INSTITUTIONAL EQUITY RESEARCH Parag Milk EQUITY RESEARCH ... PHILLIPCAPITAL INDIA RESEARCH Parag Milk Foods Milking the growth in dairy ... Strong institutional base and retail

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  • INSTITUTIONAL EQUITY RESEARCH

    Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

    Parag Milk Foods Milking the growth in dairy consumption

    INDIA | Dairy | IPO Note

    03 May 2016

    Parag Milk Foods, founded in 1992, is one of the leading private dairy players in India with a

    pan-India presence. It manufactures dairy products such as cheese, ghee, curd, buttermilk,

    flavoured milk, and fresh milk, and markets these under brands Gowardhan, Go, ToppUp, and

    Pride of Cows. As was highlighted in our March 2016 Ground View edition, growth prospects

    for the Indian dairy industry are strong, and Parag Milk Foods, being among the leaders in

    value-added products, will benefit considerably from their increasing consumption and from a

    shift to organised players (in both rural and urban India). The stock is available at 21x our FY18

    earnings (adjusting for sales tax refund) and we believe that its valuation is justified given the

    growth visibility, brand equity, innovations history, strong supply chain, and capable

    management team. We recommend SUBSCRIBE.

    Indian dairy to see 15% CAGR in 2014-20; organised segment to grow faster: The Indian dairy

    industry is poised to grow to Rs 9.4tn by 2020 from Rs 4.1tn in 2014 (15% CAGR), as per a report

    by research firm IMARC. Within this, the organised segment (20% value share) could see faster

    20% CAGR. Organised players dominate high-margin categories (cheese, flavoured and UHT milk,

    flavoured yoghurts, lassi), which are poised to see >25% CAGR. Parag Milk Foods is likely to top

    overall dairy market growth due to its strong presence in high-growth, value-added categories.

    Leading private player in value-added milk products with strong brands: Parag Milk Foods has a

    cheese plant capacity of 40T/day and is the second-largest cheese player (32% market share)

    after Amul (42% share) in India. Apart from a strong retail presence, its institutional customers

    include major QSR brands like Dominos, Pizza Hut and KFC. Its brand Gowardhan Ghee sells at a

    5-10% premium to others on a positioning of superior quality and purity. It is also present in

    other key high-margin categories like UHT, flavoured milk, buttermilk, and flavoured yoghurt.

    History of innovations and product premiumisation: Parag produces various types of cheese

    (mozzarella, shredded, cheddar, each in a variety of flavours) and recently launched super

    premium Go Almette cheese. It also produces flavoured yoghurt, buttermilk, and flavoured milk

    (highest number of variants/flavours in the market for each). It is one of the pioneers of the

    concept of farm-to-home fresh milk, which it supplies to Mumbai and Pune under its brand Pride

    of Cows (commands 100% premium to regular brands).

    Strong sourcing chain and pan-India presence: Parag sources milk from 250,000 farmers in 3,400

    villages across Maharashtra, Andhra Pradesh, Karnataka, and Tamil Nadu, and also procures milk

    indirectly through wholesalers. It has a dairy farm near Pune with 2,000 cows of the Holstein

    breed, maintained mainly for R&D purposes. It is also among the few private dairy players with a

    pan-India presence. Currently, its distribution network consists of 15 depots and over 3,000

    distributors across the country. It employs 560 people for distribution and marketing. We believe

    that the company has the right sourcing and distribution strategy and as its sales expand, its

    network will increase and aid growth.

    Margins, working capital, and cash-flow to improve as it expands: Gross/EBITDA margins in

    FY15 were 23.5%/7.4%; as its sales rise, (1) its margins will expand gradually due to higher

    operating leverage and better supply-chain efficiencies, and (2) its receivables days will fall

    (slowly) in the medium term (44 days in FY15) led by strong retail focus and higher bargaining

    power with institutional clients. Also, by FY17 most of its capex will be in place and free cash

    flows should rise from FY18.

    High valuations justified; Recommend SUBSCRIBE: The stock is available at 26/21x our

    FY17/FY18 earnings vs. 33/21/10x FY17 earnings for Hatsun Agro/Prabhat Dairy/Kwality Dairy

    (our/Bloomberg estimates) while it is available at FY17/FY18 EV/EBITDA of 13/11 vs. 14/8/7x for

    FY17 EBITDA for the same peerset. The stock is slightly expensive to some peers but the higher

    valuation is justified by lower share of institutional sales, stronger brands, distribution reach, and

    strong execution history. Also, we believe that the lower RoE/RoCE for dairy players vs. FMCG

    companies is compensated by 35% discount to FMCG sector multiple and higher growth and

    premiumisation prospects compared to penetrated FMCG categories.

    SUBSCRIBE COMPANY DATA

    ISSUE OPENS 4th May 2016

    ISSUE CLOSES 6th May 2016

    PRE-ISSUE EQUITY SHARES 70.4mn

    PRICE BAND Rs. 220-227

    NO OF SHARES TO BE ISSUED 13.3-13.7mn

    SHARES IN OFFER FOR SALE 20.57 mn

    P/E @ FY18E EARNINGS UPPER

    PRICE BAND 21

    ISSUE SIZE Rs 3bn

    PROPOSED MKT CAP.

    (AT UPPER BAND) Rs 19bn

    SHARE HOLDING PATTERN, %

    Particulars Pre-offer (%) Post-offer (%)

    Promoters 61.1% 47.5% Public 38.6% 52.2% Employee trusts 0.3% 0.3%

    Details of Selling Shareholders

    IDFC PE 8.3mn IBEF/IBEF I 6.0mn Promoter group 3.1mn Others 3.2mn

    KEY FINANCIALS

    Rs mn FY16E FY17E FY18E

    Net sales 14,950 17,568 20,658

    EBITDA 1,339 1,477 1,709

    Net profit 407 707 875

    EPS, Rs 4.8 8.4 10.4

    PER, x @220 45.8 26.4 21.3

    PER, x @227 44.4 25.6 20.7

    ROCE, % 18.1 13.5 12.1

    ROE, % 12.7 10.3 11.3

    Source: PhillipCapital India Research Est.

    Jubil Jain (+ 9122 6667 9766) jjain@phillipcapital.in Naveen Kulkarni (+ 9122 6667 9947) nkulkarni@phillipcapital.in Preeyam Tolia (+ 9122 6667 9950) ptolia@phillipcapital.in

    http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_-_Mar_issue_for_email_20160315204008.pdf

  • Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

    PARAG MILK FOODS IPO NOTE

    About the IPO 13.7-13.3mn fresh shares in a band of Rs 220-227 per share, totalling Rs 3bn.

    20.5mn shares for sale by existing investors (IDFC PE 8.3mn, Motilal Oswals IBEF/IBEF I 6mn, promoter group 3.1mn, others 3.2mn).

    Utilisation of funds: Rs 1.5bn for capex, Rs 1bn for loan repayment, and Rs 0.5bn for general corporate purposes and others.

    Market capitalisation post-issue: Rs 19bn at upper price band (84.1mn shares).

    Details of selling shareholders

    Selling shareholder

    No. of shares

    sold (mn)

    Total no. of

    shares held

    % of holding

    sold

    Promoters

    Netra Shah 2.0 10.3 19%

    Priti Shah 1.1 3.3 33%

    PE investors

    IDFC PE 8.3 14.1 59%

    Motilal Oswal sponsored IBEF and IBEF I 6.0 6.7 90%

    Others 3.2 - -

    Total 20.6

    Source: RHP

    Shareholding structure: Before and after the issue Shareholding Pre-Issue % of total Post Issue % of total

    Promoter & Promoter Group 43,045,822 61.1% 39,941,189 47.5%

    Devendra Shah 14,570,832 20.7% 14,570,832 17.3%

    Netra Shah 10,272,782 14.6% 8,268,149 9.8%

    Pritam Shah 9,159,888 13.0% 9,159,888 10.9%

    Other promoters 9,042,320 12.8% 7,942,320 9.4%

    Public 27,143,065 38.5% 43,964,774 52.3%

    IDFC PE 14,134,162 20.1% 5,874,234 7.0%

    IBEF I 4,359,749 6.2% 442,511 0.5%

    IDFC SPICE 2,411,870 3.4% 2,411,870 2.9%

    IBEF I 2,316,866 3.3% 207,583 0.2%

    Other Public 3,920,418 5.6% 35,028,576 41.6%

    Shares in employee trusts 227,000 0.3% 227,000 0.3%

    Total 70,415,887 100.0% 84,132,963 100.0%

    Source: RHP

  • Page | 3 | PHILLIPCAPITAL INDIA RESEARCH

    PARAG MILK FOODS IPO NOTE

    About Parag Milk Foods Parag Milk Foods Ltd was founded in 1992. It is an integrated dairy company, and one of the largest private dairy players, with milk-processing capacity of 2mn litres per day. It is present in over seventeen dairy product categories and it markets products under the brands Gowardhan, Go, Pride of Cows, and Topp-up.

    Brand-wise product categories of Parag Milk Foods Brands Categories Target

    Gowardhan Ghee, Milk, Paneer, Dahi, Curd , Butter,

    Dairy Whitener and Gulab Jamun Mix

    Every-day dairy products, house hold

    consumption used as cooking ingredients

    Go Flavoured cheese, tubes, slices etc Children and youth, primarily for direct

    consumption

    Pride of Cows Farm-to- home, subscription model Consumer seeking premium quality

    Topp- Up Flavored milk with extra proteins Youth and travelers

    Source: Company, PhillipCapital India Research

    Currently, the biggest contributors to its revenue (>20% each) are fresh milk, ghee/butter and cheese/paneer. It intends to increase dairy-based beverages portfolio under the Go brand, introduce milk-based high-protein drinks, and a new variant of curd with a higher protein and lower fat content. It also intends to set up a whey-proteins manufacturing facility and increase its presence in the premium health supplement space. Because of high proportion of sales from value-added products like cheese, UHT, flavoured milk, buttermilk and curd (~30%) and branding in the otherwise low-margin ghee business (~32%), Parag has consistently delivered gross margins of 22-25% in FY11-16.

    Sales mix in FY14-9MFY16 Gross-margin movement from FY11-9MFY16

    Source: Company, PhillipCapital India Research

    Manuf