Rudra Shares recommend a leading dairy farm scrip for a 1-year target of Rs 342

Rudra Shares And Stock Brokers | Jan. 27, 2017, midnight


Investment Rationale


Company has presence in the international markets like UAE, Hong Kong, Singapore, Oman, Kuwait, Mauritius, New Zealand, Australia, Congo, Iraq. Company has extensive Cheese demand from international market and supplies bulk Cheese to Philippines, Sri Lanka, UAE and Bangladesh.


Despite higher international milk prices, Parag Milk will not see a big impact as only 5 % of its sales comefrom exports. Major focus is on the domestic market in the consumer segment.


Company's focus was on a long-term sustainable growth and profitability. While company reported healthy growth in the milk and milk products , it reduced focus on SMP sales, this while its revenues remained stable & growth margins significantly improved by 75 basis points Y-O-Y to 30.5%. Company also increased ghee prices by 8% to the market, which helped improve margins. Its export revenue grew by 41.9% on the back of the reason of bulk order from the Philippine customer.


Product launch and innovation - improve profitability & return ratio

 

Company witnessed modest growth in the milk and milk products due to the rural demand and the delay ramped up in the sale side of the Diwali festival. However, witnessed a good transaction and sale improvement in important products category like cheese, whey, proteins, beverages, etc.


During Q2 FY 2017, company also launched Spice Up, the new range of the cheese slice. It has a mix of the three slices with different flavors like Achari, Kacha Aam, Piri Piri & Schezwan and green chutney. Pace of new launches to increase from 4QFY17 onwards


Launched new brand of dairy whitener, Milk rich, into the market with distinct packaging. 'Milk Rich' will be the fifth brand of the company in dairy whitener category.


Open 120-150 Gowardhan Shopees by March 17


The company plans to convert it's existing shops in Maharashtra to the uniform format to be designedunder Gowardhan Shopee. Company has also plans to expand the number of brands it owns from existing four to total of seven by the end of next year. It will not be just re-branding of the existing Gowardhan dairy whitener, however, will launching an entirely new product of a better quality than the existing one .


Enhanced product portfolio - Focus on branded whey products


Whey is a by-product of cheese. Plans to emerge India's 1st domestic company to produce and sell Whey protein consumer products in the form of branded health supplement foods and beverages. Company have upgraded production facilities therefore Whey powder is now converted into Whey protein being sold to pharma and baby food companies. This was about 3-3.5 % of company's revenue & further expect Whey business will continue to grow. Focus to increase product portfolio of UHT products & beverages to entice youth with new variants combined with Whey, company's highest margin product as of now after Pride of Cow would expand margin more than revenue, going forward.


Cheese made up of cow milk -- Advantage. as Amul's is from buffalo milk


Company having second largest share of India's cheese market (Cheese market growing at 16-18%), ispresent in both packaged milk and milk products. Company is focused 100% on cow’s milk (aggregate milk processing capacity 2 million litres per day); its cheese plant has largest production capacity in India, with raw cheese production capacity 40 MT per day.


Going forward, company is expecting a good amount of business coming from Cheese as it increases the capacity from here.


Valuation and Conclusion


Company witnessed modest growth in the milk and milk products due to the rural demand and the delay ramped up in the sale side of the Diwali festival. However, witnessed a good transaction and sale improvement in important products category like cheese, whey, proteins, beverages, etc.


Company having second largest share of India's cheese market is present in both packaged milk and milk products,expecting a good amount of business coming from Cheese as it expand the capacity of cheese plant from 40 MT to60MT by FY17, aims to increase market share & domestic presence, would boost margins & profitability.


Recently launched Spice Up, new brand of dairy whitener, Milk rich combined with plans to convert it's existingshops in Maharashtra to the uniform format to be designed under Gowardhan Shopee derives overall growth by thecompany. Focus to increase product portfolio of UHT products & beverages to entice youth with new variantscombined with Whey, company's highest margin product as of now after Pride of Cow would expand margin more than revenue, going forward.


Rise in working population, disposable incomes & High urbanization is expected to drive growth in the organized dairy industry as a result of urban consumers preferring clean, hygienic and ready to-eat milk and dairy products.


We have estimated the share price of the company as per EV/EBITDA valuation, putting the estimated EV/EBITDA of FY18E at 16x, EV comes around Rs 3298 crores, the estimated share price for one year tenure turns around to be Rs 342. We recommend to BUY.


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