The pun in the title of this article would have helped you understand that we are going to look at the milk (doodh) sector today – and we are going to look at one specific company in detail – Parag Milk Foods.
Sector Introduction –
Globally, the EU, India and the US are the largest dairy products producers and consumers and accounted for around 50% share in global dairy production. India is the world’s largest milk producing and fastest growing country.
The Indian Dairy Industry is one of the largest and fastest growing markets for milk and milk products. The total industry size stands at approximately Rs 7.1 trillion in 2018 (as per market realizations) and is projected to reach a value of RS 9.4 trillion by 2020. India has outpaced global growth in the past 35 years and is expected to continue the trend going forward.
In the last 35 years, Indian milk production outstripped with 4.5% CAGR as against 1.6% CAGR posted by global milk production. India has come a long way from being in a deficit from 20mn MT in 1970 to being the world’s largest milk producing country at 180mn MT.
While unorganized sector still continues to hold more than 75% share of Indian dairy sector, the trend is changing rapidly and organized players are gaining more market share and the organized sector is growing at around 20% as compared to sector growth of 4-5%. The major reasons for this phenomenal growth of the organized sector are consumption and the market shift to high margin Value-added Dairy products, large vegetarian population with substandard protein consumption, higher disposable income and improving living standards of the middle class of the country.
The dairy industry comprises mainly two sub-categories:
1. Commodity: Comprises of fresh milk and skimmed milk powder
2. Value-added products: Comprises of a gamut of products like Ghee, Curd, Cheese, Paneer, Beverages, and Whey protein, among others
About Parag Milk Foods –
Parag Milk Foods Pvt. Ltd. was founded in 1992, a time which saw a lot of milk holidays. As a result, the farmers were forced to throw away all their milk as co-operatives didn’t take milk from them on holidays. It was then that Devendra Shah tapped the opportunity and started processing milk collected from farmers during holidays. What started as a milk collection and processing operation has now grown into one of the largest private dairy players in India.
Currently, the company manufactures and markets milk and value-added dairy products. Company has three manufacturing facilities at Manchar (Maharashtra), Palamaner (Andhra Pradesh) and Sonipat (Haryana), 9 milk processing & packaging units, 1 State of the Art dairy farm. Its product mix is as follows –
Its sales composition is as follows. VAPD stands for Value added products. Note – Value-added products have a higher EBITDA margin so higher the number it is better.
The firm’s shareholding pattern is as follows –
45.96% owned by promoters and 53.83% owned by public. Public Shareholders are as follows –
About the Promoter and the Management –
Devendra Shah, Chairman & Managing Director, Parag Milk Foods received a Bachelor of Commerce degree from Pune University. After graduating in commerce, Shah dabbled in other businesses like clothes retailing but it was not until 1989 that he found his true calling—the dairy business. He also holds reputed positions in various ventures like Director- Bhimashankar Sahakari Sakhar Karkhana, Pargaon, Secretary of National Center for Rural Development. He also promotes India’s largest cow farm called Bhagyalaxmi Dairy farm.
The company has taken the right steps by hiring industry veterans for their business and results have shown –
Earlier in 2018, PMF had roped in few of the experts in its team. For its CFO post, the company has roped in Vimal Agarwal, who joined after a 17-year stint at PepsiCo India. Amarendra Sathe has come on board as CCO, earlier held a senior position at Kimberly-Clark India. Harshad Joshi, a dairy technologist with long stints at companies like Mother Dairy, has joined PMF as COO. The company has also roped in Niharendu Sarkar for the newly created position of Senior Vice-President-Logistics and Supply Chain; he was earlier with VIP Industries. Rajneesh Vasudevan as VP-Sales for those regions. It has also taken on board Vinay Jain, who earlier worked with Amway, as Business Head for Health and Nutrition business.
They recently appointed Venkat Shankar as its new CEO. Mr. Shankar comes with rich experience, including a stint as the sales director of Pepsico’s India business.
Peer Comparison –
Here is an overview of its peers in terms of operations –
Here is the peer comparison looking at financials and ratios –
Parag Milk Foods is the clear outperformer in operational performance and valuations. Prabhat here has a exceptional NPM due to a extra ordinary item. We can also see how Parag being small in size still has better ratios than Hatsun Agro – the biggest player.
Historical Performance –
The company has clocked an impressive CAGR of Sales, EBITDA and net profit showing a good operational efficiency.
Cash Flow Analysis –
While the company ranks mediocre in operational cash flow ratios such as operating CF ratio and Asset efficiency ratio, its solvency ratios such as Interest coverage, quick and current ratio are the best showing the safety of capital through comfortable level of money to repay debt.
Management Talk –
My Good Friend Meet Shah met one Regional Sales Officer of Parag Milk Foods. Here are the highlights from his discussion.
1)The management and promoters are extremely professional and ethical.
2)They are having approx. 246 farmers under their belt (approx 10 to 25 cows per farmer has) and expanding and convincing those who are not with them but only provide them milk.They have recruited a special team for this.
3)Milking is done in a very ethical way.
4)They also have their own product to feed the cows to maintain the quality of milk.
5)2nd generation is also engaged in the business.
6)Introduced 10 to 12 new products this year and all went successful.
7)Looking to expand their capacity.
8)R&D for a new product is going on and will be the first of it’s kind. USP of the product will be the fat content and will cater to the Chaiwallas and restaurant owners, which will allow them to serve 2.5 liters of tea from a 1-liter pack after diluting it with water.
9) Acquisition of Danone’s dairy factory in Haryana will help them to expand its market share in the Northern part of India. This will help the company to strengthen its distribution network in Haryana and Delhi NCR region.
10) Company is in a process to introduce other supplements like pre-workout, BCAA, etc.
SWOT Analysis –
Company’s vision 2020
Forecasting with the Vision 2020 in account
In line with its Vision 2020 and if it misses the vision , we see here some very basic forecasting regarding the net profit and the expected stock price at the same valuation. This forecast is very simple and doesn’t involve any complex assumptions. We assume no equity dilution and 18.07 PE multiple which is currently to stay same. Even after considering these modest valuations , we get an average expected share price of Rs 300. In best case scenario it is 387 Rs.
Future & Outlook –
Here is the outlook for its various products.
Their Strategy to benefit from this immense growth for the products they make –
Although the sector has a number of factors/opportunities to its advantage such as growth, rising consumer maturity and shift to value-added products, factors that will help the company to outperform are its product mix (products which will yield higher margins ) , Prudent Capital Allocation, Milk Sourcing capabilities and a strong moat (creating a brand differentiation with the help of their taste/experience). Milk Sourcing capabilities- Infrastructure and ability to grow.
Taking into account, the opportunities and the rising consumer trend, good promoter and management track record, affordable valuations and a clear cut strategy, we expect this company to do well in the medium to long term future. We, therefore think this company should be a Good Buy.
Hope you liked the article,
Thanks to Amit Gadre ( Founder of Midcap Mantra and SEBI Registered Investment Adviser) for his guidance on Cash Flow Analysis, Nikhil Khandelwal for the Crisp Sector Introduction and Meet Shah for his management takeaways. This article would have been incomplete without their support.