Prabhat Dairy - our plan for profitability

QUT CONSULTING

Your current problem

How does Prabhat Dairy become the most profitable diary companies in Indian?

Imagine this future…

Prabhat – the most profitable

dairy company in India

149% profit increase

Diversified products

Future proof

Our strategy for you

The right place: greatest potential for sustainable profit & growth

The right product mix: focus on addressing underutilized assets & attracting new customers

The right channels to market: addressing the imbalance

Introductions

QUT’s Senior Consulting Team: Justin Bindman Arbess Balbarias Sarah Goulding Cameron Jones

Overview

External factors Internal capabilities Options Recommended strategy Implementation Plan Financial Analysis

External influences

Market Drivers

Technology Economic Social

• Advances in IT• Operational efficiency

gains in agri-businesses

• Dairy market global growth rate of 5% by 2017 ($5.5B)

• Current demand outweighs supply

• Expenditure on food 50% +

• Increase in young adult population

• Preference for buffalo over cow (religious reasons)

• Small farmers rely on low interest loans

• Customers gain more awareness in better nutrition

External influences

Influence Importance Impact

Tier 2 & 3 cities (40% will live there by 2030)

First mover advantage Potential to establish brand

Market share• 6 % MNC• 50% self consumption• 20% unorganized sector• 24% cooperatives

Competitive landscape Target market and strategy development

Tier 1 cities Strong competitor presence

Competitive rivalry is highPenetration difficult

Legally mandated floor price

Profit margins Increased cost of milk –reduced profit margins

Internal capability analysis

Internal capabilityValuable Unique Organised to

expand Key takeawayManufacturing: Manufacturing (ISO accred.) Ability to produce milk & value add

(existing

collection points)

Strong production capabilities

Supply chain management: Ability to source directly Collection points & chilling centers

Capabilities across the end to end supply chain

Workforce management: Ability to manage a large

workforce - Positioned to grow

Information technology: Data management Supplier customer and inventory

- Limited system sophistication

Options

Three key considerations:1. Geography

2. Channel to market3. Product Mix

External influences

Competitive Landscape

Internal Capability

Options – Geographic Evaluation

AssessmentAll Tiers Tier 1 Tier 2 & 3

Competitive landscape

Strong MNC presence in Tier 1

Leader in Tier 2 & 3

Strong MNC presence in Tier 1

More favourablecompetitive landscape

Profitability Good potential for profit

growth, but requires company can scale up significantly

Larger populations, but higher risk due to competitors

Leverage first mover advantage

Company capability to

infiltrate

Company may be spread too thin to successfully infiltrate

Existing presence is in tier 2 & 3; would need to alter business model

Able to leverage existing presence in tier 2 & 3

Options – Product Evaluation

AssessmentMilk focus Value add focus

(cheese, ice-cream) Milk + Value Add

Profitability Strongest dairy market But value add sphere is

growing Less profitable Strongest combined

profit potential

Company capability to

infiltrate

Established production lines (underutilized 20%)

But we also have capability in value add products

Established production lines

But we also have capability in value add products

Established production lines for both products

Options – Channel to Market Evaluation

AssessmentStrong B-B

(status quo)Strong B-C B-B & B-C

Balance

Profitability

Adverse effect on working capital

Potentially improvedworking capital

Potential to improve profitability by supplying directly to customers

Best combined potential for profitability

Mitigates risk on working capital

Company capability to

infiltrate

Current status so BAU approach

Need to increase collaborations with farms and small businesses (as well as large businesses)

Re B2B need to increase collaborations with farms and small businesses (as well as large businesses)

Recommended Approach

Geographic Spread

Product Mix Channel to market

RecommendedApproach

Tier 2 & 3 Milk focus + closely related value add

products

B2B & B2C focus – but need to build B-C

capability

Benefits

Significant market Avoid competition with

MNC Leverage & build

established relationships

Greatest profit potential Additional products

attract new customers

Increase profitability byincreasing B2C

Recommended Approach – Geography

Tier 2 & 3Lowest competitive

landscapeLeverage established

relationshipsGreatest profitability

potential

Further develop relationships with local farmers

Promote increase of buffalo over cow milk

Strengthen B2C capability with local stores

Recommended Approach – Product

Milk + related value add

(new product)Biggest market –

greatest profit potential

Most underutilized asset (20%)

Diversifying supply chain -introduce portion of importation

from NZ (20%) with Fonterra

New healthier products –FORTIFIED & LACTOSE FREE

Strengthen FLAVOURED MILK product line

Recommended Approach – Channels to Market

B2B & B2C Balance

Mitigates adverse effect on working

capital

Ease of accessing customers

Pursue relationships with smaller vendors

(in addition to larger shops)

Promote marketing of our own brand (esp. with new products)

How do we add value?

Farmer obtains milk

Collect milk and send to chill center

Transport to manufacturing

facilities

Products processed

and packaged

Distributed to business and end

users

Supply chain

Buffalo milk – reduce

cost

Fonterra JV -reduce cost

Customers –wider product

range

Risk and Implementation Plan

Risk Analysis

# RiskInitial Score Mitigation

Residual Score

1 Milk procurement in India is costly Severe

Diversify supply chain - JV with Fonterra, increase buffallo reliance Low

2Competitors are beginning to move into flavoured milk High

Move now to gain foothold in market Low

3 Production capacity is under utilised High

Increase capacity across polypack & value added Low

4 Working Capital is impacted by receivables High Incentivise customers to pay earlier Low

>75M

25

M-

75M

5M-2

5M75

0k-5

M<7

50k

Rare Unlikely Possible Likely Certain<5% 5-15% 15-50% 50-75% >75%

1

2

34

1

2

34

Implementation Strategy

Val

ue A

dd

ed

Manufacturing UpgradesHR RecruitingIT Infrastructure

JV with Fonterra for 20% SupplyIncentivize buffalo milk production

MarketingDistribution channelsGeographical Expansion

Production Supply Distribution

Implementation Plan

Phase I Phase II Phase III2017 2018 2019

Human Resources Rp50 Rp52 Rp53

Manufacturing upgrades Rp155 Rp50

IT Infrastructure Rp37

Fonterra JV - 20% Supply Rp201 Rp168Incentivising Buffalo

Production Rp8 Rp8 Rp8

Distribution Channels Rp69

Retail Outlets Incentives Rp44 Rp44

Marketing Campaign Rp101 Rp235

Geographical Expansion Rp268Totals (M Rp) Rp1,550 Rp250 Rp525 Rp775

Produce

Supply

Distribute

Strategy Tactic

Implementation Plan

Phase I Phase II Phase III2017 2018 2019

Human Resources Rp50 Rp52 Rp53

Manufacturing upgrades Rp155 Rp50

IT Infrastructure Rp37

Fonterra JV - 20% Supply Rp201 Rp168Incentivising Buffalo

Production Rp8 Rp8 Rp8

Distribution Channels Rp69

Retail Outlets Incentives Rp44 Rp44

Marketing Campaign Rp101 Rp235

Geographical Expansion Rp268Totals (M Rp) Rp1,550 Rp250 Rp525 Rp775

Produce

Supply

Distribute

Strategy Tactic

Implementation Plan

Phase I Phase II Phase III2017 2018 2019

Human Resources Rp50 Rp52 Rp53

Manufacturing upgrades Rp155 Rp50

IT Infrastructure Rp37

Fonterra JV - 20% Supply Rp201 Rp168Incentivising Buffalo

Production Rp8 Rp8 Rp8

Distribution Channels Rp69

Retail Outlets Incentives Rp44 Rp44

Marketing Campaign Rp101 Rp235

Geographical Expansion Rp268Totals (M Rp) Rp1,550 Rp250 Rp525 Rp775

Produce

Supply

Distribute

Strategy Tactic

Financial Analysis – Overview

Metric 2015 2016 2017 2018 2019Revenue As Is Rp1,004 Rp1,172 Rp1,348 Rp1,536 Rp1,736

Revenue Proposed Rp1,172 Rp1,383 Rp1,653 Rp2,000Revenue As Is Growth % 117% 115% 114% 113%

Revenue Proposed Growth % 117% 118% 120% 121%

Expenses As Is Rp978 Rp1,147 Rp1,346 Rp1,578 Rp1,851Expenses Proposed Rp1,147 Rp1,356 Rp1,626 Rp1,963

CAPEX Proposed Rp3 Rp5 Rp8Expenses As Is Growth % 117% 117% 117% 117%

Expenses Proposed Growth % 117% 116% 116% 116%

Profit As Is Rp26 Rp25 Rp23 Rp22 Rp21Profit Proposed Rp25 Rp27 Rp27 Rp37

Profit As Is Growth % 94% 94% 94% 94%Profit Proposed Growth % 94% 110% 101% 135%

Financial Analysis – Assumptions

Key AssumptionsImported NZ milk after tariffs & exchange rate still approximatley 8% cheaperFlavoured milk margin 30-35%Milk margin 7%Market size of milk 36 trillion Rupees (56%)Market size of flavoured milk 2.5 trillion Rupees10-15% marketshare gain per year for flavoured milk3-4% marketshare gain per year for polypack milk

Financial Analysis – Revenue & Expenses

171% growth

Financial Analysis – Profits

149% growth

Your call to action

Social and economic trends are pointing towards Tier 2 & 3 cities

Internal capabilities exist; but IT has the potential to create significant operational efficiencies

Opportunity to improve the value chain at multiple points AND on multiple levels

Your call to action

The right place: Tier 2 & 3 The right product mix: milk focus (more buffalo) &

value add The right channels to market: 50% balance of B2B &

B2C