INSUBCONTINENT EXCLUSIVE:
Elara Capital has a buy call on Parag Milk Foods with a target price of Rs 366.
The current market price of Parag Milk Foods is Rs
246.45.
Time period given by the brokerage is one year when Parag Milk Foods price can reach the defined target
Investment rationale by the brokerageNetwork expansion and new products paying off: Parag Milk Foods (PARAG IN) has guided revenue to grow
in the double digits in FY19 (9MFY19: +20 per cent YoY) and margin to remain at the same levels as 9MFY19 (gross margin: 31.1 per cent and
EBITDA margin:10.4 per cent)
Revenue from the Sonipat plant at Haryana (bought from Danone in FY18) is increasing MoM for the past five months and is expected to achieve
a turnover of Rs 1.0bn in FY20 by catering to the Delhi-NCR region
Avvatar has become an Rs 250-300mn brand in FY19 and is expected to reach Rs 500-600mn by FY20
Also, the company is expecting new launches of the year to contribute to 5-10 per cent of overall revenue in the next two years.
Working
capital cycle shortening; in line with guidance: Working capital is expected to see significant improvement from FY18
The cash conversion cycle has fallen by 11 days, due to the reduction in receivables and inventory
In FY18, it was 72 days; in FY19, it is expected to be at nearly 60-61 days
Loans and advances days also have improved
Gross debt has reduced to Rs 2.1-2.3bn as on FY19 from Rs 2.9bn in FY18, led by a reduction in short- and long-term loans
Budgeted inflation in milk around 5-7 per cent in FY20: Although there can be some temporary relief in milk prices, milk prices will be
going up by 5-7 per cent YoY in FY20, according to management
Price cut through trade schemes and consumer offers seen in various VAD products in December 2018 and February 2019 have started to
stabilize on the higher side from March 2019
Overall, the industry has not taken any decision on price hike in pouch milk prices (22 per cent of sales for PMFL), given expectations of
5-7 per cent of inflation
Pouch milk prices have remained flat for the past two years due to deflation in milk prices
Valuation- reiterate Buy with a target price of Rs 366: We expect 18 per cent sales growth in FY19-21, 1) led by high double-digit growth
in value-added dairy (VAD) 2) distribution expansion in the north and east regions
High margin nutrition and wellness products also are tracking above their internal benchmarks
With concerns abating on the working capital front, we expect cash flow from operations and free cash flow to the firm to remain healthy
medium term, given no major capex is planned and reduction in working capital requirements
The stock has been flat for the past year, although it has outperformed Heritage Foods, down 23 per cent in the past 12 months) and at par
with Hatsun Agro, which was flat
The stock is currently trading at P/E of 15x/ EV/EBITDA of 8x on FY20
We reiterate Buy with a TP of Rs 366 on 11.5x FY20E EV/EBITDA.
