Parag Foods Inflated milk prices to dent margins, Book out Viewpoint

Sector: Consumer Goods Parag Milk Food Limited’s (Parag’s) Q3FY2020 performance was affected by a lower supply of milk amid a prolonged monsoon, non- Result Update availability of green fodder and delayed calving that led to disruption in availability of milk. Lower milk output drove up its prices, which Change affected the company’s profitability. Revenue grew by 5.4% y-o-y; View: Book Out growth was soft in milk products. Higher milk prices dragged gross CMP: Rs. 100 margins by over 700 bps and operating margins (OPM) declined as á Upgrade  No change â Downgrade well. The new sales model adopted by Parag has been unable to deliver results for the company. Thus, we believe that Parag will be unable to achieve its revenue target of Rs. 2,700-3,000 crore Company details and OPM target of 11-12% for FY2020. Its working capital cycle has Market cap: Rs. 841 cr deteriorated by ~10 days by H1FY2020 (from 48 days in FY2019 to

52-week high/low: Rs. 276/98 58 days in H1FY2020) in spite of efforts undertaken by the company such as implementation of the new sales model, for better working NSE volume: 2.6 lakh capital management. We expect milk prices to remain high in the (No of shares) coming quarters, which will put stress on the company’s working BSE code: 539889 capital and continue to affect the company’s profitability. This, along with an overall slowdown in demand environment which will NSE code: PARAGMILK take a few quarters to recover does not provide us any visibility of Sharekhan code: PARAGMILK improvement in the company’s performance.

Free float: Subdued profitability over 9MFY2020: Revenue grew by 10.4% y-o-y 4.53 cr (No of shares) in 9MFY2020; however, consistently rising milk prices affected Parag’s profitability. Gross margins declined by 534 bps to 26% and OPM was down by 145 bps to 9%. Operating profit registered degrowth of 5% to Shareholding (%) Rs. 171.1 crore and profit before tax declined by 5.7% y-o-y to Rs. 108.6 Promoters 46.2 crore. Effective tax rate was slightly higher in 9MFY2020, resulting in a ~7% decline in adjusted PAT to Rs. 83.6 crore. FII 21.6 No visibility of improvement in earnings, Book Out: Parag has been DII 7.5 posting subdued profitability since the past few quarters, affected by Others 24.8 disruptions in milk supply. We do not expect milk prices to drop, which along with a subdued demand environment will continue to affect the performance of the company. Further, its working capital cycle has Price chart considerably deteriorated in H1FY2020 and is not expected to improve 310 in near term. Thus, the free cash flows are expected to remain under 280 250 stress in the near to medium term. We believe that recovery will take 220 some time and we do not see any improvement in the near term. Thus, 190 160 we advise investors to book out of the stock 130 100 19 20 19 19 Valuation Rs cr - - - - Jun Oct Feb Feb Particulars FY17 FY18 FY19 FY20E FY21E Revenues 1,731 1,955 2,396 2,635 2,951 Price performance OPM (%) 5.1 9.9 9.3 8.2 7.7 Adjusted PAT 24 87 121 101 106 (%) 1m 3m 6m 12m Adjusted EPS (Rs.) 2.9 10.4 14.4 12.0 12.6 P/E (x) 34.8 9.6 7.0 8.3 7.9 Absolute -17.6 -10.3 -33.1 -44.0 P/B (x) 1.3 1.2 1.0 0.9 0.8 Relative to EV/EBIDTA (x) 10.7 5.4 4.6 4.7 4.4 -16.3 -11.8 -38.8 -50.6 Sensex RoNW (%) 5.0 13.0 15.7 11.6 11.0

Sharekhan Research, Bloomberg RoCE (%) 6.8 17.0 18.2 15.7 15.4 Source: Company; Sharekhan estimates

February 11, 2020 34 to Rs. 27.6to Rs. crore 30.7 Q3FY2020 in Rs. from crore Q3FY2019. in y-o-y 34.7 10.3% crore.Reported by Rs. fell to PAT y-o-y 10.3% by declined tax before profit Thus, flat. stood charges depreciation whereas high, were slightly crore. costs Finance 58.8 to Rs. y-o-y 5.3% by declined profit Operating bps OPM 104 todownby in grossdragged margins 9.3%. decline a significant fell, expenses other Though prices. milk in increase asubstantial in resulting monsoon, aprolonged amid availability milk in to 25.5%to bps disruptions 712 by owing declined margins Gross 7.6%, respectively. by 5.4%, and 13.9% grew products milk and milk liquid powder, milk Skimmed Q3FY2019. in crore 600.6 Rs. from Q3FY2020 in margins: hit prices milk higher ~5%, just by grew Revenue February 11,2020 Source: Company;SharekhanResearch OPM (%) GPM (%) Adjusted EPS Reported PAT Tax Profit beforetax Depreciation Finance costs Other income Operating profit Total operatingexpenses Other expenses Employee costs Raw materialcosts Net revenue Particulars Results (Consolidated)

Q3FY20 632.9 574.2 471.8 25.5 58.8 24.3 27.6 34.7 13.6 78.1 11.3 0.8 9.3 3.3 7.1

Q3FY19 600.6 404.9 538.6 108.3 62.0 25.4 32.6 38.7 30.7 10.2 13.9 10.3 0.7 7.9 3.7 Revenue grew by 5.4% y-o-y to Rs. 632.9 crore 632.9 to Rs. Revenue grew 5.4% by y-o-y

y-o-y (%) -27.8 -10.5 -10.3 -10.3 -10.3 BPS -104 16.5 -712 12.3 10.3 -4.5 -5.3 -1.8 6.6 5.4 Q2FY20 584.5 640.0 475.7 55.5 25.9 82.9 28.5 36.9 25.7 13.0 8.6 8.4 3.4 8.7 3.1

q-o-q (%) Rs cr -75.0 30.4 -15.7 BPS -0.8 -6.4 -3.2 -3.2 -5.7 -1.8 5.9 -6.1 4.4 -21 62 -1.1 35

Viewpoint Top shareholders 10 personnel Key management Data Additional February 11,2020 Š Š Key Risks term. near to the in revive earnings the we expect don’t Thus, margins. the the company’s impacting thethus, We pricesprofitability. toexpect remainhigh which will continue toimpact prices, milk in upsurge resulted asharp in of fodder unavailability and monsoon to due prolonged supply milk in disruptions The company. the for however, results revenueto to drive deliver unable growth; was model the Parag has been sincepoor posting performance the last few It had quarters. implemented a new sales model theme Investment . in 100% protein manufactured whey vegetarian first India’s as Avvatar, brand the with protein whey for segment B2C the also into ventured Company also and milk The concept). (Farm-to-Home Cows’, of ‘Pride of of adash “Topp launch the with drink with beverages -amango Up” “Slurp” based and into forayed brand flagship the under milk cow quality premium “Go”. brand sells the under brand also under sold It etc. yoghurt lassi, buttermilk, milk, UHT , while “Gowardhan” paneer, brand the like dahi, ghee, etc under sold products traditional with recall brand astrong has company The . in Sonipat and Pradesh Andhra in Palamaner , in Manchar at located strategically technology in-house with facilities manufacturing has presence. company The apan-India with player FMCG dairy private largest the is Limited Foods Milk Parag 1992, in Established company About Devendra PrakashShah Source: Bloomberg 10 9 8 7 6 5 4 3 2 1 Sr. No. Source: CompanyWebsite Rachana Sanganeria Shashikant Dalmia Venkat Shankar Pritam PrakashShah Š Š

Sharekhan Limited,itsanalystordependant(s)ofthemight beholdingorhavingapositioninthecompaniesmentionedarticle. margins. Higher input cost pressures and inability to hike prices appropriately in a timely manner might affect to costpressures hike input inability and affect Higher might manner in a timely prices appropriately visibility. revenue growth affect might products its for demand in Slowdown Ashmore GroupPLC Dimensional FundAdvisorsLP Agrawal MukulMahavir New HorizonOpportunitiesFund Goldman SachsGroupInc Norges Bank Government Pension Fund -Global Prazim Trading &InvCo Stiching DepositaryAPGMK Stiching DepositaryAPGEmergingMarkets Holder Name

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