overcoming the crossover challenge in the indian dairy market · overcoming the crossover challenge...

Overcoming the crossover challenge in the Indian dairy

marketPresenting to Joint Managing Director Mr. Vivek Nirmal

June 2016

Heinrich Heine University DuesseldorfUrsula Hilgers, Louisa Schuessler, Johannes Gerlach, Hannes Kurz

Consulting DuesseldorfMandate

June 2016 Heinrich Heine University Duesseldorf 2

Create one of the most profitable dairy companies in India, servicing a large

community of diary farmers at the one end and addressing the growing needs of

consumers of downstream dairy products at the other

Consulting DuesseldorfRecommendation


1. Expand to Madhya Pradesh via opening own stores. 2. Tackle distribution issue via a new distribution in the

North East of Maharashtra. 3. Target Tier 2 and Tier 3 areas.

Consulting DuesseldorfAgenda

1. Analysis of the Indian market

2. Prabhat Dairy

3. Strategic alternatives to grow

4. Implementation

5. Time and Costs

6. Wrap-up


Consulting DuesseldorfKey issues

Manage rising milk procurement

prices

Balance the B2B to B2C ratio

Tackle the worsening of

working capital situation

Assess potential

Indian markets


Consulting DuesseldorfThe income is rising as well as the demand for dairy products

Population with income higher than: $11,000

• 2008: 1%

• 2020: 9%

• 2030: 24%


Seize the current market potential

Dairy market• Indian demand growth

rate: 10%• Indian supply growth

rate: 7%

Consulting DuesseldorfThe Indian market offers huge potential for dairy producers

72%

28%

Rural population


Seize the trend of the growing urbanization

Population: 1.254 billion

= 0.9029 billion

= 0.3511 billion

Expected urbanization: 40% increase by 2030

61%

39%

Rural population Urban population= 0.4915 billion= 0.7625 billion

Urban areas- Tier 1 (8 cities)- Tier 2 (50,000 – 100,000

inhabitants)- Tier 3 (20,000 – 50,000

inhabitants)

Uttar Pradesh, Maharashtra, Bihar, Madhya Pradesh, West Bengal: 47.9%

Consulting Duesseldorf

The produced milk is sold to the organized and unorganized market

50%50%

Self-consumption Market


The higher potential lays within the organized sector

80%

20%

Organized sector Unorganized sector

Produced milk

Sold to

Unorganized sector:Kirana stores, street vendors

Organized sector: supermarkets, hypermarkets

Consulting DuesseldorfThe Indian market offers huge potential for dairy producers


Stay in the Indian market as there is a lot of potential

Prabhat Dairy• HQ: Navi Mumbai• 1,200 people

• Revenues: 1,171.97• Operating Expenses:

1,023.07• Profit after Tax: 24.52• Gross margin on

products: 22.4%

28%

1%71%

MilkValue-added milkValue-added milk products

70%

30%

B2B B2C

Goal: ratio of 50:50

Consulting DuesseldorfPrabhat Diary’s options to grow


Additional tier1 cities in India Tier 2 and tier3 cities in Madhya Pradesh

Less spread customers First mover advantage

Consulting DuesseldorfEvaluation of strategic alternatives


AlternativeCriteria

Tier 1 cities in IndiaTier 2 and tier3 cities in Madhya

Pradesh

Distribution costs

Competition

Market potential

Internal logistics

Consulting DuesseldorfThe necessary implementation steps along the supply chain

Farmer Production Distribution Stores Branding



Improve your procurement by negotiating long term contracts with farmers

• Fixed price for cattle fodder• Fixed price for milk per 500ml

create security in planning for famers

Contract


The issue of rising milk prices is tackled


Increase your production capacity by introducing shift system and additional farmers

• Maharashtra• Introduce 2 shift system• Hire 50 new employees• Use current equipment

Two production

facilities

• New farmers for sourcing• Negotiate contractsFarmers


Meet the rising demand of milk products

Consulting DuesseldorfBuild up a distribution center in North East of Maharashtra

Identify location Negotiate contract with landlord Construction


Reduce distribution costs by opening the distribution center near your new future markets

Production facility Distribution center

Retailers

Restaurants and others

Own outletsExternal logistic partner

External logistic partner

Consulting DuesseldorfOpen new own stores in Madhya Pradesh

• Madhya Pradesh• In total 30 new stores• Same product range

New stores


Create a balance between B2B and B2C ratio as well as meet the trend of urbanization

Consulting DuesseldorfCreate a higher brand awareness through communication

Engage marketing agency Market research Targeted

communication


Foster the awareness of Prabhat of end-consumers

Consulting DuesseldorfWorsening working capital will be tackled by factoring and more

efficient internal logistics

WC = Current assets – current liabilities


Working capital will be improved

Inventory management software Reduced inventory turnover Efficient planning of stock

Factoring 50% of all receivables

Consulting DuesseldorfTime frame for implementation plan


Total time frame for implementation lasts until 2019

2016 2017 2018 2019 20201. Improve procurement of milk2. Increase production capacity by introducing shift system3. Evaluate locations for distribution center and stores- Identify locations- Negotiate contracts- Build up distribution center and stores4. Improve inventory management- Software evaluation- Planning, implementing and debugging- Launch systme5. Implement factoring- Negotiation contracs with possible partners- Conclude contracts6. Branding

Consulting DuesseldorfTime frame for implementation plan


Total required investment: Rs. 833.7 mn

2016 2017 2018 2019 2020 Costs1. Improve procurement of milk 35 mn2. Increase production capacity by introducing shift system 175 mn3. Evaluate locations for distribution center and stores- Identify locations- Negotiate contracts 35 mn- Renovate distribution center and stores 525 mn4. Improve inventory management- Software evaluation 35 mn- Planning, implementing and debugging- Launch system X5. Implement factoring 28.7 mn- Negotiation contracs with possible partners- Conclude contracts6. Branding

Consulting DuesseldorfImprove Probhat Dairy’s Working Capital Situation

Current Working Capital:- Current Assets 374.25- Current liabilities 101.76= 272.49

Improve Working Capital situation:- Reduce inventory by 15% 4.545- Sell 50% of receivables to factor 57.4

Working Capital after implementation: 210.545

Working Capital Ratio before implementation: 41%Working Capital Ratio after implementation: 31%


Working Capital Ratio improves by 10 percentile offering improved liquidity that can be used

Assumptions: 90% Cash in for selling receivables

- 90% cash in for selling receivables

- Costs of factoring: 5% of sold volume

- Constant sum of total balance sheet

Consulting DuesseldorfTotal required investment and financial forecast

-2000.0

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

18000.0

20000.0

2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e

Revenue PAT


After the investments in 2017 and 2018 your company will be profitable and grow sustainable from 2019 onwards

Revenue PAT2016 11719.7 245.2

2017e 12071.3 -142.52018e 12674.9 -175.52019e 13308.6 245.82020e 13974.0 270.42021e 14672.7 297.42022e 15406.4 321.22023e 16176.7 346.92024e 16985.5 374.72025e 17834.8 404.6

Consulting DuesseldorfRisk and contingency

1. Milk price volatility derivatives

2. Increased demand vs. existing production capacity additional third shift

3. Competition from abroad already existing knowledge (experience from Mumbai) + first-mover advantage


1

23

Probability

Impact

Consulting DuesseldorfWrap-up

Manage rising milk procurement prices

Assess potential Indian markets


Tackle the worsening of working capital situation


1. Expand to Madhya Pradesh via opening own stores.

2. Tackle distribution issue via a new distribution in the North East of Maharashtra.

3. Target Tier 2 and Tier 3 areas.

Thank you.

overcoming the crossover challenge in the indian dairy market · overcoming the crossover challenge...

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