June 15, 2017 Prabhat Dairy (PRADAI) | 119 - ICICI Directcontent.icicidirect.com/mailimages/IDirect_PrabhatDairy_IC.pdf · newly entered categories like cheese, shrikhand & paneer,

June 15, 2017

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Shifting gears – focus on value addition…

Prabhat Dairy (Prabhat), established in 1998, has evolved from a specialty

dairy ingredients company to an emerging brand in the dairy industry. It

sells its products as a) ingredient products or co-manufactured products

to institutional clients, which currently constitute 70% of its sales and b)

retail consumer brands (Prabhat, Prabhat Milk Magic, Prabhat Flava,

Volup), which comprise the remaining sales. Aided by increasing capacity

utilisation and share of value added dairy products (VADPs) in revenue,

we expect the company to post revenue CAGR of 14.3% over FY17-19E

with an EBITDA margin of 10.0% in FY19E. With the end of the

investment phase and increasing capacity utilisations across categories,

we expect return ratios of the company to improve gradually in future.

We initiate coverage on Prabhat with a BUY recommendation and a target

price of | 140 per share.

Structural shift in dairy industry to provide a huge opportunity

Changing customers’ preferences and spending patterns are leading to

two major structural shifts in dairy industry – shift from loose milk to

branded products and from liquid milk to VADPs. With a growing urban

population, higher disposable income and rising health consciousness,

the organised dairy industry is expected to grow at 19.6% CAGR in

2016E-20E to | 2.5 lakh crore with increase in market share from 22% to

26%. The increasing share of organised players and rising proportion of

high margin VADPs together provide a vast opportunity for Prabhat.

Increasing share of VADPs and high focus on B2C to drive growth

The share of VADPs (ex- SMP) in Prabhat’s sales portfolio was 46.0% in

FY17. We estimate it will reach 48.4% by FY19E aided by an increase in

capacity utilisation. To tap the opportunity in the high growth cheese

industry (~31% CAGR in FY16E-20E), Prabhat has commissioned the

third largest cheese plant in India at its Shrirampur plant with a capacity of

30 MT/day in 2015. Additionally, the share of the consumer business in

the company has grown from mere 11% in FY12 to 30% in FY17. Prabhat

is determined to increase it to 50% by FY20E. Currently, ghee, curd, UHT,

flavoured milk, etc, are key focus areas for the B2C segment. Eventually,

the company plans to launch cheese & paneer also in the B2C segment.

Strong player to bet on value addition in dairy industry; initiate with BUY

We believe that with improving capacity utilisation levels and initiatives

undertaken to expand the distribution as well as procurement network,

Prabhat is all set to take off with its gears in place. We estimate the

revenue and adjusted PAT will grow at a CAGR of 14.3% and 45.1%,

respectively, in FY17-19E with an operating margin of 10.0% in FY19E.

Earnings visibility and improving return ratios provide comfort. Hence, we

initiate coverage on the stock with a BUY rating and target price of | 140.

Exhibit 1: Prabhat Dairy – key Financials

Particulars FY15 FY16 FY17 FY18E FY19E

Net Sales (| Crore) 1,003.7 1,167.7 1,409.9 1,616.3 1,842.5

EBITDA (| Crore) 103.8 115.3 126.8 146.9 184.3

Net Profit (| Crore) 26.2 23.2 46.9 62.7 92.8

EPS (|) 3.7 2.4 4.8 6.4 9.5

PE (x) 32.4 50.1 24.7 18.5 12.5

EV/EBITDA (x) 14.9 11.3 10.7 9.5 7.7

RoCE (%) 9.0 9.5 8.0 9.7 12.2

RoE (%) 7.5 3.6 5.1 6.8 9.7

Source: Company, ICICIdirect.com Research

Prabhat Dairy (PRADAI) | 119 Rating Matrix

Rating : Buy

Target : | 140

Target Period : 12 months

Potential Upside : 18%

Key Financials

| Crore FY16 FY17 FY18E FY19E

Sales 1,167.7 1,409.9 1,616.3 1,842.5

EBITDA 115.3 126.8 146.9 184.3

Net Profit 23.2 46.9 62.7 92.8

EPS (|) 2.4 3.6 5.0 7.5

Valuation Summary

FY16 FY17 FY18E FY19E

P/E 50.1 24.7 18.5 12.5

Target P/E 58.9 29.1 21.7 14.7

Mcap/Sales 1.0 0.8 0.7 0.6

RoNW (%) 3.6 5.1 6.8 9.7

RoCE (%) 9.5 8.0 9.7 12.2

Stock Data

Particular Amount

Market Capitalization (| Crore) 1,160.4

Total Debt (FY17) (| Crore) 319.3

Cash and Investments (FY17) (| Crore) 165.6

EV (| Crore) 1,314.1

52 week H/L 150 / 77

Equity capital | 97.7 crore

Face value | 10

Price movement

0

30

60

90

120

150

180

Jun-16 Oct-16 Feb-17 Jun-17

0

2,000

4,000

6,000

8,000

10,000

12,000

Prabhat (R.H.S) Nifty (L.H.S)

Research Analysts

Sanjay Manyal

[email protected]

Tejashwini Kumari

[email protected]

Page 2 ICICI Securities Ltd | Retail Equity Research

Company background

Established in 1998, Prabhat Dairy has evolved from a specialty dairy

ingredients company to an emerging brand in the dairy industry. The

company sells its products as a) ingredient products or co-manufactured

products to institutional clients, comprising 70% of its revenue and b) a

retail consumer brand under brand name Prabhat, Prabhat Milk Magic,

Prabhat Flava and Volup, which constitutes the remaining sales. It has two

plants in Shrirampur and Navi Mumbai in Maharashtra with a combined

milk processing capacity of 15 lakh litre per day. Additionally, it recently

commissioned a 30 MT/day cheese facility. Sales have grown at 23.9%

CAGR in FY12-17 with healthy operating margin of 9% in FY17. The

company has an extensive network of 850 distributors and 45,000 retail

touch points.

Moving up value chain; enhancing exposure to consumer segment

Prabhat started out as an ingredient supply player to major players. Over

time, it has successfully stepped up the ladder towards value added dairy

products (VADPs), which will lead to value unlocking for the company. At

present, the institutional segment contributes 70% to the company’s

revenue. Over the last five years, the company has evolved while

contribution from the consumer segment has increased from a mere 11%

in FY12 to 30% in FY17. Prabhat is aiming to increase the contribution to

50% by FY20E. Also, the proportion of value added products for the

company has increased the share of VADPs in the product portfolio from

44.2% in FY15 to 46.0% in FY17. We expect this to further grow to 48.4%

for FY19E. Moving up the product value chain would aid the company in

expanding its EBITDA margin through increasing proportion of high

margin products like ghee, butter, cheese, paneer and curd.

Exhibit 2: Stepping up value chain key to growth and profitability


Shareholding pattern (as on March 2017) (%)

Shareholder Holding (%)

Promoter 48.9

DII 3.9

FII 2.6

Others 44.6

Total 100.0

Source: Capitaline, ICICIdirect.com Research

FII and DII Trend (%)

28.1

3.3 2.8 2.6 3.5 3.2 3.0 3.9

-

5.0

10.0

15.0

20.0

25.0

30.0

Q1FY17 Q2FY17 Q3FY17 Q4FY17

FII DII

Source: bseindia.com, ICICIdirect.com Research


Procurement infrastructure – backbone of company

Being a dairy company, the procurement infrastructure defines the

competitiveness. Prabhat follows the direct sourcing ecosystem for ~70%

of its milk procurement. Direct milk procurement is favourable on account

of the flexibility it provides the company to get access to high quality milk,

maintain strong relationships with farmers and maintain access with them

to make them aware about best practices. Prabhat is focused on

educating dairy farmers about cattle breeding, feed, nutrition &

medication, insurance and financing along with training in milking,

storage and milk delivery to collection centres.

Prabhat procures milk from 85,000 farmers across 1200 villages twice a

day resulting in 750 procurement cycle per year. The procurement for the

company is currently concentrated in Maharashtra (seventh largest milk

producing state in India). Ahmednagar, Pune, Nashik and adjoining

districts are major hubs. At present, Prabhat has more than 440 milk

collection centres, ~20 milk chilling plants and ~100 bulk milk coolers,

ensuring quality protection and timely delivery.

Farmers are paid based on fat and solids-not-fat (SNF) content of milk.

The payment cycle for them is third-thirteenth-twenty third of every

month. The payment is directly done in their bank account. This direct

and transparent payment system strengthens the long term association of

farmers with the company.

Going forward, with increasing capacity utilisation, raw milk requirement

will increase. The company is in the process of ramping up its

procurement footprint to untapped regions like Sholapur and increasing

the quantum of milk procured from existing regions. Prabhat will continue

to meet the rest of the milk demand through third party agents.

Exhibit 3: Procurement quantity and realisation trend

32.1 35.0 38.5 41.5 43.8

18.8 18.3

21.822.7

24.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0.0

10.0

20.0

30.0

40.0

50.0

FY15 FY16 FY17E FY18E FY19E

Quantity procured (cr litres) Per unit cost (|/litre)


Proximity of processing units to market and procurement areas

Prabhat enjoys the advantage of having processing facilities at close

proximity to its key market. The company has two production facilities

strategically located at Shrirampur and Navi Mumbai at close proximity to

both key markets and milk procurement region. The Shrirampur unit is

~65 km from Ahmednagar, India’s largest cow milk producing district. On

the other hand, the Navi Mumbai unit enjoys close proximity to the

largest milk consuming urban centre. Additionally, the company enjoys

low transportation cost on account of close proximity of the production

facility to the market as well as its institutional clients.

Milk production in Maharashtra (‘000 tonnes)

80448469 8734

90899542

10153

0

2000

4000

6000

8000

10000

12000

FY11 FY12 FY13 FY14 FY15 FY16

Source: National Dairy Development Board, ICICIdirect.com

Research


Investment Rationale

Increasing utilisation levels, favourable mix to drive revenue

Prabhat has posted strong revenue CAGR of 23.9% in FY12-17 driven by

significant growth in traditional VADPs - SMP, butter & ghee and

condensed milk. Condensed milk, which is supplied mainly to Mondelez,

also witnessed healthy growth at 13.8% CAGR in FY12-16. However, with

a change in ingredient for Mondelez (shift from condensed milk to SMP),

revenues from condensed milk declined significantly in FY17. There was

similar growth in SMP sales. Prabhat forayed into production of non-

traditional VADPs in the recent past. The company commenced ice cream

& curd manufacturing in FY14 and cheese & shrikhand in FY16. These

categories are in a nascent stage of capacity utilisation and market

growth. It launched its ice-cream brand, Volup, in Q4FY17. It has launched

the brand in both mass (Volup) and premium (Volup Sinsane) segment.

Going forward, we believe that with focus on the brand proposition and

penetration in new markets (various tier II, tier III cities), utilisation of

newly entered categories like cheese, shrikhand & paneer, ice cream,

flavoured milk, curd and UHT is set to improve to 45%, 65, 65%, 60% and

55%, respectively, by FY19E. We believe with improving utilisation and

favourable revenue mix towards VADPs, revenues will grow at 14.3%

CAGR in FY17-19E.

Exhibit 4: Increasing capacity utilisation (%) to aid share of VADPs in revenue

641.1

856.7

1003.7

1167.7

1409.9

1616.3

1842.5

0.0

10.0

20.0

30.0

40.0

0.0

400.0

800.0

1200.0

1600.0

2000.0

FY13 FY14 FY15 FY16 FY17 FY18E FY19E

Net sales (| crore) % growth


Increasing share of value added products to be long term driver

The organised milk segment forms only 22% of the total milk industry.

The proportion is estimated to increase to 25.5% by FY20E. With

increasing urbanisation, growing consciousness towards health &

nutrition coupled with higher discretionary income, and shift in demand

from the unorganised to the organised market, Prabhat is well positioned

to leverage this opportunity. The share of value added products

(excluding SMP) in the sales portfolio was 46.0% in FY17. We estimate it

will reach 48.4% by FY19E aided by an increase in capacity utilisation.

Additionally, VADPs enjoys higher operating margins, which will be a

long term driver for the company’s profitability.

VADPs attract higher margins (Industry average)

Product Gross margin (%) EBITDA margin (%)

Liquid/ Pouch Milk 18-20% 4-6%

SMP 4-5% 1-2%

Ghee 15-18% 8-10%

Butter 15-18% 6-8%

Curd 35-40% 14-15%

Cheese 25-30% 16-20%

Whey 40-45% 20-25%

Flavored Milk 22-25% 10-12%

Buttermilk 20-22% 12-15%

Source: Industry, ICICIdirect.com Research


Exhibit 5: Increasing capacity utilisation (%) to aid share of VADPs in revenue

50.0

55.0

50.047.0

12.0

60.0

65.0 65.0

55.0

45

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Curd Ice cream Flavored milk UHT Cheese, paneer, shrikhand

Cap

acit

y u

tilizati

on

(%

)FY17E FY19E


How VADPs is adding value to milk

All dairies in India are in a race to shift their product portfolio towards

VADPs given the lucrative operating margins. To understand the same,

we have analysed value addition in milk when it is processed in various

product (forms). Depending on the conversion ratio and considering the

sale price of various products (current MRPs), we conclude that curd,

cheese and flavoured milk add maximum value to plain milk at | 63 per

kg, | 46/kg and | 44 per litre, respectively (assuming milk price at |

29/litre).

Exhibit 6: Incremental realisation in VADPs (|/unit)

8

63

46

27

44

47

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Fresh

Milk*

UHT Curd Cheese Paneer Flavored

Milk

Source: Industry, ICICIdirect.com Research; * including per unit realisation of ghee and butter

(by-products)

Exhibit 7: Conversion ratio

25

9.5

7.5

2.5

1.2

1.2

0 5 10 15 20 25

Butter+Ghee*

Cheese, paneer

Milk powder

Condensed milk

Flavored milk, curd

Milk

Source: Industry, ICICIdirect.com Research; * by-products

Marquee clientele base to benefit company

Prabhat has a strong clientele list for which it does ingredient

manufacturing and co-manufacturing. Despite garnering 70% sales from

B2B clients, Prabhat enjoys the best operating margin of 9.0% (FY17) vis-

à-vis other players in the dairy space largely due to the focus on speciality

ingredient manufacturing, which attracts high margin. Additionally, the

company has cost plus margin agreements based on quality and/or

quantity specifications, which are usually renewable after two to three

years, thus, shielding the company from any significant fluctuation in

procurement cost. Prabhat started supplying to Mondelez India Foods

(formerly Cadbury’s) in 2008 and set up a dedicated condensed milk plant

for it in 2010. Mondelez is one of the largest institutional clients for

Prabhat (~15% of revenue) followed by Britannia, Abbott Healthcare, GSK

Consumer, Patanjali, etc. Overall, the top five clients of the company

currently contribute ~30-35% of total revenue.


Exhibit 8: Major clients

Premium Ingredients Clients

Sweetened condensed milk, skimmed/whole milk Powder Mondelez India Foods Pvt Ltd

Skimmed/whole milk powder GSK Consumer Healthcare, Heinz

Nutrition supplements for baby food Abbot Healthcare Pvt Ltd

Full cream milk Mondelez India Foods Pvt Ltd

Co-manufacturing Clients

UHT milk, lassi, yogurt, dairy whitener, clarified butter (ghee), curd (dahi), flavoured milk Britannia

Ice-cream, candies Mother Dairy

Source: CRU Monitor, ICICIdirect.com Research

Increasing focus on consumer business

The share of Prabhat’s consumer business has improved from a mere

~11% in FY12 to 30% by FY17. With a strong foothold in the institutional

segment, the company is now focused on increasing the share of the

consumer business to 50% by FY20E. It retails its consumer brand under

Prabhat, Prabhat Milk Magic, Prabhat Flava and Volup. For penetrating

into the consumer segment, the company is more focused on continuous

innovation of consumer products, particularly in value added segment.

Prabhat plans to increase its reach to tier II, tier III towns with increasing

disposable income. Additionally, apart from traditional stores, it is making

its presence felt in modern trade as well through tie-ups with Big Bazaar,

Reliance, HyperCity and D-Mart to improve brand visibility. We believe

this focus of the company will lead to brand acceptability in the market.

With increasing share of the consumer business, the company will be

able to earn better gross margins over time (from 17.0% in FY17 to 18.7%

in FY19E). At present, Prabhat is focusing more on ghee, curd, UHT,

flavoured milk, ice-cream etc, for the consumer space. The company’s

plan to launch cheese & paneer (high margin products) in the retail space

may take another two to three years as currently the focus of these

categories is on the hotel, restaurant and catering (HORECA) segment. In

Q4FY17, it launched ice cream brand Volup in areas like Nashik,

Ahmednagar, Aurangabad, Jalgaon and Dhule in both mass (Volup) and

premium (Volup Sinsane) segments.

Exhibit 9: Consumer product portfolio – brand building underway

Source: Company’s analyst presentation, ICICIdirect.com Research

Any narrowing of price points to be added advantage

In the dairy space, companies like Britannia, Nestlé and Danone enjoy

premium pricing due to their strong brand names. Prabhat’s products are

competitively priced in comparison to peers (except premium brands).

We believe that as and when the brand develops and gets stronger, the

premium gap will shrink leading to additional profitability.

We expect the company to incur advertisement expense of |

24.2 crore and | 27.6 crore in FY18E and FY19E, respectively


Exhibit 10: Price comparison across product range

Product Unit Prabhat Parag Amul Mother dairy Britannia Nestle Danone Patanjali

UTH 1 litre 60 65 60 60 75 75 80

Cheese 200 gm 82 100 99 130 130

Paneer 200 gm 75 85 66 65

Lassi 250 gm 20 20 20 20

Ghee 1 litre pouch 525 530 455 510 555 530

Curd 400 gm 45 60 42 45 60 60 65

Butter 100 gm 50 42 44 44 45

Flavored milk 200 ml 26 25 20 20-25

Source: Company, E-commerce websites, ICICIdirect.com Research

Prabhat bets big on HORECA segment for cheese growth

To tap the opportunity in the high growth cheese industry, Prabhat has

commissioned the third largest cheese plant in India at its Shrirampur

plant with a capacity of 30 MT per day in 2015 (to be ramped up to ~45%

capacity utilisation by FY19E). This is the third largest cheese plant in

India after Amul and Parag Milk Foods. The company remains bullish on

the prospect of the segment. The cheese market is expected to grow at

~31% CAGR in FY16E-20E to | 5900 crore. Currently, the cheese segment

is dominated by Amul and Parag Milk Foods with 42% and 32% market

share, respectively. Given the huge growth opportunity of the segment

and increasing capacity utilisation, we expect the revenue share of cheese

(along with paneer) to reach 9.8% in FY19E to | 176.8 crore.

Currently, the company manufactures processed cheese (hard, soft &

pizza), mozzarella cheese (diced & shredded), cheddar cheese and ricotta

cheese. The cheese segment, with higher gross margin (25-30%) vis-à-vis

other dairy products, is expected to aid the company’s gross margin with

increasing utilisation levels. Prabhat has chalked out a strategy for the

segment growth in next two or three years, including the following:

• Focus on HORECA, B2B and exports to Gulf countries: Initially, the

company plans to remain focused on the fast growing HORECA

segment for the cheese segment. It has already bagged orders from

major pizza and burger chains like Dominos, Pizza Hut, McDonald’s

and other QSRs for supply of cheese as per their specifications

• Currently, it is only selling cheese in Maharashtra and Gujarat.

However, expansion in South & North India is under process.

Whey – by-product with additional value

Whey is the liquid component of milk protein, which is left after removal

of casein and fat from milk in manufacture of coagulated products like

cheese, paneer and chhana as a by-product. Total whey produced in the

country can be broadly classified into two categories – acid whey

(inedible) and sweet whey (edible). Additionally, whey is sold in two

forms – liquid and powder – depending on the product requirement. The

input output ratio for the same while manufacturing cheese is 2:1, where

whey is produced in liquid form as a by-product. Currently, Prabhat’s

cheese facility utilisation is minimal. Hence, contribution from sale of

liquid whey is negligible. However, we believe once cheese capacity

ramps up, 45% by FY19E, there should be incremental contribution from

whey. However, we are not factoring in any revenue from whey in our

estimates.

Other VADPs also gaining traction through collaboration

Prabhat is now partnering other dairy players to manufacture curd,

shrikhand, paneer, ice cream, etc for other players like Mother Dairy,

Patanjali, Britannia, Heritage Foods, etc. The company recently added

capacity in these segments. It has also entered into a MoU with Nutridor,

Thailand, for co-manufacturing its cow ghee, mozzarella cheese and

sweetened condensed milk. We, thus, expect the utilisation level to

improve with strengthening partnerships with other players & own brand.

Ramping up of cheese facility

0.9

12.0

30.0

45.0

0.0

50.0

100.0

150.0

200.0

FY16 FY17E FY18E FY19E

0.0

10.0

20.0

30.0

40.0

50.0

Revenue (| crore) Capacity utilization (%)


Whey categories in India:

(i) Acid whey, which is inedible and

accounts for 65% of the total production

by volume; and

(ii) Sweet whey, which is edible and

accounts for the remaining market 35%

of production by volume


Established distribution network; eyeing new markets through third party

Prabhat retails its products under brands Prabhat, Flava, Milk Magic and

Volup. It has ~250 sales professionals engaged in distribution along with

700 distributors and 100 mini stockists. In the HORECA segment, the

company has a strong presence across India’s metro cities. Prabhat’s

distribution network comprises super-stockists, C&F, CSA, modern trade

retail shops, third-party distributors as well as modern and specialty

channels. At present, the company retails its products with longer shelf

life [e.g. ghee, cheese and ultra-high temperature processing (UHT) milk]

across Maharashtra, Madhya Pradesh, Goa, Gujarat, Rajasthan, Himachal

Pradesh, Jammu & Kashmir, West Bengal, Assam, Andhra Pradesh, Bihar,

Chhattisgarh, Jharkhand, Punjab, Haryana and other north eastern states.

However, fresh products are restricted to Maharashtra and nearby areas.

During FY16, the company adopted Raftar, a new approach, to deliver

fresh curd in chilled vans and two-wheelers with chilling boxes to local

grocery outlets and rural heartlands, respectively. Through this model, it

has reached 9,000 outlets in Mumbai, with total curd sales of 100 tonnes

per month against 10 tonnes per month last year. Prabhat is also trying to

penetrate newer markets through third-party distributors. Additionally,

C&Fs are appointed to cater to the hotels, restaurants and catering

(HORECA) business in southern India. Apart from traditional stores,

Prabhat is making its presence felt in modern trade as well through tie-

ups with Big Bazaar, Reliance, HyperCity and D-Mart.


Indian dairy industry

According to International Market Analysis Research and Consulting

(IMARC) group, Indian dairy production is expected to grow to 185 MMT

at 4.8% CAGR in 2015-20E. In value terms, the total dairy market

(organised and unorganised) is estimated to grow at 14.9% in the same

period to | 9.4 lakh crore. As per industry data, milk processing capacity

in the country was at 730 lakh litre per day (LLPD) (by December 2015)

and is estimated to grow 40% to 1050 LLPD by 2018E. The milk industry

in India is highly unorganised with 80% of total milk production

consumed in the unorganised segment (self consumption and selling by

local vendors). Out of the total milk produced, 52% is self consumed

while the remaining 48% is available for selling purpose. Further, out of

the 48% available for sale, only 20% is available to organised players –

private (55%) and cooperatives (45%). The per capita milk consumption in

India is 97 litre per year vis-à-vis the US with per capita consumption of

285 litre per year and EU at 281 litre per year.

Exhibit 11: Dairy industry structure in India

Source: Industry reports, ICICIdirect.com Research

The organised milk industry is estimated at | 1.2 lakh crore for FY16. It is

expected to grow at 19.6% CAGR in 2016E-20E to | 2.4 lakh crore with an

increase in market share of the organised industry from 22% to 26% over

the same period.

Exhibit 12: Organised dairy market growth (| crore)

0

50,000

100,000

150,000

200,000

250,000

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E


Unorganised

80%

Organised

20%

Private

52%

Cooperatives

48%


Following the conventional dietary pattern of Indians, liquid milk is the

largest contributor to the industry at ~65% market share followed by

ghee at ~15%. Emerging products like cheese, flavoured milk contribute

just 1.5%, 1.6%, respectively. Over the years, curd and paneer, which

were highly dominated by local vendors, are also gaining momentum.

Milk production is growing at 4.3% with consumption at 5%, widening the

gap between demand and supply.

Structural shift in dairy industry panning out

Changing customers’ preferences and spending patterns are leading to

two major structural shifts in industry:

a. Shift from unorganised to organised players

Unorganised players are preponderant in the Indian dairy industry with

80% market share (as of FY14). The organised market has slowly grown

from 16.7% in 2010 to 20.8% in FY14. In FY10-15, growth of the

organised sector at 20.5% CAGR has surpassed unorganised sector

growth for the same period at 14.2% CAGR. Going forward, with growing

urban population, higher disposable income and rising consciousness

about packaged products, the organised dairy industry is expected to

grow at a faster rate in coming years. According to IMARC, organised

dairy industry is estimated to grow at a CAGR of 19.6% in FY16-20E.

b. Shift towards VADPs – new milk revolution

Favourable demographics (with more young population), increasing

urbanisation and higher disposable income have given a big push to

demand for non-traditional VADPs like cheese, condensed milk, UHT,

flavoured butter, milk, yoghurt, protein-based beverages and health

supplements. As per the IMARC report, the VADP market is expected to

increase at 19.2% CAGR in 2015E-20E, from | 28700 crore to | 69000

crore. The shift towards VADPs will be the greatest lever for growth of

conventional dairy players as VADPs enjoy huge premium and a longer

shelf life compared to conventional milk forms. Additionally, gross and

operating margin for VADPs are 2-3x greater than raw milk.

Key factors for rising demand for VADPs

i) Changing lifestyles and increasing health awareness, especially among

the young population, is leading to evolution of low-fat high-protein

dietary patterns, driving demand for products like low fat

yoghurts/cheese, protein-based health drinks/supplements among others.

ii) Aggressive growth plans of QSR players will also lead to a significant

rise in demand for fresh milk, condensed milk and cream, especially from

coffee chains with cheese demand from pizza and burger chains.

Additionally, traditional VADPS like ghee and butter will remain in

demand from food chains/restaurants with evolving habit of eating out.

iii) VADPs are gaining popularity with the increasing young population

who are more inclined towards fast food consumption, which requires

cheese usage in convenience foods for pizzas, pasta, burgers, etc.

Additionally, today 65% of total milk is sold in liquid form in India against

~11% in the European Union (EU). This provides immense potential for

growth of VADPs, going forward.

Today 65% of total milk is sold in liquid form in India against

~11% in European Union (EU)


Exhibit 13: Contribution of different categories in total dairy industry (%)

64.6

13.4

3.45.9

1.5 1.6

9.6

66.5

12.1

4.3 4.72.5 2.0

7.9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Liquid milk Ghee UHT Milk SMP Cheese Flaovored

milk

Others*

2015 2020E

Source: Industry Reports, ICICIdirect.com Research

Exhibit 14: Realisation growth over years to be favourable (|/unit*)

45 56

466 458

130 119

33

285 281

208

9971

96

726707

201185

51

444 442

324

154

0

100

200

300

400

500

600

700

800

Liq

uid

milk

UH

T M

ilk

Ghee

Cheese

Curd

Fla

vored

milk

Butterm

ilk

Paneer

SM

P

Cream

Lassi

2015 2020


* Milk (liquid, flavoured), buttermilk, lassi in litre and ghee, cheese, butter, paneer, SMP in kg

Supply chain of Indian dairy industry – key to success

The supply chain is the basic artery of the whole dairy industry in India

and is the key determinant of success and competitiveness. Milk being

highly perishable in nature requires a strong and efficient supply chain in

order to survive the process from raw milk to processed milk and/or

VADPs. Further, procurement of milk depends on seasonality, yield of

cattle, government policies and global skimmed milk powder prices.

Winters are the flush season (September-February) for the dairy industry

as the favourable climate leads to excess milk production by animals

naturally. Hence, companies tend to procure excess milk during the flush

season also and keep them in inventory in the form of SMP for lean

seasons.

The supply chain in India starts with milk procurement either by

cooperatives or private players (other than self consumption and/or the

traditional milk sale) from large, medium and small-scale farmers. The

process is highly fragmented as there are large numbers of farmers who

own two to three milch animals and sell milk for the purpose of additional

income. The procured milk is collected in chilling centres, and then

transported to processing units where it is processed to meet milk

Three types of milk procurement channels:

a. Direct: companies procures directly form

farmers on daily basis

b. Indirect: companies procure from third party

vendors/agents

c. Hybrid: company uses a mix of both direct

and indirect channels to meet total

requirement


standardisation and later packed & sold. Additionally, companies, due to

the perishable nature of milk, convert excess milk to the powder form.

Today companies are involved in manufacture of VADPs in sync with the

shift happening in dietary trend of customers and increasing urbanisation,

which has led to an increase in demand for milk and milk products.

Exhibit 15: Supply chain of Indian dairy Industry

Source: Company Presentation, ICICIdirect.com Research

Therefore, as the dairy market is supply driven, boosting milk production

in India remains the key challenge. As announced in the Budget 2017, the

industry is set to receive | 8000 crore investment under NABARD to boost

the dairy infrastructure in India. The fund, which is expected to be spent

in a phased manner, will help add milk processing capacity, increasing

milk production and distribution capacity.

Companies procure milk either directly from farmers or buy from

agents/contractors or a combination of the two. Direct procurement is

desirable for the company as it enables more flexibility in terms of quality,

amount and pricing leading to better gross margins. Indirect procurement

is an expensive affair vis-à-vis direct, e.g. Kwality Foods procures only

~22% of its milk directly. Hence, it has the lowest gross margin among

peers at 9.7% (in FY17).

Regional nature limits procurement expansion

Due to the perishable nature of milk, procurement and distribution of milk

in conventional pouches is a very regional affair. Raw milk can get spoiled

in only a few hours, if not refrigerated. Additionally, in India, dairy farming

is more of an additional occupation of families with just two or three

cows. Thus, the fragmentation and perishable nature of milk restricts

flexibility in procurement and distribution on part of dairy companies.

However, with a shift towards VADPs and innovative packaging,

companies are expanding their distribution network for products with a

long shelf life.

An investment of | 35 crore is required to set up a milk

processing unit with two lakh litre per day (LLPD)


Exhibit 16: Top 10 milk producing states in India

0

5000

10000

15000

20000

25000

30000

UP

Raja

sthan

Guja

rat

MP

AP

Punja

b

Maharashtra

Haryana

Bih

ar

Tam

il N

adu

('0

00

to

nn

es)

FY15 FY16


Low yield of milch animals in India vis-à-vis developed companies

The per annum yield of milch animals at 1.2 tonnes per cow and 1.7

tonnes per buffalo is much lower than other milk producing nations such

as the US, Germany, New Zealand (3 tonnes per animal), etc. This makes

the strong and seamless procurement channel all the more important

coupled with a wider product portfolio to have a strong presence in the

market. In 2015, 51.1% of the country’s milk output came from buffaloes,

followed by crossbred cows (25.2), indigenous cattle (20.2) and other

animals (3.5). Dairy India expects the contribution of buffaloes to fall to

45.5%, indigenous cows to 16.3% and other animals to 3.2%. Total ~35%

of India’s milk is expected to come from crossbred cattle by 2020 whose

population is likely to go up from 3.97 crore to 5.4 crore.

High SMP prices globally lead to high price in local market

India witnessed highest export of SMP in FY14 when SMP prices were at

their peak in the global market. However, in the last two years, prices

have crashed on account of high global inventory. SMP prices are down

~50% from the peak of ~$4500 per tonne (in March 2014) to ~$2160 per

tonne currently and have adversely impacted export. Strong global prices

also lead to strong prices domestically as companies get inclined towards

exporting SMP rather than selling milk locally to earn higher margins.

Hence, they are ready to pay higher prices even for procurement. With

time, newer players have started experimenting with export of cheese in

addition to SMP. New entrants in the dairy space, Parag Milk Foods and

Prabhat Dairy have entered the export of cheese as it provides a huge

opportunity. Though the quantum remains minuscule, it provides

companies with a broader horizon, going forward.


Exhibit 17: SMP exports decline with lower prices

37.4

25.6

87.8

159.3

66.4

0

40

80

120

160

200

FY11 FY12 FY13 FY14 FY15

('0

00 to

nn

es)


Exhibit 18: Global SMP price trend ($/MT)

0

500

1000

1500

2000

2500

3000

Apr-16

May-16

Jun-16

Jul-16

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

$/MT

Source: Global dairy trade, ICICIdirect.com Research

Where does India stand in global dairy industry?

Globally, milk production has grown at 2.3% CAGR in 2010-14 to 792

MMT led by a) population growth, b) urbanisation with rising disposable

income, c) favourable demographics and d) shift towards branded

products. However, India, which accounts for 18% of total world dairy

and dairy products, grew faster over the same period at 5.8% CAGR to

138 MMT over the same period. It further increased to 155.5 MMT in

FY16. India is the world’s largest consumer of milk ahead of markets like

the US, China, Russia and Pakistan.

Exhibit 19: Largest producer of milk (in 000 MT)…

166148157142

97117

4571939655 35799

0

40000

80000

120000

160000

200000

EU India USA China Pakistan Brazil


Exhibit 20: …but with low capita consumption (litre)

285 281

220

156

97

24

0

50

100

150

200

250

300

United

States

EU27 Russian Brazil India China

Source: Global dairy trade, ICICIdirect.com Research

Exhibit 21: Plethora of opportunities across segments

Unorganised

share

Organised

share

(%) (%) FY14 FY20E CAGR (%) FY14 FY20E

CAGR

(%)

Liquid milk 80% 20% 15% 68.0 90.0 5% 2,621.0 6,068.0 15% Amul (20.2%), Nandini (8.1%) Mahanand Dairy (5.2%)

UHT 100% 27% 0.5 1.1 15% 26.0 103.8 26% Amul (40%), Nandini (30%), Visakha Dairy (10%)

Ghee 82% 18% 16% 1.5 2.0 4% 618.0 1,367.0 14% Amul (15%), Nandini (11%) and SMC Foods (9%)

Cheese 100% 24% 0.0 0.1 20% 12.0 59.0 30% Amul (42%), Parag (32%) Britannia (9%)

Curd 94% 6% 15% 2.7 3.6 5% 217.0 493.0 15% Nandini (20%), Tirumala (18%) and Amul (15%)

Paneer 98% 2% 16% 1.3 1.7 5% 293.0 654.0 14% Amul market leaderwith 28% market share

Categories

CAGR

(2010-14)

Volume (mt) Value (| bn)

Key players



What it took India to reach this place

Milk production in India takes place across the length and breadth of the

country in rural households. The erstwhile milk deficient country has

become the world’s second largest milk producer after the European

Union (EU) over the last three decades. This was a result of ‘Operation

Flood’ and other initiatives taken by state and central governments.

‘Operation Flood’ was launched in 1970 by India's National Dairy

Development Board (NDDB). Aided by the significant revolution, India

surpassed the US in milk production in 1998 and reached 17% of global

output in 2010-11. During these years, India doubled its per capita milk

availability and transformed dairy farming into the largest self-sustainable

rural employment generator.

Exhibit 22: Operation Flood – Transforms milk deficient company into dairy giant

Phase I

(1970–1980)

•Financed by the sale of SMP & butter oil donated by the European Union•Aimed at linking India's 18 best milksheds with the milk markets of the four

metropolitan cities of Delhi, Mumbai, Kolkata & Chennai

Phase II

(1981–1985)

•Number was raised to ~136 milksheds linked to over 290 urban markets

•By end of 1985, a self-sustaining system of 43,000 village cooperatives covering 4.25 million milk producers was in place

Phase III

(1985–1996)

•Enabled dairy cooperatives to rapidly build up the basic infrastructure required to procure and market milk in larger volumes; milksheds peaked at 173

•Veterinary first-aid health care services, feed and artificial insemination services for cooperative members were extended



Growth opportunities by categories – quick glance

Exhibit 23: Liquid milk market size (| crore)

51,9

00

62,9

00

76,0

00

91,8

00

110,5

00

132,9

00

159,3

00

0

40000

80000

120000

160000

200000

2014 2015E 2016E 2017E 2018E 2019E 2020E


Exhibit 24: UHT market size (| crore)

2,6

00

3,3

00

4,2

00

5,3

00

6,6

00

8,3

00

10,4

00

-

2,000

4,000

6,000

8,000

10,000

12,000

2014 2015E 2016E 2017E 2018E 2019E 2020E


Exhibit 25: Ghee market size (| crore)

11,0

00

13,0

00

15,4

00

18,1

00

21,2

00

24,8

00

28,9

00

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2014 2015E 2016E 2017E 2018E 2019E 2020E


Exhibit 26: Cheese market size (| crore)

1,2

00

1,5

00

2,0

00

2,7

00

3,5

00

4,6

00

5,9

00

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2014 2015E 2016E 2017E 2018E 2019E 2020E


Exhibit 27: Flavoured milk market size (| crore)

1,3

00

1,6

00

2,0

00

2,5

00

3,1

00

3,9

00

4,8

00

-

1,000

2,000

3,000

4,000

5,000

6,000

2014 2015E 2016E 2017E 2018E 2019E 2020E


Exhibit 28: SMP market size (| crore)

5,0

00

5,7

00

6,6

00

7,6

00

8,7

00

9,9

00

11,3

00

-

2,000

4,000

6,000

8,000

10,000

12,000

2014 2015E 2016E 2017E 2018E 2019E 2020E



Competitive structure of Indian dairy industry

Era of cooperative dominance to end with private players stepping up

Consumers are becoming more conscious about hygiene in the products

they consume. This is leading to increasing competition in the dairy

space, which is dominated by cooperatives in India.

As per industry reports, private dairies are set to overtake cooperatives

and are estimated to handle larger milk volumes in the next five years.

During FY01, the share of private players was only 39%, which has

reached 50% in FY15 with both cooperatives and private dairy players,

procuring ~15.6 MT of milk. However, by 2020E, procurement of milk by

private players is estimated to reach 28.9 MT, ahead of 23.7 MT procured

by cooperatives. Currently, big cooperatives like Gujarat Cooperative Milk

Marketing Federation (Amul) and Karnataka Cooperative Milk Producers

Federation (Nandini) procure 170 LLPD and 63 LLPD, respectively. In the

private sector, Hatsun has highest procurement at 26 LLPD followed by

the likes of Heritage, Kwality in the range of 10-15 LLPD.

Private players’ white revolution

Slowly and steadily, private dairy players have been strengthening their

presence in the cooperative dominated industry. The remarkable fact

about this growth is that it has come about without any subsidies or

government support. The risk taking capacity and entrepreneurial

initiatives has led the way here. As per industry reports, it is estimated

that investments in the dairy business will broadly range between | 9,000

and | 10,000 crore in the next five years for capacity creation, milk

procurement, handling and product manufacturing. Majority of this

investment is expected to come from private dairy players who are

succeeding in setting foot in the dairy industry through innovation and

technology in product development and differentiation.

Exhibit 29: Working capital days trend across major private players (FY17)

Company Inventory days Debtor days Creditor days Working capital days

Prabhat Dairy 34 70 14 91

Parag Milk Foods 90 45 66 70

Heritage Foods 17 2 8 11

Hatsun Agro 26 4 15 15

Kwality 19 84 5 97



Exhibit 30: Dairy players – a comparison analysis

FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

Processing capacity (mn litre/day) 1.5 2.0 1.5 2.5 4.3

Direct procurement 70% 80% 100% 95% 22%

B2B 70% 30% Nil 7% 60%

B2C 30% 70% 100% 93% 40%

Fresh milk + SMP 51% 54% 31% 34% 64% NA 68% NA 72% NA

VADPs 49% 46% 69% 66% 36% NA 27% NA 27% NA

Categories

Brands

Geographical presence

Net sales 1167.7 1409.9 1645.2 1730.7 2380.6 2642.9 3444.7 4199.7 6348.1 6871.8

Gross margin (%) 18.1 17.0 26.9 27.3 21.1 21.9 27.7 27.4 8.5 9.7

EBITDA 115.3 126.8 148.2 108.2 130.8 141.3 304.7 379.5 386.5 453.6

EBITDAM 9.9 9.0 9.0 6.2 5.5 5.3 8.8 9.0 6.1 6.6

PAT 23.2 46.9 47.3 17.5 55.4 66.9 60.5 134.0 164.0 194.2

RoE 3.6 5.1 13.1 2.7 23.1 22.2 26.2 38.6 19.2 17.4

RoCE 9.5 8.0 15.9 7.8 28.3 23.8 26.1 21.8 16.6 16.1

Debt 157.8 357.9 360.5 233.4 105.1 140.3 519.2 690.4 1469.2 1589.6

Asset turnover 1.4 1.3 2.2 1.9 6.5 5.7 4.4 3.8 2.7 2.5

TN, Karnataka, Goa & parts of AP

Milk, curd; buttermilk; ice cream

Heritage Food Hatsun Agro

Kwality, Dairy Best, Kream

Kountry, Livlite

Kwality

Ghee, milk, SMP, curd

Predominantly Maharashtra

NCR (Delhi), Rajasthan, Haryana,

Uttar Pradesh

Prabhat Dairy

Cheese, ghee, milk, SMP,

paneer, curd, , ice-cream, dairy

beverages, shrikhand

Prabhat, Flava, Milk magic,

Volup

Gowardhan, Go, Topp Up, Pride

of Cows

cheese, ghee, milk, SMP,

paneer, curd, dairy beverages

Ice cream, milk, curd, ghee,

butter, SMP, DW, paneer

Parag Milk Foods

Arun, Arokya, Hatsun, Ibaco,

Oyalo

Telangana, AP, Karnataka, TN,

Maharashtra & Delhi

Predominantly Maharashtra &

AP

Heritage

Source: Company, Analyst presentations, ICICIdirect.com Research


Financials

Increasing utilisation levels, favourable mix to aid revenues, margins

Prabhat has posted strong revenue CAGR of 23.9% in FY12-17 driven by

significant growth in traditional VADPs - SMP, butter & ghee and

condensed milk. Condensed milk, which is supplied mainly to Mondelez,

also witnessed healthy growth at 13.8% CAGR in FY12-16. However, with

a change in ingredient for Mondelez (shift from condensed milk to SMP),

revenues from condensed milk declined significantly in FY17. There was

similar growth in SMP sales. The company forayed into production of

non-traditional VADPs in the recent past. Prabhat commenced curd

manufacturing in FY14, cheese & shrikhand in FY16 and launched ice-

cream brand Volup in Q4FY17 (in both mass and premium segment).

These categories are in a nascent stage of capacity utilisation and market

growth. Thus, they have huge headroom for growth.

We believe that with improving utilisation levels and increasing mix of

VADPs, revenues of the company are expected to grow at 14.3% CAGR in

FY17-19E to | 1842.5 crore. The utilisation of newly entered categories

like cheese, shrikhand & paneer, ice cream, flavoured milk, curd and UHT

is set to improve to 45%, 65, 65%, 60% and 55%, respectively, by FY19E.

Exhibit 31: Increasing share of VADPs in revenue mix (%)

55.850.7 54.0 53.8 51.6

44.249.3 46.0 46.2 48.4

0.0

20.0

40.0

60.0

80.0

100.0

FY15 FY16 FY17 FY18E FY19E

Milk + milk powder VAP


Exhibit 32: Increasing share of VADPs in revenue mix (%)

21.314.0 13.2 12.5

29.4 40.0 40.6 39.2

21.623.0 22.9 23.9

23.7 12.0 8.2 6.3

0.23.0 7.0 9.8

3.8 8.0 8.1 8.4

0.0

20.0

40.0

60.0

80.0

100.0


Milk Milk powder Butter+Ghee Condensed milk Cheese, paneer, shrikhand others*


Prabhat has historically enjoyed higher operating margin of ~10-11% in

the past vis-à-vis competitors on account of a) lower capacity utilisation,

b) higher proportion of revenue from institutional players where it follows

cost plus model and c) minimal advertisement cost. However, going

forward, we estimate operating margins will be marginally lower on

account of a) increasing capacity utilisation, b) increasing exposure to the

B2C segment and advertisement cost coming in play to strengthen the

brand (1.5% of net sales in FY19E) and c) increasing procurement cost.

We estimate operating margins will remain under pressure in FY18E to

9.1% on account of elevated milk procurement prices. Then with

softening in milk price growth and increasing share of high margin

categories i.e. non-traditional VADPs, we estimate the margin will reach

10.0% for FY19E. Further, the company is making an effort to increase the

share of the B2C business from current 27% to 50% by FY20E, which

could be an additional driver.

The company incurred marketing spend of | 8.1 crore, | 9.4

crore and | 18.0 crore in FY15, FY16 and FY17, respectively.

We estimate it will increase to | 27.6 crore (1.5% of net

sales) in FY19E


Exhibit 33: Increasing capacity utilisation to drive revenue growth

856.7

1003.7

1167.7

1409.9

1616.3

1842.5

0.0

400.0

800.0

1200.0

1600.0

2000.0

FY14 FY15 FY16 FY17 FY18E FY19E

0.0

10.0

20.0

30.0

40.0

Net sales (| crore) % growth


Exhibit 34: EBITDA margin of 10.0% expected in FY19E

90.4 103.8 115.3 126.8 146.9 184.3

10.6

10.3

9.9

9.09.1

10.0

0.0

40.0

80.0

120.0

160.0

200.0


8.0

8.5

9.0

9.5

10.0

10.5

11.0

EBITDA (| crore) EBITDA Margin (%)


No significant increase in interest & depreciation cost to drive profitability

We estimate significant profitability growth of the company in FY17-19E.

With capacity already in place, Prabhat’s focus is on improving them over

time leading to expansion in operating margins. Only planned capex at

present is for | 50 crore for a) expansion of its SMP facility

(| 30 crore) to meet demand from Mondelez and b) distribution network

expansion (| 20 crore). Hence, interest cost and depreciation charges are

expected to remain capped as no significant capex is planned in the near

future. This is expected to lead to a significant increase in profitability with

PAT growing at 40.9% CAGR in FY17-19E. Additionally, Sunfresh Agro

Industries, a material subsidiary of the company, has received an

eligibility certificate on May 5, 2016 from the Government of Maharashtra

for its mega project under the Package Scheme of Incentives 2007 (PSI)

under which the company is expected to get VAT refunds. This is spread

over seven years from April 1, 2014 to March 31, 2021. Taking into

account the VAT refund estimates at | 19.1 crore and | 26.2 crore for

FY18E and FY19E, respectively, we expect adjusted PAT to register a

CAGR of 45.1% over the same period.

Exhibit 35: Adjusted PAT to grow significantly

20 26 23 35 49 74

46.7

29.7

-11.7

51.2

39.4

51.0

0.0

20.0

40.0

60.0

80.0


-20.0

0.0

20.0

40.0

60.0

Adj. PAT (| crore) % growth



To clock healthy FCF, return ratios as investment slows down

Prabhat has incurred a capex of | 282.5 crore over FY13-16 for capacity

expansion and development of new category lines. On account of the

investment phase, the company had negative free cash flow (FCF) till

FY15. However, going forward, with no major capex planned, and

improvement in profitability, we expect the company to report marginal

positive FCF in FY18E, and further jump to | 56.3 crore in FY19E.

Additionally, we expect subdued return ratios to improve, going forward,

with increasing capacity utilisation in various categories. The RoE, RoCE

are estimated to reach 9.7%, 12.2%, respectively, for FY18E and FY19E.

Exhibit 36: FCF to turn positive, going ahead, on lower capex

(94.2)(86.9)

16.4

(4.5)

1.8

56.3

(150.0)

(100.0)

(50.0)

-

50.0

100.0

FY14 FY15 FY16 FY17E FY18E FY19E


Exhibit 37: Return ratios to improve with increasing capacity utilisation

7.5

3.6

5.1

6.8

9.7

9.09.5

8.0

9.7

12.2

6.4

9.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


(%

)

RoE RoCE


No major capex on radar for now, leverage status to improve

We believe the company has already incurred the required capex for now

and would now focus on optimising the capacity utilisation leading to a

significant improvement in the gross block turnover of the company at

2.7x for FY19E. The company’s debt level peaked out in FY15 when it was

setting up a plant for manufacturing cheese. The debt/equity ratio for the

company was also at its peak during the year at 1.2x. However, with a

small capex plan of | 50 crore in the near future and improving

profitability, we estimate the company will enjoy low debt/equity ratio of

0.5x in FY17-19E. We are not expecting any decline in debt level for the

same period as with increasing capacity utilisation and share of VADPs,

the company’s working capital debt requirement with be there. Further,

with improving operating efficiency and a favourable product mix, the

interest coverage ratio is expected to improve substantially.

Exhibit 38: Improving leverage status

1.1

0.9

0.2

0.5 0.5

2.5

1.20.5

1.6

1.9

2.8

2.5

1.8

1.7 1.7

3.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

0.0

1.0

2.0

3.0

4.0

Debt/Equity (x) Interest coverage (x)


Exhibit 39: Gross block turnover (x) to improve

2.1

2.7

2.3

2.1

2.4

2.62.7

1.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E



Risk & concerns

Brand acceptability

Prabhat is an emerging dairy player in the dairy space and is currently in

the process of improving its exposure to the B2C segment. The company

is taking initiatives to make the brand strong and expand the retail

presence. However, if the brand is not accepted well by consumers, it

may adversely impact the profitability of the company.

Significant dependence on certain institutional clients

The company is currently significantly dependent on certain marquee

clients. Any disruption in contracts/orders may be a threat to Prabhat’s

revenue.

Lower procurement

The business is dependent on a large quantity of raw milk sourcing. Any

disruption in the existing procurement channel and/or inability to procure

at a competitive price can be a margin deterrent.

Concentration of entire procurement in Maharashtra

The company’s milk procurement operation is concentrated in

Maharashtra. Currently, the state is facing ~20% milk shortage (during

flush season due to consecutive droughts in past years). This may get

acute in the summer leading to higher procurement cost. Any such

adverse climatic condition, at present or future, may impede the

company’s profitability. Any real or perceived product contamination may

impact revenues and also damage brand reputation.

Usage of banned drugs to increase productivity of the milch animals

As per various news articles, Oxytocin, a banned drug, is used to procure

more milk from cattle as it helps cattle produce more milk. However, it

has severely harmful effects on the health of both, the animals it is

injected into and humans who consume milk that comes from them. This

drug not only reduces the reproductive ability of cows over time

(eventually making them barren) but also reduces their lifespan. Despite a

ban on artificially injecting hormone into cattle, this is being used at many

places as per various articles. Any identification of such issue can lead to

a disruption in procurement.


Valuation

We believe that with improving capacity utilisation levels and initiatives

undertaken to expand the distribution as well as procurement network,

Prabhat is all set to take off on the growth path. Aided by increasing

capacity utilisation and share of VADPs in revenue, we estimate the

company to post revenue CAGR of 14.3% in FY17-19E with an EBITDA

margin of 10.0% in FY19E. With the completion of the investment phase

and increase in capacity utilisation levels across categories, we expect

return ratios, RoCE and RoE, of the company to improve to 12.2% and

9.7% in FY19E against 8.0% and 5.1% in FY17, respectively. We initiate

coverage on Prabhat with a BUY recommendation and a target price of

| 140/share based on triangulated valuation.

Exhibit 40: Triangulated valuation

Multiple (x) Fair value (|) Weightage (%) Value (|)

EV/EBITDA 8.0 124 0.3 41

PE 16.0 152 0.3 51

DCF 143 0.3 48

Target Price 140

CMP 119

Upside (%) 18

Rating Buy

Source: ICICIdirect.com Research

Exhibit 41: One year forward PE band

0

50

100

150

200

250

300

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Sep-17

Dec-17

Mar-18

20x 25x 30x 35x Close Price (|)


Exhibit 42: One year forward EV/EBITDA band

0

500

1000

1500

2000

2500

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Sep-17

Dec-17

Mar-18

EV (|) 6x 8x 10x 12x



DCF valuation

Using the DCF methodology, we have arrived at a fair value of | 143 per

share, considering a terminal growth of 4% and weighted average cost of

capital (WACC) of 12.5%. We have assumed the company would witness

revenue growth (CAGR FY17-27E) of 12.2%, operating margins of 10.9%

and average tax rate of 27% till 2027E.

Exhibit 43: DCF

(| crore) FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E

EBITDA 115.3 126.8 146.9 184.3 214.1 250.4 279.7 312.4 348.9 389.7 435.3 486.3

Depreciation 39.6 43.2 45.5 48.1 48.8 49.9 55.7 60.0 67.1 71.3 75.7 80.1

Tax 13.5 27.4 23.2 34.3 84.1 101.0 60.5 68.1 76.1 86.0 97.1 109.7

NOPAT 62.2 56.2 78.2 101.9 81.2 99.5 163.5 184.2 205.8 232.4 262.5 296.5

Capital expenditure 12.4 47.1 55.0 25.0 15.0 15.0 25.6 28.6 31.9 35.7 39.8 44.5

Change in WC 24.2 245.0 60.5 75.2 -7.9 152.9 29.5 47.6 46.5 80.1 45.5 -3.0

FCF 65.2 -192.6 8.2 49.7 122.9 -18.6 164.1 168.0 194.4 188.0 252.9 335.1

| crore

4%

4348

0.3

1248

420

1668

378

111

1401

9.8

143

No. of Equity Shares

DCF Target Price

DCF valuation

Terminal Growth Rate

Terminal Value

Discounting Factor

PV of Terminal Value

PV of Cash Flow Till Terminal Year

Total Value of Firm

Gross Debt

Cash & cash equivalent

Target Market Cap


Exhibit 44: Relative valuation

Mcap

mn $ FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E

Danone 50135.6 18.1 18.5 17.2 15.5 10.6 9.9 1.8 1.8 16.1 16.8

Bright Dairy 2211.0 8.1 8.1 23.1 20.8 8.2 7.7 0.1 0.1 11.8 11.7

Fonterra 9463.5 9.4 9.5 10.6 9.7 7.8 7.4 0.4 0.4 12.2 13.1

Dean Foods 1676.0 5.5 5.5 12.8 12.4 5.7 5.8 0.2 0.2 17.3 18.1

Parag Milk Foods 318.9 6.9 8.0 36.3 26.2 15.2 11.4 1.0 0.8 9.5 10.9

Prabhat dairy 181.0 9.1 10.0 18.5 12.5 9.5 7.7 0.7 0.6 6.8 9.7

Mcap/sales EV/EBITDA EBITDAM (%) PE (x) ROE

Source: Company, ICICIdirect.com Research; Note: Bloomberg estimates for companies other than Prabhat Dairy


Financial Summary

Exhibit 45: Income statement


Total operating Income 1167.7 1409.9 1616.3 1842.5

Growth (%) 16.3 20.7 14.6 14.0

Raw Material Expenses 928.3 1135.8 1291.6 1451.9

Employee Expenses 28.3 34.7 40.4 46.1

Marketing Expenses 9.4 18.0 24.2 27.6

Administrative Expenses

Other expenses 86.4 94.6 113.1 132.7

Total Operating Expenditure 1052.4 1283.1 1469.4 1658.3

EBITDA 115.3 126.8 146.9 184.3

Growth (%) 11.0 10.0 15.9 25.4

Depreciation 39.6 43.2 45.5 48.1

Interest 40.5 29.4 39.9 39.7

Other Income 1.5 1.3 5.4 4.4

PBT 36.6 55.4 66.8 100.9

Exceptional item 0 18.9 19.1 26.2

Total Tax 13.5 27.4 23.2 34.3

PAT 23.2 46.9 62.7 92.8

Growth (%) -11.7 51.2 39.4 51.0

EPS (|) 2.4 4.8 6.4 9.5

Adj. PAT 23.2 35.0 48.8 73.7

Adj. EPS (|) 2.4 3.6 5.0 7.5


Exhibit 46: Balance sheet

(Year-end March) FY16 FY17 FY18E FY19E

Liabilities

Equity Capital 97.7 97.7 97.7 97.7

Reserve and Surplus 548.0 590.5 621.9 659.0

Total Shareholders funds 645.6 688.2 719.6 756.7

LT Borrowings & Provisions 119.3 319.3 329.3 349.3

Deferred Tax Liability 38.4 38.6 33.6 28.6

Others Non-current Liabilities 0.0 0.0 0.0 0.0

Total Liabilities 810.6 1063.4 1099.8 1151.9

Assets

Gross Block 545.9 590.9 632.5 687.5

Less: Acc Depreciation 132.7 175.9 221.5 269.6

Net Block 413.2 415.0 411.0 417.9

Capital WIP 24.5 26.5 40.0 10.0

Net Intangible Assets

Non-current Investments 0.0 0.0 0.0 0.0

LT loans & advances 75.0 80.8 88.6 101.0

Current Assets

Inventory 87.9 133.3 168.3 212.0

Debtors 226.3 271.1 332.1 383.7

Loans and Advances 75.0 80.8 88.6 101.0

Other Current Assets 7.0 19.9 22.1 25.2

Cash 12.0 165.6 134.8 110.7

Deferred Tax Assests 3.6 2.8 2.8 2.8

Current Liabilities

Creditors 52.1 53.8 66.4 75.7

Provisions 0.5 0.5 0.5 0.6

Short term debt & other CL 7.9 13.5 15.5 17.6

Application of Funds 810.6 1,063.4 1,099.7 1,151.9



Exhibit 47: Cash flow statement

(Year-end March) FY16 FY17E FY18E FY19E

Profit After Tax 23.1 46.9 62.7 92.8

Add: Depreciation 39.9 43.2 45.5 48.1

(Inc)/dec in Current Assets 30.5 -79.4 -66.1 -71.1

Inc/(dec) in CL and Provisions -11.4 7.3 14.7 11.5

CF from operating activities 28.7 42.6 56.8 81.3

(Inc)/dec in Investments 0.0 0.8 0.0 0.0

(Inc)/dec in LT loans & advances 0.0 0.0 0.0 0.0

(Inc)/dec in Fixed Assets -32.2 -47.1 -55.0 -25.0

Others 2.2 0.0 0.0 0.0

CF from investing activities -24.3 -40.9 -21.4 -25.0

Issue/(Buy back) of Equity 300.0 0.0 0.0 0.0

Inc/(dec) in loan funds -253.2 200.1 5.0 15.0

Dividend paid & dividend tax 0.0 -18.8 -31.4 -55.7

Inc/(dec) in Sec. premium

Others -59.8 -29.4 -39.9 -39.7

CF from financing activities -13.0 151.9 -66.3 -80.3

Net Cash flow -8.6 153.6 -30.8 -24.0

Opening Cash 20.3 12.0 165.6 134.8

Closing Cash 12.0 165.6 134.8 110.7

Source: ICICIdirect.com Research

Exhibit 48: Ratio analysis

(Year-end March) FY16 FY17 FY18E FY19E

Per share data (|)

EPS 2.4 4.8 6.4 9.5

Cash EPS 6.4 9.2 11.1 14.4

BV 66.1 70.5 73.7 77.5

DPS 0.5 1.9 3.2 5.7

Cash Per Share 1.2 17.0 13.8 11.3

Operating Ratios (%)

EBITDA Margin 9.9 9.0 9.1 10.0

PBT / Total Operating income 3.1 3.9 4.1 5.5

PAT Margin 2.0 3.3 3.9 5.0

Inventory days 27.5 34.5 38.0 42.0

Debtor days 70.7 70.2 75.0 76.0

Creditor days 16.3 13.9 15.0 15.0

Return Ratios (%)

RoE 3.6 5.1 6.8 9.7

RoCE 9.5 8.0 9.7 12.2

Valuation Ratios (x)

P/E 50.1 24.7 18.5 12.5

EV / EBITDA 11.3 10.7 9.5 7.7

EV / Net Sales 1.1 1.0 0.9 0.8

Market Cap / Sales 1.0 0.8 0.7 0.6

Price to Book Value 1.8 1.7 1.6 1.5

Solvency Ratios

Debt/EBITDA 1.4 2.8 2.5 2.1

Debt / Equity 0.2 0.5 0.5 0.5

Current Ratio 6.6 7.5 7.4 7.7

Quick Ratio 5.1 5.5 5.4 5.4



Annexure I – Milk Pricing

The Food Safety and Standards Act (FSSAI), 2006 stipulates that the Milk

and Milk Products Order, 1992 shall be deemed to be regulations made

under this Act. The FSSAI prescribes specific standards for various types

of milk.

Milk is priced based on the fat and SNF content of milk at the time of

procurement.

Exhibit 51: Additional expenses

Sr.No Particulars Rate |/Litre

1.0 Internal transport 1.1

2.0 Can expenditure 0.1

3.0 Management expenditure 0.3

4.0 Chilling expenditure 0.4

5.0 Total Commission to Sangh (1+2.+3+4) 1.8

6.0 Commission to Society 0.7

7.0 Total Commission (5+6) 2.5

Source: Dairy Development Department, ICICIdirect.com Research

Exhibit 52: Printed transaction receipt - Prabhat

Source: Company Presentation, ICICIdirect.com Research

Exhibit 49: FSSAI standards for different classes and designations of milk

Class of milk Designation Minimum % milk fat Minimum % milk SNF

Buffalo Milk Raw, pasteurized, boiled, flavored, sterilized ~5-6 9.0

Cow Milk Raw, pasteurized, boiled, flavored, sterilized ~3-4 8.5


Exhibit 50: Case Study - Dairy development department, Maharashtra procurement price

Quality

Flush season

rate

Lean season

rate Quality

Flush season

rate

Lean season

rate

Fat% / S.N.F.% Rs/ Litre Rs/ Litre Fat% / S.N.F.% Rs/ Litre Rs/ Litre

3.5/8.5 22.0 22.0 6.0/90 31.0 31.0

3.6/8.5 22.3 22.3 6.1/90 31.3 31.3

3.7/8.5 22.6 22.6 6.2/90 31.6 31.6

3.8/8.5 22.9 22.9 6.3/90 31.9 31.9

3.9/8.5 23.2 23.2 6.4/90 32.2 32.2

4.0/8.5 23.5 23.5 6.5/90 32.5 32.5

4.1/8.5 23.8 23.8 6.6/90 32.8 32.8

4.2/8.5 24.1 24.1 6.7/90 33.1 33.1

4.3 /8.5 24.4 24.4 6.8/90 33.4 33.4

4.4/8.5 24.7 24.7 6.9/90 33.7 33.7

- - - 7.0/9.0 34.0 34.0

- - - 7.1/9.0 34.3 34.3

- - - 7.2/9.0 34.6 34.6

- - - 7.3/9.0 34.9 34.9

- - - 7.4/9.0 35.2 35.2

- - - 7.5/9.0 35.5 35.5

Buffalo Milk Cow Milk

Source: Dairy Development Department , ICICIdirect.com Research

Fat content:

Cow milk: Fat constitutes ~3-4% of the solid

content of cow milk, protein at 3.5% and

lactose at 5%.

Buffalo milk: Fat content is very high at twice

as high as that of cow milk on an average.

The fat: protein ratio in buffalo milk is about

2:1

The water contents of milk in cattle and

buffalo is ~ 83%


Annexure II – Company milestones & capacity details

Exhibit 53: Relative valuation


Exhibit 54: Capacity details

Shrirampur Navi mumbai Total

Aggregate milk processing capacity (litres/day) 1,100,000 400,000 1,500,000

Pasteurized and Pouch Milk (litres/day) 200,000 300,000 500,000

Milk Powders (Kg/day) 36,000 0 36,000

Condensed Milk (Kg/day) 180,000 0 180,000

Clarified Butter (Ghee) (Kg/day) 50,000 0 50,000

Flavored Milk (litres/day) 15,000 0 15,000

Butter (Kg/day) 2,500 0 2,500

Ice Cream (litres/day) 0 10,000 10,000

Curd (Flavored Yogurt, Pouch Curd) (Kg/day) 0 40,000 40,000

UHT Milk (litres/day) 40,000 0 40,000

Cheese (Cheddar/ Mozzarella/Processed) (Kg/day) 20,000 0 20,000

Paneer (Kg/day) 5,000 0 5,000

Shrikhand (Kg/day) 5,000 0 5,000



RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


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Documents

June 15, 2017 Prabhat Dairy (PRADAI) | 119 - ICICI Directcontent.icicidirect.com/mailimages/IDirect_PrabhatDairy_IC.pdf · newly entered categories like cheese, shrikhand & paneer,