Sole Integrated Dairy Player – Company Analysis

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The Emerging Indian Dairy Consumer Play

The dairy industry in India is on the cusp of moving from unorganized to organized sector. Since 2016, the shift has been in double digits. In 2016, 80% of the Indian diary sector was into unorganized sector, while at the start of 2018, this percentage is at 70%. This shift is significant.

The Indian diary industry is growing at 14% CAGR, while the company under discussion is growing at 17% CAGR. This clearly shows that it is not only able to outperform entire industry growth rate, but also able to benefit from the shift from unorganized to organized.

Following exhibit shows how organized players benefit when market moves from unorganized to organized with taking above data into consideration.

The base of market size is taken from year 2016 when Indian Diary Industry was at 80,000 Cr. So, in

2018, the market size is at 104,000 Cr, growing at 14% YoY. If we consider unorganized sector is growing at 8%, then organized sector grows at 28%

indian diary industry unorganized to organized sectoral change

The above exhibit shows the immense growth opportunity for organized players as the industry moved from unorganized to organized players.

The company is growing at 17% CAGR, thereby, leaving decent space for future growth. Indian diary sector offers strong potential for premium & wellness products.

Major competitors in the market include Amul, Mother Dairy, Nestle, Danone, Kwality, Hatsun Agro, Heritage Foods, Paras Dairy, Parag Milk Foods, Creamline Dairy, Aavin, and Nandini.

Trends supporting market growth include:

  • Steady expansion of the organized sector
  • Opportunities to differentiate basic products
  • Urban consumer preference for convenient, healthy yet indulgent products that increase premiumization
  • User disposition toward the taste of dairy-based health products despite the availability of several non-dairy substitutes
  • Demand for and hence opportunity to create new categories in functional products and single serving units; and
  • High acceptance of new brands in the wellness and premium segment, which enables easy market entry for new players
  • Ability to gain market share in niche segments such as Yogurt, Flavored Drink, Specialty Cheese, Protein, and Paneer

Procurement from farmers remains key to higher growth!

Value Added Products, Growth Characteristics, and Business Scalability

  • The dairy farm tourism has opened a new segment for more revenue
  • Back-end integration, ability to convert byproducts into value added products are two main characteristics of the company that pose significant growth potential
  • Ability to convert diary waste into value added products such as micro-nutrients is a great way to make into new segment

Parag Milk Products

  • Parag Milk Foods Limited started in 1992 to help farmers by collecting milk on milk holidays during Operation Flood. Back then, Parag was primarily involved in the distribution and collection of milk
  • Bhagyalaxmi Dairy Farm – India’s most modern dairy farm with the finest international equipment
  • The concept of Dairy Tourism was brought to life for the first time in India by Parag Milk
  • On realizing the needs of institutional clients, launched B2B whey protein
  • Commissioned “Go Cheese World” – India’s largest cheese manufacturing plant with a capacity of 60 MT per day
  • The year saw the birth of ‘Pride of Cows’, a first-of-its-kind premium farm-to-home milk brand
  • The Palamaner plant was established with a world-class UHT facility
  • Entered into the Juice drink market by launching a mango drink with a dash of milk
  • Launched a 100% Whey protein, first-of-its-kind manufactured in India. From our farm to your shaker cup, fresh and pure

Parag Milk has strategically re-positioned itself from just a milk distribution company to value added consumer FMCG company. The company is focusing on health, nutrition, and value-added products.

In diary industry, only those companies that are equipped with a strong back-end of milk procurement, healthy relationships with grass-root level farmers and are armed with innovative value-added products will emerge as strong growth companies.

Product Range

Slurp

The innovation and ability to re-position itself & its products into already over crowded market is the key strength of Parag Milk. The Indian fruit juice market size is of 6000 cr. The market is already overcrowded with many players selling mango drinks – Parle Agro, Pepsico, Manpasand, Varun beverages, and all other players are trying to get a slice of over crowded market without trying to re- position its products with a differentiating edge.

Parag milk has launched Slurp – A mango drink with a dash of milk has not only positioned itself in both flavored milk & energy drink category with variants available with differential % of milk so that consumer can decide to have a fully flavored milk or a juice with some milk.

In 2 years, Parag Milk has captured 5% of the market share of this product category. This shows that innovation is the only differentiating factor that will propel the growth.

Speciality Cheese

Proceeds from the IPO has already helped Parag Milk to expand cheese capacity by 25% in just 1 year. Now, Parag Milk has 60 MT per day of capacity.

This has helped the company to launch a variety of speciality cheese products. Company has launched 5 different flavored cheese and these products are now marketed a 5-in-1 box for one cheese every day of work week.

The Spiced Cheese is the new product launched by Parag Milk. Cheese with spices & herbs is a premium product and is growing at 19% QoQ.

UTH & Milk Products

Flavored Milk products TopUp, MilkRich, Flavored Yogurt are some of the new premium segment products launched. Badam Milk & Diary whitener are growing at a whopping rate. Company is innovatively marketing these products for premium category customers. Instead of marketing these products via traditional distribution channels, company has opened new distribution channels.

Flavored yogurt & diary whitener are introduced exclusively for international flight meals, 5-star hotel breakfasts, and in-room accessories. This enables company to market its products to high income range customers. This will not only expand company brands into new customer category, but also enable regular customers to buy premium products.

Flagship Gowardhan Ghee

Gowardhan has been awarded the distinction of “Most Trusted Brand” in the ghee category for the 2nd year in a row in 2017, by the Brand Trust Report.

Within a year, Gowardhan Ghee as a brand has moved 132 notches up in the overall ranking of FMCG brands across categories, which is rare.

Fully Integrated Products

Bhagyalaxmi Bioscience Division, Parag Milk has driven the commercialization of cow manure under the brand name Microrich and have converted it into a high value product. This has helped Bhagyalaxmi Diary Farm, a subsidiary, turn profitable for first time.

Premium Milk – Pride of Cows

The brand Pride of Cows sources milk from Holstein Friesian cows which are cared for, loved, and kept at open farm without any bonds. The motto for this brand is – Happy cows give healthy milk. The milk is sourced & distributed to customer home without any vendor presence. The Holstein Friesian cow milk has a higher melatonin % over Jersy cow milk. Melatonin is one of the good hormones impacting wellness – quality of sleep & recovery. Hence, the product is priced at 90 rs. Per liter.

Business Model

Diary Farming & Milk Procurement

At Bhagyalaxmi Dairy Farm, wholly-owned subsidiary, houses over 2,000 Holstein Friesian cows. The brand ‘Pride of Cows’ derives its milk from these cows. Parag Milk procure 100% cow’s milk from more than 2 lakh farmers in 29 districts in Maharashtra, Andhra Pradesh, Tamil Nadu and Karnataka. Our average daily procurement is 1.2 million liters milk per day.

Processing

Two dairy plants at Manchar (Maharashtra) and Palamaner (Andhra Pradesh). Installed milk processing capacity of 2 million litres per day. One of the largest cheese plant with a capacity of 60 MT per day. India’s 1st state-of-the-art whey plant. Fully automated fresh Paneer manufacturing unit. UHT Technology at the Palamaner plant.

Distribution

A network comprising 17 Depots, 100+ super stockist and 3,000+ distributors. Pan-India presence through both traditional & modern trade channels reaching 2.5 lakh plus retail touch points. Exports of products to several countries.

Branding

Diversified product portfolio with a well thought out brand engineering strategy. Four existing brands – Gowardhan, Go, Topp Up, Pride of Cows. Launched 3 new brands this year – Milkrich, Avvatar, Slurp.

Institutional Alliance

For expanding sales, it is essential to have strategic partners. Parag Milk has developed a strategic alliance with KFC, McDonalds, McCain, Dominos, MTR Restaurants, Taco Bell, and has built a fully equipped sale force targeting street vendors who are largest consumer of cheese in unorganized food sector.

This is a key for longevity of growth as 100% of distribution & consumption channels are reached & served duly with specialized products for each channel.

Gourmet Tasting Events

parag milk - tasting events

A lot of big malls organize food seminars, events. Luxury hotels also arrange celebrity chef promoted gourmet tasting events. Parag Milk has strategically developed ties with Taj Vivanta, Holidy Inn, Hotel Lalit, Novotel in hotel segment. Apart from hotels, Parag Milk has tied up with Hypercity, Inorbit, Phoenix market city to promote their speciality products such as flavord cheese, yogurt, and mozzarella cheese varieties via gourmet tasting events. These events are promoted by celebrity chefs & other celebrities

Parag Milk has also developed ties with vineyards & wine tasting events to promote their cheese products

New Product Range

parag milk - new product range.PNG

parag milk - new product range_products.PNG

parag milk - new product range_milk.PNG

parag milk - protein.PNG

parag milk - value addtion products.PNG

parag milk - value addtion products-details.PNG

parag milk - new product range-cheese.PNG

Avvatar Protein

Parag Milk Foods is India’s first Company to manufacture a sports nutrition whey protein powder. This fresh and 100% vegetarian whey protein is quality tested at every stage. Avvatar is clearly a nextgen product developed in line with the Company’s vision of promoting health and nutrition amongst the youth in the country.

Avvatar has a higher and better-quality protein; grammage per scoop as follow:

  • 24g – Protein
  • 7.8g – BCAA
  • 7.9g – EAA
  • 4.9g – Glutamic Acid

Parag Milk Foods has a clear advantage in Avvatar because: Whey is a by-product of cheese which gives a clear advantage to enter the category. Meets the Company’s vision of promoting health and nutrition. Expands the Company’s market presence through the introduction of new route-to-market channels. Broadens the portfolio of higher margin products. Leverages our advanced technology in Dairy sector.

Parag Milk is also providing B2B category unprocessed whey powder to 3rd party vendors, who then convert this into marketable protein supplements.

The sports nutrition market size is 1422 cr & protein powder market size is 1221 cr.

Sales, Profit, and Growth Rates

  • Net Sales growing at 17% CAGR over last 5 years
  • FY17 YoY – revenue growth at 86.4%
  • Consumer product division growth at 110% Fresh Milk division growth at 84.1% Skimmer Milk growth at 20.4%
  • Domestic sales comprise 97% of the revenue

PAT growth at 10%, subdued mainly because delay in passing on milk price increase to customer in the same quarter. However, QoQ trends showing that demonetization aggravated price differential and restricted company to pass on the price to customer. However, company has now working on implemented a revolutionary TOC (Theory of Constraint), term coined by legendary management theorist specializing in production optimization, efficient supply chain deployment, leveraging bottlenecks in production & distribution and so on.

Management guidance indicates that PAT growth rate set to double by 2021.

Parag Milk Financial 1

Demonetization has impacted company significantly and thereby impacted net profits & earnings. Although recent result shows significant dip in both, management guidelines on these numbers are very optimistic.

A good business usually has 2-3 bad years, and 7-8 good years. It is safe to consider FY17 as one of those years when company growth was impacted.

Following shows shareholding pattern & it is clearly visible from management activities that growth is in the offing

parag milk share holding pattern 2018

Promoters released pledge of 34% of shares in this year and as of now there is ZERO pledge by promoters.

Presence of ace investors also shows the confidence in the company.

Parag Milk Financial Prominent INvestors

Debt

Parag Milk debt1

Parag Milk debt2

  • Indian rupee loan from a bank of ` 181.03 million (March 31, 2016: `303.57 million) carries interest @ 12.00%-12.50%. The loans are repayable in 38-43 monthly installments starting from Feb 2013 and November 2013 along with interest. The loan is secured by pari pasu charge on fixed assets and second pari pasu charge on current assets of the Company and personal guarantee of Promoter Directors.
  • Foreign currency loan from a financial institution of `783.47 million (March 31, 2016: `961.83 million) carries interest @ 5.15%-5.92%. The loans are repayable in 12 semiannual installments along with interest starting from June, 2016
  • Indian rupee loans from financial institutions of ` 30.53 million loan secured by hypothecation of equipment and vehicles with installments in the range of 36-78 and interest rate in the range of 9.75%-12.98%
  • Hire purchase loan from banks of ` 2.61 million (March 31, 2016: `4.87 million) carries interest @ 9.38% to 11.24 % p.a. The loans are repayable in 36 to 60 monthly installments starting from the respective date of finance

parag milk contingent liabilities

Parag Milk COst of raw material

parag milk cash and bank

Key Strengths

  • Largest private value-added player with vibrant product portfolio
  • Sole integrated player; innovative offerings, premiumisation strategy to boost realization
  • Strong proxy for changing consumption patterns
  • 32% market share in cheese sector makes Parag Milk only player after Amul to have significant market share
  • Cheese has lowest asset turns and high working capital making it capital intensive, thus offers higher margins and would continue to be organized. Parag has 6 types of cheese while Amul has 5
  • Cheese accounts for 20% of Parag’s top line and has posted CAGR of 24% over FY14-17
  • Ghee constitutes around 20% of Parag’s revenue and has posted CAGR of 14.5% over FY14-17

Prospects

parag milk prospects multibagger

Likely PAT CAGR of 40% over next 5 years

EBITDA to clock 35% CAGR over FY17-20E

Deep integrated play across the categories – vis-à-vis peers

parag deep integrated play

In a nutshell

Over the past 2 years, Parag has increased capacity on various counts:

(a) Increased milk handling & processing capacity from 2.0 mn liters per day to 2.4 mn litres per day;

(b) Increased cheese capacity from 40 tonnes per day to 60 tonnes per day;

(c) Created a separate paneer manufacturing facility with capacity of 20 tons per day; and

(d) Undertook capex to upgrade the whey facility to manufacture consumer whey.

Currently, its plants are running at 55-60% utilization levels, which is likely to take care of the near-term capex. The company has around INR 65 crore fund from IPO proceeds, which would be used for enhancing procurement and chilling infrastructure going ahead. With relatively low capex requirement, improvement in working capital needs and likely growth in key categories, we expect Parag’s margins and return ratios to improve.

Concerns

  • Management remuneration stands at 30% of FY17 PAT. Steady salary revisions while company took the impact of demonetization is a concern going forward. This must be carefully watched to ensure management not taking due advantage of the situation, pocketing the gains for own benefit.
  • Demonetization has severely impacted margins, rather beyond expectation levels, and must be watched carefully for due recovery in coming year.
  • Deployment of IPO proceeds must result in introduction of more value-added products to ensure margin keeps on expanding YoY.
  • Debt re-payment plan must be clearly laid down to ensure leak in profits going forward
  • Any further rise in milk procurement & company’s inability to pass on the rise to customer remains key concern as this impacts margin significantly
  • As cheese is a capex intensive product, expansion must be kept in check
  • Careful watch must be kept on how company is utilizing IPO proceeds & money into new units, factories. All units/factories must be justified as per capex plan given money consuming nature of business

Disclaimer: This report is only for study purpose and is not a recommendation to buy or sell the stock/equity of the said company. Please consult with your financial adviser to take any decision. Any loss/profit resulting from buying/selling the said stock is only yours & we hold no responsibility for any loss/profit.

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