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June 15, 2017
Initiating Coverage
ICICI Securities Ltd | Retail Equity Research
Shifting gears – focus on value addition…
Prabhat Dairy (Prabhat), established in 1998, has evolved from a specialty
dairy ingredients company to an emerging brand in the dairy industry. It
sells its products as a) ingredient products or co-manufactured products
to institutional clients, which currently constitute 70% of its sales and b)
retail consumer brands (Prabhat, Prabhat Milk Magic, Prabhat Flava,
Volup), which comprise the remaining sales. Aided by increasing capacity
utilisation and share of value added dairy products (VADPs) in revenue,
we expect the company to post revenue CAGR of 14.3% over FY17-19E
with an EBITDA margin of 10.0% in FY19E. With the end of the
investment phase and increasing capacity utilisations across categories,
we expect return ratios of the company to improve gradually in future.
We initiate coverage on Prabhat with a BUY recommendation and a target
price of | 140 per share.
Structural shift in dairy industry to provide a huge opportunity
Changing customers’ preferences and spending patterns are leading to
two major structural shifts in dairy industry – shift from loose milk to
branded products and from liquid milk to VADPs. With a growing urban
population, higher disposable income and rising health consciousness,
the organised dairy industry is expected to grow at 19.6% CAGR in
2016E-20E to | 2.5 lakh crore with increase in market share from 22% to
26%. The increasing share of organised players and rising proportion of
high margin VADPs together provide a vast opportunity for Prabhat.
Increasing share of VADPs and high focus on B2C to drive growth
The share of VADPs (ex- SMP) in Prabhat’s sales portfolio was 46.0% in
FY17. We estimate it will reach 48.4% by FY19E aided by an increase in
capacity utilisation. To tap the opportunity in the high growth cheese
industry (~31% CAGR in FY16E-20E), Prabhat has commissioned the
third largest cheese plant in India at its Shrirampur plant with a capacity of
30 MT/day in 2015. Additionally, the share of the consumer business in
the company has grown from mere 11% in FY12 to 30% in FY17. Prabhat
is determined to increase it to 50% by FY20E. Currently, ghee, curd, UHT,
flavoured milk, etc, are key focus areas for the B2C segment. Eventually,
the company plans to launch cheese & paneer also in the B2C segment.
Strong player to bet on value addition in dairy industry; initiate with BUY
We believe that with improving capacity utilisation levels and initiatives
undertaken to expand the distribution as well as procurement network,
Prabhat is all set to take off with its gears in place. We estimate the
revenue and adjusted PAT will grow at a CAGR of 14.3% and 45.1%,
respectively, in FY17-19E with an operating margin of 10.0% in FY19E.
Earnings visibility and improving return ratios provide comfort. Hence, we
initiate coverage on the stock with a BUY rating and target price of | 140.
Exhibit 1: Prabhat Dairy – key Financials
Particulars FY15 FY16 FY17 FY18E FY19E
Net Sales (| Crore) 1,003.7 1,167.7 1,409.9 1,616.3 1,842.5
EBITDA (| Crore) 103.8 115.3 126.8 146.9 184.3
Net Profit (| Crore) 26.2 23.2 46.9 62.7 92.8
EPS (|) 3.7 2.4 4.8 6.4 9.5
PE (x) 32.4 50.1 24.7 18.5 12.5
EV/EBITDA (x) 14.9 11.3 10.7 9.5 7.7
RoCE (%) 9.0 9.5 8.0 9.7 12.2
RoE (%) 7.5 3.6 5.1 6.8 9.7
Source: Company, ICICIdirect.com Research
Prabhat Dairy (PRADAI) | 119 Rating Matrix
Rating : Buy
Target : | 140
Target Period : 12 months
Potential Upside : 18%
Key Financials
| Crore FY16 FY17 FY18E FY19E
Sales 1,167.7 1,409.9 1,616.3 1,842.5
EBITDA 115.3 126.8 146.9 184.3
Net Profit 23.2 46.9 62.7 92.8
EPS (|) 2.4 3.6 5.0 7.5
Valuation Summary
FY16 FY17 FY18E FY19E
P/E 50.1 24.7 18.5 12.5
Target P/E 58.9 29.1 21.7 14.7
Mcap/Sales 1.0 0.8 0.7 0.6
RoNW (%) 3.6 5.1 6.8 9.7
RoCE (%) 9.5 8.0 9.7 12.2
Stock Data
Particular Amount
Market Capitalization (| Crore) 1,160.4
Total Debt (FY17) (| Crore) 319.3
Cash and Investments (FY17) (| Crore) 165.6
EV (| Crore) 1,314.1
52 week H/L 150 / 77
Equity capital | 97.7 crore
Face value | 10
Price movement
0
30
60
90
120
150
180
Jun-16 Oct-16 Feb-17 Jun-17
0
2,000
4,000
6,000
8,000
10,000
12,000
Prabhat (R.H.S) Nifty (L.H.S)
Research Analysts
Sanjay Manyal
Tejashwini Kumari
Page 2 ICICI Securities Ltd | Retail Equity Research
Company background
Established in 1998, Prabhat Dairy has evolved from a specialty dairy
ingredients company to an emerging brand in the dairy industry. The
company sells its products as a) ingredient products or co-manufactured
products to institutional clients, comprising 70% of its revenue and b) a
retail consumer brand under brand name Prabhat, Prabhat Milk Magic,
Prabhat Flava and Volup, which constitutes the remaining sales. It has two
plants in Shrirampur and Navi Mumbai in Maharashtra with a combined
milk processing capacity of 15 lakh litre per day. Additionally, it recently
commissioned a 30 MT/day cheese facility. Sales have grown at 23.9%
CAGR in FY12-17 with healthy operating margin of 9% in FY17. The
company has an extensive network of 850 distributors and 45,000 retail
touch points.
Moving up value chain; enhancing exposure to consumer segment
Prabhat started out as an ingredient supply player to major players. Over
time, it has successfully stepped up the ladder towards value added dairy
products (VADPs), which will lead to value unlocking for the company. At
present, the institutional segment contributes 70% to the company’s
revenue. Over the last five years, the company has evolved while
contribution from the consumer segment has increased from a mere 11%
in FY12 to 30% in FY17. Prabhat is aiming to increase the contribution to
50% by FY20E. Also, the proportion of value added products for the
company has increased the share of VADPs in the product portfolio from
44.2% in FY15 to 46.0% in FY17. We expect this to further grow to 48.4%
for FY19E. Moving up the product value chain would aid the company in
expanding its EBITDA margin through increasing proportion of high
margin products like ghee, butter, cheese, paneer and curd.
Exhibit 2: Stepping up value chain key to growth and profitability
Source: Company, ICICIdirect.com Research
Shareholding pattern (as on March 2017) (%)
Shareholder Holding (%)
Promoter 48.9
DII 3.9
FII 2.6
Others 44.6
Total 100.0
Source: Capitaline, ICICIdirect.com Research
FII and DII Trend (%)
28.1
3.3 2.8 2.6 3.5 3.2 3.0 3.9
-
5.0
10.0
15.0
20.0
25.0
30.0
Q1FY17 Q2FY17 Q3FY17 Q4FY17
FII DII
Source: bseindia.com, ICICIdirect.com Research
Page 3 ICICI Securities Ltd | Retail Equity Research
Procurement infrastructure – backbone of company
Being a dairy company, the procurement infrastructure defines the
competitiveness. Prabhat follows the direct sourcing ecosystem for ~70%
of its milk procurement. Direct milk procurement is favourable on account
of the flexibility it provides the company to get access to high quality milk,
maintain strong relationships with farmers and maintain access with them
to make them aware about best practices. Prabhat is focused on
educating dairy farmers about cattle breeding, feed, nutrition &
medication, insurance and financing along with training in milking,
storage and milk delivery to collection centres.
Prabhat procures milk from 85,000 farmers across 1200 villages twice a
day resulting in 750 procurement cycle per year. The procurement for the
company is currently concentrated in Maharashtra (seventh largest milk
producing state in India). Ahmednagar, Pune, Nashik and adjoining
districts are major hubs. At present, Prabhat has more than 440 milk
collection centres, ~20 milk chilling plants and ~100 bulk milk coolers,
ensuring quality protection and timely delivery.
Farmers are paid based on fat and solids-not-fat (SNF) content of milk.
The payment cycle for them is third-thirteenth-twenty third of every
month. The payment is directly done in their bank account. This direct
and transparent payment system strengthens the long term association of
farmers with the company.
Going forward, with increasing capacity utilisation, raw milk requirement
will increase. The company is in the process of ramping up its
procurement footprint to untapped regions like Sholapur and increasing
the quantum of milk procured from existing regions. Prabhat will continue
to meet the rest of the milk demand through third party agents.
Exhibit 3: Procurement quantity and realisation trend
32.1 35.0 38.5 41.5 43.8
18.8 18.3
21.822.7
24.3
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0.0
10.0
20.0
30.0
40.0
50.0
FY15 FY16 FY17E FY18E FY19E
Quantity procured (cr litres) Per unit cost (|/litre)
Source: Company, ICICIdirect.com Research
Proximity of processing units to market and procurement areas
Prabhat enjoys the advantage of having processing facilities at close
proximity to its key market. The company has two production facilities
strategically located at Shrirampur and Navi Mumbai at close proximity to
both key markets and milk procurement region. The Shrirampur unit is
~65 km from Ahmednagar, India’s largest cow milk producing district. On
the other hand, the Navi Mumbai unit enjoys close proximity to the
largest milk consuming urban centre. Additionally, the company enjoys
low transportation cost on account of close proximity of the production
facility to the market as well as its institutional clients.
Milk production in Maharashtra (‘000 tonnes)
80448469 8734
90899542
10153
0
2000
4000
6000
8000
10000
12000
FY11 FY12 FY13 FY14 FY15 FY16
Source: National Dairy Development Board, ICICIdirect.com
Research
Page 4 ICICI Securities Ltd | Retail Equity Research
Investment Rationale
Increasing utilisation levels, favourable mix to drive revenue
Prabhat has posted strong revenue CAGR of 23.9% in FY12-17 driven by
significant growth in traditional VADPs - SMP, butter & ghee and
condensed milk. Condensed milk, which is supplied mainly to Mondelez,
also witnessed healthy growth at 13.8% CAGR in FY12-16. However, with
a change in ingredient for Mondelez (shift from condensed milk to SMP),
revenues from condensed milk declined significantly in FY17. There was
similar growth in SMP sales. Prabhat forayed into production of non-
traditional VADPs in the recent past. The company commenced ice cream
& curd manufacturing in FY14 and cheese & shrikhand in FY16. These
categories are in a nascent stage of capacity utilisation and market
growth. It launched its ice-cream brand, Volup, in Q4FY17. It has launched
the brand in both mass (Volup) and premium (Volup Sinsane) segment.
Going forward, we believe that with focus on the brand proposition and
penetration in new markets (various tier II, tier III cities), utilisation of
newly entered categories like cheese, shrikhand & paneer, ice cream,
flavoured milk, curd and UHT is set to improve to 45%, 65, 65%, 60% and
55%, respectively, by FY19E. We believe with improving utilisation and
favourable revenue mix towards VADPs, revenues will grow at 14.3%
CAGR in FY17-19E.
Exhibit 4: Increasing capacity utilisation (%) to aid share of VADPs in revenue
641.1
856.7
1003.7
1167.7
1409.9
1616.3
1842.5
0.0
10.0
20.0
30.0
40.0
0.0
400.0
800.0
1200.0
1600.0
2000.0
FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Net sales (| crore) % growth
Source: Company, ICICIdirect.com Research
Increasing share of value added products to be long term driver
The organised milk segment forms only 22% of the total milk industry.
The proportion is estimated to increase to 25.5% by FY20E. With
increasing urbanisation, growing consciousness towards health &
nutrition coupled with higher discretionary income, and shift in demand
from the unorganised to the organised market, Prabhat is well positioned
to leverage this opportunity. The share of value added products
(excluding SMP) in the sales portfolio was 46.0% in FY17. We estimate it
will reach 48.4% by FY19E aided by an increase in capacity utilisation.
Additionally, VADPs enjoys higher operating margins, which will be a
long term driver for the company’s profitability.
VADPs attract higher margins (Industry average)
Product Gross margin (%) EBITDA margin (%)
Liquid/ Pouch Milk 18-20% 4-6%
SMP 4-5% 1-2%
Ghee 15-18% 8-10%
Butter 15-18% 6-8%
Curd 35-40% 14-15%
Cheese 25-30% 16-20%
Whey 40-45% 20-25%
Flavored Milk 22-25% 10-12%
Buttermilk 20-22% 12-15%
Source: Industry, ICICIdirect.com Research
Page 5 ICICI Securities Ltd | Retail Equity Research
Exhibit 5: Increasing capacity utilisation (%) to aid share of VADPs in revenue
50.0
55.0
50.047.0
12.0
60.0
65.0 65.0
55.0
45
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Curd Ice cream Flavored milk UHT Cheese, paneer, shrikhand
Cap
acit
y u
tilizati
on
(%
)FY17E FY19E
Source: Company, ICICIdirect.com Research
How VADPs is adding value to milk
All dairies in India are in a race to shift their product portfolio towards
VADPs given the lucrative operating margins. To understand the same,
we have analysed value addition in milk when it is processed in various
product (forms). Depending on the conversion ratio and considering the
sale price of various products (current MRPs), we conclude that curd,
cheese and flavoured milk add maximum value to plain milk at | 63 per
kg, | 46/kg and | 44 per litre, respectively (assuming milk price at |
29/litre).
Exhibit 6: Incremental realisation in VADPs (|/unit)
8
63
46
27
44
47
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Fresh
Milk*
UHT Curd Cheese Paneer Flavored
Milk
Source: Industry, ICICIdirect.com Research; * including per unit realisation of ghee and butter
(by-products)
Exhibit 7: Conversion ratio
25
9.5
7.5
2.5
1.2
1.2
0 5 10 15 20 25
Butter+Ghee*
Cheese, paneer
Milk powder
Condensed milk
Flavored milk, curd
Milk
Source: Industry, ICICIdirect.com Research; * by-products
Marquee clientele base to benefit company
Prabhat has a strong clientele list for which it does ingredient
manufacturing and co-manufacturing. Despite garnering 70% sales from
B2B clients, Prabhat enjoys the best operating margin of 9.0% (FY17) vis-
à-vis other players in the dairy space largely due to the focus on speciality
ingredient manufacturing, which attracts high margin. Additionally, the
company has cost plus margin agreements based on quality and/or
quantity specifications, which are usually renewable after two to three
years, thus, shielding the company from any significant fluctuation in
procurement cost. Prabhat started supplying to Mondelez India Foods
(formerly Cadbury’s) in 2008 and set up a dedicated condensed milk plant
for it in 2010. Mondelez is one of the largest institutional clients for
Prabhat (~15% of revenue) followed by Britannia, Abbott Healthcare, GSK
Consumer, Patanjali, etc. Overall, the top five clients of the company
currently contribute ~30-35% of total revenue.
Page 6 ICICI Securities Ltd | Retail Equity Research
Exhibit 8: Major clients
Premium Ingredients Clients
Sweetened condensed milk, skimmed/whole milk Powder Mondelez India Foods Pvt Ltd
Skimmed/whole milk powder GSK Consumer Healthcare, Heinz
Nutrition supplements for baby food Abbot Healthcare Pvt Ltd
Full cream milk Mondelez India Foods Pvt Ltd
Co-manufacturing Clients
UHT milk, lassi, yogurt, dairy whitener, clarified butter (ghee), curd (dahi), flavoured milk Britannia
Ice-cream, candies Mother Dairy
Source: CRU Monitor, ICICIdirect.com Research
Increasing focus on consumer business
The share of Prabhat’s consumer business has improved from a mere
~11% in FY12 to 30% by FY17. With a strong foothold in the institutional
segment, the company is now focused on increasing the share of the
consumer business to 50% by FY20E. It retails its consumer brand under
Prabhat, Prabhat Milk Magic, Prabhat Flava and Volup. For penetrating
into the consumer segment, the company is more focused on continuous
innovation of consumer products, particularly in value added segment.
Prabhat plans to increase its reach to tier II, tier III towns with increasing
disposable income. Additionally, apart from traditional stores, it is making
its presence felt in modern trade as well through tie-ups with Big Bazaar,
Reliance, HyperCity and D-Mart to improve brand visibility. We believe
this focus of the company will lead to brand acceptability in the market.
With increasing share of the consumer business, the company will be
able to earn better gross margins over time (from 17.0% in FY17 to 18.7%
in FY19E). At present, Prabhat is focusing more on ghee, curd, UHT,
flavoured milk, ice-cream etc, for the consumer space. The company’s
plan to launch cheese & paneer (high margin products) in the retail space
may take another two to three years as currently the focus of these
categories is on the hotel, restaurant and catering (HORECA) segment. In
Q4FY17, it launched ice cream brand Volup in areas like Nashik,
Ahmednagar, Aurangabad, Jalgaon and Dhule in both mass (Volup) and
premium (Volup Sinsane) segments.
Exhibit 9: Consumer product portfolio – brand building underway
Source: Company’s analyst presentation, ICICIdirect.com Research
Any narrowing of price points to be added advantage
In the dairy space, companies like Britannia, Nestlé and Danone enjoy
premium pricing due to their strong brand names. Prabhat’s products are
competitively priced in comparison to peers (except premium brands).
We believe that as and when the brand develops and gets stronger, the
premium gap will shrink leading to additional profitability.
We expect the company to incur advertisement expense of |
24.2 crore and | 27.6 crore in FY18E and FY19E, respectively
Page 7 ICICI Securities Ltd | Retail Equity Research
Exhibit 10: Price comparison across product range
Product Unit Prabhat Parag Amul Mother dairy Britannia Nestle Danone Patanjali
UTH 1 litre 60 65 60 60 75 75 80
Cheese 200 gm 82 100 99 130 130
Paneer 200 gm 75 85 66 65
Lassi 250 gm 20 20 20 20
Ghee 1 litre pouch 525 530 455 510 555 530
Curd 400 gm 45 60 42 45 60 60 65
Butter 100 gm 50 42 44 44 45
Flavored milk 200 ml 26 25 20 20-25
Source: Company, E-commerce websites, ICICIdirect.com Research
Prabhat bets big on HORECA segment for cheese growth
To tap the opportunity in the high growth cheese industry, Prabhat has
commissioned the third largest cheese plant in India at its Shrirampur
plant with a capacity of 30 MT per day in 2015 (to be ramped up to ~45%
capacity utilisation by FY19E). This is the third largest cheese plant in
India after Amul and Parag Milk Foods. The company remains bullish on
the prospect of the segment. The cheese market is expected to grow at
~31% CAGR in FY16E-20E to | 5900 crore. Currently, the cheese segment
is dominated by Amul and Parag Milk Foods with 42% and 32% market
share, respectively. Given the huge growth opportunity of the segment
and increasing capacity utilisation, we expect the revenue share of cheese
(along with paneer) to reach 9.8% in FY19E to | 176.8 crore.
Currently, the company manufactures processed cheese (hard, soft &
pizza), mozzarella cheese (diced & shredded), cheddar cheese and ricotta
cheese. The cheese segment, with higher gross margin (25-30%) vis-à-vis
other dairy products, is expected to aid the company’s gross margin with
increasing utilisation levels. Prabhat has chalked out a strategy for the
segment growth in next two or three years, including the following:
• Focus on HORECA, B2B and exports to Gulf countries: Initially, the
company plans to remain focused on the fast growing HORECA
segment for the cheese segment. It has already bagged orders from
major pizza and burger chains like Dominos, Pizza Hut, McDonald’s
and other QSRs for supply of cheese as per their specifications
• Currently, it is only selling cheese in Maharashtra and Gujarat.
However, expansion in South & North India is under process.
Whey – by-product with additional value
Whey is the liquid component of milk protein, which is left after removal
of casein and fat from milk in manufacture of coagulated products like
cheese, paneer and chhana as a by-product. Total whey produced in the
country can be broadly classified into two categories – acid whey
(inedible) and sweet whey (edible). Additionally, whey is sold in two
forms – liquid and powder – depending on the product requirement. The
input output ratio for the same while manufacturing cheese is 2:1, where
whey is produced in liquid form as a by-product. Currently, Prabhat’s
cheese facility utilisation is minimal. Hence, contribution from sale of
liquid whey is negligible. However, we believe once cheese capacity
ramps up, 45% by FY19E, there should be incremental contribution from
whey. However, we are not factoring in any revenue from whey in our
estimates.
Other VADPs also gaining traction through collaboration
Prabhat is now partnering other dairy players to manufacture curd,
shrikhand, paneer, ice cream, etc for other players like Mother Dairy,
Patanjali, Britannia, Heritage Foods, etc. The company recently added
capacity in these segments. It has also entered into a MoU with Nutridor,
Thailand, for co-manufacturing its cow ghee, mozzarella cheese and
sweetened condensed milk. We, thus, expect the utilisation level to
improve with strengthening partnerships with other players & own brand.
Ramping up of cheese facility
0.9
12.0
30.0
45.0
0.0
50.0
100.0
150.0
200.0
FY16 FY17E FY18E FY19E
0.0
10.0
20.0
30.0
40.0
50.0
Revenue (| crore) Capacity utilization (%)
Source: Company, ICICIdirect.com Research
Whey categories in India:
(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
Page 8 ICICI Securities Ltd | Retail Equity Research
Established distribution network; eyeing new markets through third party
Prabhat retails its products under brands Prabhat, Flava, Milk Magic and
Volup. It has ~250 sales professionals engaged in distribution along with
700 distributors and 100 mini stockists. In the HORECA segment, the
company has a strong presence across India’s metro cities. Prabhat’s
distribution network comprises super-stockists, C&F, CSA, modern trade
retail shops, third-party distributors as well as modern and specialty
channels. At present, the company retails its products with longer shelf
life [e.g. ghee, cheese and ultra-high temperature processing (UHT) milk]
across Maharashtra, Madhya Pradesh, Goa, Gujarat, Rajasthan, Himachal
Pradesh, Jammu & Kashmir, West Bengal, Assam, Andhra Pradesh, Bihar,
Chhattisgarh, Jharkhand, Punjab, Haryana and other north eastern states.
However, fresh products are restricted to Maharashtra and nearby areas.
During FY16, the company adopted Raftar, a new approach, to deliver
fresh curd in chilled vans and two-wheelers with chilling boxes to local
grocery outlets and rural heartlands, respectively. Through this model, it
has reached 9,000 outlets in Mumbai, with total curd sales of 100 tonnes
per month against 10 tonnes per month last year. Prabhat is also trying to
penetrate newer markets through third-party distributors. Additionally,
C&Fs are appointed to cater to the hotels, restaurants and catering
(HORECA) business in southern India. Apart from traditional stores,
Prabhat is making its presence felt in modern trade as well through tie-
ups with Big Bazaar, Reliance, HyperCity and D-Mart.
Page 9 ICICI Securities Ltd | Retail Equity Research
Indian dairy industry
According to International Market Analysis Research and Consulting
(IMARC) group, Indian dairy production is expected to grow to 185 MMT
at 4.8% CAGR in 2015-20E. In value terms, the total dairy market
(organised and unorganised) is estimated to grow at 14.9% in the same
period to | 9.4 lakh crore. As per industry data, milk processing capacity
in the country was at 730 lakh litre per day (LLPD) (by December 2015)
and is estimated to grow 40% to 1050 LLPD by 2018E. The milk industry
in India is highly unorganised with 80% of total milk production
consumed in the unorganised segment (self consumption and selling by
local vendors). Out of the total milk produced, 52% is self consumed
while the remaining 48% is available for selling purpose. Further, out of
the 48% available for sale, only 20% is available to organised players –
private (55%) and cooperatives (45%). The per capita milk consumption in
India is 97 litre per year vis-à-vis the US with per capita consumption of
285 litre per year and EU at 281 litre per year.
Exhibit 11: Dairy industry structure in India
Source: Industry reports, ICICIdirect.com Research
The organised milk industry is estimated at | 1.2 lakh crore for FY16. It is
expected to grow at 19.6% CAGR in 2016E-20E to | 2.4 lakh crore with an
increase in market share of the organised industry from 22% to 26% over
the same period.
Exhibit 12: Organised dairy market growth (| crore)
0
50,000
100,000
150,000
200,000
250,000
2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Industry reports, ICICIdirect.com Research
Unorganised
80%
Organised
20%
Private
52%
Cooperatives
48%
Page 10 ICICI Securities Ltd | Retail Equity Research
Following the conventional dietary pattern of Indians, liquid milk is the
largest contributor to the industry at ~65% market share followed by
ghee at ~15%. Emerging products like cheese, flavoured milk contribute
just 1.5%, 1.6%, respectively. Over the years, curd and paneer, which
were highly dominated by local vendors, are also gaining momentum.
Milk production is growing at 4.3% with consumption at 5%, widening the
gap between demand and supply.
Structural shift in dairy industry panning out
Changing customers’ preferences and spending patterns are leading to
two major structural shifts in industry:
a. Shift from unorganised to organised players
Unorganised players are preponderant in the Indian dairy industry with
80% market share (as of FY14). The organised market has slowly grown
from 16.7% in 2010 to 20.8% in FY14. In FY10-15, growth of the
organised sector at 20.5% CAGR has surpassed unorganised sector
growth for the same period at 14.2% CAGR. Going forward, with growing
urban population, higher disposable income and rising consciousness
about packaged products, the organised dairy industry is expected to
grow at a faster rate in coming years. According to IMARC, organised
dairy industry is estimated to grow at a CAGR of 19.6% in FY16-20E.
b. Shift towards VADPs – new milk revolution
Favourable demographics (with more young population), increasing
urbanisation and higher disposable income have given a big push to
demand for non-traditional VADPs like cheese, condensed milk, UHT,
flavoured butter, milk, yoghurt, protein-based beverages and health
supplements. As per the IMARC report, the VADP market is expected to
increase at 19.2% CAGR in 2015E-20E, from | 28700 crore to | 69000
crore. The shift towards VADPs will be the greatest lever for growth of
conventional dairy players as VADPs enjoy huge premium and a longer
shelf life compared to conventional milk forms. Additionally, gross and
operating margin for VADPs are 2-3x greater than raw milk.
Key factors for rising demand for VADPs
i) Changing lifestyles and increasing health awareness, especially among
the young population, is leading to evolution of low-fat high-protein
dietary patterns, driving demand for products like low fat
yoghurts/cheese, protein-based health drinks/supplements among others.
ii) Aggressive growth plans of QSR players will also lead to a significant
rise in demand for fresh milk, condensed milk and cream, especially from
coffee chains with cheese demand from pizza and burger chains.
Additionally, traditional VADPS like ghee and butter will remain in
demand from food chains/restaurants with evolving habit of eating out.
iii) VADPs are gaining popularity with the increasing young population
who are more inclined towards fast food consumption, which requires
cheese usage in convenience foods for pizzas, pasta, burgers, etc.
Additionally, today 65% of total milk is sold in liquid form in India against
~11% in the European Union (EU). This provides immense potential for
growth of VADPs, going forward.
Today 65% of total milk is sold in liquid form in India against
~11% in European Union (EU)
Page 11 ICICI Securities Ltd | Retail Equity Research
Exhibit 13: Contribution of different categories in total dairy industry (%)
64.6
13.4
3.45.9
1.5 1.6
9.6
66.5
12.1
4.3 4.72.5 2.0
7.9
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Liquid milk Ghee UHT Milk SMP Cheese Flaovored
milk
Others*
2015 2020E
Source: Industry Reports, ICICIdirect.com Research
Exhibit 14: Realisation growth over years to be favourable (|/unit*)
45 56
466 458
130 119
33
285 281
208
9971
96
726707
201185
51
444 442
324
154
0
100
200
300
400
500
600
700
800
Liq
uid
milk
UH
T M
ilk
Ghee
Cheese
Curd
Fla
vored
milk
Butterm
ilk
Paneer
SM
P
Cream
Lassi
2015 2020
Source: Industry Reports, ICICIdirect.com Research
* Milk (liquid, flavoured), buttermilk, lassi in litre and ghee, cheese, butter, paneer, SMP in kg
Supply chain of Indian dairy industry – key to success
The supply chain is the basic artery of the whole dairy industry in India
and is the key determinant of success and competitiveness. Milk being
highly perishable in nature requires a strong and efficient supply chain in
order to survive the process from raw milk to processed milk and/or
VADPs. Further, procurement of milk depends on seasonality, yield of
cattle, government policies and global skimmed milk powder prices.
Winters are the flush season (September-February) for the dairy industry
as the favourable climate leads to excess milk production by animals
naturally. Hence, companies tend to procure excess milk during the flush
season also and keep them in inventory in the form of SMP for lean
seasons.
The supply chain in India starts with milk procurement either by
cooperatives or private players (other than self consumption and/or the
traditional milk sale) from large, medium and small-scale farmers. The
process is highly fragmented as there are large numbers of farmers who
own two to three milch animals and sell milk for the purpose of additional
income. The procured milk is collected in chilling centres, and then
transported to processing units where it is processed to meet milk
Three types of milk procurement channels:
a. Direct: companies procures directly form
farmers on daily basis
b. Indirect: companies procure from third party
vendors/agents
c. Hybrid: company uses a mix of both direct
and indirect channels to meet total
requirement
Page 12 ICICI Securities Ltd | Retail Equity Research
standardisation and later packed & sold. Additionally, companies, due to
the perishable nature of milk, convert excess milk to the powder form.
Today companies are involved in manufacture of VADPs in sync with the
shift happening in dietary trend of customers and increasing urbanisation,
which has led to an increase in demand for milk and milk products.
Exhibit 15: Supply chain of Indian dairy Industry
Source: Company Presentation, ICICIdirect.com Research
Therefore, as the dairy market is supply driven, boosting milk production
in India remains the key challenge. As announced in the Budget 2017, the
industry is set to receive | 8000 crore investment under NABARD to boost
the dairy infrastructure in India. The fund, which is expected to be spent
in a phased manner, will help add milk processing capacity, increasing
milk production and distribution capacity.
Companies procure milk either directly from farmers or buy from
agents/contractors or a combination of the two. Direct procurement is
desirable for the company as it enables more flexibility in terms of quality,
amount and pricing leading to better gross margins. Indirect procurement
is an expensive affair vis-à-vis direct, e.g. Kwality Foods procures only
~22% of its milk directly. Hence, it has the lowest gross margin among
peers at 9.7% (in FY17).
Regional nature limits procurement expansion
Due to the perishable nature of milk, procurement and distribution of milk
in conventional pouches is a very regional affair. Raw milk can get spoiled
in only a few hours, if not refrigerated. Additionally, in India, dairy farming
is more of an additional occupation of families with just two or three
cows. Thus, the fragmentation and perishable nature of milk restricts
flexibility in procurement and distribution on part of dairy companies.
However, with a shift towards VADPs and innovative packaging,
companies are expanding their distribution network for products with a
long shelf life.
An investment of | 35 crore is required to set up a milk
processing unit with two lakh litre per day (LLPD)
Page 13 ICICI Securities Ltd | Retail Equity Research
Exhibit 16: Top 10 milk producing states in India
0
5000
10000
15000
20000
25000
30000
UP
Raja
sthan
Guja
rat
MP
AP
Punja
b
Maharashtra
Haryana
Bih
ar
Tam
il N
adu
('0
00
to
nn
es)
FY15 FY16
Source: Industry Reports, ICICIdirect.com Research
Low yield of milch animals in India vis-à-vis developed companies
The per annum yield of milch animals at 1.2 tonnes per cow and 1.7
tonnes per buffalo is much lower than other milk producing nations such
as the US, Germany, New Zealand (3 tonnes per animal), etc. This makes
the strong and seamless procurement channel all the more important
coupled with a wider product portfolio to have a strong presence in the
market. In 2015, 51.1% of the country’s milk output came from buffaloes,
followed by crossbred cows (25.2), indigenous cattle (20.2) and other
animals (3.5). Dairy India expects the contribution of buffaloes to fall to
45.5%, indigenous cows to 16.3% and other animals to 3.2%. Total ~35%
of India’s milk is expected to come from crossbred cattle by 2020 whose
population is likely to go up from 3.97 crore to 5.4 crore.
High SMP prices globally lead to high price in local market
India witnessed highest export of SMP in FY14 when SMP prices were at
their peak in the global market. However, in the last two years, prices
have crashed on account of high global inventory. SMP prices are down
~50% from the peak of ~$4500 per tonne (in March 2014) to ~$2160 per
tonne currently and have adversely impacted export. Strong global prices
also lead to strong prices domestically as companies get inclined towards
exporting SMP rather than selling milk locally to earn higher margins.
Hence, they are ready to pay higher prices even for procurement. With
time, newer players have started experimenting with export of cheese in
addition to SMP. New entrants in the dairy space, Parag Milk Foods and
Prabhat Dairy have entered the export of cheese as it provides a huge
opportunity. Though the quantum remains minuscule, it provides
companies with a broader horizon, going forward.
Page 14 ICICI Securities Ltd | Retail Equity Research
Exhibit 17: SMP exports decline with lower prices
37.4
25.6
87.8
159.3
66.4
0
40
80
120
160
200
FY11 FY12 FY13 FY14 FY15
('0
00 to
nn
es)
Source: Industry reports, ICICIdirect.com Research
Exhibit 18: Global SMP price trend ($/MT)
0
500
1000
1500
2000
2500
3000
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
$/MT
Source: Global dairy trade, ICICIdirect.com Research
Where does India stand in global dairy industry?
Globally, milk production has grown at 2.3% CAGR in 2010-14 to 792
MMT led by a) population growth, b) urbanisation with rising disposable
income, c) favourable demographics and d) shift towards branded
products. However, India, which accounts for 18% of total world dairy
and dairy products, grew faster over the same period at 5.8% CAGR to
138 MMT over the same period. It further increased to 155.5 MMT in
FY16. India is the world’s largest consumer of milk ahead of markets like
the US, China, Russia and Pakistan.
Exhibit 19: Largest producer of milk (in 000 MT)…
166148157142
97117
4571939655 35799
0
40000
80000
120000
160000
200000
EU India USA China Pakistan Brazil
Source: Industry reports, ICICIdirect.com Research
Exhibit 20: …but with low capita consumption (litre)
285 281
220
156
97
24
0
50
100
150
200
250
300
United
States
EU27 Russian Brazil India China
Source: Global dairy trade, ICICIdirect.com Research
Exhibit 21: Plethora of opportunities across segments
Unorganised
share
Organised
share
(%) (%) FY14 FY20E CAGR (%) FY14 FY20E
CAGR
(%)
Liquid milk 80% 20% 15% 68.0 90.0 5% 2,621.0 6,068.0 15% Amul (20.2%), Nandini (8.1%) Mahanand Dairy (5.2%)
UHT 100% 27% 0.5 1.1 15% 26.0 103.8 26% Amul (40%), Nandini (30%), Visakha Dairy (10%)
Ghee 82% 18% 16% 1.5 2.0 4% 618.0 1,367.0 14% Amul (15%), Nandini (11%) and SMC Foods (9%)
Cheese 100% 24% 0.0 0.1 20% 12.0 59.0 30% Amul (42%), Parag (32%) Britannia (9%)
Curd 94% 6% 15% 2.7 3.6 5% 217.0 493.0 15% Nandini (20%), Tirumala (18%) and Amul (15%)
Paneer 98% 2% 16% 1.3 1.7 5% 293.0 654.0 14% Amul market leaderwith 28% market share
Categories
CAGR
(2010-14)
Volume (mt) Value (| bn)
Key players
Source: Industry reports, ICICIdirect.com Research
Page 15 ICICI Securities Ltd | Retail Equity Research
What it took India to reach this place
Milk production in India takes place across the length and breadth of the
country in rural households. The erstwhile milk deficient country has
become the world’s second largest milk producer after the European
Union (EU) over the last three decades. This was a result of ‘Operation
Flood’ and other initiatives taken by state and central governments.
‘Operation Flood’ was launched in 1970 by India's National Dairy
Development Board (NDDB). Aided by the significant revolution, India
surpassed the US in milk production in 1998 and reached 17% of global
output in 2010-11. During these years, India doubled its per capita milk
availability and transformed dairy farming into the largest self-sustainable
rural employment generator.
Exhibit 22: Operation Flood – Transforms milk deficient company into dairy giant
Phase I
(1970–1980)
•Financed by the sale of SMP & butter oil donated by the European Union•Aimed at linking India's 18 best milksheds with the milk markets of the four
metropolitan cities of Delhi, Mumbai, Kolkata & Chennai
Phase II
(1981–1985)
•Number was raised to ~136 milksheds linked to over 290 urban markets
•By end of 1985, a self-sustaining system of 43,000 village cooperatives covering 4.25 million milk producers was in place
Phase III
(1985–1996)
•Enabled dairy cooperatives to rapidly build up the basic infrastructure required to procure and market milk in larger volumes; milksheds peaked at 173
•Veterinary first-aid health care services, feed and artificial insemination services for cooperative members were extended
Source: Industry reports, ICICIdirect.com Research
Page 16 ICICI Securities Ltd | Retail Equity Research
Growth opportunities by categories – quick glance
Exhibit 23: Liquid milk market size (| crore)
51,9
00
62,9
00
76,0
00
91,8
00
110,5
00
132,9
00
159,3
00
0
40000
80000
120000
160000
200000
2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Industry reports, ICICIdirect.com Research
Exhibit 24: UHT market size (| crore)
2,6
00
3,3
00
4,2
00
5,3
00
6,6
00
8,3
00
10,4
00
-
2,000
4,000
6,000
8,000
10,000
12,000
2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Industry reports, ICICIdirect.com Research
Exhibit 25: Ghee market size (| crore)
11,0
00
13,0
00
15,4
00
18,1
00
21,2
00
24,8
00
28,9
00
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Industry reports, ICICIdirect.com Research
Exhibit 26: Cheese market size (| crore)
1,2
00
1,5
00
2,0
00
2,7
00
3,5
00
4,6
00
5,9
00
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Industry reports, ICICIdirect.com Research
Exhibit 27: Flavoured milk market size (| crore)
1,3
00
1,6
00
2,0
00
2,5
00
3,1
00
3,9
00
4,8
00
-
1,000
2,000
3,000
4,000
5,000
6,000
2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Industry reports, ICICIdirect.com Research
Exhibit 28: SMP market size (| crore)
5,0
00
5,7
00
6,6
00
7,6
00
8,7
00
9,9
00
11,3
00
-
2,000
4,000
6,000
8,000
10,000
12,000
2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Industry reports, ICICIdirect.com Research
Page 17 ICICI Securities Ltd | Retail Equity Research
Competitive structure of Indian dairy industry
Era of cooperative dominance to end with private players stepping up
Consumers are becoming more conscious about hygiene in the products
they consume. This is leading to increasing competition in the dairy
space, which is dominated by cooperatives in India.
As per industry reports, private dairies are set to overtake cooperatives
and are estimated to handle larger milk volumes in the next five years.
During FY01, the share of private players was only 39%, which has
reached 50% in FY15 with both cooperatives and private dairy players,
procuring ~15.6 MT of milk. However, by 2020E, procurement of milk by
private players is estimated to reach 28.9 MT, ahead of 23.7 MT procured
by cooperatives. Currently, big cooperatives like Gujarat Cooperative Milk
Marketing Federation (Amul) and Karnataka Cooperative Milk Producers
Federation (Nandini) procure 170 LLPD and 63 LLPD, respectively. In the
private sector, Hatsun has highest procurement at 26 LLPD followed by
the likes of Heritage, Kwality in the range of 10-15 LLPD.
Private players’ white revolution
Slowly and steadily, private dairy players have been strengthening their
presence in the cooperative dominated industry. The remarkable fact
about this growth is that it has come about without any subsidies or
government support. The risk taking capacity and entrepreneurial
initiatives has led the way here. As per industry reports, it is estimated
that investments in the dairy business will broadly range between | 9,000
and | 10,000 crore in the next five years for capacity creation, milk
procurement, handling and product manufacturing. Majority of this
investment is expected to come from private dairy players who are
succeeding in setting foot in the dairy industry through innovation and
technology in product development and differentiation.
Exhibit 29: Working capital days trend across major private players (FY17)
Company Inventory days Debtor days Creditor days Working capital days
Prabhat Dairy 34 70 14 91
Parag Milk Foods 90 45 66 70
Heritage Foods 17 2 8 11
Hatsun Agro 26 4 15 15
Kwality 19 84 5 97
Source: Company, ICICIdirect.com Research
Page 18 ICICI Securities Ltd | Retail Equity Research
Exhibit 30: Dairy players – a comparison analysis
FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17
Processing capacity (mn litre/day) 1.5 2.0 1.5 2.5 4.3
Direct procurement 70% 80% 100% 95% 22%
B2B 70% 30% Nil 7% 60%
B2C 30% 70% 100% 93% 40%
Fresh milk + SMP 51% 54% 31% 34% 64% NA 68% NA 72% NA
VADPs 49% 46% 69% 66% 36% NA 27% NA 27% NA
Categories
Brands
Geographical presence
Net sales 1167.7 1409.9 1645.2 1730.7 2380.6 2642.9 3444.7 4199.7 6348.1 6871.8
Gross margin (%) 18.1 17.0 26.9 27.3 21.1 21.9 27.7 27.4 8.5 9.7
EBITDA 115.3 126.8 148.2 108.2 130.8 141.3 304.7 379.5 386.5 453.6
EBITDAM 9.9 9.0 9.0 6.2 5.5 5.3 8.8 9.0 6.1 6.6
PAT 23.2 46.9 47.3 17.5 55.4 66.9 60.5 134.0 164.0 194.2
RoE 3.6 5.1 13.1 2.7 23.1 22.2 26.2 38.6 19.2 17.4
RoCE 9.5 8.0 15.9 7.8 28.3 23.8 26.1 21.8 16.6 16.1
Debt 157.8 357.9 360.5 233.4 105.1 140.3 519.2 690.4 1469.2 1589.6
Asset turnover 1.4 1.3 2.2 1.9 6.5 5.7 4.4 3.8 2.7 2.5
TN, Karnataka, Goa & parts of AP
Milk, curd; buttermilk; ice cream
Heritage Food Hatsun Agro
Kwality, Dairy Best, Kream
Kountry, Livlite
Kwality
Ghee, milk, SMP, curd
Predominantly Maharashtra
NCR (Delhi), Rajasthan, Haryana,
Uttar Pradesh
Prabhat Dairy
Cheese, ghee, milk, SMP,
paneer, curd, , ice-cream, dairy
beverages, shrikhand
Prabhat, Flava, Milk magic,
Volup
Gowardhan, Go, Topp Up, Pride
of Cows
cheese, ghee, milk, SMP,
paneer, curd, dairy beverages
Ice cream, milk, curd, ghee,
butter, SMP, DW, paneer
Parag Milk Foods
Arun, Arokya, Hatsun, Ibaco,
Oyalo
Telangana, AP, Karnataka, TN,
Maharashtra & Delhi
Predominantly Maharashtra &
AP
Heritage
Source: Company, Analyst presentations, ICICIdirect.com Research
Page 19 ICICI Securities Ltd | Retail Equity Research
Financials
Increasing utilisation levels, favourable mix to aid revenues, margins
Prabhat has posted strong revenue CAGR of 23.9% in FY12-17 driven by
significant growth in traditional VADPs - SMP, butter & ghee and
condensed milk. Condensed milk, which is supplied mainly to Mondelez,
also witnessed healthy growth at 13.8% CAGR in FY12-16. However, with
a change in ingredient for Mondelez (shift from condensed milk to SMP),
revenues from condensed milk declined significantly in FY17. There was
similar growth in SMP sales. The company forayed into production of
non-traditional VADPs in the recent past. Prabhat commenced curd
manufacturing in FY14, cheese & shrikhand in FY16 and launched ice-
cream brand Volup in Q4FY17 (in both mass and premium segment).
These categories are in a nascent stage of capacity utilisation and market
growth. Thus, they have huge headroom for growth.
We believe that with improving utilisation levels and increasing mix of
VADPs, revenues of the company are expected to grow at 14.3% CAGR in
FY17-19E to | 1842.5 crore. The utilisation of newly entered categories
like cheese, shrikhand & paneer, ice cream, flavoured milk, curd and UHT
is set to improve to 45%, 65, 65%, 60% and 55%, respectively, by FY19E.
Exhibit 31: Increasing share of VADPs in revenue mix (%)
55.850.7 54.0 53.8 51.6
44.249.3 46.0 46.2 48.4
0.0
20.0
40.0
60.0
80.0
100.0
FY15 FY16 FY17 FY18E FY19E
Milk + milk powder VAP
Source: Company, ICICIdirect.com Research
Exhibit 32: Increasing share of VADPs in revenue mix (%)
21.314.0 13.2 12.5
29.4 40.0 40.6 39.2
21.623.0 22.9 23.9
23.7 12.0 8.2 6.3
0.23.0 7.0 9.8
3.8 8.0 8.1 8.4
0.0
20.0
40.0
60.0
80.0
100.0
FY16 FY17 FY18E FY19E
Milk Milk powder Butter+Ghee Condensed milk Cheese, paneer, shrikhand others*
Source: Company, ICICIdirect.com Research
Prabhat has historically enjoyed higher operating margin of ~10-11% in
the past vis-à-vis competitors on account of a) lower capacity utilisation,
b) higher proportion of revenue from institutional players where it follows
cost plus model and c) minimal advertisement cost. However, going
forward, we estimate operating margins will be marginally lower on
account of a) increasing capacity utilisation, b) increasing exposure to the
B2C segment and advertisement cost coming in play to strengthen the
brand (1.5% of net sales in FY19E) and c) increasing procurement cost.
We estimate operating margins will remain under pressure in FY18E to
9.1% on account of elevated milk procurement prices. Then with
softening in milk price growth and increasing share of high margin
categories i.e. non-traditional VADPs, we estimate the margin will reach
10.0% for FY19E. Further, the company is making an effort to increase the
share of the B2C business from current 27% to 50% by FY20E, which
could be an additional driver.
The company incurred marketing spend of | 8.1 crore, | 9.4
crore and | 18.0 crore in FY15, FY16 and FY17, respectively.
We estimate it will increase to | 27.6 crore (1.5% of net
sales) in FY19E
Page 20 ICICI Securities Ltd | Retail Equity Research
Exhibit 33: Increasing capacity utilisation to drive revenue growth
856.7
1003.7
1167.7
1409.9
1616.3
1842.5
0.0
400.0
800.0
1200.0
1600.0
2000.0
FY14 FY15 FY16 FY17 FY18E FY19E
0.0
10.0
20.0
30.0
40.0
Net sales (| crore) % growth
Source: Company, ICICIdirect.com Research
Exhibit 34: EBITDA margin of 10.0% expected in FY19E
90.4 103.8 115.3 126.8 146.9 184.3
10.6
10.3
9.9
9.09.1
10.0
0.0
40.0
80.0
120.0
160.0
200.0
FY14 FY15 FY16 FY17 FY18E FY19E
8.0
8.5
9.0
9.5
10.0
10.5
11.0
EBITDA (| crore) EBITDA Margin (%)
Source: Company, ICICIdirect.com Research
No significant increase in interest & depreciation cost to drive profitability
We estimate significant profitability growth of the company in FY17-19E.
With capacity already in place, Prabhat’s focus is on improving them over
time leading to expansion in operating margins. Only planned capex at
present is for | 50 crore for a) expansion of its SMP facility
(| 30 crore) to meet demand from Mondelez and b) distribution network
expansion (| 20 crore). Hence, interest cost and depreciation charges are
expected to remain capped as no significant capex is planned in the near
future. This is expected to lead to a significant increase in profitability with
PAT growing at 40.9% CAGR in FY17-19E. Additionally, Sunfresh Agro
Industries, a material subsidiary of the company, has received an
eligibility certificate on May 5, 2016 from the Government of Maharashtra
for its mega project under the Package Scheme of Incentives 2007 (PSI)
under which the company is expected to get VAT refunds. This is spread
over seven years from April 1, 2014 to March 31, 2021. Taking into
account the VAT refund estimates at | 19.1 crore and | 26.2 crore for
FY18E and FY19E, respectively, we expect adjusted PAT to register a
CAGR of 45.1% over the same period.
Exhibit 35: Adjusted PAT to grow significantly
20 26 23 35 49 74
46.7
29.7
-11.7
51.2
39.4
51.0
0.0
20.0
40.0
60.0
80.0
FY14 FY15 FY16 FY17 FY18E FY19E
-20.0
0.0
20.0
40.0
60.0
Adj. PAT (| crore) % growth
Source: Company, ICICIdirect.com Research
Page 21 ICICI Securities Ltd | Retail Equity Research
To clock healthy FCF, return ratios as investment slows down
Prabhat has incurred a capex of | 282.5 crore over FY13-16 for capacity
expansion and development of new category lines. On account of the
investment phase, the company had negative free cash flow (FCF) till
FY15. However, going forward, with no major capex planned, and
improvement in profitability, we expect the company to report marginal
positive FCF in FY18E, and further jump to | 56.3 crore in FY19E.
Additionally, we expect subdued return ratios to improve, going forward,
with increasing capacity utilisation in various categories. The RoE, RoCE
are estimated to reach 9.7%, 12.2%, respectively, for FY18E and FY19E.
Exhibit 36: FCF to turn positive, going ahead, on lower capex
(94.2)(86.9)
16.4
(4.5)
1.8
56.3
(150.0)
(100.0)
(50.0)
-
50.0
100.0
FY14 FY15 FY16 FY17E FY18E FY19E
Source: Company, ICICIdirect.com Research
Exhibit 37: Return ratios to improve with increasing capacity utilisation
7.5
3.6
5.1
6.8
9.7
9.09.5
8.0
9.7
12.2
6.4
9.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
FY14 FY15 FY16 FY17 FY18E FY19E
(%
)
RoE RoCE
Source: Company, ICICIdirect.com Research
No major capex on radar for now, leverage status to improve
We believe the company has already incurred the required capex for now
and would now focus on optimising the capacity utilisation leading to a
significant improvement in the gross block turnover of the company at
2.7x for FY19E. The company’s debt level peaked out in FY15 when it was
setting up a plant for manufacturing cheese. The debt/equity ratio for the
company was also at its peak during the year at 1.2x. However, with a
small capex plan of | 50 crore in the near future and improving
profitability, we estimate the company will enjoy low debt/equity ratio of
0.5x in FY17-19E. We are not expecting any decline in debt level for the
same period as with increasing capacity utilisation and share of VADPs,
the company’s working capital debt requirement with be there. Further,
with improving operating efficiency and a favourable product mix, the
interest coverage ratio is expected to improve substantially.
Exhibit 38: Improving leverage status
1.1
0.9
0.2
0.5 0.5
2.5
1.20.5
1.6
1.9
2.8
2.5
1.8
1.7 1.7
3.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
0.0
1.0
2.0
3.0
4.0
Debt/Equity (x) Interest coverage (x)
Source: Company, ICICIdirect.com Research
Exhibit 39: Gross block turnover (x) to improve
2.1
2.7
2.3
2.1
2.4
2.62.7
1.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Source: Company, ICICIdirect.com Research
Page 22 ICICI Securities Ltd | Retail Equity Research
Risk & concerns
Brand acceptability
Prabhat is an emerging dairy player in the dairy space and is currently in
the process of improving its exposure to the B2C segment. The company
is taking initiatives to make the brand strong and expand the retail
presence. However, if the brand is not accepted well by consumers, it
may adversely impact the profitability of the company.
Significant dependence on certain institutional clients
The company is currently significantly dependent on certain marquee
clients. Any disruption in contracts/orders may be a threat to Prabhat’s
revenue.
Lower procurement
The business is dependent on a large quantity of raw milk sourcing. Any
disruption in the existing procurement channel and/or inability to procure
at a competitive price can be a margin deterrent.
Concentration of entire procurement in Maharashtra
The company’s milk procurement operation is concentrated in
Maharashtra. Currently, the state is facing ~20% milk shortage (during
flush season due to consecutive droughts in past years). This may get
acute in the summer leading to higher procurement cost. Any such
adverse climatic condition, at present or future, may impede the
company’s profitability. Any real or perceived product contamination may
impact revenues and also damage brand reputation.
Usage of banned drugs to increase productivity of the milch animals
As per various news articles, Oxytocin, a banned drug, is used to procure
more milk from cattle as it helps cattle produce more milk. However, it
has severely harmful effects on the health of both, the animals it is
injected into and humans who consume milk that comes from them. This
drug not only reduces the reproductive ability of cows over time
(eventually making them barren) but also reduces their lifespan. Despite a
ban on artificially injecting hormone into cattle, this is being used at many
places as per various articles. Any identification of such issue can lead to
a disruption in procurement.
Page 23 ICICI Securities Ltd | Retail Equity Research
Valuation
We believe that with improving capacity utilisation levels and initiatives
undertaken to expand the distribution as well as procurement network,
Prabhat is all set to take off on the growth path. Aided by increasing
capacity utilisation and share of VADPs in revenue, we estimate the
company to post revenue CAGR of 14.3% in FY17-19E with an EBITDA
margin of 10.0% in FY19E. With the completion of the investment phase
and increase in capacity utilisation levels across categories, we expect
return ratios, RoCE and RoE, of the company to improve to 12.2% and
9.7% in FY19E against 8.0% and 5.1% in FY17, respectively. We initiate
coverage on Prabhat with a BUY recommendation and a target price of
| 140/share based on triangulated valuation.
Exhibit 40: Triangulated valuation
Multiple (x) Fair value (|) Weightage (%) Value (|)
EV/EBITDA 8.0 124 0.3 41
PE 16.0 152 0.3 51
DCF 143 0.3 48
Target Price 140
CMP 119
Upside (%) 18
Rating Buy
Source: ICICIdirect.com Research
Exhibit 41: One year forward PE band
0
50
100
150
200
250
300
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
20x 25x 30x 35x Close Price (|)
Source: Company, ICICIdirect.com Research
Exhibit 42: One year forward EV/EBITDA band
0
500
1000
1500
2000
2500
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
EV (|) 6x 8x 10x 12x
Source: Company, ICICIdirect.com Research
Page 24 ICICI Securities Ltd | Retail Equity Research
DCF valuation
Using the DCF methodology, we have arrived at a fair value of | 143 per
share, considering a terminal growth of 4% and weighted average cost of
capital (WACC) of 12.5%. We have assumed the company would witness
revenue growth (CAGR FY17-27E) of 12.2%, operating margins of 10.9%
and average tax rate of 27% till 2027E.
Exhibit 43: DCF
(| crore) FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E
EBITDA 115.3 126.8 146.9 184.3 214.1 250.4 279.7 312.4 348.9 389.7 435.3 486.3
Depreciation 39.6 43.2 45.5 48.1 48.8 49.9 55.7 60.0 67.1 71.3 75.7 80.1
Tax 13.5 27.4 23.2 34.3 84.1 101.0 60.5 68.1 76.1 86.0 97.1 109.7
NOPAT 62.2 56.2 78.2 101.9 81.2 99.5 163.5 184.2 205.8 232.4 262.5 296.5
Capital expenditure 12.4 47.1 55.0 25.0 15.0 15.0 25.6 28.6 31.9 35.7 39.8 44.5
Change in WC 24.2 245.0 60.5 75.2 -7.9 152.9 29.5 47.6 46.5 80.1 45.5 -3.0
FCF 65.2 -192.6 8.2 49.7 122.9 -18.6 164.1 168.0 194.4 188.0 252.9 335.1
| crore
4%
4348
0.3
1248
420
1668
378
111
1401
9.8
143
No. of Equity Shares
DCF Target Price
DCF valuation
Terminal Growth Rate
Terminal Value
Discounting Factor
PV of Terminal Value
PV of Cash Flow Till Terminal Year
Total Value of Firm
Gross Debt
Cash & cash equivalent
Target Market Cap
Source: Company, ICICIdirect.com Research
Exhibit 44: Relative valuation
Mcap
mn $ FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E
Danone 50135.6 18.1 18.5 17.2 15.5 10.6 9.9 1.8 1.8 16.1 16.8
Bright Dairy 2211.0 8.1 8.1 23.1 20.8 8.2 7.7 0.1 0.1 11.8 11.7
Fonterra 9463.5 9.4 9.5 10.6 9.7 7.8 7.4 0.4 0.4 12.2 13.1
Dean Foods 1676.0 5.5 5.5 12.8 12.4 5.7 5.8 0.2 0.2 17.3 18.1
Parag Milk Foods 318.9 6.9 8.0 36.3 26.2 15.2 11.4 1.0 0.8 9.5 10.9
Prabhat dairy 181.0 9.1 10.0 18.5 12.5 9.5 7.7 0.7 0.6 6.8 9.7
Mcap/sales EV/EBITDA EBITDAM (%) PE (x) ROE
Source: Company, ICICIdirect.com Research; Note: Bloomberg estimates for companies other than Prabhat Dairy
Page 25 ICICI Securities Ltd | Retail Equity Research
Financial Summary
Exhibit 45: Income statement
FY16 FY17 FY18E FY19E
Total operating Income 1167.7 1409.9 1616.3 1842.5
Growth (%) 16.3 20.7 14.6 14.0
Raw Material Expenses 928.3 1135.8 1291.6 1451.9
Employee Expenses 28.3 34.7 40.4 46.1
Marketing Expenses 9.4 18.0 24.2 27.6
Administrative Expenses
Other expenses 86.4 94.6 113.1 132.7
Total Operating Expenditure 1052.4 1283.1 1469.4 1658.3
EBITDA 115.3 126.8 146.9 184.3
Growth (%) 11.0 10.0 15.9 25.4
Depreciation 39.6 43.2 45.5 48.1
Interest 40.5 29.4 39.9 39.7
Other Income 1.5 1.3 5.4 4.4
PBT 36.6 55.4 66.8 100.9
Exceptional item 0 18.9 19.1 26.2
Total Tax 13.5 27.4 23.2 34.3
PAT 23.2 46.9 62.7 92.8
Growth (%) -11.7 51.2 39.4 51.0
EPS (|) 2.4 4.8 6.4 9.5
Adj. PAT 23.2 35.0 48.8 73.7
Adj. EPS (|) 2.4 3.6 5.0 7.5
Source: Company, ICICIdirect.com Research
Exhibit 46: Balance sheet
(Year-end March) FY16 FY17 FY18E FY19E
Liabilities
Equity Capital 97.7 97.7 97.7 97.7
Reserve and Surplus 548.0 590.5 621.9 659.0
Total Shareholders funds 645.6 688.2 719.6 756.7
LT Borrowings & Provisions 119.3 319.3 329.3 349.3
Deferred Tax Liability 38.4 38.6 33.6 28.6
Others Non-current Liabilities 0.0 0.0 0.0 0.0
Total Liabilities 810.6 1063.4 1099.8 1151.9
Assets
Gross Block 545.9 590.9 632.5 687.5
Less: Acc Depreciation 132.7 175.9 221.5 269.6
Net Block 413.2 415.0 411.0 417.9
Capital WIP 24.5 26.5 40.0 10.0
Net Intangible Assets
Non-current Investments 0.0 0.0 0.0 0.0
LT loans & advances 75.0 80.8 88.6 101.0
Current Assets
Inventory 87.9 133.3 168.3 212.0
Debtors 226.3 271.1 332.1 383.7
Loans and Advances 75.0 80.8 88.6 101.0
Other Current Assets 7.0 19.9 22.1 25.2
Cash 12.0 165.6 134.8 110.7
Deferred Tax Assests 3.6 2.8 2.8 2.8
Current Liabilities
Creditors 52.1 53.8 66.4 75.7
Provisions 0.5 0.5 0.5 0.6
Short term debt & other CL 7.9 13.5 15.5 17.6
Application of Funds 810.6 1,063.4 1,099.7 1,151.9
Source: Company, ICICIdirect.com Research
Page 26 ICICI Securities Ltd | Retail Equity Research
Exhibit 47: Cash flow statement
(Year-end March) FY16 FY17E FY18E FY19E
Profit After Tax 23.1 46.9 62.7 92.8
Add: Depreciation 39.9 43.2 45.5 48.1
(Inc)/dec in Current Assets 30.5 -79.4 -66.1 -71.1
Inc/(dec) in CL and Provisions -11.4 7.3 14.7 11.5
CF from operating activities 28.7 42.6 56.8 81.3
(Inc)/dec in Investments 0.0 0.8 0.0 0.0
(Inc)/dec in LT loans & advances 0.0 0.0 0.0 0.0
(Inc)/dec in Fixed Assets -32.2 -47.1 -55.0 -25.0
Others 2.2 0.0 0.0 0.0
CF from investing activities -24.3 -40.9 -21.4 -25.0
Issue/(Buy back) of Equity 300.0 0.0 0.0 0.0
Inc/(dec) in loan funds -253.2 200.1 5.0 15.0
Dividend paid & dividend tax 0.0 -18.8 -31.4 -55.7
Inc/(dec) in Sec. premium
Others -59.8 -29.4 -39.9 -39.7
CF from financing activities -13.0 151.9 -66.3 -80.3
Net Cash flow -8.6 153.6 -30.8 -24.0
Opening Cash 20.3 12.0 165.6 134.8
Closing Cash 12.0 165.6 134.8 110.7
Source: ICICIdirect.com Research
Exhibit 48: Ratio analysis
(Year-end March) FY16 FY17 FY18E FY19E
Per share data (|)
EPS 2.4 4.8 6.4 9.5
Cash EPS 6.4 9.2 11.1 14.4
BV 66.1 70.5 73.7 77.5
DPS 0.5 1.9 3.2 5.7
Cash Per Share 1.2 17.0 13.8 11.3
Operating Ratios (%)
EBITDA Margin 9.9 9.0 9.1 10.0
PBT / Total Operating income 3.1 3.9 4.1 5.5
PAT Margin 2.0 3.3 3.9 5.0
Inventory days 27.5 34.5 38.0 42.0
Debtor days 70.7 70.2 75.0 76.0
Creditor days 16.3 13.9 15.0 15.0
Return Ratios (%)
RoE 3.6 5.1 6.8 9.7
RoCE 9.5 8.0 9.7 12.2
Valuation Ratios (x)
P/E 50.1 24.7 18.5 12.5
EV / EBITDA 11.3 10.7 9.5 7.7
EV / Net Sales 1.1 1.0 0.9 0.8
Market Cap / Sales 1.0 0.8 0.7 0.6
Price to Book Value 1.8 1.7 1.6 1.5
Solvency Ratios
Debt/EBITDA 1.4 2.8 2.5 2.1
Debt / Equity 0.2 0.5 0.5 0.5
Current Ratio 6.6 7.5 7.4 7.7
Quick Ratio 5.1 5.5 5.4 5.4
Source: Company, ICICIdirect.com Research
Page 27 ICICI Securities Ltd | Retail Equity Research
Annexure I – Milk Pricing
The Food Safety and Standards Act (FSSAI), 2006 stipulates that the Milk
and Milk Products Order, 1992 shall be deemed to be regulations made
under this Act. The FSSAI prescribes specific standards for various types
of milk.
Milk is priced based on the fat and SNF content of milk at the time of
procurement.
Exhibit 51: Additional expenses
Sr.No Particulars Rate |/Litre
1.0 Internal transport 1.1
2.0 Can expenditure 0.1
3.0 Management expenditure 0.3
4.0 Chilling expenditure 0.4
5.0 Total Commission to Sangh (1+2.+3+4) 1.8
6.0 Commission to Society 0.7
7.0 Total Commission (5+6) 2.5
Source: Dairy Development Department, ICICIdirect.com Research
Exhibit 52: Printed transaction receipt - Prabhat
Source: Company Presentation, ICICIdirect.com Research
Exhibit 49: FSSAI standards for different classes and designations of milk
Class of milk Designation Minimum % milk fat Minimum % milk SNF
Buffalo Milk Raw, pasteurized, boiled, flavored, sterilized ~5-6 9.0
Cow Milk Raw, pasteurized, boiled, flavored, sterilized ~3-4 8.5
Source: Company, ICICIdirect.com Research
Exhibit 50: Case Study - Dairy development department, Maharashtra procurement price
Quality
Flush season
rate
Lean season
rate Quality
Flush season
rate
Lean season
rate
Fat% / S.N.F.% Rs/ Litre Rs/ Litre Fat% / S.N.F.% Rs/ Litre Rs/ Litre
3.5/8.5 22.0 22.0 6.0/90 31.0 31.0
3.6/8.5 22.3 22.3 6.1/90 31.3 31.3
3.7/8.5 22.6 22.6 6.2/90 31.6 31.6
3.8/8.5 22.9 22.9 6.3/90 31.9 31.9
3.9/8.5 23.2 23.2 6.4/90 32.2 32.2
4.0/8.5 23.5 23.5 6.5/90 32.5 32.5
4.1/8.5 23.8 23.8 6.6/90 32.8 32.8
4.2/8.5 24.1 24.1 6.7/90 33.1 33.1
4.3 /8.5 24.4 24.4 6.8/90 33.4 33.4
4.4/8.5 24.7 24.7 6.9/90 33.7 33.7
- - - 7.0/9.0 34.0 34.0
- - - 7.1/9.0 34.3 34.3
- - - 7.2/9.0 34.6 34.6
- - - 7.3/9.0 34.9 34.9
- - - 7.4/9.0 35.2 35.2
- - - 7.5/9.0 35.5 35.5
Buffalo Milk Cow Milk
Source: Dairy Development Department , ICICIdirect.com Research
Fat content:
Cow milk: Fat constitutes ~3-4% of the solid
content of cow milk, protein at 3.5% and
lactose at 5%.
Buffalo milk: Fat content is very high at twice
as high as that of cow milk on an average.
The fat: protein ratio in buffalo milk is about
2:1
The water contents of milk in cattle and
buffalo is ~ 83%
Page 28 ICICI Securities Ltd | Retail Equity Research
Annexure II – Company milestones & capacity details
Exhibit 53: Relative valuation
Source: Company, ICICIdirect.com Research
Exhibit 54: Capacity details
Shrirampur Navi mumbai Total
Aggregate milk processing capacity (litres/day) 1,100,000 400,000 1,500,000
Pasteurized and Pouch Milk (litres/day) 200,000 300,000 500,000
Milk Powders (Kg/day) 36,000 0 36,000
Condensed Milk (Kg/day) 180,000 0 180,000
Clarified Butter (Ghee) (Kg/day) 50,000 0 50,000
Flavored Milk (litres/day) 15,000 0 15,000
Butter (Kg/day) 2,500 0 2,500
Ice Cream (litres/day) 0 10,000 10,000
Curd (Flavored Yogurt, Pouch Curd) (Kg/day) 0 40,000 40,000
UHT Milk (litres/day) 40,000 0 40,000
Cheese (Cheddar/ Mozzarella/Processed) (Kg/day) 20,000 0 20,000
Paneer (Kg/day) 5,000 0 5,000
Shrikhand (Kg/day) 5,000 0 5,000
Source: Company, ICICIdirect.com Research
Page 29 ICICI Securities Ltd | Retail Equity Research
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
Page 30 ICICI Securities Ltd | Retail Equity Research
ANALYST CERTIFICATION
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research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific
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