Parag Milk Foods
BSE SENSEX
31,159
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm/ Vol m
Free float (%)
S&P CNX
9,625
PARAG IN
84.1
20.9 / 0.3
357 / 203
-6/-29/-15
92
52.5
30 May 2017
4QFY17 Results Update | Sector: Consumer
CMP: INR238
TP: INR245(+3%)
Neutral
Financials & Valuations (INR b)
Y/E Mar
2017 2018E 2019E
16.5
17.1
19.7
Net Sales
1.5
0.8
1.5
EBITDA
0.5
0.1
0.6
PAT
6.7
0.9
6.7
EPS (INR)
-66.7 -86.5 631.5
Gr. (%)
51.4
81.2
87.9
BV/Sh (INR)
19.5
1.5
7.9
RoE (%)
12.4
2.6
7.4
RoCE (%)
31.7 234.5
32.1
P/E (x)
4.1
2.6
2.4
P/BV (x)
Estimate change
TP change
Rating change
Sales in-line; EBITDA margin expands 250bp YoY led by subsidiary turnaround
PARAG reported net sales growth of 3.4% YoY
(est. of +2.5%) to INR4.3b in
4QFY17. Healthy EBITDA margin versus low expectations after the disastrous
3QFY17 meant that EBITDA grew by 29.6% YoY (est. of -42%) to INR519m, and
adj. PAT by 98% YoY to INR319m (est. of INR84m).
Gross margin expanded 240bp YoY to 32.4%.
Higher employee costs (+80bp
YoY to 5.2%) were offset by lower other expenses (-90bp to 15.1%).
Higher other income (due to reversal of INR71m impairment losses taken
earlier) and a lower tax rate aided strong PAT growth.
FY17 performance:
Sales, EBITDA and adj. PAT grew by 5.2%, -27% and -36%
YoY, respectively. EBITDA margin contracted 280bp YoY to 6.2%.
Key concall highlights:
(1) Company took 8% price increase in January.
Competitors followed 30-45 days later, leading to weak volumes for PARAG. (2)
Further price hike is required to protect margins. The company will now take a
decision on price increase in June after taking into account revised GST rates.
(3) Reason for high depreciation: a) Half of IPO spends capitalized and b)
INR0.53b catch-up cost due to Ind-AS (correction of historical accounting).
Valuation and view:
Opportunity size in Dairy is huge and in turn offers strong
growth visibility for branded players. PARAG, with its strength in procurement,
distribution, innovation and management bandwidth, is best placed among
peers. While rest of the listed dairy players are either regional or have
dominant B2B positioning, PARAG offers a pan-national branded dairy play
with a B2C focus. The crucial factor to monitor remains RoE improvement over
the medium term. Until RoE improves, target multiples would not be more
than 20x even if earnings momentum is strong. We maintain
Neutral
with a
target price of INR245 (20x FY19 EPS).
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Vishal Punmiya
(Vishal.Punmiya@MotilalOswal.com); +91 22 3980 4261
Krishnan Sambamoorthy
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 3982 5428

Parag Milk Foods
Key quarterly charts
Exhibit 1: Consol. sales grew by 3.4% YoY
Sales (INR b)
19.6
Growth (%)
30.1
Exhibit 2: Gross margins expanded by 240bp YoY
Gross profit (INR b)
29.9
30.5
Gross margin (%)
32.4
15.1
2.6
0.7
4.7
2Q17
4.5
3Q17
3.4
4.3
4Q17
1.2
4Q16
1.1
1Q17
1.4
2Q17
22.1
4.1
4Q16
3.8
1Q17
1.0
3Q17
1.4
4Q17
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: EBITDA margins expanded 250bp YoY
EBITDA (INR b)
9.7
8.6
8.0
EBITDA margin (%)
12.1
Exhibit 4: Consol. Adj. PAT grew 98% YoY to INR319m
Adj. PAT (INR b)
3.9
2.8
3.0
0.3
0.2
PAT margin (%)
7.5
0.4
0.3
0.4
(3.2)
-0.1
0.1
0.1
(6.0)
0.5
-0.3
4Q17
4Q16
1Q17
2Q17
3Q17
4Q17
4Q16
1Q17
2Q17
3Q17
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Employee cost were up 80bp YoY, while other expenses were down mostly due
to curtailment in ad spends
Employee costs as a % of sales
Other expenses as a % of sales
16.0
16.7
18.2
20.6
15.1
4.4
4Q16
4.6
1Q17
4.4
2Q17
4.7
3Q17
5.2
4Q17
Source: Company, MOSL
20 May 2016
2

Parag Milk Foods
Exhibit 6: Product wise revenue breakup
Consol. Revenue breakup (INR m)
Skimmed Milk Powder
Fresh Milk
Milk Products
Other Revenues
Total
Consol. Revenue breakup (% share)
Skimmed Milk Powder
Fresh Milk
Milk Products
Other Revenues
Total
Consol. Revenue breakup (% growth)
Skimmed Milk Powder
Fresh Milk
Milk Products
Other Revenues
Total
4Q16
517
805
2,754
66
4,142
4Q16
12
19
66
2
100
4Q16
(40.4)
8.8
54.5
(9.6)
19.6
1Q17
481
932
2,389
33
3,835
1Q17
13
24
62
1
100
1Q17
(14.1)
24.9
4.9
(78.7)
2.6
2Q17
440
970
3,262
56
4,728
2Q17
9
21
69
1
100
2Q17
(30.6)
12.5
5.1
(41.1)
0.7
3Q17
544
918
2,953
45
4,460
3Q17
12
21
66
1
100
3Q17
272.6
15.2
4.9
(61.9)
15.1
4Q17
770
889
2,475
149
4,283
4Q17
18
21
58
3
100
4Q17
48.9
10.4
(10.1)
125.8
3.4
Source: Company, MOSL
Exhibit 7: New launches done in FY17
Source: Company, MOSL
20 May 2016
3

Parag Milk Foods
Parag’s 4QFY17 conference call highlights
Key highlights
Subsidiary Bhagyalakshmi Dairy farm turned EBITDA positive for the first time
this year in 3QFY17. INR 450m sales in FY17 compared to INR420m in FY16.
Has setup fully automated 20MT paneer plant. Earlier manufactured from
cheese facility. Looking to make paneer a pan-India product.
Utilization before expansion was ~85% now 55-60% combined utilization
(cheese +paneer).
Slurp launched in 4 cities as of now (Mumbai, Delhi, Kanpur and Chennai). No
new infrastructure for Slurp. Already have UHT facility. Gross margins are higher
than overall gross margins but will be invested in A&P in the 1st year.
Financials
Gross margin expansion led by price hike, better realization in SMP and stable
raw milk prices. Some higher margin products within the same basket grew
faster. SMP margins were also higher than usual in 4QFY17. Normal 5-10% gross
margin; in 4QFY17 it was in double digits.
Curtailed 4QFY17 Adspend. Full year ad spends + in-store advt (deducted from
revenues) stood at 8.5%.
Took 8% price increase in January. Competition followed 30-45 days later.
Reason for high depreciation: 1) Half of IPO spends capitalized; 2) INR0.53b
catch-up cost due to IndAS (correction of historical accounting).
Curtailed 4QFY17 Adspend. Full year ad spends + in-store advt (deducted from
revenues) stood at 8.5%.
Inventory higher due to higher procurement in FY17 whereas sales grew by 5%
YoY over this period.
Inventory of Cheese and SMP higher than usual at the end of FY17.
INR 1.78b working capital loan, LTL INR 1.1b.
Had a plan to take price increase in end May or early June. Will now take a
decision based on GST rates and make a decision in June.
Capex- Will spend INR 2b over the next 3 years.
Effective tax rate going forward 30%.
Other takeaways
Procurement was up 14% for FY17; 4QFY17 procurement was flat YoY.
Distribution: 2.5-2.7lacs outlets covered.
Valuation & view
Opportunity size in Dairy is huge and in-turn offers strong growth visibility for
branded players. PARAG with its strengths on procurement, distribution,
innovation and management bandwidth is best placed among peers. While rest
of the listed dairy players are either regional or have dominant B2B positioning,
PARAG offers a pan-national branded dairy play with B2C focus.
The crucial factor to monitor remains ROE improvements over the medium
term. Until ROE improves, target multiples won’t be more than 20x even if
earnings momentum is strong.
We maintain Neutral rating with a target price of INR 245 (20xFY19 EPS).
20 May 2016
4

Parag Milk Foods
Exhibit 8: We have marginally changed our EPS numbers for FY18/FY19
New
Sales
EBITDA
PAT
FY18E
19,832
1,561
626
FY19E
23,141
2,146
1,030
FY18E
19,866
1,504
584
Old
FY19E
23,786
2,197
1,048
Change
FY18E
FY19E
0%
-3%
4%
-2%
7%
-2%
Source: Company, MOSL
Exhibit 9: Valuation Matrix of coverage universe
Company
Consumer
Asian Paints
Britannia
Colgate
Dabur
Emami
Godrej Consumer
GSK Consumer
Hind. Unilever
ITC
Jyothy Labs
Marico
Nestle
P & G Hygiene
Page Industries
Parag Milk Foods
Pidilite Inds.
United Breweries
United Spirits
Retail
Jubilant Foodworks
Titan Company
Reco
Neutral
Buy
Buy
Neutral
Buy
Neutral
Sell
Buy
Buy
Neutral
Neutral
Sell
Buy
Buy
Neutral
Neutral
Neutral
Neutral
Sell
Neutral
Price
(INR)
1,159
3,419
1,012
278
1,082
1,857
5,325
1,071
310
367
315
6,605
7,454
14,222
238
765
789
2,090
909
469
Mkt Cap
(USD M)
17.0
6.4
4.3
7.6
3.8
9.6
3.5
35.9
59.4
1.0
6.3
9.9
3.7
2.5
0.3
6.0
3.2
4.5
1.0
6.5
EPS Growth YoY (%)
P/E (x)
EV/EBITDA (x)
ROE (%) Div. (%)
FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17
FY17
8.7
10.0
7.3
13.1
-5.7 20.8
1.9
6.7
4.5
10.2
12.4 15.4
0.9
8.7
1.9
14.3
9.4
14.1
175.7 -20.4
12.1 10.5
-1.6
0.6
11.5
7.5
15.0 31.5
-46.4 106.4
6.7
10.2
-23.0 11.6
71.2 47.2
-32.1
18.5
21.6
13.8
18.6
22.0
21.1
18.3
18.6
14.6
9.3
15.3
19.6
22.4
21.1
17.6
16.6
27.4
64.7
14.8
51.9
39.1
47.4
18.2
55.1
46.4
47.6
38.4
40.8
49.1
34.1
54.5
37.0
32.6
50.1
56.0
51.4
59.6
66.1
45.7
90.8
73.0
90.8
52.0
50.1
41.0
39.4
36.0
37.0
42.6
31.4
47.7
32.4
41.0
45.3
55.7
47.8
45.3
32.0
41.5
81.3
49.6
74.7
45.7
42.2
33.6
32.6
30.4
31.2
37.2
28.7
41.4
27.1
33.5
37.4
47.3
41.0
35.6
19.4
36.1
53.6
35.6
50.7
38.6
35.6
34.2
29.0
30.8
32.5
33.9
23.2
37.5
25.5
27.8
35.5
34.3
34.6
37.1
19.9
29.9
33.1
34.0
25.1
35.6
32.1
30.2
24.0
29.3
28.4
29.2
21.5
33.0
22.6
24.0
32.2
33.3
30.2
29.2
13.4
26.4
33.9
27.2
21.6
31.2
27.0
23.9
20.0
24.6
23.9
25.7
19.1
28.6
18.8
20.6
26.8
28.2
25.5
23.0
10.1
22.6
25.9
21.1
16.8
26.2
28.5
36.9
50.4
28.4
35.8
24.6
22.2
65.6
23.5
21.1
36.7
39.0
45.3
40.0
5.9
28.2
10.4
20.8
8.2
20.6
1.0
0.6
1.0
0.9
0.6
0.6
1.0
1.6
1.8
1.6
1.0
1.0
4.9
0.6
0.2
0.6
0.1
0.0
0.3
0.6
Note: For Nestle FY16 means CY15
Source: Company, MOSL
20 May 2016
5

Parag Milk Foods
Financials and Valuations
Income Statement
Y/E March
Total Income
Growth (%)
COGS
Gross Profit
Gross Margin (%)
Operating expenses
EBITDA
Change (%)
Margin (%)
Depreciation
Int. and Fin. Charges
Financial Other Income
Profit before Taxes
Change (%)
Margin (%)
Tax
Tax Rate (%)
Adjusted PAT
Change (%)
Margin (%)
Non-rec. (Exp)/Income
Reported PAT
2014
10,883
17.7
8,359
2,524
23.2
1,701
823
-1.2
7.6
275
437
12
123
-35.4
1.1
-37
-29.6
160
-22.9
1.5
0
160
2015
14,441
32.7
10,616
3,825
26.5
2,753
1,072
30.2
7.4
275
469
15
343
177.6
2.4
21
6.0
322
101.2
2.2
0
322
2016
16,452
13.9
12,030
4,422
26.9
2,940
1,482
38.3
9.0
334
496
15
668
94.9
4.1
195
29.2
473
46.9
2.9
0
473
2017
17,307
5.2
12,588
4,719
27.3
3,637
1,082
-27.0
6.2
490
333
110
369
-44.7
2.1
66
17.9
303
-36.0
1.8
-132
171
2018E
19,832
14.6
14,265
5,567
28.1
4,006
1,561
44.3
7.9
455
256
44
894
142.1
4.5
268
30.0
626
106.4
3.2
0
626
(INR Million)
2019E
23,141
16.7
16,320
6,821
29.5
4,675
2,146
37.5
9.3
479
244
48
1,472
64.7
6.4
442
30.0
1,030
64.7
4.5
0
1,030
(INR Million)
2019E
841
7,389
0
8,230
2,168
99
10,497
7,143
3,213
3,930
230
10,449
5,464
2,332
516
1,062
676
400
4,113
3,301
791
21
6,336
10,497
Balance Sheet
Y/E March
Share Capital
Reserves
CCD's
Net Worth
Loans
Deferred Liability
Capital Employed
Gross Block
Less: Accum. Depn.
Net Fixed Assets
Capital WIP
Curr. Assets, L&A
Inventory
Account Receivables
Cash & Bank
Loans & Advances
Others
Long term advances
Curr. Liab. and Prov.
Account Payables
Other Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2014
160
761
1,250
2,171
4,369
52
6,592
3,600
1,181
2,419
371
5,408
1,903
1,673
42
437
335
1,019
1,614
1,254
349
10
3,795
6,592
2015
160
1,079
0
1,239
4,409
60
5,708
4,367
1,456
2,911
283
6,043
2,119
1,709
53
974
522
665
3,531
1,931
1,591
9
2,511
5,708
2016
704
2,915
0
3,619
3,787
110
7,516
5,229
1,789
3,439
286
6,184
2,724
2,360
77
455
411
157
2,394
1,678
668
48
3,790
7,516
2017
841
5,733
0
6,574
2,499
99
9,172
5,843
2,279
3,564
230
9,504
4,285
2,150
1,008
878
475
708
4,127
3,119
977
31
5,378
9,172
2018E
841
6,358
0
7,200
2,283
99
9,581
6,793
2,734
4,059
230
7,964
2,018
2,740
1,375
966
566
300
2,672
1,771
879
21
5,292
9,582
20 May 2016
6

Parag Milk Foods
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
Valuation (x)
P/E
Cash P/E
EV/Sales
EV/EBITDA
P/BV
Return Ratios (%)
RoE
RoCE (post-tax)
RoIC
Working Capital Ratios
Debtor (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2014
10.0
27.3
135.9
2015
20.2
37.4
77.6
2016
6.7
11.5
51.4
2017
3.6
9.4
78.2
2018E
7.4
12.8
85.6
(INR Million)
2019E
12.3
17.9
97.8
23.7
8.7
0.7
9.9
1.8
11.8
6.4
0.6
7.6
3.1
35.4
20.8
1.2
13.8
4.6
66.1
25.3
1.2
19.9
3.0
32.0
18.5
1.1
13.4
2.8
19.4
13.3
0.9
10.1
2.4
7.6
12.1
12.6
53
1.7
18.9
12.4
13.2
43
2.5
19.5
12.5
13.2
45
2.2
5.9
6.9
7.6
48
1.9
9.1
8.6
10.1
45
2.1
13.4
12.0
13.6
40
2.2
5.9
3.3
1.0
0.4
0.3
0.2
Cash Flow Statement
Y/E March
OP/(loss) before Tax
Direct Taxes Paid
(Incr)/Decr in WC
CF from Operations
2014
823
37
-846
14
-570
-556
10
-560
-37
1,055
0
-451
567
20
22
42
2015
1,072
-21
1,295
2,346
-679
1,667
0
-679
-1,254
40
0
-442
-1,656
11
42
53
2016
1,482
-195
-1,256
32
-866
-834
3
-863
1,907
-622
0
-431
854
23
53
76
2017
1,082
-66
-656
360
-558
-199
0
-558
2,652
-1,288
0
-234
1,130
931
77
1,008
2018E
1,561
-268
452
1,745
-950
795
0
-950
0
-217
0
-212
-429
366
1,008
1,375
(INR Million)
2019E
2,146
-442
-1,903
-198
-350
-548
0
-350
0
-115
0
-196
-311
-859
1,375
516
(Incr)/Decr in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Invest.
Change in Equity
(Incr)/Decr in Debt
Dividend Paid
Others
CF from Fin. Activity
Incr/Decr of Cash
Add: Opening Balance
Closing Balance
E: MOSL Estimates
20 May 2016
7

Parag Milk Foods
Corporate profile
Company description
Parag Milk Foods is a leading manufacturer and
marketer of branded dairy foods and
beverages in India. It started off with collection
and distribution of milk in 1992; over
the years, it has developed a portfolio of dairy
products under its four flagship brands
Gowardhan, Go, Topp Up & Pride of Cows.
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Promoter
DII
FII
Others
Mar-17
47.5
2.3
24.7
25.6
Dec-16
47.5
4.0
27.4
21.1
Jun-16
47.5
4.3
27.3
21.0
Exhibit 3: Top holders
Holder Name
IDFC TRUSTEE CO. LTD A/C IDFC
INFRASTRUCTURE FUND
NOMURA INDIA INVESTMENT FUND
MOTHER FUND
NEW HORIZON OPPORTUNITIES MASTER
FUND
GOLDMAN SACHS INDIA LIMITED
% Holding
6.0
3.5
3.0
2.9
Source: Capitaline
Note: FII Includes depository receipts
Source: Capitaline
Exhibit 4: Top management
Name
Devendra Shah
Pritam Shah
B M Vyas
Narendra Ambwani
Nitin Dhavalikar
Designation
Executive Chairman
Managing Director
Director
Director
Director
Exhibit 5: Directors
Name
Pritam Shah
B M Vyas
Narendra Ambwani
Name
Nitin Dhavalikar
Radhika C Pereira
Sunil Badriprasad Goyal
Ramesh Chandak
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
KPMG
N L Bhatia & Associates
Haribhakti & Co LLP
Harshad S Deshpande & Associates
Type
Internal
Secretarial Audit
Statutory
Cost Auditor
Source: Capitaline
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY18
FY19
MOSL
forecast
7.4
12.3
Consensus
forecast
7.7
10.7
Variation (%)
-4.3
14.5
Source: Bloomberg
20 May 2016
8

Parag Milk Foods
NOTES
20 May 2016
9

Disclosures
Parag Milk Foods
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Analyst Certification
Disclosure of Interest Statement
Analyst ownership of the stock
Served as an officer, director or employee
PaARAG MILK FOODS
No
No
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20 May 2016
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