase
Heritage sells cattle feed to farmers for increasing milk productivity
Source: Company
Milk 63%
VAD 23%
FAT 9%
SMP 1%
Others 4%
7
23
4
91
25
10
0
25
50
75
100
Milk Value added
products
Fat products
SMP Others Total
(%)
The only dairy with balance sheet strength to fund growth � Fresh Dairy products to grow at 17% CAGR in FY17-FY20 period led by 25% CAGR in VAD
� VAD expected to become 40% of sales by FY22 from 23% in FY17
� Dairy EBITDA margin to expand by 80bps over FY17-20 period from 7.8% to 8.6%
� Growing the milk delivery service in new markets like Mumbai to build the brand ‘Heritage’
� Accelerating capex program to grow direct milk procurement by 10% p.a. to enter Tier 2-3 towns
� Reliance Dairy acquisition to add 16% to total milk procurement of HFL
Heritage Foods
50 Elara Securities (India) Private Limited
Exhibit 15: Liquid milk sales volumes have grown at 3% CAGR in FY14-17 period
Source: Company, Elara Securities Research
Margins in liquid milk gets squeezed during inflationary periods as it is highly competitive
Exhibit 16: Liquid milk realization has increased at 7% CAGR in FY14-17 period
Source: Company, Elara Securities Research
Exhibit 17: Liquid milk procurement price has increased at 10% CAGR in FY14-17 period
Source: Company, Elara Securities Research
Exhibit 18: Gross spread in liquid milk tends to come under pressure during inflationary phases
Source: Company, Elara Securities Research
Exhibit 19: Gross margin in liquid milk hovers around 15% and drops during high inflation periods
Source: Company, Elara Securities Research
7
8
9
10
11 Q
1FY
14
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(LLP
D)
25
30
35
40
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(INR/
Litr
e)
24
26
28
30
32
34
36
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(INR/
Litr
e)
0
1
2
3
4
5
6
7
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(INR/
Litr
e)
6
8
10
12
14
16
18
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(%)
Heritage Foods
Dai
ry
51 Elara Securities (India) Private Limited
Growing the delivery service in new markets like Mumbai
Heritage currently has chilling capacity of 1LLPD in Maharashtra where it procures primarily from Baramati and brings the chilled milk to their processing and packaging plant in Vashi (packing capacity of 1LLPD). The company collects its milk through 9 milk chilling centres in Maharashtra. Currently the company is procuring only 62K LPD (3QFY17 presentation) and selling around 40K LPD(3QFY17) of liquid milk. Heritage is distributing their branded pouch milk through 160 distributors and has a presence of 1200 retailers currently in Mumbai. They are approaching townships for establishing the milk delivery system (delivery charges of INR1/Litre) which shall help in creating brand visibility for Heritage and which then helps in cross selling other fresh dairy products to the same customer and hence increase through-put and grow in scale.
Reliance Dairy acquisition to add 16% to liquid milk procurement
HFL acquired dairy business of Reliance Retail Ltd (RRL) in a slump sale for INR615mn in FY17. The dairy business operated a pan-India procurement (2LLPD – additional procurement of 16%) and distribution platform under two brands “Dairy Life” and “Dairy Pure” with wide variety of products such as packaged milk, flavored milk, butter, ghee, curd, dairy whitener, sweets and skimmed milk powder. Milk procurement during lean season is around 1.5LLPD while in flush it reached 2LLP. This acquisition augurs well for HFL as it gives new opportunities in states like Punjab, Uttarakhand and Rajasthan it is not currently present and strong synergies in markets like Mumbai and Delhi-NCR where your company already commenced its operation and can add the procurement from these regions to sell products under Heritage brand also. TThe company was integrated into HFL in April’17 and is expected to turnaround by Sept’17.
RRL to breakeven by 3QFY18
� RRL incurred a loss of INR60mn at PBT level in 1QFY18 as the company has operations spread out all across India with many milk routes which are not viable. HFL is rationalizing those routes, like in UP and MP the company has completely wound up its operations.
� In certain states, the chilling centres are not located at optimal distances, hence some milk procurement routes were shut (20 out of 184 rationalized)
� RRL was also not prudent with milk balancing and would always procure more than could sell and hence ended up with SMP for making dairy whitener which was causing losses. There are also stocks of
bulk commodities that HFL will be disposing off by Sept’17
� HFL plans to divert the excess milk procured into fresh VAD products under either of the two brands depending on the relative strength of each brand in each region. In Delhi & Rajasthan, all products will be sold under “Heritage” brand to consolidate its position in the market. While in Punjab and Haryana, RRL has better penetration, hence would continue. In Telangana, Heritage brand will continue in urban areas while RRL will be expanded into suburbs.
� In 1QFY18, HFL was already able to match procurement volumes with sales volumes, hence we expect that the turnaround will be quite quick. RRL contributed to INR670mn (10% of sales) to the top line of HFL in 1QFY18, and incurred a PBT loss of 10% (INR60mn).
� HFL plans to achieve long term margin of 7-8% in RRL by driving 5% margin in liquid milk and 15% margin in fresh dairy products
Will invest INR750mn per year for growing milk procurement infrastructure
To grow their direct procurement they have to set up more village collection centres (VCC), bulk milk coolers in non –core markets like Delhi, Mumbai, Orissa for which the company has capex outlay of INR750mn per year. The company added 1MLPD chilling capacity as part of its on-going capex for increasing milk procurement capacity in FY17. Arranging credit through banks, supplying cattle feed and veterinary services to farmers. Heritage is able to attract more farmers to pour milk at their village collection centres as they pay very timely which attracts many farmers. They have built trust of farmers by using digital measurement equipments – called milk analysers for measuring FAT and SNF content of milk and thereby make payments to farmers according to the quality of milk supplied. Since the system has been built on transparency it attracts farmers for joining their network.
Exhibit 20: Direct milk procurement has grown at 8% CAGR in FY14-17 period
Source: Company, Elara Securities Research
4
6
8
10
12
14
Q1
FY1
4
Q2
FY1
4
Q3
FY1
4
Q4
FY1
4
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(LLP
D)
Heritage Foods
52 Elara Securities (India) Private Limited
Exhibit 21: Accelerating capex program to grow direct milk procurement by 10% p.a. to enter Tier 2-3 towns
Source: Company, Elara Securities Estimate
Value added products in fresh dairy segment which earn high margins and have low working capital requirements
Value added products expected to become 40% of turnover by 2020 from 23% currently. The company plans to increase the salience of VAD by 300bps every year. VAD products fetch EBITDA margin of ~15% compared to 6% in pouch milk, thereby will lift the overall margin profile of the company going forward. VAD products have reported a CAGR of 23% in FY14-17 period while the branded curd sales have reported a faster growth at 28% in the same period.
Source: Company, Elara Securities Research
Exhibit 22: Branded fresh dairy products have grown at a CAGR of 23% in FY14-17 period with curd growing at 28%
Source: Company, Elara Securities Research
VAD expected to reach 40% of sales by FY22
The company reported total sales of INR 24bn in FY17 of which dairy was INR18.7bn. The dairy business has reported a CAGR of 18% in FY06-17 period driven by 20% volume growth in VAD and higher realizations due to increasing share of value added dairy (VAD) in to the portfolio. Currently, VAP contributes around 23% to sales in dairy and the contribution is expected to increase by 300bps every year and is expected to become 40% of dairy revenues in next 5 years. In the VAD portfolio, curd forms the largest segment with 77% (as of FY17) contribution.
VAD has grown at 23% CAGR in FY14-17 period led by 28% CAGR in packaged curd in the same period
Exhibit 23: VAD revenues expected to grow at 25% CAGR in FY17-20E
Source: Company, Elara Securities Estimate
Exhibit 24: Share of VAD to increase to 40% by FY22 from 23% in FY17
Source: Company, Elara Securities Estimate
89
26
2
32
5
15
4
26
7
21
1
19
8
23
4
30
0
38
7
38
7
80
0
75
0
75
0
75
0
0
200
400
600
800
1,000 FY
06
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
Dairy Capex accelerated
37 34
31 30
15
28 25 24
20
12
18
10
21
0
10
20
30
40
Q1
FY1
5
Q2
FY1
5
Q3
FY1
5
Q4
FY1
5
Q1
FY1
6
Q2
FY1
6
Q3
FY1
6
Q4
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(%)
2,438 3,161
3,823 4,390
5,487
6,859
8,573
0
2,000
4,000
6,000
8,000
10,000
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(IN
R m
n)
22 23 23 26
29 33
40
0
10
20
30
40
50
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
FY2
1E
FY2
2E
(%)
Heritage Foods
Dai
ry
53 Elara Securities (India) Private Limited
Exhibit 25: Dairy EBITDA margin to expand by 80bps over FY17-20E
Source: Company, Elara Securities Estimate
Exhibit 26: Dairy sales expected to grow at 17% CAGR in FY17-20E period led by 25% growth in VAD and inorganic growth (Acquisition of Reliance Dairy)
Source: Company, Elara Securities Estimate
Exhibit 27: EBIT for dairy business expected to grow at 20% CAGR in FY17-20 period
Source: Company, Elara Securities Estimate
Exhibit 28: Dairy EBIT margin expected to expand by 50bps in FY17-20E
Source: Company, Elara Securities Estimate
Exhibit 29: Capital employed in dairy in FY17 includes the acquisition cost of Reliance Dairy in it (INR 615mn)
Source: Company, Elara Securities Estimate
Exhibit 30: Dairy ROCE to fall to 42% by FY20 from 55% in FY17 due to accelerated capex program and Reliance Dairy acquisition
Source: Company, Elara Securities Estimate
7.7 7.8 8.1 8.3 8.6 8.5
5.9 6.0 6.0 6.0 5.0
14.5 15.0 15.0 15.0
0
2
4
6
8
10
12
14
16
FY16 FY17 FY18E FY19E FY20E
(%)
0
10
20
30
40
50
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(YoY %
) (INR
mn
)
Dairy Revenue Growth
(40)
(20)
0
20
40
60
80
100
0
500
1,000
1,500
2,000
2,500
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(YoY %
)
(IN
R m
n )
Dairy EBIT Growth
6.6
5.2 4.7
6.7
9.4
5.4 5.5
8.6
7.5
4.4
6.5 6.5
5.6
6.7 7.0
3
4
5
6
7
8
9
10
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
84
2
1,1
40
1,1
68
1,2
51
1,5
56
1,4
59
1,4
20
1,4
84
1,7
61
1,8
69
1,9
57
2,4
30
3,4
30
4,4
30
5,4
30
0
1,000
2,000
3,000
4,000
5,000
6,000
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
22
.7
17
.9
19
.9 3
2.8
46
.2
30
.9 42
.1
75
.3
60
.8
37
.0
60
.3
55
.5
46
.4
45
.8
42
.5
0
20
40
60
80
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
Heritage Foods
54 Elara Securities (India) Private Limited
Exhibit 31: We expect Adj. PAT CAGR of 18% in FY17-20 period led by improvement in mix and inorganic growth led by Reliance Dairy acquisition
Source: Company, Elara Securities Estimate
Exhibit 32: We expect reported PAT CAGR of 26% in FY17-20 period led by hiving off of loss making retail, bakery and agri division to Future Retail
Source: Company, Elara Securities Estimate
Exhibit 33: Fixed asset T/O(x) to improve led by hive off of loss making businesses
Source: Company, Elara Securities Estimate
Exhibit 34: Working capital as % of sales to reduce as the retail business has been hived off
Source: Company, Elara Securities Estimate
Exhibit 35: ROCE at company level expected to improve
Source: Company, Elara Securities Estimate
684 827
916
1,173
1,352
0
300
600
900
1,200
1,500
FY16 FY17 FY18E FY19E FY20E
(INR
mn
)
555 669
916
1,173
1,352
0
300
600
900
1,200
1,500
FY16 FY17 FY18E FY19E FY20E
(INR
mn
)
3.3 3.5 3.4 3.2
3.6
4.2 4.5 4.4
4.7 4.9
4.4
4.8 5.0
4.7
2
3
4
5
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(x)
5
(2)
1
2
4
3 3 3
4 4
3
2 2 2
(2)
(1)
0
1
2
3
4
5
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
4
(12) (5)
12 7
12
31 25
15
28 33
54
73 67
(20)
0
20
40
60
80
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
Heritage Foods
Dai
ry
55 Elara Securities (India) Private Limited
Return ratios are superior to peers as it is majorly invested in less capital intensive products We believe that in order to keep growing any consumer oriented dairy business, one has to continuously keep investing in direct milk procurement in newer markets and also to deliver freshness in fresh milk products, one has to procure locally. Low working capital requirements and the management’s decision to grow in to value added products, as that is where the growth is, in a calibrated manner shall keep the cash flow from operations healthy enough to keep growing the procurement side through internal accruals of INR750mn annually on average.
Exhibit 36: ROCE for Dairy Business upwards of 30%
Source: Company, Elara Securities Research
Exhibit 37: Liquid milk has very low working capital requirements
Source: Company, Elara Securities Research
Exhibit 38: Capital employed in the dairy business is minimal due to low gross capital requirements in pouch milk
Source: Company, Elara Securities Estimate
Exhibit 39: Asset turns falling due to accelerated capex to increase milk procurement and RRL acquisition
Source: Company, Elara Securities Estimate
0
20
40
60
80
100
120
1Q
FY1
0
3Q
FY1
0
1Q
FY1
1
3Q
FY1
1
1Q
FY1
2
3Q
FY1
2
1Q
FY1
3
3Q
FY1
3
1Q
FY1
4
3Q
FY1
4
1Q
FY1
5
3Q
FY1
5
1Q
FY1
6
3Q
FY1
6
1Q
FY1
7
3Q
FY1
7
(%)
20
2
13
9
0
5
10
15
20
25
Inventory days
Receivable days
Trade payables
Cash conversion
cycle
(Day
s)
22
.7
17
.9
19
.9 32
.8 4
6.2
30
.9 42
.1
75
.3
60
.8
37
.0
60
.3
55
.5
46
.4
45
.8
42
.5
0
20
40
60
80
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
3.5
3.2
3.6
4.5
4.6
5.1
6.8
8.1
8.0
7.8
8.6
8.3
7.3
6.5
5.8
0
2
4
6
8
10
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(X)
Return ratios and cash flow from operations superior than others � Return ratios are superior than peers as it is majorly invested in fresh dairy products
� Liquid milk business is less capital intensive compared to cheese/ghee etc
Heritage Foods
56 Elara Securities (India) Private Limited
Slump sale of loss making retail venture to Future Retail will lift the profitability and improve ROCE They have completed the transaction of slum sale of retail, agri, bakery, VetCa divisions to Heritage Foods Retail Limited, 100% owned subsidiary of HFL (effective 1st Nov’16) and then demerger into Future Retail Limited with effect from 31st Mar’17 and integration process is in progress. The transaction was completed on May 31, 2017 and the business controls have totally shifted into Future Retail on June 1.
In FY17, the company clocked net sales of INR22.7bn of which Retail was 7.6bn (29% of revenues). Retail division (124 Heritage Fresh Stores) had accumulated losses of INR3bn on the books. In exchange, Heritage Foods Ltd has acquired Future Retail in exchange of 3.65% stake in Future Retail or 17.8 mn shares through fresh issuance. The value of the stake in Future Retail is around INR10bn at CMP of INR 569 (as on 4th Sept’17). Since there is a lock –in period of 3 years starting from the date of transaction closing which was May’17 i.e. May’20, we have discounted the value of the stake (INR10bn at CMP INR569) by WACC of 12.3% to arrive at the present value of the stake at INR5.8bn. We expect that the company will liquidate the stake in Future Retail in CY20 and use the cash to fund its capex (for increasing direct milk procurement and capacity expansion for fresh dairy products) and investments in JVCo (total investment by both the partners will be INR750mn which will be ramped up in next 5 years). OOverall, Heritage will transfer assets worth INR2.95bn to Future Retail for shares worth INR10bn at current market price of INR 569( discounted PV for HFL’s share in the stake is INR 176/share of HFL). Since retail division had accumulated losses of INR3bn, and the net assets transferred are worth INR2.95bn, the present value of the Future Retail stake is lower than the total capital employed by HFL in HFRL. They will recover the total capital employed in retail only if the stock price of Future Retail goes to INR1175/share.
Value of HFL stake in FRL at INR176/share
Exhibit 40: Future Retail Transaction
CMP of Future Retail (INR) 569
No of shares (mn) 17.8
Value of Holding in Future Retail (INR mn) in 2020 at CMP 10,128
HFL's share in the FRL stake (INR mn) 5,782
PV of Holding in Future Retail (INR mn) 4,083
Value of Holding in Future Retail (INR/ share) 176
#CMP of Future Retail as on 4th Sept 2017
Accumulated losses (INR mn) 3,000
Assets Transferred (INR mn) 2,950
Capital Invested in Retail business 5,950
Net gains/(losses) today for Heritage Foods Ltd (1,867)
Source: Elara Securities Estimate
Exhibit 41: When does Heritage make profits in Future Retail Deal?
Stock price of Future RRetail (INR) 1,175
No of shares (mn) 17.8
Value of Holding in Future Retail (INR mn) in 2020 at CMP 20,915
HFL's share in the FRL stake (INR mn) 8,479
PV of Holding in Future Retail (INR mn) 5,988
Value of Holding in Future Retail (INR) 258
Accumulated losses (INR mn) 3,000
Assets Transferred (INR mn) 2,950
Total Capital deployed by HFL 5,950
Net gains/(losses) today for Heritage Foods Ltd 38
Source: Elara Securities Estimate
Exhibit 42: Weighted average cost of capital (%)
Cost of Equity (%) 15.0
Cost of Debt (Pre-tax) (%) 9.5
Market rate of Return (%) 15.0
Risk free rate (%) 7.5
Debt/(Debt+Equity) 31.3
Equity/(Debt+ Equity) 68.7
WACC 12.3
Source: Elara Securities Estimate
Value of stake in Future Retail at INR176/share at CMP � Slump sale of loss making retail venture to boost profitability
� HFL can sell it’s stake in Future Retail post June’20 (lock-in of 3 years)
� HFL to use the cash flows from the stake sale for funding organic growth in dairy business
Heritage Foods
Dai
ry
57 Elara Securities (India) Private Limited
Investments in JVCo will be in a very calibrated fashion � The JVCo will manufacture and market the products
viz. Fruit and Flavored Yogurts, as well as western style desserts like custards
� Each company will nominate two directors
� Will be setting up a Greenfield plant in Maharashtra under the first phase of investments in FY18 for INR160mn. The JVCo has plans to invest INR750mn over next 5 years (HFL’s share INR325mn)
� The JVCo will be setting up a yogurt capacity of 20MTPD for INR160mn (INR80mn by HFL as its share of the investments) and will be commissioned during FY19E
� The first year revenue plan is for INR300mn in
FY19E( Yr 1) which can be scaled upto INR1bn at full utilization.
� The two JV partners will be looking to invest into the JVCo to start a new product line every alternate year, after giving two enough time to set up the previous project.
50:50 JV announced with France based Novandie SNC � Initial investment of INR160mn by the JVCo to set up Greenfield yogurt plant in Maharashtra
� Total 5 year project with INR3bn in sales and investment plans of INR750
� Yogurt plant to breakeven by Year 2; expected to clock margins of 10-20%
Heritage Foods
58 Elara Securities (India) Private Limited
Initiate with BUY and TP INR 1,804 Heritage is a pure-play B2C dairy company which checks all the boxes in terms of key requirements by any dairy company to become a significant player in value added products. Heritage will also be driving growth in distribution reach and increasing its advertising spends on brand Heritage in order to establish its brands in new markets like Maharashtra and Delhi. The company is focused on growing its procurement base by 10% CAGR in order to expand into new markets and more into value added products. The company is taking measured steps to grow in to mid-shelf life dairy products in a very calibrated approach in order to avoid stretching of balance sheet due to higher working capital requirements. We have factored in 25% CAGR growth for the VAD segment in –line with 23% growth recorded in FY13-17 period.
Arrive at SOTP valuation of INR1,804 for HFL including value of stake in FRL at INR176/share
We have used an equal average of EV/Sales(x) and EV/EBITDA (x) methodology as 1) bottom line for dairy companies is extremely volatile due to growth capex and interest costs 2) dairy business has capital invested behind milk procurement which is an on-going capex for increasing direct milk procurement, the benefits of which come with a lag in terms of achieving higher salience in value added products. Hence we choose EV/Sales(x) and EV/EBITDA(x) methodology to value dairy companies. We have assigned a EV/Sales(x) multiple of 1.1x and 16.5x EV/EBITDA(x) on FY20E estimates, at a steep discount to Hatsun Agro (TTM EV/Sales (x) 2.5x vs 1.6 for HFL) as it has higher margin profile (7.8% for Hatsun) compared to HFL (7.5%) despite much higher ads-to-sales ratio (2.4% in Hatsun vs 0.8% in HFL).
Exhibit 43: Valuation Methodology
FY20E
EV/Sales (x)
Weightage (%) 50
Sales (INR mn) 29,954
EV/Sales (x) 1.1
EV (INR mn) 33,975
Gross Debt (INR mn) 3024
Cash (INR mn) 3,191
Net Debt (INR mn) (167)
Fair Value (INR mn) 34,141
TP (INR/Share) 1,472
CMP (INR/Share) 1,530
Upside (%) (3.8)
Implied P/E(x) 25.3
EV/EBITDA (x)
EBITDA (INR mn) 2,495
EV/EBITDA (x) 16.5
EV (INR mn) 41,241
Gross Debt (INR mn) 3,024
Cash (INR mn) 3,191
Net Debt (INR mn) (167)
Fair Value (INR mn) 41,407
TP (INR/Share) 1,785
CMP (INR/Share) 1,530
Upside (%) 16.7
Implied P/E(x) 30.6
Weighted TP (INR) 1,628
CMP (INR) 1,530
Upside (%) 6
Implied P/E(x) on FY20 28
Source: Elara Securities Estimates
Exhibit 44: SOTP Valuation
INR/share
HFL 1,628 Value of stake in FRL 176 Target Price on FY20 1,804 Implied P/E(x) for Dairy & FRL stake 31.0 CMP 1,530 Upside (%) 18
Source: Elara Securities Estimates
Valuation & Recommendation � Pure-play B2C dairy company to become a significant player in VAD going forward
� Use SOTP method to arrive at TP INR1804 with dairy business valued at INR1628 and stake in
Future Retail valued at INR176/share
� HFL valued at implied P/E(x) of 31x on FY20 EPS of INR58.3
Heritage Foods
Dai
ry
59 Elara Securities (India) Private Limited
HFL has got re-rated by 3x over the period of last 3 years as they increased salience of VAD in their portfolio
Exhibit 45: 1-yr forward EV/EBITDA Band
Source: Bloomberg, Elara Securities Estimates
Exhibit 46: 1-yr forward rolling EV/EBITDA
Source: Bloomberg, Elara Securities Estimates
Exhibit 47: 1-yr forward EV/Sales Band
Source: Bloomberg, Elara Securities Estimates
Exhibit 48: 1-yr forward rolling EV/Sales
Source: Bloomberg, Elara Securities Estimates
2x
5x
8x
11x
15x
(200) 0
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(IN
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Rolling 2yr fwd Ev/Sales Avg + 1 Std dev - 1 Std dev + 2 Std dev - 2 Std dev
Heritage Foods
60 Elara Securities (India) Private Limited
Board of Directors Seetharamaiah Devineni - Chairperson
He is a commerce graduate from Andhra University and a fellow member of the Institute of Chartered Accountants of India. Senior partner of Brahmayya & Co., a leading Chartered Accountancy firm and has been practicing for the last five decades. Has held various coveted posts, which include Membership of the Southern Regional Board of Reserve Bank of India, and Federation of Andhra Pradesh Chamber of Commerce and Industry, Chairpersonship of the Tirumala Tirupati Devasthanams Trust Board and Trusteeship of the NTR Memorial Trust and is also on the Board of several other companies.
Srivishnu Raju Nandyala - Director
He holds a bachelors degree in Chemical Engineering from Osmania University, Andhra Pradesh. Founder Chairperson and CEO of EXCIGA group, which consists of five non banking finance companies. He is the Founder and Past President of Entrepreneurs Organization, Hyderabad. Past President of CII's (Confederation of Indian Industries) Young Indians, Hyderabad Chapter and a past member on the state council of CII. Is a Director in several Public and Private Companies.
Dr. Nagaraja Naidu Vadlamudi - Director
He is an M. Com, M. Litt and a PhD. (Financial Management), he began his career from the Administrative Staff College of India, Hyderabad in 1972. He has held various positions in reputed Universities, like Professor, Dean, Director etc., and has taught in the fields of Finance and Business Economics at Post Graduate and Doctorate levels for about 25 years. He has been the Registrar (Administrative Head) of the Dr B R Ambedkar Open University for about 10 years. He has been associated with the company since its inception and has been able to utilize his intimate understanding of the rural socio-economic scenario to strengthen milk
procurement systems and strategies of Heritage, which has contributed to the current status of Heritage as a leading player in South India.
Bhuvaneswari Nara - Vice-Chairperson & Managing Director
She is a B.A Graduate and is a Director in several other Companies. She is a dynamic leader who has extensive experience in business and has been successfully steering Heritage towards growth and better prospects.
Mrs. Brahmani Nara Executive Director,
She has Master's Degree in Business Administration from Stanford University, Bachelor of Science degree in Electrical Engineering from Santa Clara University USA and Bachelor of Engineering with specialization of Electronics and Communications from Chaitanya Bharathi Institute of Technology. Investment Associate in Vertex Venture Management Pvt Ltd between 2009-2011 in Singapore and was associated with the Company as a Vice-President (Business Development).
Corporate Management Team Dr. M. Sambasiva Rao - President
He is a Post Graduate and Doctorate in Zoology. He has served the state and central governments for about two decades as a member of the Indian Administrative Services(IAS). Dr Rao was the Joint Secretary in the Department of Commerce under the Ministry of Commerce and Industry, Government of India.
CA A Prabhakara Naidu Vice President - Finance & Accounts
He is a Fellow Member of the Institute of Chartered Accountants of India and Graduated from Sri Venkateswara University with a University rank in Science. He has 23 years of experience in Finance and Accounts. Has been associated with the Heritage group since It's inception.
Company Description Heritage Foods Ltd was established as a Dairy company to benefit farmers through transparent and guaranteed off-take practices. Heritage Foods Ltd was founded in 1992 with a vision to assure remunerative prices to dairy farmers who needed better marketing opportunities. The company has a milk procurement network of 3 lakh dairy farmers through 11k milk agents. The company directly procures 90% of its milk requirement (around 1.06MLPD) from its 144 chilling plants (average capacity of 11,400 LPD) and bulk coolers spread across 8 states of AP & Telangana, Tamil Nadu, Karnataka, Maharashtra, Gujarat, Rajasthan and Delhi. The company procures both cow (60% of volumes) and buffalo (40% of volumes) milk with blended fat content of 5.5%. It has a Chilling Capacity 1.73 million liters per day, Processing Capacity 1.89 million liters per day and Packaging Capacity 1.14 million liters per day through 15 packaging stations. The company clocked revenues of INR18.7bn in dairy segment of which INR4.4bn (23% of revenues) was from value added products like curd (77% of VAD), flavoured milk and paneer etc.
Heritage Foods
Dai
ry
61 Elara Securities (India) Private Limited
Umakanta Barik Company Secretary,
He has Masters in Economics, LLB, FCS, LIII and is a Fellow Member of the Institute of Company Secretaries of India, New Delhi and a Licentiate from Insurance Institute of India, Mumbai. Has over 14 years of experience in the domains of Secretarial, Legal, Insurance & Intellectual Property Rights.
J Samba Murthy Head - Dairy Division,
He holds an MBA in Marketing and a Bachelors of Science degree. He is the Senior Vice President at Heritage and has been associated with the Company since 2007. He has worked previously in APDDCF Limited, Visakha Dairy NDDB, and Reliance in various positions in the field of Sales & Marketing.
Heritage Foods
62 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
4-Sep-2017 Buy INR 1,804 INR 1,502
Guide to Research Rating BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
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Not Covered Covered
Sagarika Mukherjee • sagarika.mukherjee@elaracapital.com • +91 22 6164 8594
Shubham Maheshwari • shubham.maheshwari@elaracapital.com • +91 22 6164 8562
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Elara Securities (India) Private Limited
Leveraging its roots Prabhat differentiates itself as a low cost ingredients supplier
Prabhat is a specialized ingredients supplier of SCM and SMP to large confectionary, infant foods and MFD players like Mondelez, Abbott, GSK Consumer along with being a co-packer for Mother Dairy, Britannia, ITC to name a few. The dairy plant is located at Shrirampur which is in close vicinity of the milk surplus region of Ahmednagar from where Prabhat procures its milk requirements. Prabhat stands to benefit from differentiating it as a low cost ingredients supplier( freight costs at <1% vs 3.5%+ for other players) to large branded dairy players as most of its clients are located within a radius of 150-300kms from its plants in Shrirampur and Navi Mumbai.
Leveraging its roots for increasing procurement
Ahmednagar has cross-bred in-milk cows population growing at a fast pace of 4% which have much higher yield than buffaloes and indigenous cows. We believe that Prabhat will be able to grow its procurement at 16% CAGR due to increase in milk production led by increasing milk yield in the region, encouraging farmers to own more cattle.
Targeting Tier-2&3 cities in Maharashtra as they are less cluttered and fast growing
Tier –II cities are emerging as software export hubs hence leading to faster economic growth and hence increasing the spending and purchasing power of the region. The four urban districts of Mumbai, Thane, Pune and Nasik account for 50% of the state income/ 45% of the population and balance 31 districts share the remaining 50% of the income and 55% of the population. In order to en-cash this catchment area in Tier-II cities, the company has built a distribution network for the HORECA segment (as proxy retail channel) exclusively for curd, paneer and cheese for daily requirements.
Valuation We expect Prabhat to report a 13%/21%/36% CAGR in Sales/EBITDA/Adj. PAT in-line with the growth reported in FY12-17 period. We initiate coverage with Buy rating and TP of INR160 with an upside of 20% by valuing it on equal weighted EV/Sales(x)/ EV/EBITDA(x) of 0.8x/8x respectively in-line with its own historic trading multiple and at a steep discount to B2C players (HFL/Hatsun Agro) to account for lower CFO/EBITDA(%) (50% lower) and higher working capital requirements (30% of sales vs 5%)
Source: Bloomberg
Key FFinancials YE March
Revenue ((INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA Maargin ((%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)
FY17 14,099 20.7 1,268 9.0 470 102.1 4.8 7.0 8.8 27.7 11.7
FY18E 15,931 13.0 1,523 9.6 497 5.8 5.1 7.0 10.0 26.2 9.7
FY19E 18,003 13.0 1,839 10.2 690 39.0 7.1 9.0 12.0 18.8 8.0
FY20E 20,343 13.0 2,231 11.0 929 34.6 9.5 11.0 14.2 14.0 6.9
Note: pricing as on 4 September 2017; Source: Company, Elara Securities Estimate
India | Dairy 12 September 2017
Initiating Coverage
Prabhat Dairy
Rating: Buy Target Price: INR 160 Upside: 20% CMP: INR 133 (as on 4 September 2017)
Key data Bloomberg /Reuters Code PRABHAT IN/PRDA.BO
Current /Dil Shares O/S (mn) 98/98
Mkt Cap (INR bn/USD mn) 13/204
Daily Volume (3M NSE Avg) 45,551
Face Value (INR) 10
1 US$= INR 64.1
Note: *as on 4 September 2017; Source: Bloomberg
Price & Volume
Source: Bloomberg
Shareholding (%) Q2FY17 Q3FY17 Q4FY17 Q1FY18
Promoter 44.4 44.4 48.9 48.9
Institutional Investor 6.5 5.7 6.5 7.3
Other Investor 40.0 39.8 35.8 37.2
General Public 9.1 10.2 8.8 6.6
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 1.5 9.0 9.2
Prabhat dairy 17.6 3.4 41.0
Parag 5.0 10.1 (25.8)
Heritage foods 30.3 33.4 96.4
Source: Bloomberg
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Vol. in mn (RHS) Prabhat dairy (LHS)
Prabhat Dairy
64 Elara Securities (India) Private Limited
Valuation trigger
Source: Bloomberg, Elara Securities Estimate
Valuation overview (FY20E) EV/Sales (x)
Sales (INR mn) 20,343
EV/Sales (x) 0.8
EV (INR mn) 16,812
Gross Debt (INR mn) 3,714
Cash (INR mn) 1,522
Net Debt (INR mn) 2,191
Fair Value (INR mn) 14,621
TP (INR/Share) 150
CMP (INR/Share) 133
Upside (%) 12.5
Implied P/E(x) 15.7
EV/EBITDA (x)
EBITDA (INR mn) 2,231
EV/EBITDA (x) 8.3
EV (INR mn) 18,556
Gross Debt (INR mn) 3,714
Cash (INR mn) 1,522
Net Debt (INR mn) 2,191
Fair Value (INR mn) 16,364
TP (INR/Share) 168
CMP (INR/Share) 133
Upside (%) 26.0
Implied P/E(x) 17.6
Weighted TP (INR) 160
CMP (INR) 133
Upside (%) 20
Implied P/E(x) on FY20 17
Source: Elara Securities Estimate
Valuation driver
Source: Elara Securities Research
Investment summary
� Prabhat sources 70% of its milk directly giving it an advantage over forward integrated B2B players
� Strategically located in milk surplus region and in close proximity to its B2B clients
� Ahmednagar has high population of high yielding cross-bred cows growing at 4% p.a.
� Milk procurement of Prabhat expected to grow at 16% p.a. and reach 1.4MLPD by 2020
� Targeting Tier-2&3 cities in Maharashtra as they are less cluttered and fast growing
� Targeting mid-sized QSR chains/HORECA segment and less cluttered markets in Maharashtra for selling Cheese
Valuation trigger
� VAD to become 40% of sales by FY19
� VAD to become 50% of sales by FY20
Key risks
� Execution risk of increasing capacity utilization of the cheese plant
� Disproportionate increase in inventory and receivables due to higher salience of cheese
� Extending financial support to distributors to stock their products in order to increase B2C salience
Our assumptions
� Expect gross margin and operating margin to expand by 156bps/197 bps in FY17-20E due to better product mix, and operational leverage due to increase in cheese plant utilization
� Expect EBITDA to grow at 21% CAGR in FY17-20E led by high growth and increase in B2C sales
� Adj PAT expected to grow at 36% CAGR in FY17-20E period led by lower interest costs
1
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VAD to become 40% of sales by
FY19
VAD to become 50% of sales by
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Prabhat Dairy
Dai
ry
65 Elara Securities (India) Private Limited
Financials (YE March) Income Statement (INR mn) FY17 FY18E FY19E FY20E Net Revenue 14,099 15,931 18,003 20,343 EBITDA 1,268 1,523 1,839 2,231 Add Non operating income 13 13 13 13 OPBITDA 1,281 1,535 1,852 2,244 Less: Depreciation & Amortization 432 423 450 485 EBIT 836 1,100 1,389 1,745 Less Interest Expense 294 371 371 371 PBIT 849 1,112 1,401 1,758 Less Taxes 274 245 340 458 Minority Interests - - - - Adjusted PAT 280 497 690 929 Add or less extraordinary items - - - - Reported PAT 280 497 690 929 Balance Sheet (INR mn) FY17 FY18E FY19E FY20E Share capital 977 977 977 977 Reserves 5,905 6,356 7,001 7,884 Minority Interests - - - - Borrowings 3,714 3,714 3,714 3,714 Deferred Tax (Net) 159 159 159 159 Other long term liabilities - - Total Liabilities 10,754 11,205 11,850 12,733 Net Block 4,150 4,227 4,277 4,291 Add: Capital work in progress 265 265 265 265 Goodwill - - - - Investments 567 567 567 567 Cash 1,656 967 1,120 1,462 Net working capital 4,130 5,193 5,635 6,161 Other assets (14) (14) (14) (14) Total Assets 10,754 11,205 11,850 12,733 Cash flow statement (INR mn) FY17 FY18E FY19E FY20E Cash profit adjusted for non-cash items 1,391 1,278 1,499 1,773 (Inc)/Dec in working capital (1,191) (1,063) (442) (526) Operating cash flow 200 215 1,058 1,247 Less: Capex 394 500 500 500 Free cash flow (194) (285) 558 747 Financing cash flow 2,221 (417) (417) (417) Investing cash flow (393) (487) (487) (487) Net change in cash 2,028 (689) 153 342 Ratio Analysis FY17 FY18E FY19E FY20E Income statement Ratios (%) Revenue growth 20.7 13.0 13.0 13.0 EBITDA growth 9.9 20.1 20.8 21.3 PAT growth 20.7 77.1 39.0 34.6 EBITDA margin 9.0 9.6 10.2 11.0 Net margin 2.0 3.1 3.8 4.6 Return and liquidity ratios Net debt/Equity (x) 0.3 0.3 0.3 0.2 ROE (%) 4.2 7.0 9.0 11.0 ROCE (%) 9.0 10.1 12.2 14.3 Per share data and Valuation ratios Diluted EPS (INR) 4.8 5.1 7.1 9.5 EPS growth (%) 102.1 5.8 39.0 34.6 DPS (INR) - - - - P/E (x) 28.4 26.8 19.3 14.3 EV/EBITDA (x) 12.0 10.4 8.5 6.9 EV/Sales (x) 1.1 1.0 0.9 0.8 Price/Book (x) 1.9 1.8 1.7 1.5 FCFF yield (%) (1.5) (2.1) 4.2 5.6 Dividend yield (%) - - - -
Note: pricing as on 4 September 2017; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Research
Adjusted profit growth trend
Source: Company, Elara Securities Research
Return ratios
Source: Company, Elara Securities Research
9.0
9.6
10.2
11.0
8
9
10
11
12
0
5,000
10,000
15,000
20,000
25,000
FY17 FY18E FY19E FY20E
(%) (IN
R m
n)
Net Revenue (LHS) EBITDA margin (RHS)
20.7
77.1
39.0 34.6
0
20
40
60
80
100
0
200
400
600
800
1,000
FY17 FY18E FY19E FY20E
(%) (IN
R m
n)
Adjusted PAT (LHS) PAT growth (RHS)
4.2
7.0 9.0
11.0
9.0 10.1
12.2 14.3
0 2 4 6 8
10 12 14 16
FY17 FY18E FY19E FY20E
ROE (%) ROCE (%)
Prabhat Dairy
66 Elara Securities (India) Private Limited
Prabhat sources 70% of its milk requirements directly; giving it a distinct advantage over forward integrated players Prabhat dairy is a western dairy major with total milk procurement capacity of 1.5MLPD and is based out of milk surplus region of Ahmednagar, Maharashtra with plants located in Shrirampur and Navi Mumbai. The company procures around 70% of its total milk requirement (~1MLPD) from its network of more than 85,000 farmers and registered vendors. As of 31st Mar’17, the company had 481 milk collection centres and 115 bulk milk coolers across 600 villages.
The company procures around 70% of its milk requirement directly from the farmers ('Prabhat Mitras') in order to maintain the high quality of milk and due to consistent delivery on the quality front, the company is able to command a high gross margin of around 22-23%. The company has a stabilised operating margin of around ~9-10%, which is higher than other B2B players (drawing 7-8% operating margin) which primarily sell milk powders by sourcing milk from several bulk milk agents.
The second advantage of sourcing directly is that it’s a key requirement for catering to large MNC clients due to quality assurance reasons and also that VAD requires high quality milk sourced within less than 25Kms from the chilling centre. Hence Prabhat is ahead of other B2B players which are forward integrated and will remain restricted to making commodity dairy products like SMP.
Long standing relationship with leading global and domestic FMCG companies The company is primarily a specialty ingredients supplier in the B2B segment and has large dairy players like Modelez (Sweetened condensed milk or SCM), Abbott Healthcare Private Ltd (speciality milk powders) and Britannia, Gokul, Mahanand, Mother Dairy, Heritage Foods ltd as a co-manufacturing partner for products such as UHT milk, curd and ice creams. The company’s long standing relationship with these large MNCs has not only increased the consumption of their milk produced, provided a stable revenue source, but also has helped them align their quality standards in-line with global food benchmarks.
Recent client wins in B2B segment
� Entered into an MOU with Nutridor Ltd. Thailand for being it’s co-manufacturer for Cow Ghee, Mozzarella Cheese and Sweetened Condensed Milk.
� Cheese, Skimmed Milk Powder and Butter supplies to Dabon International
� Cheese supplies to Domino’s Sri Lanka & Britannia
Rock solid foundation � Prabhat sources 70% of its milk directly giving it an advantage over forward integrated B2B players
� Long standing relationship with leading global and domestic FMCG companies
� Strategically located in milk surplus region and in close proximity to its B2B clients
� Ahmednagar has high population of high yielding cross-bred cows growing at 4% p.a.
� Milk procurement of Prabhat expected to grow at 16% p.a. and reach 1.4MLPD by 2020
Exhibit 1: Key B2B clients of Prabhat Dairy
Source: Company, Elara Securities Research
Prabhat Dairy
Dai
ry
67 Elara Securities (India) Private Limited
Exhibit 2: Prabhat has the largest sweetened condensed milk plant in Asia with capacity of 180MT/Day and 3rd largest cheese plant after Amul and Parag Milk Foods Ltd
Production/PProcessing Capacity Shrirampur Navi
MMumbai Total
Aggregate milk processing capacity (in litres per day)
11,00,000 4,00,000 15,00,000
Pasteurized and Pouch Milk (in litres per day)
2,00,000 3,00,000 5,00,000
Milk powder (Kg) 36,000 - 36,000
Condensed Milk (in kgs per day) 1,80,000 - 1,80,000
Clarified Butter (Ghee) (in kgs per day)
20,000 - 20,000
Flavored Milk (in litres per day) 15,000 - 15,000
Butter (in kgs per day) 2,500 - 2,500
Ice Cream (in litres per day) - 10,000 10,000
Curd (Flavored Yogurt, Pouch Curd) (in kgs per day)
- 40,000 40,000
UHT Milk (in litres) 40,000 - 40,000
Cheese (Cheddar/ Mozzarella/Processed) (in kg per day)
30,000 - 30,000
Paneer (in kgs per day) 5,000 - 5,000
Shrikhand (in kgs per day) 5,000 - 5,000
Source: Company, Elara Securities Research
Strategically located in milk surplus region and in close proximity to its B2B clients The company makes operating margin of close to 9-10% which is the highest in the industry as the production facilities are strategically located in Shrirampur (Ahmednagar), in close proximity to both milk generating regions (Ahmednagar – has highest population of female cross bred cows ~26% of total in Maharashtra) and in Navi Mumbai, a target market for end products. It does majority of its procurement within 160kms radius.
Exhibit 3: Freight forwarding costs of Prabhat is lower than peers as it sources and sells in a close vicinity
Source: Company, Elara Securities Estimate
1.9
0.7
0.9 0.8 0.8 0.8
0.0
0.4
0.8
1.2
1.6
2.0
FY15 FY16 FY17 FY18E FY19E FY20E
(%)
Exhibit 4: Milk surplus districts in Maharashtra
Note: Map not to scale; Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Ahmednagar
Akola
Amravati
Aurangabad
Beed
Buldhana Chandrapur
Dhule
Gadchiroli
Gondia
Hingoli
Jalgaon
Jalna
Kolhapur
Latur
Mumbai City
Mumbai Suburban
Nagpur
Nanded
Nandurbar
Nashik
Osmanabad
Parbhani
Pune Raigad
Ratnagiri
Sangli
Satara
Sindhudurg
Solapur
Thane
Wardha
Washim Yavatmal
Alibag
District HQ
Census Year 2001
Prabhat Dairy
68 Elara Securities (India) Private Limited
Exhibit 5: Parag milk foods spends around 4.3% of sales on Freight costs as the operations are more spread out
Source: Company, Elara Securities Estimate
Milk procurement expected to reach 1.4MLPD by 2020 recording a CAGR of 16% in the period In Maharashtra, more than three-fourth of the agriculture is rain-fed. Moreover uneven distribution of rainfall across various regions of the state and also with erratic pattern, dairying is gaining importance as a source of livelihood for the small and marginal farmers of the state. Prabhat is expected to operate its business within Maharashtra for at least the next 2-3 years, and will be using its proprietary milk procurement models to increase its milk procurement by 1) increasing milk productivity of existing milch cattle 2) encourage more farmers to join their network for direct milk procurement 3) encouraging farmers to buy more cattle in order to expand their revenue from dairy.
Exhibit 6: Milk collection centre in Maharashtra
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile
Prabhat is located strategically in Western region of Maharashtra where Dairying is prevalent
As per “19th Livestock Census-2012”, bovine population in Maharashtra has declined by about 5 per cent to 2.1 crore as against 2.2 crore in 2007. While crossbreds cattle increased by 19 per cent, local cows and buffaloes have shown 8-9 per cent decline. However, the indigenous cattle and buffalo milch population declined by 5-7 per cent between 2007 and 2012, while there has been an impressive growth of 26 percent in crossbred milch animals. Region-wise, the Marathawada and Vidarbha regions are characterised by frequent droughts, cracked soils, parched wells, dry hand pumps, low yielding livestock and accordingly, dairying is relegated to western parts of the state. The perpendicular strip of land in western part comprising of Ahmadnagar, Nasik, Pune, Satara, Sangli, Kolhapur and Solapur districts comprises more than one-third of bovine population of the state, mainly crossbred cows and buffaloes.
Exhibit 7: Ahmednagar has 26% of the total population of cross bred cows in Maharashtra
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Exhibit 8: Ahmednagar has 26% of the total population of in-milk cross bred cows in Maharashtra
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
2.7%
1.2%
2.6% 3.0%
3.9% 3.8% 4.3% 4.5% 4.5% 4.5%
0%
1%
2%
3%
4%
5%
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
Ahmadnagar 26
Kolhapur 5
Nashik 7
Pune 13 Sangli
5
Satara 6
Solapur 10
Others 28
District wise Female Cross Bred Population (%) - 2012
Ahmadnagar 26
Kolhapur 6
Nashik 6
Pune 14
Sangli 6
Satara 6
Solapur 10
Others 25
District wise in-milk population (2012)
Prabhat Dairy
Dai
ry
69 Elara Securities (India) Private Limited
Exhibit 9: Types of crossbred cows grown in Ahmadnagar – Total population of 818k crossbred cows
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Exhibit 10: Cattle Milk Yield (Kg/day)
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Exotic Cattle
1%
Jersey crossbred
33%
Holstein Friesian
Crossbred 66%
Other crossbred
0%
Exotic and crossbred cattle population in Ahmadnagar
3.055
8.13
4.98
1.75
7.17
4.351
0
2
4
6
8
10
Indigenous Crossbred Buffalo
(kg
/Day
)
Ahmadnagar Mumbai
Exhibit 11: Maharashtra is a cow belt as cattle population is 73.5% of total bovine population
1992 1997 2003 2007 2012
CAGR (%) (1992--2012)
Total Bovine 2,28,88,246 2,41,44,225 2,24,47,724 2,22,56,144 2,10,78,599
Growth (%) 5.5 (7.0) (0.9) (5.3)
Total Cattle 1,74,41,008 1,80,71,537 1,63,03,019 1,61,83,527 1,54,84,207 (1.0)
Growth (%) 3.6 (9.8) (0.7) (4.3)
Total Cattle as % of total Bovine Population 76.2 74.8 72.6 72.7 73.5
1992 1997 2003 2007 2012
CAGR (%) (1992--2012)
Total Bovine 2,28,88,246 2,41,44,225 2,24,47,724 2,22,56,144 2,10,78,599 0
Growth (%) 5.5 (7.0) (0.9) (5.3)
Total Cattle 1,74,41,008 1,80,71,537 1,63,03,019 1,61,83,527 1,54,84,207 (1.0)
Growth (%) 3.6 (9.8) (0.7) (4.3)
% of total Bovine Population 76.2 74.8 72.6 72.7 73.5
Total Indigenous cows 1,56,71,675 1,56,14,653 1,35,27,018 1,30,61,236 1,18,33,330 (1.0)
Growth (%) (0.4) (13.4) (3.4) (9.4)
% of total Bovine Population 68.5 64.7 60.3 58.7 56.1
Total Buffaloes 54,47,238 60,72,688 61,44,705 60,72,617 55,94,392 0.0
Growth (%) 11.5 1.2 (1.2) (7.9)
% of total Bovine Population 23.8 25.2 27.4 27.3 26.5
Total Exotic/ Crossbred cows 17,69,333 24,56,884 27,76,001 31,22,291 36,50,877 4.0
Growth (%) 38.9 13.0 12.5 16.9
% of total Bovine Population 7.7 10.2 12.4 14.0 17.3 Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Prabhat Dairy
70 Elara Securities (India) Private Limited
Exhibit 12: Distribution of Holstein Friesian and Jersey Crossbred
Note: Map not to scale; Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Ahmednagar
Akola
Amravati
Aurangabad
Beed
Buldhana Chandrapur
Dhule
Gadchiroli
Gondia
Hingoli
Jalgaon
Jalna
Kolhapur
Latur
Mumbai City
Mumbai Suburban
Nagpur
Nanded
Nandurbar
Nashik
Osmanabad
Parbhani
Pune Raigad
Ratnagiri
Sangli
Satara
Sindhudurg
Solapur
Thane
Wardha
Washim Yavatmal
Alibag
Holstein Friesian CrossbredMajor Distribution
Minor Distribution
Ahmednagar
Akola
Amravati
Aurangabad
Beed
Buldhana Chandrapur
Dhule
Gadchiroli
Gondia
Hingoli
Jalgaon
Jalna
Kolhapur
Latur
Mumbai City
Mumbai Suburban
Nagpur
Nanded
Nandurbar
Nashik
Osmanabad
Parbhani
Pune Raigad
Ratnagiri
Sangli
Satara
Sindhudurg
Solapur
Thane
Wardha
Washim Yavatmal
Alibag
Jersey CrossbredMajor Distribution
Minor Distribution
Prabhat Dairy
Dai
ry
71 Elara Securities (India) Private Limited
Prabhat specialises in cow milk products as that is more preferred by consumers both domestically and internationally
Maharashtra’s total bovine population (cows+buffaloes) is skewed towards cows (73.5% of total bovine population). Prabhat has the strategic advantage of being located in this region and hence sourcing becomes easier. On the other hand, globally, all major milk exporters (EU, NZ) are cow milk producers which helps Prabhat is being a partner of choice for many B2B players. While domestically consumer tastes are also developing more in favour of cow milk than buffalo due to its low fat content.
Indigenous cows comprise the largest portion of the bovine population The low milk yielding indigenous cow population has been declining at -1% CAGR in 1992-2012 period while exotic or cross bred cows have be growing at 4% CAGR in the same period.
Exhibit 13: Share of in-milk indigenous cows have been declining due to reduction in indigenous cow population
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Exotic and crossbred cows population growing at 4% CAGR in Maharashtra as it has the highest yeild
Maharashtra is growing the population of higher yielding crossbred cows by growing the female population at 4% CAGR.
Exhibit 14: Exotic or crossbred cows are now 17.3% of total bovine population up from 7.7% in 1992
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
8.7
9.0
8.4
8.8
8.1
7.6
7.8
8.0
8.2
8.4
8.6
8.8
9.0
9.2
1992 1997 2003 2007 2012
(%)
7.7
10.2
12.4 14.0
17.3
0
4
8
12
16
20
1992 1997 2003 2007 2012
(%)
Exhibit 15: Maharashtra is a cow belt as cattle population is 73.5% of total bovine population
1992 1997 2003 2007 2012
CAGR (%) (1992--2012)
Total Exotic/ Crossbred cows 17,69,333 24,56,884 27,76,001 31,22,291 36,50,877 4.0%
% of total bovine population 7.7 10.2 12.4 14.0 17.3
Females 13,85,341 18,78,747 22,38,377 25,80,347 32,07,011 4.0%
In-milk 5,48,027 7,32,957 9,33,877 11,38,932 14,44,659 5.0%
% of female population in milk 0.4 0.4 0.4 0.4 0.5
% of total bovine population 2.4 3.0 4.2 5.1 6.9
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Prabhat Dairy
72 Elara Securities (India) Private Limited
Exhibit 16: Cross bred cows mainly grown for dairying purposes as female cross bred cows comprise 88% of the population
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Exhibit 17: Indigenous cows grown more as beasts of burden and for farming related work
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Exhibit 18: In-milk indigenous cow population in Maharashtra has been de-growing at CAGR of -1% in 1992-2012 period
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Average Milk Procurement of Prabhat grown at 15% CAGR in FY12-17 period
Average milk procurement has grown at 15% CAGR in FY12-17 period. Milk procurement was adversely hit during 2HFY17 due to drought conditions prevailing in Maharashtra which led to shortage of milk production, hence the milk procurement dropped sharply. The
company substituted liquid milk requirement by buying ingredients like cream from the market and manufacturing its products. We believe that Prabhat despite being into B2B has been able to pass on inflation to its institutional clients with a lag of 2-3 months.
Average milk procurement of Prabhat has grown 3x faster than the population growth in cross bred cows
Population growth in crossbred cows in the period 2007-2012 has been around 3.2% and average milk procurement for Prabhat has grown at 15% p.a. in the same period.
Exhibit 19: Growth in population of cross bred cows in Maharashtra
Source: NDDB – ‘Dairying in Maharashtra – A Statistical Profile, Elara Securities Research
Exhibit 20: Milk procurement of Prabhat expected to grow at 16% p.a. and reach 1.4MLPD by 2020
Source: Company, Elara Securities Estimate
Long standing relationships with B2B clients converted into in-house expertise
One of its largest and oldest institutional client to which it supplies sweetened condensed milk (18% of revenues) is Mondelez India Foods Private Ltd based out of Pune. Sweetened condensed milk is sold both as a finished product and as a vital ingredient for the manufacturing of certain foods (such as chocolates, confectionaries and bakery items). Prabhat acts as dedicated supplier of SCM for Mondelez. Prabhat commenced selling condensed milk to Cadbury’s in 2008 and then in 2010 set up a
78.3 76.5
80.6 82.6
87.8
68
72
76
80
84
88
92
1992 1997 2003 2007 2012
(%)
44.3 43.8 43.7
41.6
42.7
40
42
44
46
1992 1997 2003 2007 2012
(%)
8.7
9.0
8.4
8.8
8.1
7.6
7.8
8.0
8.2
8.4
8.6
8.8
9.0
9.2
1992 1997 2003 2007 2012
(%)
38.9
13.0 12.5
16.9
0
5
10
15
20
25
30
35
40
45
1997 2003 2007 2012
(%)
0.45 0.61
0.78 0.90
1.07
0.900 1.04
1.21
1.4
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
Prabhat Dairy
Dai
ry
73 Elara Securities (India) Private Limited
dedicated condensed milk plant for Cadbury’s. They have appointed Mr. Sridhar Vishwanath (ex-Mondelez, 16+ years of experience) as Commercial Director in FY17 to boost the B2B business in specialty ingredients.
Prabhat derives 53% of its sales from top 10 clients
Exhibit 21: Prabhat Dairy: Key Institutional Clients Some of their institutional ccustomers for speciality ingredient products include the ffollowing: CCustomer
Specialty Ingredient Products partnerships
Mondelez India Foods Private Limited (formerly known as Cadbury India Limited
Sweetened condensed milk, Skimmed / Whole milk powder, Full cream milk for chocolates
Abbott Healthcare Private Limited
Speciality milk powder for baby food
GSK Consumer Healthcare, Heinz
Speciality milk powder for malted food drinks and sweetened condensed milk
Source: Company, Elara Securities Research
Co-manufactured Products: Co-manufactured products include specialty milk powders, curd (dahi), clarified butter (ghee), dairy whiteners, yogurts, processed and concentrated milk, and ice creams for various institutional customers including Britannia Industries Limited, Mother Dairy Fruit & Vegetable Private Limited and Heritage Foods Limited.
Exhibit 22: List of Institutional Customers for Co- Manufactured Products Some oof our institutional customers for co-manufactured products include the following: Customer
Co-Manufactured Products
Heritage Foods Limited dairy whitener; curd (dahi); butter milk
Britannia Industries Limited UHT milk, lassi, yogurt, dairy whitener, clarified butter (ghee), curd (dahi), flavoured milk
Mother Dairy Fruit & Vegetable Private Limited
Ice cream; milk candies
Source: Company, Elara Securities Research
Prabhat Dairy
74 Elara Securities (India) Private Limited
Increasing B2C presence within Maharashtra through unique distribution model For the B2C foray, the company is increasing its distribution network for curd(fast moving product with low working capital requirements) in cities like Pune, Nasik and Aurangabad, which are within its catchment area. The company has 270 sales professionals to service the retail outlets on a regular basis (almost every 2-3 days) since Prabhat is selling fresh milk products in Maharashtra which needs frequent replenishment.
Targeting Tier-2&3 cities in Maharashtra as they are less cluttered and fast growing
Maharashtra is the second richest state amongst all major states in India in terms of Net Domestic Product. It has one of the fastest growing economy in India with sustained higher growth rate and its per capita income is significantly higher than national average. Tier –II cities are emerging as software export hubs hence leading to faster economic growth and hence increasing the spending and purchasing power of the region. The four urban districts of Mumbai, Thane, Pune and Nasik account for 50% of the state income and balance 31 districts share the remaining other half. These four urban districts account for 45% of the population of
Targeting less cluttered Tier-2/3 cities for B2C products � Increasing B2C presence within Maharashtra through unique distribution model – ‘Raftaar’
� Aggressive product launches in the last 2 years to cater to B2C customers
� Targeting Tier-2&3 cities in Maharashtra as they are less cluttered and fast growing
� B2C business supported through brand investments
� Targeting mid-sized QSR chains/HORECA segment and less cluttered markets in Maharashtra for
selling Cheese
� Foray into B2C should be margin accretive despite increase in brand investments
Exhibit 23: Unique distribution model ‘Raftaar’ adopted for distributing curd and supported by OOH advertising
Launched Dahi with no preservatives in Mumbai. Adopted a unique model for distribution of fresh Dahi for the first time in Indiaunder the project called ‘Raftaar’ which delivers fresh Dahi in chilled vans / mopeds with chilled box at the back to 10,000 grocery shops in Mumbai.
Source: Company
Prabhat Dairy
Dai
ry
75 Elara Securities (India) Private Limited
Maharashtra hence giving a huge locational advantage to players like Prabhat. In order to encash this catchment area in Tier-II cities, the company has built a distribution network for the HORECA segment (as proxy retail
product) exclusively for curd, paneer and cheese for daily requirements.
Exhibit 24: Aggressive product launches in the last 2 years to cater to B2C customers
Source: Company
Launched FFresh Paneer in an attractive thermoform ppackaging, extending the shelf life from 15 days to 21 days.
Prabhat Dairy
76 Elara Securities (India) Private Limited
Exhibit 25: B2C business supported through brand investments
Source: Company, Elara Securities Estimate
Gradually establishing pan-India presence through modern retail
Outside the state, the company has established presence in major metropolitan cities and is now available across 1,10,000 retail outlets across 26 states in India. The company’s distribution network comprised of 40 super stockists, 6 C&F agents, 135+ modern trade outlets, and 1200 distributors as of Mar’17.
0.8 0.8
1.2 1.2 1.2 1.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
FY15 FY16 FY17 FY18E FY19E FY20E
(%)
Ad-spends as % of sales
Prabhat Dairy
Dai
ry
77 Elara Securities (India) Private Limited
Exhibit 26: Advertising Ghee and other products during festival season offline and online
Source: Company, Elara Securities Research
Ganpati Festival Campaign
Social Media Campaign
Prabhat Dairy
78 Elara Securities (India) Private Limited
� Products like Cottage Cheese, Curd, Lassi, Butter Milk and Shrikhand are retailed in Modern Trade shelves like Big Bazaar, Star Bazaar, Hypercity, D-Mart, etc
� Measures in Modern trade have been extended beyond Mumbai in Maharashtra and also Gujarat.
Expanding reach to Northern and Southern Indian markets especially for long shelf like products like Ghee and Cheese, Curd and Cottage Cheese
Exhibit 27: Prabhat’s increasing its footprint by getting listed in modern retail outlets
Source: Company, Elara Securities Research
Prabhat Dairy
Dai
ry
79 Elara Securities (India) Private Limited
Exhibit 28: Prabhat’s distribution and supply chain network
Note: Map not to scale; Source: Company, Elara Securities Research
Assam
Bihar
Goa
Gujarat
Himachal Pradesh
Jammu and Kashmir
Jharkhand
Karnataka
Madhya Pradesh
Maharashtra
Meghalaya
Orissa
Punjab
Rajasthan
Tamil Nadu
Tripura
Uttar Pradesh
Uttarakhand
Chandigarh
Dadra and Nagar Haveli
Daman and Diu
Delhi
Pondicherry
Telangana
Retail presence across states in India
Milk procurement districts in Maharashtra
Facility locations
28 States250+ Sales professional800+ Distributors
Prabhat Dairy
80 Elara Securities (India) Private Limited
Exhibit 29: Prabhat’s Pure Cow Ghee is present in 26 states in 1lac + retail outlets benefitting from the category tailwind
Source: Company, Elara Securities Research
Targeting mid-sized QSR chains/HORECA segment and less cluttered markets in Maharashtra for selling Cheese
The company has gradually picked up pace of entering into value added products in the B2C segment and has commissioned a 30MTPD cheese plant (FY17) to cater to the institutional market in the HORECA (hotels, restaurants and catering) segment along with pan-India QSRs like Domino’s, KFC etc. The company has established its cheese brand in HORECA segment in Maharashtra and Gujarat last year and now plans to foray into South and North India. They are planning to operate in less cluttered segments like mozzarella cheese for small and mid- sized pizza chains. We believe that the margins are unlikely to see any contraction in the coming years as it will primarily focus on catering to the institutional business in Maharashtra or to the retail consumers in the interiors of Maharashtra where the competition from big multinational companies is far lower.
Foray into B2C should be margin accretive despite increase in brand investments
We believe that with the entry into value added products (VAP) like cheese, paneer, curd, flavored milk etc through B2C and B2B channel, the advantage will continue to stay as they are targeting Tier 2/ 3 cities in Maharashtra and Gujarat. Consumer expenditures in Tier 2/3 cities have been rising at the rate of 14% YoY and in metros at the rate of 12% YoY. Secondly, VAP and B2C fetches 300bps higher gross margin (~25%) compared to the existing gross margin profile of the company. We have accounted for high growth in ad-spends (CAGR of 13% in FY17-20E period) as Prabhat intends to increase its presence outside Maharashtra and has ventured into North and South India as well. We believe Prabhat will be able to expand its margin despite an increase in ad-spends. Therefore, we estimate that operating margins for Prabhat to be around 11% (+200bps expansion from current 9% levels).
Gross margin expected to expand due to higher sales from VAP (B2C) and cheese (B2B)
In cheese category, Parag, Amul, Prabhat and Schreiber Dynamix are key players in this market which is around INR18 bn in size and is growing at 10-15% p.a. Cheese is a fast growing category as out of home consumption is also spurring in-home consumption by consumers in the form of cheese slices, spreads etc. Secondly, cheese market is highly lucrative at the premium end where specialty cheese can fetch margins as high as 40-50% for branded players. Therefore, as opposed to the fresh milk products or commoditized products like SMP, selling value added products like cheese will fetch better margins for Prabhat Dairy. Currently the gross margin hovers around 22-23% while Cheese has gross margin upwards of 25% (at realizations fetched from institutional buyers like QSRs). And with the huge plans of expansion for the whole QSR industry going ahead, we remain confident that the gross margin profile can structurally see an improvement, albeit gradually.
Exhibit 30: Share of revenues between B2B and B2C
Source: Company, Elara Securities Estimate
Exhibit 31: B2C as % of sales
Source: Company, Elara Securities Estimate
11 30
50
89 70
50
0
20
40
60
80
100
FY12 FY17 FY20E
(%)
B2C B2B
11 14 14
24 28 30
36 42
50
0
10
20
30
40
50
60
20
12
20
13
20
14
20
15
20
16
20
17
20
18
E
20
19
E
20
20
E
(%)
B2C as % of sales
Prabhat Dairy
Dai
ry
81 Elara Securities (India) Private Limited
Exhibit 32: Gross Margin expected to expand due to VAD
Source: Company, Elara Securities Estimate
Operational leverage to come into play with increasing capacity utilization in pouched milk and value added products curd, UHT milk and cheese segment
Exhibit 33: SG&A as % of sales expected to come down
Source: Company, Elara Securities Estimate
Exhibit 34: Operating margin (%) expected to improve due to operational leverage
Source: Company, Elara Securities Estimate
Cheese production ramp-up underway
The company commissioned a new plant in Sept'15 for Cheese (30 TPD), Paneer (5TPD) and Shrikhand (5TPD) post a capex of INR1.4bn. This is the 3rd largest cheese plant in India. Given that the asset turn in cheese or any value added product is generally around 3x, we estimate that peak revenues from the cheese facility could be around INR3bn. The capacity utilisation of cheese is
around 20%- 22% at the moment and it is expected to reach around 40%.
The company strategy to grow cheese business over next 2-3 years:
� Initially focus on selling cheese to HORECA and B2B segments and exports to Gulf countries.
� They have already procured orders from major pizza and burger chains like Dominos, Pizza Hut, Mc Donald’s and other QSRs.
� Currently manufactures following types of Cheese-
� Processed Cheese (Hard, Soft & Pizza)
� Mozzarella Cheese (Diced & Shredded)
� Cheddar Cheese
� Ricotta Cheese
� Cheese sales in HORECA segment have already started in Maharashtra and Gujarat and are planned in South India and North India.
Exhibit 35: Key Institutional Clients In Cheese:
Source: Company
Prabhat reduced its salience in liquid milk during inflationary periods to curb excess margin erosion
During FY17, the liquid milk prices shot up by 25% in Western region due to shortage of milk supply in the flush season (Oct-Feb) in India. Additionally, global milk powder prices started inching upwards from June 2016 onwards due to cut back in supply by major exporters leading to a huge pressure on margins for dairy companies. As a result, dairy companies resorted to buying milk ingredients like powder, cream, butter oil for diverting their direct milk procurement (high quality milk) for only value added products irrespective of whether they were selling it for B2C or B2B customers. Prabhat followed the same approach as a quick response to the situation and has applied the same technique previously to avoid excessive margin erosion. Secondly, Prabhat was able to pass on the inflation with a shorter lag of 2-3 month (other players took at least 6 months) to pass on the inflation to its B2B customers since it operates on cost+ basis.
0
5
10
15
20
25
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
0
2
4
6
8
10
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
0
2
4
6
8
10
12
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
Prabhat Dairy
82 Elara Securities (India) Private Limited
Exhibit 36: Milk prices prevailing in Maharashtra (INR/Ltr)
Source: Company, Elara Securities Research
Exhibit 37: Change in milk prices in Maharashtra YoY (%)
Source: Company, Elara Securities Research
Liquid milk sales and condensed milk sales reduced during FY17 while SMP sales improved due to better realisations
Exhibit 38: Prabhat revenue mix as per FY16
Source: Company, Elara Securities Research
Exhibit 39: Prabhat Revenue Mix as per FY17
Source: Company, Elara Securities Research
Average milk selling price has grown at 6% CAGR while procurement costs have risen at CAGR of 8% in FY12-17 period thereby leading to contraction in margin for the liquid milk business.
Exhibit 40: Increase in milk realization lags inflation
Source: Company, Elara Securities Research
Exhibit 41: Average milk procurement cost rose sharply in FY17
Source: Company, Elara Securities Research
20 22
26 26 26 25 25 23
19 21 21 21
26 26 27 29 27
0
5
10
15
20
25
30 1
QFY
14
2
QFY
14
3
QFY
14
4
QFY
14
1
QFY
15
2
QFY
15
3
QFY
15
4
QFY
15
1
QFY
16
2
QFY
16
3
QFY
16
4
QFY
16
1
QFY
17
2
QFY
17
3
QFY
17
4
QFY
17
1
QFY
18
(INR/
Litr
e)
27
14
(6) (13)
(26) (17) (14)
(9)
35
23 28
38
6
(30)
(20)
(10)
0
10
20
30
40
50
1Q
FY1
5
2Q
FY1
5
3Q
FY1
5
4Q
FY1
5
1Q
FY1
6
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(%)
Processed and pouch milk , 21%
Condensed and
concentrated milk ,
24%
Flavored milk, 0% Curd, 2%
Ghee and Butter ,
22%
Ice cream , 1%
SMP, WMP, DW , 29%
Cheese, paneer,
shrikhand , 0
Others , 1%
Processed and pouch milk , 14%
Condensed and
concentrated milk ,
12%
Flavored milk, 0%
Curd, 2%
Ghee and Butter ,
21% Ice cream ,
1%
SMP, WMP, DW , 46%
Cheese, paneer,
shrikhand , 3%
Others , 1%
22.0
23.8
25.2
28.2 27.3
30.0
20
23
26
29
32
FY12 FY13 FY14 FY15 FY16 FY17
(IN
R/lit
re)
18.5 19.3
20.5
22.3 20.8
26.7
15
18
21
24
27
30
FY12 FY13 FY14 FY15 FY16 FY17
(IN
R/lit
re)
Prabhat Dairy
Dai
ry
83 Elara Securities (India) Private Limited
Exhibit 42: Gross Spread (INR/Ltr) impacted due to inflation
Source: Company, Elara Securities Research
Exhibit 43: Gross Margin (%) in liquid milk dipped in FY17
Source: Company, Elara Securities Research
Blended Gross Margin for Prabhat contracted for almost 6 quarters due to global commodity deflation in FY16 and then domestic inflation in FY17
Exhibit 44: Gross Margin impacted for prolonged period
Source: Company, Elara Securities Research
Exhibit 45: EBITDA Margin impacted due to steep inflation
Source: Company, Elara Securities Research
Parag Milk Foods had taken a bigger hit during the same period as they increased milk procurement
Exhibit 46: Gross Margin dipped sharply in 3QFY17..
Source: Company, Elara Securities Research
Exhibit 47: …EBITDA margin was impacted due to higher ad-spends
Source: Company, Elara Securities Research
3.5
4.5 4.7
6.0
6.6
3.4
2
3
4
5
6
7
FY12 FY13 FY14 FY15 FY16 FY17
(IN
R/lit
re)
15.8
19.1 18.5
21.2
24.0
11.2 10
12
14
16
18
20
22
24
26
FY12 FY13 FY14 FY15 FY16 FY17
(%)
23 22 22 24
20 24
21 19 19 20 19 19 21
0
5
10
15
20
25
30
1Q
FY1
5
2Q
FY1
5
3Q
FY1
5
4Q
FY1
5
1Q
FY1
6
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(%)
11
10 10 10 10
12
9 8 8 8
9 8 8
0
2
4
6
8
10
12
14
1Q
FY1
5
2Q
FY1
5
3Q
FY1
5
4Q
FY1
5
1Q
FY1
6
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(%)
31
26 27 30 31 30 31
22
32 29
0
5
10
15
20
25
30
35
4Q
FY1
5
1Q
FY1
6
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(%)
8 8 9
10 10 9 8
(3)
12
7
(6)
(3)
0
3
6
9
12
15
4Q
FY1
5
1Q
FY1
6
2Q
FY1
6
3Q
FY1
6
4Q
FY1
6
1Q
FY1
7
2Q
FY1
7
3Q
FY1
7
4Q
FY1
7
1Q
FY1
8
(%)
Prabhat Dairy
84 Elara Securities (India) Private Limited
Striking a fine balance: Growth & Capital Exhibit 48: Sales expected to grow at 13% CAGR in FY17-20 period
Source: Company, Elara Securities Estimate
Exhibit 49: EBITDA expected to grow at 21% CAGR in FY17-20 period
Source: Company, Elara Securities Estimate
Exhibit 50: PAT expected to grow at 26% CAGR in FY17-20 period
Source: Company, Elara Securities Estimate
Net working capital requirement expected to rise despite rise in B2C sales as Cheese inventory will negate the gains
Currently the working capital requirement of B2B businesses in dairy is typically higher than B2C because higher credit terms (~90 to 180 days) extended to the institutional customers. As B2C businesses usually operate on cash or just 7 days of receivables, the working capital requirements of dairy companies will tend to come down with increasing proportion of sales coming from retail especially in fresh milk products. Prabhat has guided for 50% of its sales coming from B2C products in next 3 years. We have adjusted the working capital requirements keeping in mind that B2C business carries only 7 days of receivable days and zero inventory days. While increasing sales contribution from cheese business will add to the inventory days due to the curing process, we believe the lower traction from milk powder inventory should net off the two effects since the receivables days in milk powder days is almost close to 90 days.
Exhibit 51: Cash conversion cycle close to 4.5months
Source: Company, Elara Securities Estimate
Exhibit 52: Inventory Days expected to increase further due to higher cheese production
Source: Company, Elara Securities Estimate
0
5,000
10,000
15,000
20,000
25,000
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
0
500
1,000
1,500
2,000
2,500
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
0
200
400
600
800
1,000
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
115 124
103 120 114
121 138 134 131
0
20
40
60
80
100
120
140
160 FY
12
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
22 26 24
30 35
43 46
50 53
0
10
20
30
40
50
60
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
Prabhat Dairy
Dai
ry
85 Elara Securities (India) Private Limited
Exhibit 53: Working capital as % of sales
Source: Company, Elara Securities Estimate
Exhibit 54: Receivable days expected to drop due to higher traction of B2C sales going forward
Source: Company, Elara Securities Estimate
Exhibit 55: Loans and advances days
Source: Company, Elara Securities Estimate
Exhibit 56: Creditor days
Source: Company, Elara Securities Estimate
Exhibit 57: Cash flow from operations was affected due to increase in SMP inventory in FY17
Source: Company, Elara Securities Estimate
Exhibit 58: Most of the capex has been done, expect only milk procurement capex to continue in next 3 years
Source: Company, Elara Securities Estimate
Exhibit 59: Fixed asset turn to improve due to ramp up in cheese plant utilisation from 22% to 40%
Source: Company, Elara Securities Estimate
27 29
26 30 29 31
34 32 31
0
5
10
15
20
25
30
35
40
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
35
45
66 76 71 70
64 56
50
0
10
20
30
40
50
60
70
80
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
89
73
39 45
29 26
45 45 45
0
20
40
60
80
100
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
28
19
24
29
21 17 17 17 17
0
5
10
15
20
25
30
35
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
627 590
130 79
438 279
460
1,397
1,704
0
300
600
900
1,200
1,500
1,800
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
(1,092) (1,136)
(674)
(481)
(300) (394)
(500) (500) (500)
(1,200)
(900)
(600)
(300)
0
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(IN
R m
n)
1.6 2.0
2.3 2.3 2.6
3.2 3.6
4.0 4.5
0
1
2
3
4
5
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(x)
Fixed Asset Turn
Prabhat Dairy
86 Elara Securities (India) Private Limited
Exhibit 60: ROCE expected to improve on the back of higher cheese plant utilization
Source: Company, Elara Securities Estimate
Exhibit 61: Interest expenses expected to remain stable (INR mn)
Source: Company, Elara Securities Estimate
8.5
11.1 10.5 10.3 9.6 8.8
10.0
12.0
14.2
0
2
4
6
8
10
12
14
16 FY
12
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
184
297 330
412 427
294
371 371 371
0
100
200
300
400
500
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
Prabhat Dairy
Dai
ry
87 Elara Securities (India) Private Limited
Initiate coverage with Buy rating and TP INR 160 Prabhat dairy is a western dairy major with total milk procurement capacity of 1.5MLPD and is based out of milk surplus region of Ahmednagar, Maharashtra with plants located in Shrirampur and Navi Mumbai. The company procures around 70% of its total milk requirement (~1MLPD) from its network of more than 85,000 farmers (‘Prabhat Mitras) in order to maintain the high quality of milk and due to consistent delivery on the quality front. We believe Prabhat is well positioned to remain a partner of choice as a specialised ingredient supplier major dairy brands in India, given that it is located in one of the fastest growing milk production regions within Maharashtra. We expect Prabhat to report a 13%/21%/36% CAGR in Sales/EBITDA/Adj. PAT in-line with the growth reported in FY12-17 period.
We have valued the stock based on two valuation methodologies:
� We are pegging EV/Sales(x) multiple at 0.8x FY20E estimates, in line with its historical trading multiple (limited stock price history) at 20% discount to B2C players in pouch milk to account for lower return ratios (50% lower than HFL and Hatsun Agro) and lower cash flows to EBITDA (30-40% vs >100% for HFL)
� We are pegging the EV/EBITDA(x) multiple at 8.4x at ~50% discount to completely integrated (forward and backward) and high CFO generating peers like HFL and Hatsun Agro as they have much lower working capital requirements.
� We arrive at a TP of INR160 with an upside of 20% from current levels with an implied P/E(x) multiple of 17x on FY20E EPS estimate of INR9.5
Exhibit 62: Valuation Methodology
FY20E
EV/Sales (x)
Sales (INR mn) 20,343
EV/Sales (x) 0.8
EV (INR mn) 16,812
Gross Debt (INR mn) 3,714
Cash (INR mn) 1,522
Net Debt (INR mn) 2,191
Fair Value (INR mn) 14,621
TP (INR/Share) 150
CMP (INR/Share) 133
Upside (%) 12.5
Implied P/E(x) 15.7
EV/EBITDA (x)
EBITDA (INR mn) 2,231
EV/EBITDA (x) 8.3
EV (INR mn) 18,556
Gross Debt (INR mn) 3,714
Cash (INR mn) 1,522
Net Debt (INR mn) 2,191
Fair Value (INR mn) 16,364
TP (INR/Share) 168
CMP (INR/Share) 133
Upside (%) 26.0
Implied P/E(x) 17.6
Weighted TP (INR) 160
CMP (INR) 133
Upside (%) 20
Implied P/E(x) on FY20 17
Source: Elara Securities Estimate
Valuation & Recommendation � Initiate with a Buy rating on Prabhat with TP INR160 implying upside of 20%
� Expect gross margin and operating margin to expand by 156bps/197 bps in FY17-20E due to
better product mix, and operational leverage due to increase in cheese plant utilization
� Expect EBITDA to grow at 21% CAGR in FY17-20E led by high growth and increase in B2C sales
� Adj PAT expected to grow at 36% CAGR in FY17-20E period led by lower interest costs
Prabhat Dairy
88 Elara Securities (India) Private Limited
Relative Valuation: Trading at B2B valuations Exhibit 63: 1-yr forward EV/Sales Band
Source: Bloomberg, Elara Securities Estimates
Exhibit 64: 1-yr forward rolling EV/Sales
Source: Bloomberg, Elara Securities Estimates
Exhibit 65: 1-yr forward EV/EBITDA Band
Source: Bloomberg, Elara Securities Estimates
Exhibit 66: 1-yr forward rolling EV/EBITDA
Source: Bloomberg, Elara Securities Estimates
40
60
80
100
120
140
160
180
200
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(INR)
1.1x
0.6x
0.7x
0.8x
1.0x
0.8 1.0
0.7
1.1
0.6
0.4
0.6
0.8
1.0
1.2
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(x)
Rolling 2yr fwd Ev/Sales Avg +1 Std dev -1 Std dev +2 Std dev -2 Std dev
50
100
150
200
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(INR)
11x
7x
8x
9x
10x
8.4 9.9
6.9 5.4
11.4
4
8
12
16
Oct
-15
Dec
-15
Feb
-16
Ap
r-1
6
Jun
-16
Au
g-1
6
Oct
-16
Dec
-16
Feb
-17
Ap
r-1
7
Jun
-17
Au
g-1
7
(x)
Rolling 2yr fwd Ev/EBITDA Avg +1 Std dev -1 Std dev -2 Std dev +2 Std dev
Prabhat Dairy
Dai
ry
89 Elara Securities (India) Private Limited
Board of Directors & Management Mr. Sarangdhar R Nirmal (Chairman and Managing Director)
Sarangdhar R Nirmal is the Chairman and Managing Director of the Company. He holds a Bachelor’s degree in Commerce from the University of Poona and a Master’s degree in Business Administration from the University of Poona. He has been a Director of our Company since November 25, 1998. He has also worked with Pravara Sugar Factory, acted as a trader of goods and then established a proprietorship firm, Nirmal Paper Industries, which was a paper board manufacturing unit based on waste paper. He has approximately 16 years of professional experience in the dairy industry. As the Chairman and Managing Director of the Company, he is involved in the business, management and operations of the Company.
Mr. Vivek S. Nirmal: (Joint Managing Director)
Mr. Vivek S. Nirmal was instrumental in the incorporation of Sunfresh Agro Industries Pvt. Ltd. (SAIPL), which later became a subsidiary of the Company. He is currently the Managing Director of SAIPL. He has approximately seven years of professional experience in the dairy industry. He is currently a member of the CII National Committee on Dairy, 2015-16. As the Joint Managing Director of the Company he is involved in the operational activities of the Company and its Subsidiaries.
Mr. Rajesh Srivastava (Independent Director)
Mr. Rajesh Srivastava is a designated General Partner in the Rabo Equity Fund (‘the Fund’), along with Rabobank. He had 28 years of professional experience prior to moving to the Fund, including 10 years in Rabo India Finance where his last assignment was as the Managing Director in charge of corporate and commercial banking.
He had also worked in agribusiness consulting for 2 years and with the South Asian Regional Apex Fund (sponsored by Lazard India) for 3 years. He started his career with the Bank of Baroda, where he worked for 12 years in Credit, 9 years in Regional/Zonal Offices in Merchant Banking and Business Development and for 2 years as a Branch Manager. He is a graduate in economics and also holds the professional law degree.
Mr. Raphael Plihon (Non-Executive Director)
Mr. Raphael Plihon has approximately eight years of experience in corporate and project finance (both debt and equity) as an investment officer and project manager for Dexia Credit Local and as an investment officer at Proparco (French Development Financial Institution). He is currently a senior investment officer in the manufacturing, agribusiness and services division of Proparco. He has the Master’s Degree in Business Administration from ESSEC.
Mr. Soundararajan Bangarusamy (Independent Director)
Mr. Soundararajan, an entrepreneur hails from a teacher’s family at Udumalpet, near Coimbatore and have a strong agricultural background. Mr. Soundararajan started his career as a trader for egg and poultry feed in the year 1985. He is a dynamic person who actively contributes to the industry and society. He served as President of the Indian Breeders Association from 2002 to 2007. He was Chairman for National Poultry Committee in 2006-07 and Vice Chairman for CLFMA from 2005 till date. He was recognized for his contribution and achievements and awarded the Best Entrepreneur and influential people by Business Today and CII (Confederation of Indian Industry). Under his able leadership, Suguna Poultry Farm Limited won the National Productivity Council Awards 7 times successively, since 1994-95 and won the Best Asian Poultry Company in 2008.
Company Description Prabhat dairy is a western dairy major with total milk procurement capacity of 1.5MLPD and is based out of milk surplus region of Ahmednagar, Maharashtra with plants located in Shrirampur and Navi Mumbai. The company procures around 70% of its total milk requirement (~1MLPD) from its network of more than 85,000 farmers and registered vendors. As of 31st Mar’17, the company had 481 milk collection centres and 115 bulk milk coolers across 600 villages. The company is primarily a specialty ingredients supplier in the B2B segment and has large dairy players like Modelez (Sweetened condensed milk or SCM), Abbott Healthcare Private Ltd (speciality milk powders) and Britannia, Gokul, Mahanand, Mother Dairy, Heritage Foods ltd as a co-manufacturing partner for products such as UHT milk, curd and ice creams. The company’s long standing relationship with these large MNCs has not only increased the consumption of their milk produced, provided a stable revenue source, but also has helped them align their quality standards in-line with global food benchmarks.
Prabhat Dairy
90 Elara Securities (India) Private Limited
Mr. Haresh Shah (Independent Director)
Mr. Haresh Shah is a Chartered Accountant, Bachelors of Law and holding Ph.D. in Mergers & Acquisitions from University of Pune. He has a successful track record of practice of more than 35 years. Presently he is acting as the Chairman of HU Consultancy Pvt. Ltd., He also practices as a Chartered Accountant in the areas of audit, taxation, law, finance, etc. He is acting as an
Independent Director on the Board of Enkei Wheels India Ltd., Anvil Share & Stock Broking Pvt. Ltd., Mergers India.com. Earlier, he also acted as a Director of Vyapar Industries Ltd. He was also a Senior Partner in J.K. Shah & Co. Chartered Accountants. His practice areas covers almost all types of industrial sectors like auto ancillary, chemical & pharma, engineering, financial services, information technology, metals, real & realty, etc
Prabhat Dairy
Dai
ry
91 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
4-Sep-2017 Buy INR 160 INR 133
Guide to Research Rating BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
1
80
90
100
110
120
130
140
150
160
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
Sep
-17
Not Covered Covered
Prabhat Dairy
92 Elara Securities (India) Private Limited
Notes
Sagarika Mukherjee • sagarika.mukherjee@elaracapital.com • +91 22 6164 8594
Shubham Maheshwari • shubham.maheshwari@elaracapital.com • +91 22 6164 8562
Glo
bal
Mar
kets
Res
earc
h
Elara Securities (India) Private Limited
Cheese and Whey all the way! Striving hard to grow its brand in cheese
Cheese is one of the fastest growing categories among dairy products despite being an “acquired taste” for Indians. Adoption of cheese was led largely by the growth of food service outlets (e.g. Pizza Hut, Domino‘s, KFC, McDonald’s) in the initial stages. Today, the market has expanded further into specialty stores and local restaurants across urban India as the popularity of grated cheese spilled over to Indian snacks and meals like “Dosa/ Idli/Paranthas”. TThe Indian cheese market grew at a CAGR of 26.8% during 2007 to 2014 period expected to grow at a CAGR of 31.3% from INR 15.2bn in 2015 to INR 59.4bn in 2020. Most cheese manufacturers were just catering to large institutional clients (Dominos, KFC, McDonalds) and didn’t feel the need to develop their own brand. Interestingly, the OOH consumption of cheese led to in-home consumption as well. However, we believe that building a brand in B2C cheese is difficult as ‘Amul’ has built a category around value cheese (processed cheese in the form of slices, cubes & spreads for in-home consumption) which holds chunk of the volumes and has made premium pricing difficult. HHence we expect Parag to strengthen its brand power along with increasing its distribution reach. We estimate ad-spends to increase from 3.4% in FY17 to 4.8% in FY20E for Parag.
Foraying into a nascent category of whey for protein shakes
The realizations in sweet whey currently used is very low at <INR140/Kg as it can be easily extracted from liquid whey by the same drying machines used for making SMP (commodity). The variant of whey used for fitness products called Whey Protein Isolate (WPI), is expensive to extract (INR1000/kg and upwards) as it forms only a small fraction (~1% ) out of the total sweet whey (35% of total whey) extracted from the cheese making process. Hence Parag has forayed into this market through fitness centers & e-commerce to improve its overall realizations in Whey powder.
Valuation We estimate top line to grow at a CAGR of 16% in FY17-20E period led by 20% CAGR growth in non-pouch milk segment. Expect gross margin and operating margin to expand by 280bps/143 bps in FY17-20E due to better mix, and stable distribution costs. Cash PAT expected to grow at 30.5% CAGR in FY17-20E period led by lower interest costs. We value Parag using equal weighted average of EV/Sales (x) and EV/EBITDA(x) of 1x/12.5x on FY20E at a discount to B2C players like, HFL and Hatsun Agro. We initiate coverage of Parag with Accumulate rating and TP of INR289.
Price performance
Source: Bloomberg
Key FFinancials YE March
Revenue ((INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA Maargin ((%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)
FY17 17,307 5.2 1,082 6.3 172 (63.7) 2.0 6.0 8.1 122.3 20.9
FY18E 19,909 15.0 1,380 6.9 437 154.7 5.2 6.4 9.6 48.0 16.5
FY19E 23,000 15.5 1,502 6.5 538 23.0 6.4 7.4 10.4 39.0 15.2
FY20E 26,678 16.0 2,050 7.7 932.5 73.4 11.1 11.6 14.7 22.5 11.0
Note: pricing as on 4 September 2017; Source: Company, Elara Securities Estimate
India | Dairy 12 September 2017
Initiating Coverage
Parag Milk Foods
Rating: Accumulate Target Price: INR 289 Upside: 16% CMP: INR 250 (as on 4 September 2017)
Key data
Bloomberg /Reuters Code PARAG IN/PAMF.BO
Current /Dil Shares O/S (mn) 84/84
Mkt Cap (INR bn/USD mn) 21/326
Daily Volume (3M NSE Avg) 82,576
Face Value (INR) 10
1 US$= INR 64.1
Note: *as on 4 September 2017; Source: Bloomberg
Price & Volume
Source: Bloomberg
Shareholding (%) Q2FY17 Q3FY17 Q4FY17 Q1FY18
Promoter 47.5 47.5 47.5 48.2
Institutional Investor 31.0 31.1 26.7 29.9
Other Investor 14.3 13.4 15.4 10.3
General Public 7.3 8.1 10.5 11.6
Source: BSE
Price performance (%) 3M 6M 12M
Sensex 1.5 9.0 9.2
Parag Milk Foods 5.0 10.1 (25.8)
Heritage Foods 30.3 33.4 96.4
Prabhat dairy 17.6 3.4 41.0
Source: Bloomberg
50
70
90
110
130
Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Reb
ased
to
10
0
Parag Milk Foods Sensex
0.0
1.0
2.0
3.0
4.0
150
250
350
450
Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
Vol. in mn (RHS) Parag Milk Foods (LHS)
Parag Milk Foods
94 Elara Securities (India) Private Limited
Valuation trigger
Source: Bloomberg, Elara Securities Estimate
Valuation overview (FY20E) EV/Sales (x)
Sales (INR mn) 26,678
EV/Sales (x) 1.0
EV (INR mn) 26,224
Gross Debt (INR mn) 2123
Cash (INR mn) 588
Net Debt (INR mn) 1,535
Fair Value (INR mn) 24,690
TP (INR/Share) 294
CMP (INR/Share) 250
Upside (%) 17.6
Implied P/E(x) 26.5
EV /EBITDA (x)
EBITDA (INR mn) 2,050
EV/EBITDA (x) 12.4
EV (INR mn) 25,408
Gross Debt (INR mn) 2,123
Cash (INR mn) 588
Net Debt (INR mn) 1,535
Fair Value (INR mn) 23,873
TP (INR/Share) 284
CMP (INR/Share) 250
Upside (%) 13.7
Implied P/E(x) 25.6
Weighted TP (INR) 289
CMP (INR) 250
Upside (%) 16
Implied P/E(x) on FY20 26
Source: Elara Securities Estimate
Valuation driver
Source: Elara Securities Estimate
Investment summary
� Categories relevant to Parag expected to grow at a faster pace
� Investing behind milk procurement and milk handling capacity to grow VAD portfolio
� Added capacity to grow high margin products like UHT, Cottage Cheese, Flavored Milk, Curd
� Investing behind brands through both ATL and BTL
Valuation trigger
1. Gross margin to touch 30% by FY20E as company is driving for mix improvement
2. Improvement in ROCE from 8% in FY17 to 14% in FY20E
Key risks
� High working capital requirements can lead to lower cash flows and hence lead to shortage of funds to grow
� Higher interest costs due to increase in short term debt could lead to lower profitability
� High inflation in milk prices could lead to lower gross margins as pricing power is low
Our assumptions
� Expect gross margin and operating margin to expand by 280bps/143 bps in FY17-20E due to better product mix, higher realizations in SMP and operational leverage
� Expect EBITDA to grow at 24% CAGR in FY17-20E led by better realization and product mix
� Cash PAT expected to grow at 30.5% CAGR in FY17-20E period led by lower interest costs
12
150
200
250
300
350
400
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-17
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
Sep
-17
Oct
-17
No
v-17
Dec
-17
Jan
-18
Feb
-18
Mar
-18
Ap
r-18
May
-18
Jun
-18
Jul-1
8
Au
g-1
8
Sep
-18
Improvement in ROCE from 8% in FY17 to
14% in FY20EGross margin to touch 30% by
FY20E as company is driving for mix
improvement
23.5
(16.0) (28.2)
47.1
121.3
68.4
13.1
72.3
36.5 42.6
(40) (20)
0 20 40 60 80
100 120 140
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
CFO as % of EBITDA
Parag Milk Foods
Dai
ry
95 Elara Securities (India) Private Limited
Financials (YE March) Income Statement (INR mn) FY17 FY18E FY19E FY20E Net Revenue 17,307 19,909 23,000 26,678 EBITDA 1,082 1,380 1,502 2,050 Add Non operating income 110 16 16 16 OPBITDA 1,192 1,396 1,518 2,066 Less: Depreciation & Amortization 490 492 514 536 EBIT 702 904 1,004 1,530 Less Interest Expense 333 320 287 287 PBT 370 583 717 1,243 Less Taxes 4 146 179 311 Minority Interests - - - - Adjusted PAT 172 437 538 933 Add or less extraordinary items - - - - Reported PAT 172 437 538 933 Balance Sheet (INR mn) FY17 FY18E FY19E FY20E Share capital 841 841 841 841 Reserves 5,733 6,171 6,708 7,641 Minority Interests - - - - Borrowings 2,623 2,123 2,123 2,123 Deferred Tax (Net) 99 99 99 99 Other long term liabilities 181 181 181 181 Total Liabilities 9,477 9,414 9,952 10,884 Gross Block 5,850 6,750 7,050 7,350 Less: Accumulated depreciation 2,261 2,753 3,267 3,802 Net Block 3,631 4,039 3,825 3,590 Add: Capital work in progress 164 164 164 164 Goodwill - - - - Investments 0 0 0 0 Cash 1,007 311 284 588 Net working capital 4,656 4,881 5,659 6,524 Other assets 19 19 19 19 Total Assets 9,477 9,414 9,952 10,884 Cash flow statement (INR mn) FY17 FY18E FY19E FY20E Cash profit adjusted for non-cash items 1,082 1,223 1,326 1,737 (Inc)/Dec in working capital (940) (226) (778) (864) Operating cash flow 142 998 549 873 Less: Capex 499 900 300 300 Free cash flow (358) 98 249 573 Financing cash flow 1,179 (820) (287) (287) Investing cash flow (390) (874) (288) (283) Net change in cash 931 (696) (26) 304 Ratio Analysis FY17 FY18E FY19E FY20E Income statement Ratios (%) Revenue growth 5.2 15.0 15.5 16.0 EBITDA growth (27.0) 27.5 8.9 36.5 PAT growth (63.7) 154.7 23.0 73.4 EBITDA margin 6.3 6.9 6.5 7.7 Net margin 1.0 2.2 2.3 3.5 Return and liquidity ratios Net debt/Equity (x) 0.2 0.3 0.2 0.2 ROE (%) 6.0 6.4 7.4 11.6 ROCE (%) 8.1 9.6 10.4 14.7 Per share data and Valuation ratios Diluted EPS (INR) 2.0 5.2 6.4 11.1 EPS growth (%) (63.7) 154.7 23.0 73.4 DPS (INR) - - - - P/E (x) 122.3 48.0 39.0 22.5 EV/EBITDA (x) 20.9 16.5 15.2 11.0 EV/Sales (x) 1.3 1.1 1.0 0.8 Price/Book (x) 3.2 3.0 2.8 2.5 FCFF yield (%) (1.7) 0.5 1.2 2.7 Dividend yield (%) - - - -
Note: pricing as on 4 September 2017; Source: Company, Elara Securities Estimate
Revenue & margin growth trend
Source: Company, Elara Securities Estimate
Adjusted profit growth trend
Source: Company, Elara Securities Estimate
Return ratios
Source: Company, Elara Securities Estimate
6.3
6.9
6.5
7.7
5
6
7
8
0
5,000
10,000
15,000
20,000
25,000
30,000
FY17 FY18E FY19E FY20E
(%)
(INR
mn
)
Net Revenue (LHS) EBITDA margin (RHS)
(63.7)
154.7
23.0
73.4
(100)
(50)
0
50
100
150
200
250
(400)
(200)
0
200
400
600
800
1,000
FY17 FY18E FY19E FY20E
(%)
(INR
mn
)
Adjusted PAT (LHS) PAT growth (RHS)
6.0 6.4 7.4
11.6 8.1
9.6 10.4
14.7
0
2
4
6
8
10
12
14
16
FY17 FY18E FY19E FY20E
(%)
ROE (%) ROCE (%)
Parag Milk Foods
96 Elara Securities (India) Private Limited
Categories relevant to Parag expected to grow at a faster pace Parag is very rapidly driving growth in categories like curd, UHT products, cheese, yogurt, and now whey powder, which will see sectoral tailwind like urbanisation, changing lifestyle habits and propensity for hygienic and packaged dairy products.
Milk procurement has to go hand –in-hand with capacity expansion
Increase in direct milk procurement has come from increasing yield of milch cattle: The direct milk procurement growth has been 8% per annum and has been coming purely from increase in yield. Parag has built its milk procurement chain for more than two decades now and hence the farmers who supply milk to them have seen several cycles of deflation and inflation, giving them the confidence that Parag will pick up excess milk from them also if required. This kind of network differentiates Parag from several other small-time dairies operating in Maharashtra and who are just converters of milk or procure in an irregular fashion or only for some portion of the year. Parag also helps its farmers in improving productivity of their milch cattle by educating them about proper feed and lifestyle management.
Total milk procurement has increased by 8% p.a. in FY11-17 period: The supply chain network includes procurement from 29 districts across Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu, through
over 3,000 village level milk collection centres (MCC). They procure milk from milk farmers and through chilling centres and bulk coolers. The volume of milk procured by Parag increased at a CAGR of 8% from 0.68 million litres per day for the financial year 2011 to 1.2 million litres per day for the financial year 2017, slightly higher than increase in milk procurement shown by Amul (~5% p.a.) in the same period.
Adding bulk milk coolers and MCCs to their network: They propose to increase milk procurement by adding facilities in milk rich areas and also to add milk collection centers close to their existing facilities. In addition to this, they plan to add 75 bulk milk coolers (costing INR15lac per machine of 5000L capacity), 100 automated milk collection systems and install them at villages in the vicinity of their facilities and establish village level collection centers in under penetrated areas.
Capacity expansion and modernization plans of Parag
The company plans to invest INR1.47bn in capacity enhancement and modernization (to be completed in FY18) of its existing plants mainly in cheese, paneer, whey, curd/ yogurt, and UHT products. The company has increased its overall milk handling capacity from 2mn LPD to 3.4mn LPD. The milk procurement in Manchar (Pune) plant will have to nearly expand from 1.2mn LPD to 2mn LPD for which the company is planning to procure milk from nearby districts which are rich in milk.
Investing behind fast growing value added products � Categories relevant to Parag expected to grow at a faster pace
� Investing behind milk procurement and milk handling capacity to grow VAD portfolio
� Added capacity to grow high margin products like UHT, Cottage Cheese, Flavored Milk, Curd
� Investing behind brands through both ATL and BTL
Exhibit 1: Parag caters to all fast growing dairy categories
(INR mn) 22014 2020 CAGR 2014 -2020
Category Sales Sales of
oorganized dairy
Share of oorganized
sector Sales
Sales of oorganized
dairy
Share of oorganized sector (%)
Total Market ((%)
Organized mmarket (%)
Liquid milk 2,621,460 519,400 19.8 6,068,000 1,593,000 26.3 15.0 20.5
UHT Milk 26,045 26,045 100.0 103,778 103,778 100.0 25.9 25.9
Flavored milk 12,636 12,636 100.0 47,828 47,828 100.0 24.8 24.8
Curd 216,496 12,121 5.6 492,690 35,421 7.2 14.7 19.6
Frozen yogurt 2,268 2,268 100.0 12,075 12,075 100.0 32.1 32.1
Cheese 11,721 11,721 100.0 59,388 59,388 100.0 31.1 31.1
Ghee 618,225 110,256 17.8 1,367,212 288,912 21.1 14.1 17.4
Paneer 293,300 6,145 2.1 653,576 22,684 3.5 14.3 24.3
Whey (powder) 3,009 3,009 100.0 9,712 9,712 100 21.6 21.6
Source: IMARC
Parag Milk Foods
Dai
ry
97 Elara Securities (India) Private Limited
Exhibit 3: Current capacity of different products
Installed capacity Manchar Palamaner Total
Milk handling capacity (liters per day)
2,000,000 1,400,000 3,400,000
Milk powder (includes drying capacity for Whey) – MTPD
70 40 110
Liquid milk in pouches (Liters per day)
200,000 175,000 375,000
Flavored milk (packs per day) 30,000 70,000 100,000
UHT products (liters per day) 245,000 245000
Cheese/Paneer (MTPD) 60 60
Ghee (MTPD) 40 30 70
Butter (MTPD) 50 25 75
Curd(MTPD) 40 40 80
Whey Processing(liters per day) 4 10
Source: Company, Elara Securities Research
Exhibit 4: Capacity utilization was nearing peak for milk handling and cheese
Total Plant Utilization (%) FY13 FY14 FY15 9MFY16
Milk procured 65 62 88 50
Milk powder (includes drying capacity for Whey)
68 62 79 65
Liquid milk in pouches 54 70 82 62
Flavored milk 2 28 29 28
UHT products 0 0 0 0
Cheese/Paneer 44 47 67 81
Ghee 49 45 39 72
Butter 18 6 17 17
Curd 55 48 27 43
Source: Company, Elara Securities Research
Exhibit 2: Capacity expansion and modernization plans
Current Capacity Expanded Capacity
Amount ((INR mn)
Date of commissioning
Machar Facility -- PPune
Effluent Treatment 2000 cubic meter per
day 2600 cubic meter per
day 307.2
Under Process/ Expected completion in FY18
Cheese 40 MTD 60 MTD 115.2 Commissioned in FY18
Milk handling capacity 1.2 MLPD 2MLPD 38.4 Commissioned in FY17
Whey 4LLPD 10LLPD 145.8 Commissioned in FY17
Paneer 20 MTD 78.4 Commissioned in FY17
Milk packing capacity 2LLPD 3LLPD 81.9 Under Process/ Expected completion in FY18
Milk procurement expansion 51.5 Under Process/ Expected completion in FY18
R&D 102.0 Under Process/ Expected completion in FY18
Contingency 2.1
Total
922
Palamaner Facility -- AAP
Milk based beverages line 0.3LLPD 177.4 Under Process/ Expected completion in FY18
Milk handling capacity 0.8 MLPD 1.4MLPD 33.5 Commissioned in FY17
Curd 40 MTPD 60MTPD 5.4 Commissioned in FY17
Milk packing capacity 1.75 LLPD 2.25 LLPD 4.4 Commissioned in FY17
UHT processing facility 0.17MLPD 0.08MLPD additional 41.2 Under Process/ Expected completion in FY18
Cold storage and warehousing 10000 pellets 124.1 Under Process/ Expected completion in FY18
Milk procurement expansion 65.5 Under Process/ Expected completion in FY18
Contingency 1.0
Total 452
Source: Company, Elara Securities Research
Parag Milk Foods
98 Elara Securities (India) Private Limited
Cheese is one of the fastest growing categories in dairy products in India
Cheese represents one of the fastest growing categories among dairy products. Traditionally India has been a cottage cheese (paneer) consuming market which is dominated by the unorganized players. The rise in food service outlets (e.g. Pizza Hut, Domino‘s, KFC) across the country and changing food habits has triggered the increase in demand for this cheese in both out-of-home and in-home consumption. The Indian cheese market grew at a CAGR of 26.8% during 2007 to 2014 period. Total sales value of cheese is expected to grow at a CAGR of 31.3% from INR 15.2bn in 2015 to INR 59.4bn in 2020. Similarly, total sales volume of cheese is expected increase from 33,200 MT (90MTPD) 2015 to 84,000 MT (230MTPD) in 2020. Parag is the second largest cheese manufacturer in India with 60MTPD capacity, second only to Amul which has 120MTPD operational capacity. Prabhat is third largest cheese maker in India with 30MTPD capacity which was commissioned only in FY17 catering to B2B customers in India and for exports.
Key drivers for growth of cheese market in India
� The key drivers of the Indian cheese market include the fast growth expected in the Indian fast food market which uses cheese across a wide number of fast food products such as pizza‘s, burgers, sandwiches among others.
� Cheese is now also consumed along-with traditional Indian food products like paratha, idli, dosa and also used as a replacement of butter in many recipes.
� Further the current demand for cheese, both in the institutional and retail segment, is focused in the metro areas of India. With increasing disposable income and shift in food consumption trends in Tier 2 and Tier 3 cities, penetration of cheese is expected to increase rapidly going forward.
� Further, the price per kilogram for cheese in the organized segment is expected to rise from INR 458 per kilogram in 2015 to INR 707 per kilogram in 2020 at 9% CAGR while up trading consumers from processed cheese to gourmet cheese will add to realizations for all cheese manufacturers, thereby improving margins.
Cheese Processing:
Cheese making involves a number of main stages that are common to most types of cheese. There are also other modes of treatment that are specific to certain varieties. The cheese milk is pre-treated, possibly pre-ripened after addition of a bacteria culture appropriate to the type of cheese, and mixed with rennet. The
enzyme activity of the rennet causes the milk to coagulate into a solid gel known as coagulum. This is cut with special cutting tools into small cubes of the desired size – primarily to facilitate expulsion of whey. During the rest of the curd making process, the bacteria grow and multiply and form lactic acid from the lactose. The curd grains are subjected to mechanical treatment with stirring tools, while at the same time the curd is heated, according to a pre-set program. The combined effect of these three actions – growth of bacteria, mechanical treatment and heat treatment – results in syneresis, i.e. expulsion of whey from the curd grains. The finished curd is placed in cheese moulds, mostly made of plastic, which determine the shape and size of the finished cheese. The cheese is pressed, either by its own weight or more commonly by applying pressure to the moulds. Treatment during curd making, pressing, brining and storage conditions determines the characteristics of the cheese. The process flow chart also shows salting and storage. Finally, the cheese is coated, wrapped or packed.
Exhibit 5: Cheese making process
Source: Dairy Processing Handbook- TetraPack
Raw milk Thermisation
Cooling Storage
Pasteurization Options
Bactofugation or microfiltration
Separation Standardization
Surplus cream
Curd manufacture
Starter culture CaCl2 Rennet
Options Protein standardization /
concentration
Draining
Moulding/ Forming
Cheddaring
Final pressing Milling
Salting
Forming
Brining Hooping Bagging
Final pressing Cooling
Ripening
Distribution
Parag Milk Foods
Dai
ry
99 Elara Securities (India) Private Limited
Parag has 32% market share in Cheese with a high brand recall for its brand ‘Go Cheese’
Parag has 60MTPD capacity for production of cheese as on date. Of which 20MTPD capacity was commissioned in 1QFY18 in its plant in Manchar, Pune. Currently, Parag derives 20% of its revenues from Cheese of which 50% is in B2C (INR 480/Kg and upwards) at a steep discount to other branded players like Britannia (~INR600/Kg), Amul (~INR550/Kg), Dairy Craft (~INR675/kg), D’Lecta (~INR722/Kg). The company also sells cheese to the fast growing HORECA segment which has started using cheese as a topping on very traditional dishes like paratha, idli, dosa. However, the market is dominated by the market leader Amul which sells cheese blocks to HORECA segment at INR370/Kg, thereby setting a ceiling for entrants like Parag into this category, hence limiting the margin potential for Parag in this segment. With increasing retail reach and building consumer franchise, we believe Parag can graduate to better realisations and hence margins in cheese category could look up.
Cheese was introduced into India through QSRs
Cheese is one of the fastest growing categories among dairy products despite being an “acquired taste” for Indians. The Indian cheese market grew at a CAGR of 26.8% during 2007 to 2014 period. Total sales value of cheese is expected to grow at a CAGR of 31.3% from INR 15.2bn in 2015 to INR 59.4bn in 2020. Adoption of cheese was led largely by the growth of food service outlets (e.g. Pizza Hut, Domino‘s, KFC, McDonald’s) in the initial stages. Today, the market has expanded further into specialty stores and local restaurants across urban India as the popularity of grated cheese spilled over to Indian snacks and meals like “Dosa/ Idli/Paranthas”.
Cheese evolved into a B2C category along the way
Most cheese manufacturers were just catering to large institutional clients (Dominos, KFC, McDonalds) and didn’t feel the need to develop their own brand. Interestingly, the OOH consumption of cheese led to in-home consumption as well which led to a lot of supermarkets stocking them and which spurred the growth further. However, we believe that building a
brand in B2C cheese is difficult as Amul has built a category around value cheese (processed cheese in the form of slices, cubes & spreads for in-home consumption) which holds chunk of the volumes and the rest of the market is scattered with between several other hand-crafted cheese makers in the gourmet segment. We expect Parag to strengthen its brand power along with increasing its distribution reach. WWe estimate ad-spends to increase from 3.4% in FY17 to 4.8% in FY20E for Parag.
Parag has second highest market share in cheese after Amul (Including B2B market)
Exhibit 6: Key players in cheese and market shares
Source: Parag DRHP
Parag also has a geographical benefit of being based out of Maharashtra – The biggest cheese consuming state in India
Exhibit 7: Statewise cheese market break-up
Source: Parag DRHP
Amul 41%
Parag 32%
Britannia 9%
Dynamix 7%
Others 11%
Maharashtra
33%
Gujarat 16%
Delhi 7%
Tamil Nadu 7%
Uttar Pradesh
6%
Karnataka 6%
West Bengal
5%
Others 20%
Parag Milk Foods
100 Elara Securities (India) Private Limited
Exhibit 8: GO cheese is priced at a discount of 15-50% compared to other players including Amul (Not exhaustive)
FY18E FY17
At current prices
Price Hike (%)
Brand Company Product Grammage
(gm) MRP MRP
Standardized (IINR/kg)
YoY (%)
Amul Amul
Cheese spread 200 72 70 360.0 3
Cheese spread 400 146 141 365.0 4
Cheese block (HORECA) 1000 370 370 370.0 0
Cheese cubes 200 105 105 525.0 0
Cheese slices 200 110 110 550.0 0
Cheese slices 100 67 65 670.0 3
Gouda 250 210 210 840.0 0
Britannia Britannia
Cheese cubes 200 120 105 600.0 14
Processed cheddar block 400 250 230 625.0 9
Processed cheddar block 200 130 122 650.0 7
Processed cheddar slices 480 350 320 729.2 9
Processed cheddar slices 200 145 138 725.0 5
Processed cheddar slices 100 75 70 750.0 7
Dairy craft Dairy craft
Pizza cheese 400 200 200 500.0 0
Mozarella 200 105 105 525.0 0
Cheese Slices (Garlic) 200 165 160 825.0 3
Cheese slices (Plain) 200 135 165 675.0 (18)
Cheddar 200 220 220 1,100.0 0
Smoked cheddar 200 270 270 1,350.0 0
D'Lecta D'lecta Foods
Mozarella Shredded 500 244 260 488.0 (6)
Cheese block 400 235 225 587.5 4
Cheese slices (Plain) 180 130 722.2
Cheese slices (Plain) 450 310 688.9
Cheese spread 180 85 472.2
Kodai Kodai cheese
Feta Cheese 200 200 200 1,000.0 0
Cheddar 200 200 200 1,000.0 0
Parmesan Cheese 200 300 300 1,500.0 0
Gouda 200 250 1,250.0
Smoked cheese - Edam 200 250 1,250.0
Goat 200 250 1,250.0
Smoked mozarella 200 200 1,000.0
Mother Dairy Mother Dairy Cheese cubes 180 99 110 550.0 (10)
Go Cheese Parag
Cheese slices (Plain) 750 365 340 487 7
Cheese spread 200 79 99 395 (20)
Cheese Angles 200 115 100 575 15
Mozarella 200 110 550
Almette 150 120 800
Natural cheese Cheddar 200 149 745
Natural cheese Gouda 200 149 745
Spice up - Cheese slice 200 140 700
Cheese slices (Plain) 100 72 720
Cheese slices 200 140 125 700 12
Cheese wedges 140 105 90 750 17
Prices for HORECA segment
FY18E FY17 At current
pprices Price Hike (%)
Brand Company Product Grammage
(gm) MRP MRP
Standardised (IINR/kg)
YoY (%)
Amul Amul Pizza cheese (Mozarella) 1000 348 328 348.0 6%
Amul Amul Processed cheese 1000 370 370 370.0 0%
Source: Company, Elara Securities Estimate
Parag Milk Foods
Dai
ry
101 Elara Securities (India) Private Limited
Foraying into a nascent category of Whey for protein shakes Whey is a by - product of Cheese which used to find no market in India…..
Whey is a component of milk protein; it is the liquid which is left after the removal of casein and fat from milk in the manufacturing of coagulated products. It is obtained as a by-product during the manufacturing of cheese, paneer and chhana. The total whey produced in the country can be broadly classified into two categories (i) acid whey which is inedible and accounts for 65% of the total production by volume; and (ii) sweet whey which is edible and accounts for the remaining market 35% of production by volume.
…..but is now a fast evolving category in India with higher realizations
The sweet whey powder market in India grew at a CAGR of approximately 26.0% during 2007 to 2014, reaching a value of INR 3.0 billion and a volume of 29,500 MT in 2014 (Average realization was INR100/kg). Key players in the Indian sweet whey market include Amul, Parag and Schreiber Dynamix. The realizations for the products in which sweet whey is currently used is very low at INR140/Kg as that whey powder variant can be easily extracted from liquid whey from the same drying machines used for making SMP. However, for supplying whey powder for usage in the health supplements industry and high end Whey Protein Concentrate (WPC) which fetches realizations of INR200/Kg and upwards. The variant of whey used for fitness products is called Whey Protein Isolate (WPI), and is expensive (INR1000/kg and upwards) to extract as it forms only a small fraction (~1% ) out of the total sweet whey (35% of total whey) extracted from the cheese making process. Hence Parag milk foods now foresees the potential market to be INR25bn including the sophisticated varieties like whey protein microfractions from whey protein isolate (WPI) and ultrafiltered whey protein concentrate (WPC).
Whey protein finds its use in several fast growing categories like infant food and health supplements
Sweet whey powder has a wide variety of applications on basis of its nutritional and functional properties. It is used as a value added ingredient in many food products and is also receiving a growing interest as a functional ingredient in dietetic and health foods. The end uses of sweet whey in infant food, health supplements, dairy, pharmacy and confectionary industries, account for 40%, 30%, 15%, 5% and 5%, respectively, of total sweet whey powder usage.
Exhibit 9: Sweet whey powder applications
Source: Parag DRHP
Whey powder has many uses in different product categories The global sweet whey powder can be classified based on protein concentration as follows:
� Whey protein concentrate (WPC) –has several variants ranging from 29-89% protein by weight
� Whey protein isolate(WPI) – has 90% protein by weight and are processed to remove fat and lactose
� Whey protein hydrolysate (WPH) - predigested and partially hydrolyzed for the purpose of easier metabolizing, but their cost is generally higher
� Native whey
Exhibit 10: Global sweet whey market
Source: Parag DRHP
Parag is the biggest whey powder supplier (DWP) for Nestle and is running commercial trials with some large malted food drinks companies in India as well. Parag sells DWP to Nestle in a customized form which fetches realization of INR340-350/Kg as opposed to market rates of INR100-140/kg.
Infant food 40%
Health supplements
30%
Dairy 15%
Pharmacy 5%
Confectionary 5%
Others 5%
WPC35 45%
DWP 35%
WPC80 13%
WPI 5%
WPH 2%
Parag Milk Foods
102 Elara Securities (India) Private Limited
Exhibit 11: End usage by product categories for different whey protein concentrates and isolates
Whey product Whey Whey concentrate or powder Whey protein concentrate or
ppowder Lactose & Permeate
PPowder
Liq
uid
wh
ey
Nat
ura
l
Swee
ten
ed
Dem
iner
aliz
ed
40
-50
Dem
iner
aliz
ed
70
-90
Del
acto
sed
/
Dep
rote
iniz
ed
WPC
35
-59
WPC
60
-80
Wh
ey P
rote
in
Iso
late
Cru
de
Edib
le
Refin
ed E
dib
le
Phar
ma
Perm
eate
p
ow
der
Animal Feed X X
X
X
X
X
Human CConsumption
Baby food
X
X X
X X
Diet food
X X
X
Sports nutrition
X X
Clinical nutrition
X X
Sausages
X
Soups
X X X
X
X
Bakery X X
X
X
Salad dressings
X
Ice cream
X
Whey spread/ cheese
X
Cheeses
X
X
Beverages X
X X
X
Confectionery
X X X
X
X X
X
Pharmaceutical
X
Yeast Products X
X
Industrial PProducts
Source: Tetrapak Dairy Processing Handbook
Exhibit 12: Realizations in different types of Whey and their uses
Type of Whey Product Price range (INR/kg) Usage
Whey Protein concentrate WPC 35 250-300 Infant food
Demineralised Whey Powder DWP 100-140 Bakery, chocolate, ice cream & desserts, confectionery and dairy drinks.
Whey Protein concentrate WPC 80 700-800 Nutritional drinks, soups, bakery products, meat, dietetic foods, low-fat products and protein-fortified beverages.
Whey Protein Isolate WPI 1200-1300 Fitness products
Source: Parag DRHP
Parag Milk Foods
Dai
ry
103 Elara Securities (India) Private Limited
Realizations in Whey protein in health supplements are manifold compared to infant nutrition
Currently most of the demand in the B2C category for Whey protein is coming from health supplements or protein powders. Most of the demand for Whey Protein Isolate (WPI) is met through imports in India which also incur 35% import duty. The retail price of such products are at a very exorbitant levels like INR3500-4500 per Kg which indicates a high potential for manufacturing such products in India since the trend for bodybuilding and healthy lifestyle habits is only increasing by the day.
Parag currently sells mostly all the whey in the cheapest category of DWP (used in infant food) at INR100-140/kg and therefore plans to upscale its operations and also fetch higher realizations (INR1000-1400/kg) by manufacturing WPI very soon.
Parag had incurred INR318.47 million capex in FY16 in enhancing its whey products processing infrastructure and are in the process of commissioning additional technological infrastructure to increase the concentration and grading of whey proteins that they manufacture, and have just launched whey directly to retail consumers in the form of branded health supplement foods and beverages under the brand name of “Avvatar Absolute” priced at INR3200/900gms. The company has already tied up with several fitness centres and has listed its product on e-commerce portals in order to tap into the opportunity. Parag has a distinct cost advantage as most of the whey protein powder is still imported and is imposed a import duty of 25%. This category is very popular in the grey market for the same reason which sells at 20% to the listed price and does not pay the taxes. Net realization in WPI can be around INR2000/Kg for Parag Milk Foods Ltd.
Exhibit 14: Launched Avvatar in FY17 to tap into the growing sports protein powder market in India
Source: Company
Exhibit 15: Sports protein powder market expected to grow at 13% CAGR in 2016-20E to INR12.2bn
Source: Company
0.03
6.8
12.2
0
2
4
6
8
10
12
14
FY11 FY16 FY20E
(IN
R b
n)
Exhibit 13: Whey powder of Parag compared to other manufacturers/ products available in the market
Source of milk Best of Cow’s milk Not known Not known
100% Made in India √ Imported Repacked in India
100% Vegetarian √ Not known Not known
100% control in manufacturing √ x x
Freshness of raw whey protein Milked & processed in 24 hrs ~7-9 months old Not known
Detailed nutritional info on pack √ x x
No artificial colors √ x x
No artificial flavour √ x X
No preservatives √ x x
Manufacturer Leading International dairy player
with multiple dairy FMCG products
Mostly imported by multiple importers
Mostly unorganized or small players, mixing and repacking
Source: Company
Parag Milk Foods
104 Elara Securities (India) Private Limited
Product margins for cheese and whey combined can improve with mix shifting towards B2C in cheese and towards WPC from DWP in whey powder
Exhibit 16: Cheese and Whey Economics
CCheese and Whey economics BB2C BB2C BB2B
MMilk 1100 llitres 1100 litres 1100 litres
Cost of Milk (INR/Ltr) 26 26 26
Total Milk Cost (INR) 2600 2600 2600
CConversion from 100 litres of MMilk
BB2C BB2C BB2B
Cheese produced (Kg) 8.8 8.8 8.8
MRP INR/Kg (Parag's MRP) 480 480
Net Realisation INR/kg 370 370 350
Cheese revenues (INR) 3,266 3,266 3,089
TType of customer B2B
((WPC) B2B
((DWP) B2B
((DWP)
Whey 4.4 4.4 4.4
Realisation INR/Kg 200 140 140
Whey revenues (INR) 883 618 618
Total Revenues (INR) 4,148 3,883 3,707
Packaging cost @6% of COGS 156 156 156
Blended gross profit (INR) 1,392 1,127 951
Blended gross margin (%) 34 29 26
Source: Elara Securities Ltd
Source: Elara Securities Research
High on product innovation in terms of packaging and offerings Parag is constantly innovating its product offerings in cheese/paneer and UHT products like lassi, chaas and flavored milk to develop the categories in India
The company has developed paneer which has shelf life of 30-90days while all the other players are selling paneer with shelf life of 15 days. The company has developed this product by using cutting edge technology in cheese/paneer in both the processing and packaging side in order to make longer shelf life products in paneer.
Exhibit 17: Key product innovations done in FY17
Source: Company
Products launched during FY17 � Go "Cheede wedges - Herbs and Spices" � Go "Badam Milk Instant Mix" � "Spice up" box in 5 new flavoured cheese slices � Milkrich - Dairy Whitner � Avvatar - Whey Protein powder � Slurp - Mango drink with dash of milk
Exhibit 18: Product portfolio
One of kind premium quality cow milk under "farm-to-home" concept through a subscription model
"Go Cheezooz" awarded the "Best Children's Dairy Product" for the product innovation category
Wide & innovative variety of cheese including gourmet cheese, creamy, jalapeno cheese spread, herb cheese cubes, etc
Only one in India to market fresh paneer in retail stores (not frozen paneer) which has a shelf life of 90 days
Leading supplier in India of Whey protein powder to Nestle
Source: Company
Parag Milk Foods
Dai
ry
105 Elara Securities (India) Private Limited
Exhibit 20: Small packs for rural consumption
Source: Company
9 ml Ghee sachet 200ml Curd pouch 200ml small UHT milk
Exhibit 19: Product packaging is vibrant and attractive
Source: Company
Parag Milk Foods
106 Elara Securities (India) Private Limited
How are they expanding their retail reach? � Grow product reach by adding depots: They
currently have 17 depots and they plan to have 7 additional depots in North India (2), South India (2), Western India (2), Eastern India (1). Increasing the number of our depots will enable retailers to source a greater number and a wider range of our products from Parag’s stable.
� Distribution network spread across most states in India; Institutional clients include most QSR chains
� They have an extensive sales and distribution network, which covers 16 depots, 103 super-stockists and over 3,000 distributors as of June 30, 2015, spread across most states and union territories in India. They also have dedicated sales and marketing team comprising 520 personnel based in key distribution centres. Some of their leading institutional customers include leading restaurant and cafe chains such as Yum! Restaurants (India) Private Limited (for Pizza Hut, Taco Bell and KFC), Jubilant Foodworks Limited (for Domino’s Pizza) and Sankalp Recreation Private Limited (for Sam’s Pizza).
Exhibit 21: Distribution network of Parag Milk Foods
Region Depots Super stockiest Distributors
Mumbai 1 2 250
North 5 31 450
East 2 17 300
West 5 28 800
South 3 26 1,200
Total 16 104 3,000
Source: Company
� On account of their short shelf life, fresh milk and fresh milk products are largely sold in the western and southern regions of India, in proximity to the manufacturing facilities at Manchar (Pune) and Palamaner (AP). They sell farm-to-home premium fresh milk directly to retail customers in Mumbai and Pune and they sell beverages to direct consumption outlets such as canteens, railway stations, road-side and highway eateries and educational institutions. They have established a separate route-to-market to focus on the distribution of low unit price products including ghee, flavoured milk, UHT milk, dairy whiteners and gulab jamun mix in Tier 3 cities and rural areas in India. They cater to our institutional customers, hotels, restaurants and caterers directly and through distributors appointed by us.
‘Pride of cows’ – Operating under ‘Farm-to-home’ model
� In 2005, they set up Bhagyalaxmi Dairy Farm at Manchar, through a Subsidiary, with an aim to educate farmers about best practices of breeding, feeding, animal management and improving productivity. Their dairy farm is fully automated and houses over 2,000 holstein breed cows with higher yields of superior quality milk. They supply farm-to-home premium fresh milk (INR 80-100/Ltr; 2x the price of pouch milk and 30% premium to UHT milk) from Bhagyalaxmi Dairy Farm, which they market and sell under the brand name of ‘Pride of Cows’ in Mumbai and Pune.
Ghee and SMP margins highest during high inflation in global and domestic milk prices Ghee and SMP can fetch a combined margin of 21% during moderate inflation in milk prices
Our estimates show that Ghee and SMP margins fluctuate from 13.6% to 31% depending on global SMP prices which range between $2000/tonne to $4800/tonne (Source: Global Dairy Trade) which translates into SMP prices at INR130-312/Kg. Net realization for Ghee ranges from INR350-390/Kg. As we expect moderation in milk prices going ahead both globally (due to slowdown in dairy importing nations like China and oversupply of milk in USA and EU) and domestically (due to good monsoon in 2016 and 2017), Parag milk foods is expected to fetch 21% in gross margin from the combination of Ghee and SMP for the next two years at least which will be higher than 13% margin it fetched in FY16. Parag reduced SMP as % of its sales from 22% in FY16 to 12% in FY17 as SMP had turned unprofitable post a sharp run-up in milk prices domestically due to shortage of milk supply during the flush season (Oct-Feb). As global milk prices rose by 40% starting June-16 post which it stagnated due to no major pick-up in demand from importing nations. Hence we believe that as milk prices are expected to fall from the current levels of INR30/litre in 2HFY17 due to higher production of milk, Ghee will be able to lift the margins of this combination from 13% to 21%.
Parag Milk Foods
Dai
ry
107 Elara Securities (India) Private Limited
Exhibit 22: Ghee and SMP economics works best in high inflation
Ghee and SMP economics Case 1 - High prices of milk
((Domestic and global) Case 2 - Moderate milk prices
((Domestic and global) Case 3 - Benign prices(Both
gglobal and domestic)
Milk 100 litres 100 litres 100 litres
Cost of Milk (INR/Ltr) 28 25 21
Total Milk Cost (INR) 2,800 2,500 2,100
Conversion from 100 litres of Milk
Ghee (Kg) 4.2 4.2 4.2
MRP INR/Kg
Net Realisation INR/kg 390 355 350
Ghee revenues (INR) 1,638 1,491 1,470
SMP 8.5 8.5 8.5
Net Realisation (INR/kg) 310 220 130
SMP Revenues 2,635 1,870 1,105
Total 4,273 3,361 2,575
Packaging cost @6% of COGS 168 150 126
Blended gross profit (INR) 1,305 711 349
Blended gross margin (%) 30.5 21.2 13.6
Source: Company, Elara Securities Research
Parag Milk Foods
108 Elara Securities (India) Private Limited
Exhibit 23: Revenue expected to grow at 16% CAGR in FY17-20E
Source: Company, Elara Securities Estimate
Exhibit 24: EBITDA expected to grow at 24% CAGR in FY17-20E
Source: Company, Elara Securities Estimate
Exhibit 25: Adj. PAT expected to grow at 45% CAGR in FY17-20E
Source: Company, Elara Securities Estimate
Exhibit 26: Gross margin to benefit from better mix
Source: Company, Elara Securities Estimate
Exhibit 27: EBITDA margin expected to improve
Source: Company, Elara Securities Estimate
Exhibit 28: Freight costs (%) expected to stabilize
Source: Company, Elara Securities Estimate
Exhibit 29: A&SP as % of sales expected to rise
Source: Company, Elara Securities Estimate
Exhibit 30: Inventory days spiked due to SMP
Source: Company, Elara Securities Estimate
6,5
29
8,7
57
8,9
49
10
,27
8
13
,78
3
15
,80
1
16
,82
8
19
,42
9
22
,52
1
26
,19
9
0
5,000
10,000
15,000
20,000
25,000
30,000 FY
11
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
50
2 82
3
83
4
82
3
1,0
72
1,4
82
1,0
82
1,3
80
1,5
02
2,0
50
0
500
1,000
1,500
2,000
2,500
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
(3.8
)
18
9.0
20
7.7
15
9.7
32
2.1
47
3.2
30
7.4
43
7.4
53
7.9
93
2.5
(200)
0
200
400
600
800
1,000
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
21
.9
22
.1 25
.3
23
.2 2
6.5
26
.9
27
.3
27
.9
28
.4
30
.1
15
20
25
30
35
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
7.6
9.1
9.0
7.6
7.4
9.0
6.3
6.9
6.5
7.7
5
6
7
8
9
10
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
2.7
1.2
2.6
3.0
3.9
3.8
4.3
4.5
4.5
4.5
0
1
2
3
4
5
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
2.4
1.9
2.4
1.6
2.1
2.7
3.4
4.3
4.8
4.8
0
1
2
3
4
5
6
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
83
67 74 72 69
73
102
73 73 73
40
60
80
100
120
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
Parag Milk Foods
Dai
ry
109 Elara Securities (India) Private Limited
Exhibit 31: Receivable days expected to be stable
Source: Company, Elara Securities Estimate
Exhibit 32: Loans and advances expected to stabilize
Source: Company, Elara Securities Estimate
Exhibit 33: Payable days expected to drop
Source: Company, Elara Securities Estimate
Exhibit 34: Working capital as % of sales
Source: Company, Elara Securities Estimate
Exhibit 35: CFO as % of EBITDA
Source: Company, Elara Securities Estimate
Exhibit 36: Cash flows from operations
Source: Company, Elara Securities Estimate
47
41
52 52
42 45
48 48 48 48
20
30
40
50
60
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
22 25
48
57 53
34
46 46 46 46
10
20
30
40
50
60
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
42 38
47 47
55 55
70
55 55 55
30
40
50
60
70
80
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
23 24
33 34
24 24
28 26 26 25
10
15
20
25
30
35
40
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(day
s)
23.5
(16.0) (28.2)
47.1
121.3
68.4
13.1
72.3
36.5 42.6
(40)
(20)
0
20
40
60
80
100
120
140
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(%)
118
(132) (236)
388
1,300
1,013
142
998
549
873
(400)
(200)
0
200
400
600
800
1,000
1,200
1,400
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8E
FY1
9E
FY2
0E
(INR
mn
)
Parag Milk Foods
110 Elara Securities (India) Private Limited
Initiate coverage with Accumulate rating and TP INR 289 Parag Milk Foods Ltd is a value added player and a visionary leading the transition that the Indian dairy industry is currently embarking on. Value added cheese and whey are high margin products but highly capital intensive also. HHence although growth in earnings will be high for Parag, but the cash flow from operations get heavily weighed down due to high loans and advances given to farmers for buying cattle, building relationship with them and to distributors to set up their channel for selling Parag’s products.
We have valued the stock based on two valuation methodologies:
� EV/Sales (x) to even out the volatility of earnings arising due to volatility in milk prices and low pricing power and high interest costs led by both capex and working capital requirements. We are pegging it at 1x FY20E estimates, in line with its historical trading multiple (limited stock price history).
� EV/EBITDA (x) to capture the capacity to generate profits in a working capital and capex heavy industry like dairy which inherently turns it debt laden. We are pegging the EV/EBITDA(x) multiple at 12.5x at ~25% discount to completely integrated (forward and backward) and high CFO generating peers like HFL and Hatsun Agro.
� We arrive at a TP of INR289 with an upside of 16% from current levels with an implied P/E(x) multiple of 26x on FY20E EPS estimate of INR11.1
Exhibit 37: Valuation Methodology
FY20E
EV/Sales (x)
Sales (INR mn) 26,678
EV/Sales (x) 1.0
EV (INR mn) 26,224
Gross Debt (INR mn) 2123
Cash (INR mn) 588
Net Debt (INR mn) 1,535
Fair Value (INR mn) 24,690
TP (INR/Share) 294
CMP (INR/Share) 250
Upside (%) 17.6
Implied P/E(x) 26.5
EV /EBITDA (x)
EBITDA (INR mn) 2,050
EV/EBITDA (x) 12.4
EV (INR mn) 25,408
Gross Debt (INR mn) 2,123
Cash (INR mn) 588
Net Debt (INR mn) 1,535
Fair Value (INR mn) 23,873
TP (INR/Share) 284
CMP (INR/Share) 250
Upside (%) 13.7
Implied P/E(x) 25.6
Weighted TP (INR) 289
CMP (INR) 250
Upside (%) 16
Implied P/E(x) on FY20 26
Source: Elara Securities Estimate
Valuation & Recommendation � Initiate with a Accumulate rating on Parag with TP INR289 implying upside of 16%
� Expect top line to grow at a CAGR of 16% in FY17-20E period led by 20% CAGR growth in non-
pouch milk segment.
� Expect gross margin and operating margin to expand by 280bps/143 bps in FY17-20E due to
better product mix, higher realizations in SMP and stable freight costs.
� Expect EBITDA to grow at 24% CAGR in FY17-20E led by better realization and product mix
� Cash PAT expected to grow at 30.5% CAGR in FY17-20E period led by lower interest costs
Parag Milk Foods
Dai
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111 Elara Securities (India) Private Limited
Relative valuation: Parag was de-rated due to heavy fluctuations in margins Exhibit 38: EV/ EBITDA (x) band
Source: Bloomberg, Elara Securities Estimate
Exhibit 39: Rolling EV/EBITDA(x)
Source: Bloomberg, Elara Securities Estimate
Exhibit 40: EV/ Sales (x) band
Source: Bloomberg, Elara Securities Estimate
Exhibit 41: Rolling EV/Sales (x)
Source: Bloomberg, Elara Securities Estimate
12x
14x
16x
18x
20x
150
200
250
300
350
400
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(INR)
16.3 19.1
13.6
21.9
10.8
5
10
15
20
25
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(x)
Rolling 2yr fwd Ev/EBITDA Avg +1 Std dev -1 Std dev +2 Std dev -2 Std dev
0.5x
0.7x
0.9x
1.1x
1.4x
0
100
200
300
400
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(INR)
1.1 1.3
0.9
1.5
0.7
0.5
0.7
0.9
1.1
1.3
1.5
1.7
Jun
-16
Jul-1
6
Au
g-1
6
Sep
-16
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
(X)
Rolling 2yr fwd Ev/Sales Avg +1 Std dev -1 Std dev +2 Std dev -2 Std dev
Parag Milk Foods
112 Elara Securities (India) Private Limited
Board of Directors & Management Devendra Shah - Chairman
He has taken Parag Milk Foods to new heights and under his leadership, the Group's revenues have grown manifold. Apart from promoting India’s largest cow farm called Bhagyalaxmi Dairy farm, he also holds reputed positions in various ventures like Director- Bhimashankar Sahakari Sakhar Karkhana, Pargaon, Secretary of National centre for Rural Development, Chairman, Sharad Sahakari Bank and Director, NDRI.
Pritam Shah - Managing Director
Responsible for the overall executional strategy of the company and consolidating the market presence. Responsible for bringing in the best manufacturing technology for the company. He has a strong understanding of procurement and production process.
B.M Vyas – Director
Advises the top management and assists in the creation of efficient and effective growth strategies for the Company. He is closely involved with monitoring the entire gamut of the business processes from the perspective of sales and distribution, getting them streamlined and efficient. Being a dairy veteran, he advises the Chairman on various aspects regarding the development of business.
Sunil Goyal – Director
Qualified C.A. and joined the board in January 2008 and is currently an Independent Director.
Narendra Ambwani – Director
He has an experience of 39 years in the consumer product industry and was ex-Chairman of Advertising Council of India (ASCI). He was appointed on our Board on May 26, 2015 and is currently an Independent Director and Chairman of Stakeholders’ Relationship Committee and member of Audit Committee.
Nitin Dhavalikar – Director
Qualified C.A.. Appointed to the board in July 2015 and currently an Independent Director and Chairman of Nomination and Remuneration committee and member of Audit Committee.
Radhika Pereira – Director
Post graduation from Cambridge and Havard. She worked for some time with Arthur Andersen and in the year 1996, she set up Dudhat Pereira & Associates. Later, she joined as a Partner at Shardul Amarchand Mangaldas & Co at their Mumbai Office.
Ramesh Chandak – Director
Qualified C.A.. He is closely working with the Company on growth strategies and cost reduction initiatives. He was awarded the ‘CA Business Leader of the Year - 2008’ by The Institute of Chartered Accountants of India.
Mahesh Israni - Chief Marketing Officer
Heads Sales and Marketing functions of the company and also handles the overall value added product sales. He has over 25 years’ of rich experience in sales and customer marketing in the FMCG sector which entailed valuable stints at Pidilite and Unilever.
Company Description Dr. Kurien ushered in ‘White Revolution’ in India with ‘Operation Flood’, the largest project for dairy development in the world. This revolution led to an increase in milk production many fold which led to the co-operatives declaring milk holidays around Pune. This adversity was circumvented by Mr. Devendra Shah (our Founder & Chairman) by helping farmers by collecting their milk on such milk holidays. And thus was born Parag Milk Foods Ltd. Parag Milk Foods Ltd, founded in 1992, is one of India's elite private sector dairy company, with a diverse portfolio in over 15 consumer centric product categories. They aim to identify, elaborate and disseminate best practices at all their infrastructures, a dairy farms set on global standards, a modern fully automated cheese plant with state of the art technology, a ghee plant with traditional way of making ghee like made at home and an UHT milk processing plant using the best equipment from one of the leading plant equipment manufacture. They manufacture products of truly international quality under internationally famous brand names such as Gowardhan, Go, Topp Up & Pride of Cows. Its product portfolio includes ghee,fresh milk, skim milk powder, whole milk powder, paneer, an array of processed and natural cheese, cheese spreads, butter, dahi, dairy whitener and gulab jamun mix under the brand names of 'Gowardhan' and 'Go' ,all made from 100% fresh cow milk. Pride of Cows is a brand of fresh farm- to -home milk and Topp Up, a flavoured milk in many a variants.
Parag Milk Foods
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113 Elara Securities (India) Private Limited
H.S. Oberoi - President – Cheese Manufacturing
Mozarella cheese manufacturing expert with over 52 years’ experience in the dairy industry. His career includes stints with Modern Dairies, Road Master Food, Milk Federation Indodan Milk Products, Dalmia Dairy Industry and Haryana Milk Foods.
Sachin Shah- VP Southern Operations
A science graduate, with over two decades of professional experience, he oversees the Company’s operations at Palamaner. He heads Supply Chain function of the Company.
Sanjay Mishra - General Manager – Plant
Sanjay Mishra has over two decades of experience and is a Specialist in Process Cheese Recipes. He has a deep understanding of the evolving Indian palate and can develop various products to suit the Indian Taste. He also heads the Liquid Milk Procurement in the Company. In his career, he has worked with renowned dairy firms like Vadilal Dairy International Ltd. and Gokul Dairy.
Sanjay Nakra - General Manager, Plant
Sanjay Nakra is a Dairy Technologist with experience of over 25 years in Dairy Plant level manufacturing. His illustrious career includes stints across key companies like Glaxo SmithKline, Himachal Milk Product, Foremost Industries and Modern Dairies. He travels across the world, to track global practices and advancements in the dairy sector.
Akshali Shah – VP, Strategy
Akshali Shah joined the Company as a Management trainee and has been working with the organisation for the past 6 years. Despite being the youngest leader in the management team, she is responsible for strategies on marketing and works on the next horizon product categories. Along with this, she heads the Pride of Cows business and works very closely on the marketing campaigns, to drive executional excellence. She has a post graduate degree in FMB from SP Jain Institute. She was nominated to the 6th edition of Impact’s 50 most influential women in Indian media, marketing and advertising where she received a “Special Mention”. This award acknowledges the achievements of women who are influencers in their field.
Parag Milk Foods
114 Elara Securities (India) Private Limited
Coverage History
Date Rating Target Price Closing Price
1
4-Sep-2017 Accumulate INR 289 INR 250
Guide to Research Rating BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%
1
180
200
220
240
260
280
300
320
340
360 Se
p-1
6
Oct
-16
No
v-16
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-1
7
May
-17
Jun
-17
Jul-1
7
Au
g-1
7
Sep
-17
Not Covered Covered
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Disclosures & Confidentiality for non U.S. Investors
The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara Securities (India) Private Limited or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara Securities (India) Private Limited or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara Securities (India) Private Limited or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Elara Securities (India) Private Limited or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara Securities (India) Private Limited or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara Securities (India) Private Limited is under no obligation to update or keep the information current. Neither Elara Securities (India) Private Limited nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
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Disclaimer for non U.S. Investors
The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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Disclosures for U.S. Investors
The research analyst did not receive compensation from Heritage Foods Limited, Prabhat Dairy Limited and Parag Milk Foods Limited.
Elara Capital Inc.’s affiliate did not manage an offering for Heritage Foods Limited, Prabhat Dairy Limited and Parag Milk Foods Limited.
Elara Capital Inc.’s affiliate did not receive compensation from Heritage Foods Limited, Prabhat Dairy Limited and Parag Milk Foods Limited in the last 12 months.
Elara Capital Inc.’s affiliate does not expect to receive compensation from Heritage Foods Limited, Prabhat Dairy Limited and Parag Milk Foods Limited in the next 3 months.
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