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Elara Capital
Parag Milk Foods (Buy)
CMP: ₹238.65
Target: ₹366
Parag Milk Foods net sales was up 30 per cent y-o-y at ₹670 crore, 13 per cent higher than our estimates, led by 71 per cent y-o-y growth in SMP, 19.4 per cent of sales. VAD (62.7 per cent of sales) grew by 21 per cent y-o-y, led by 25 per cent y-o-y volume growth. Liquid milk, 16.3 per cent of sales, grew by 9 per cent y-o-y. Gross margin shrank by 240 bps y-o-y and 300 bp q-o-q, due to unfavorable mix as salience of SMP increased by 460 bps to 19.4 per cent and price hikes in response to milk inflation in terms of reduction on discount, down 400 bps y-o-y, was taken only in March 2019. EBITDA was down 20.7 per cent y-o-y at ₹43.7 crore, 28 per cent lower than our estimates.
Parag has reported high growth by expanding into North & East India while keeping working capital under control. As the company reduces SMP salience and increases liquid milk or VAD salience in FY20E, margin should move up to 10 per cent. We assume an EBITDA margin of 9.9 per cent, up 90 bps, led by gross margin expansion and operational leverage. We reiterate ‘Buy’ with a TP of ₹366 based on 11.5x FY20E EV/EBITDA.
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