Prabhat Dairy (PRADAI) 119

Transcription

1 Initiating Coverage Rating Matrix Rating : Buy Target : 140 Target Period : 12 months Potential Upside : 18% Key Financials Crore FY16 FY17 FY18E FY19E Sales 1, , , ,842.5 EBITDA Net Profit EPS ( ) Valuation Summary FY16 FY17 FY18E FY19E P/E Target P/E Mcap/Sales RoNW (%) RoCE (%) Stock Data Particular Amount Market Capitalization ( Crore) 1,160.4 Total Debt (FY17) ( Crore) Cash and Investments (FY17) ( Crore) EV ( Crore) 1, week H/L 150 / 77 Equity capital 97.7 crore Face value 10 Price movement Jun-16 Oct-16 Feb-17 Jun-17 Research Analysts Prabhat (R.H.S) Sanjay Manyal sanjay.manyal@icicisecurities.com Tejashwini Kumari tejashwini.kumari@icicisecurities.com Nifty (L.H.S) 12,000 10,000 8,000 6,000 4,000 2,000 0 June 15, 2017 Prabhat Dairy (PRADAI) 119 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 1% 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 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 1% 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, , , , ,842.5 EBITDA ( Crore) Net Profit ( Crore) EPS ( ) PE (x) EV/EBITDA (x) RoCE (%) RoE (%)

2 Shareholding pattern (as on March 2017) (%) Shareholder Holding (%) Promoter 48.9 DII 3.9 FII 2.6 Others 44.6 Total 10 Source: Capitaline, ICICIdirect.com Research FII and DII Trend (%) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Source: bseindia.com, ICICIdirect.com Research FII DII 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 Page 2

3 Milk production in Maharashtra ( 000 tonnes) FY11 FY12 FY13 FY14 FY15 FY16 Source: National Dairy Development Board, 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 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. Page 3

4 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 FY 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 nontraditional 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 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Net sales ( crore) % growth 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% 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. Source: Industry, ICICIdirect.com Research Page 4

5 Capacity utilization (%) Exhibit 5: Increasing capacity utilisation (%) to aid share of VADPs in revenue Curd Ice cream Flavored milk UHT Cheese, paneer, shrikhand 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) Exhibit 7: Conversion ratio 12 Milk Flavored milk, curd Condensed milk Milk powder Cheese, paneer Fresh Milk* UHT Curd Cheese Paneer Flavored Milk Butter+Ghee* Source: Industry, ICICIdirect.com Research; * including per unit realisation of ghee and butter (by-products) 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) visà-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 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. Page 5

6 Exhibit 8: Major clients Premium Ingredients Sweetened condensed milk, skimmed/whole milk Powder Skimmed/whole milk powder Nutrition supplements for baby food Full cream milk Co-manufacturing UHT milk, lassi, yogurt, dairy whitener, clarified butter (ghee), curd (dahi), flavoured milk Ice-cream, candies Source: CRU Monitor, ICICIdirect.com Research Clients Mondelez India Foods Pvt Ltd GSK Consumer Healthcare, Heinz Abbot Healthcare Pvt Ltd Mondelez India Foods Pvt Ltd Clients Britannia Mother Dairy We expect the company to incur advertisement expense of 24.2 crore and 27.6 crore in FY18E and FY19E, respectively 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. Page 6

7 Exhibit 10: Price comparison across product range Product Unit Prabhat Parag Amul Mother dairy Britannia Nestle Danone Patanjali UTH 1 litre Cheese 200 gm Paneer 200 gm Lassi 250 gm Ghee 1 litre pouch Curd 400 gm Butter 100 gm Flavored milk 200 ml Source: Company, E-commerce websites, ICICIdirect.com Research Ramping up of cheese facility FY16 Revenue ( crore) FY17E FY18E Capacity FY19E utilization (%) Whey categories in India: (i) (ii) Acid whey, which is inedible and accounts for 65% of the total production by volume; and Sweet whey, which is edible and accounts for the remaining market 35% of production by volume 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 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. Page 7

8 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 tieups with Big Bazaar, Reliance, HyperCity and D-Mart. Page 8

9 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 E. 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 Unorganised 80% Organised 20% Private 52% Cooperatives 48% 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) 250, , , ,000 50, E 2016E 2017E 2018E 2019E 2020E Source: Industry reports, ICICIdirect.com Research Page 9

10 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 crore to 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. Today 65% of total milk is sold in liquid form in India against ~11% in European Union (EU) 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. Page 10

11 Lassi Cream SMP Paneer Buttermilk Flavored milk Curd Cheese Ghee UHT Milk Liquid milk Exhibit 13: Contribution of different categories in total dairy industry (%) Liquid milk Ghee UHT Milk SMP Cheese Flaovored milk E Others* Source: Industry Reports, ICICIdirect.com Research Exhibit 14: Realisation growth over years to be favourable ( /unit*) Source: Industry Reports, ICICIdirect.com Research * Milk (liquid, flavoured), buttermilk, lassi in litre and ghee, cheese, butter, paneer, SMP in kg 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 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 Page 11

12 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 An investment of 35 crore is required to set up a milk processing unit with two lakh litre per day (LLPD) 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. Page 12

13 Exhibit 16: Top 10 milk producing states in India UP Rajasthan Gujarat ('000 tonnes) MP AP Punjab Maharashtra Haryana Bihar Tamil Nadu FY15 FY16 Source: Industry Reports, ICICIdirect.com Research 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. Page 13

14 Exhibit 17: SMP exports decline with lower prices Exhibit 18: Global SMP price trend ($/MT) ('000 tonnes) FY11 FY12 FY13 FY14 FY Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 $/MT Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Source: Industry reports, ICICIdirect.com Research 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 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 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) Exhibit 20: but with low capita consumption (litre) EU India USA China Pakistan Brazil United States EU27 Russian Brazil India China Source: Industry reports, ICICIdirect.com Research Source: Global dairy trade, ICICIdirect.com Research Exhibit 21: Plethora of opportunities across segments Categories Unorganised share Organised share Volume (mt) Value ( bn) CAGR (%) (%) ( ) FY14 FY20E CAGR (%) FY14 FY20E Liquid milk 80% 20% 15% % 2, , % Amul (20.2%), Nandini (8.1%) Mahanand Dairy (5.2%) UHT 100% 27% % % Amul (40%), Nandini (30%), Visakha Dairy (10%) Ghee 82% 18% 16% % , % Amul (15%), Nandini (11%) and SMC Foods (9%) Cheese 100% 24% % % Amul (42%), Parag (32%) Britannia (9%) Curd 94% 6% 15% % % Nandini (20%), Tirumala (18%) and Amul (15%) Paneer 98% 2% 16% % % Amul market leaderwith 28% market share Source: Industry reports, ICICIdirect.com Research CAGR (%) Key players Page 14

15 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 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 ( ) 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 ( ) 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 ( ) 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 Source: Industry reports, ICICIdirect.com Research Page 15

16 Growth opportunities by categories quick glance Exhibit 23: Liquid milk market size ( crore) Exhibit 24: UHT market size ( crore) 12, , ,000 6,000 4, ,900 62,900 76,000 91, , , , E 2016E 2017E 2018E 2019E 2020E 2,000-2,600 3,300 4,200 5,300 6,600 8,300 10, E 2016E 2017E 2018E 2019E 2020E Source: Industry reports, ICICIdirect.com Research Source: Industry reports, ICICIdirect.com Research Exhibit 25: Ghee market size ( crore) Exhibit 26: Cheese market size ( crore) 35,000 7,000 30,000 6,000 25,000 5,000 20,000 4,000 15,000 3,000 10,000 2,000 5,000-11,000 13,000 15,400 18,100 21,200 24,800 28, E 2016E 2017E 2018E 2019E 2020E 1,000-1,200 1,500 2,000 2,700 3,500 4,600 5, E 2016E 2017E 2018E 2019E 2020E Source: Industry reports, ICICIdirect.com Research Source: Industry reports, ICICIdirect.com Research Exhibit 27: Flavoured milk market size ( crore) 6,000 5,000 4,000 3,000 2,000 Exhibit 28: SMP market size ( crore) 12,000 10,000 8,000 6,000 4,000 1,000-1,300 1,600 2,000 2,500 3,100 3,900 4, E 2016E 2017E 2018E 2019E 2020E 2,000-5,000 5,700 6,600 7,600 8,700 9,900 11, E 2016E 2017E 2018E 2019E 2020E Source: Industry reports, ICICIdirect.com Research Source: Industry reports, ICICIdirect.com Research Page 16

17 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 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 Parag Milk Foods Heritage Foods Hatsun Agro Kwality Page 17

18 Exhibit 30: Dairy players a comparison analysis Prabhat Dairy Parag Milk Foods Heritage Food Hatsun Agro Kwality FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 Processing capacity (mn litre/day) 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 Cheese, ghee, milk, SMP, paneer, curd,, ice-cream, dairy beverages, shrikhand Prabhat, Flava, Milk magic, Volup cheese, ghee, milk, SMP, paneer, curd, dairy beverages Gowardhan, Go, Topp Up, Pride of Cows Milk, curd; buttermilk; ice cream Heritage Ice cream, milk, curd, ghee, butter, SMP, DW, paneer Arun, Arokya, Hatsun, Ibaco, Oyalo Ghee, milk, SMP, curd Kwality, Dairy Best, Kream Kountry, Livlite Geographical presence Predominantly Maharashtra Predominantly Maharashtra & AP Telangana, AP, Karnataka, TN, Maharashtra & Delhi TN, Karnataka, Goa & parts of AP NCR (Delhi), Rajasthan, Haryana, Uttar Pradesh Net sales Gross margin (%) EBITDA EBITDAM PAT RoE RoCE Debt Asset turnover Source: Company, Analyst presentations, ICICIdirect.com Research Page 18

19 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 FY 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 icecream 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 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 (%) Exhibit 32: Increasing share of VADPs in revenue mix (%) FY15 FY16 FY17 FY18E FY19E Milk + milk powder VAP FY16 FY17 FY18E FY19E Milk Milk powder Butter+Ghee Condensed milk Cheese, paneer, shrikhand others* 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 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 1% 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. Page 19

20 Exhibit 33: Increasing capacity utilisation to drive revenue growth Exhibit 34: EBITDA margin of 1% expected in FY19E FY14 FY15 FY16 FY17 FY18E FY19E FY14 FY15 FY16 FY17 FY18E FY19E Net sales ( crore) % growth 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, 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 FY14 FY15 FY16 FY17 FY18E FY19E -2 Adj. PAT ( crore) % growth Page 20

21 To clock healthy FCF, return ratios as investment slows down Prabhat has incurred a capex of 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 Exhibit 37: Return ratios to improve with increasing capacity utilisation (5) (10) (15) (4.5) (94.2) (86.9) FY14 FY15 FY16 FY17E FY18E FY19E (%) FY14 FY15 FY16 FY17 FY18E FY19E RoE RoCE 9.7 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 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Debt/Equity (x) Interest coverage (x) Exhibit 39: Gross block turnover (x) to improve FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Page 21

22 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. Page 22

23 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 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 1% 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 PE DCF Target Price 140 CMP 119 Upside (%) 18 Rating Buy Source: ICICIdirect.com Research Exhibit 41: One year forward PE band Exhibit 42: One year forward EV/EBITDA band x 25x 30x 35x Close Price ( ) EV ( ) 6x 8x 10x 12x Page 23

24 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 Depreciation Tax NOPAT Capital expenditure Change in WC FCF 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 No. of Equity Shares DCF Target Price crore 4% Exhibit 44: Relative valuation Mcap EBITDAM (%) PE (x) EV/EBITDA Mcap/sales ROE mn $ FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E Danone Bright Dairy Fonterra Dean Foods Parag Milk Foods Prabhat dairy ; Note: Bloomberg estimates for companies other than Prabhat Dairy Page 24

25 Financial Summary Exhibit 45: Income statement FY16 FY17 FY18E FY19E Total operating Income Growth (%) Raw Material Expenses Employee Expenses Marketing Expenses Administrative Expenses Other expenses Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional item Total Tax PAT Growth (%) EPS ( ) Adj. PAT Adj. EPS ( ) Exhibit 46: Balance sheet (Year-end March) FY16 FY17 FY18E FY19E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds LT Borrowings & Provisions Deferred Tax Liability Others Non-current Liabilities Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Net Intangible Assets Non-current Investments LT loans & advances Current Assets Inventory Debtors Loans and Advances Other Current Assets Cash Deferred Tax Assests Current Liabilities Creditors Provisions Short term debt & other CL Application of Funds , , ,151.9 Page 25

26 Exhibit 47: Cash flow statement (Year-end March) FY16 FY17E FY18E FY19E Profit After Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments 0.8 (Inc)/dec in LT loans & advances (Inc)/dec in Fixed Assets Others 2.2 CF from investing activities Issue/(Buy back) of Equity 30 Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities Net Cash flow Opening Cash Closing Cash Source: ICICIdirect.com Research Exhibit 48: Ratio analysis (Year-end March) FY16 FY17 FY18E FY19E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio Page 26

27 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 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. 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 ~ Cow Milk Raw, pasteurized, boiled, flavored, sterilized ~ Milk is priced based on the fat and SNF content of milk at the time of procurement. Exhibit 50: Case Study - Dairy development department, Maharashtra procurement price Quality Flush season rate Cow Milk Lean season rate Quality Flush season rate Buffalo Milk Lean season rate Fat% / S.N.F.% Rs/ Litre Rs/ Litre Fat% / S.N.F.% Rs/ Litre Rs/ Litre 3.5/ / / / / / / / / / / / / / / / / / / / / / / / / / Source: Dairy Development Department, ICICIdirect.com Research Exhibit 51: Additional expenses Sr.No Particulars Rate /Litre 1.0 Internal transport Can expenditure Management expenditure Chilling expenditure Total Commission to Sangh ( ) Commission to Society 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 Page 27

28 Exhibit 53: Relative valuation Annexure II Company milestones & capacity details Exhibit 54: Capacity details Shrirampur Navi mumbai Total Aggregate milk processing capacity (litres/day) 1,100, ,000 1,500,000 Pasteurized and Pouch Milk (litres/day) 200, , ,000 Milk Powders (Kg/day) 36, ,000 Condensed Milk (Kg/day) 180, ,000 Clarified Butter (Ghee) (Kg/day) 50, ,000 Flavored Milk (litres/day) 15, ,000 Butter (Kg/day) 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 Cheese (Cheddar/ Mozzarella/Processed) (Kg/day) 20, ,000 Paneer (Kg/day) 5, ,000 Shrikhand (Kg/day) 5, ,000 Page 28

29 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 pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com Page 29