Quick take. Parag Milk Foods BUY. Expanding dairy industry to unleash huge potential. CMP Target Price `277 ` year daily price chart

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1 Expanding dairy industry to unleash huge potential (PMFL) is one of the leading manufacturers and marketers of dairy-based branded foods in India. The company has well recognized brands like Gowardhan and Go in its portfolio and has a pan-india network comprising of 15 depots, 104 super stockists and over 3,000 distributors. It has also been growing in the lowly penetrated Indian cheese market (household penetration of ~5%) where it current market share stands at 32%. Going ahead, we expect PMFL to report a top-line CAGR of ~16% to ~`2,231cr and net profit CAGR of ~39% to `91cr over FY E. Shift in trend from unorganized to organized sector to drive growth: The Indian dairy industry is currently valued at ~`4,061bn and is mainly dominated by the unorganized sector which accounts for an 80% share. Industry reports indicate that the Indian dairy industry is expected to grow at a CAGR of 14.9% over FY E to ~`9,397bn and within it the organized segment is expected to grow at a faster pace, thus resulting in its share improving from 20% to ~26% in FY2020E. We believe that this shift in industry will benefit branded players like PMFL. Low consumption of cheese in India presents opportunity for PMFL: The cheese industry in the country is in its nascent stage with cheese only accounting for a fraction of the total dairy industry. India s household penetration of cheese is also very low compared to other developed countries. Going forward, we expect consumption to increase on account of increase in home consumption due to increasing disposable incomes, faster growth expected in the Indian fast food industry, and shift in food consumption trends in tier II and III cities. Considering PMFL s strong brands (Go Cheese) and distribution network, we believe that the company will benefit from growth in the overall cheese industry in India. Margins to improve on account of branded product sales: The company derives approximately two-thirds of its revenues from the sale of high margin branded consumer products like ghee, cheese, UHT, whey products etc. We believe the company will be able to continue its strong growth in the above products going forward on the back of its strong brands and distribution network. Outlook Valuation: PMFL is anticipated to post strong growth in value added products on back of its diversified product basket, strong brands and wide distribution network. Also PMFL would benefit from a shift in mix in favor of the organized market for dairy products. Moreover, PMFL is also reducing its debt significantly, which will enable cost savings. At the current market price, the company trades at a P/E of 21.4x its FY2018E EPS. We initiate coverage on the stock with a Buy recommendation and target price of `336, indicating an upside of ~21% from the current levels. Key financials Y/E March (` cr) FY2015 FY2016 FY2017 FY2018 Net sales 1,444 1,645 1,919 2,231 % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Source: Company, Angel Research, Note: CMP as of July 1, 2016 BUY CMP Target Price Investment Period `277 ` Months Stock Info Sector Dairy Products Market Cap (` cr) 2,326 Net Debt (` cr) 382 Beta Week High / Low 287/ 202 Avg. Daily Volume 333,344 Face Value (`) 10 BSE Sensex 26,999 Nifty 8,287 Reuters Code PAMF.NS Bloomberg Code PARAG:IN Shareholding Pattern (%) Promoters 47.5 MF / Banks / Indian Fls 4.5 FII / NRIs / OCBs 25.8 Indian Public / Others 22.2 Abs. (%) 1m 1yr 3yr Sensex 1.0 (2.8) 39.2 PMFL year daily price chart Source: Company, Angel Research Amarjeet S Maurya Ext: 6831 amarjeet.maurya@angelbroking.com Noel Vaz Ext: 6847 noel.vaz@angelbroking.com Please refer to important disclosures at the end of this report Quick take May-16 May-16 Jun-16 Jun-16 Jun-16 Jun-16 Jun-16

2 Investment Arguments Well established brands and diversified product portfolio The company has well recognized brands in its portfolio that include Gowardhan and Go. It markets dairy products (milk, ghee, paneer, butter, etc) and processed cheese blocks under the Gowardhan brand which targets consumption at home. It has launched a wide range of cheese products, UHT, fresh cream etc, since 2008 under the Go brand targeting the younger generation and these have gained enormous traction since their launches. Gowardhan has been recognized by media houses and consulting agencies as most trusted brand in the food products category and Go has been acknowledged as the Most Promising Brand in the FMCG category. Go cheese especially has gained significant momentum since its launch and has been competing with products of Amul, whose name has been synonymous with cheese and butter in India for the longest period of time. Its other brands include Pride of Cows (premium quality cow milk) and Topp Up (beverages). Exhibit 1: Diversified Mix of Products Source: Company, Angel Research Over the years, the company has introduced a range of innovative and value added products in the market to cater to retail as well as institutional customers. Its manufactured product mix is made up of fresh milk, skimmed milk powder, milk products and other products which accounted for 18%, 12%, 67%, and 2% of revenue from manufactured products respectively. 4 July,

3 Exhibit 2: Manufactured products revenue mix FY2016 2% 12% 18% 67% Skimmed Milk Powder Fresh Milk Milk Products Other Revenues Source: Company, Angel Research *Milk Products includes cheese, paneer UHT, whey and beverages Integrated business model The company has an integrated business model which is present across the entire value chain ranging from manufacturing and processing to branding and distribution of a wide variety of products. It has a robust milk procurement network with 3,400 village level collection centers that are present in 29 districts across the states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. It has built strong relationships with milk farmers through continuous engagement and its milk procurement belt lies in close proximity to its facilities at Manchar and Palamaner which have high population of dairy cows. This enables the company to procure quality milk at reasonable costs, reduce transportation time and costs, and reduce wastages. Growing pan-india distribution network The company has a pan-india distribution network which comprises of 15 depots, 104 super stockists and over 3,000 distributors as of February 29, Its depots are present in 13 states and union territories in India. It also has a dedicated sales and marketing team comprising 560 personnel (~35% of total workforce) based in key distribution centres. Its products with shorter life (fresh milk and milk products) are sold in the western and southern regions of India, in proximity to its manufacturing facilities. It has established a separate route-to-market to focus on the distribution of low unit price products including ghee, flavoured milk, UHT milk, dairy whiteners and gulab jamun mix in tier 3 cities and rural areas in India. Going forward, the company intends to appoint additional distributors and super stockists to increase the availability of products in smaller towns in India and introduce new low unit price products in tier 3 cities and rural areas. 4 July,

4 Exhibit 3: Pan-India presence Source: Company, Angel Research Projected financial performance Going forward, we expect the company to report a top-line CAGR of 16% over FY E on the back of robust sales growth in consumer driven products like cheese/paneer and UHT. Further, we expect the company to be able to maintain its growth on the back of shift in share from unorganized market to organized market for products (branded) like ghee, paneer, curd, etc. Further, penetration in the cheese segment in India is expected to grow and we believe with its strong brand, the company will be able to report significant growth in the cheese segment. Currently the company commands a market share of 32% in the cheese segment. On the bottom-line front, we expect the company to post a CAGR of 39% over FY aided by improvement in operating margin with sale of higher value products like cheese/paneer, ghee, UHT, etc. Further the company is also reducing debt which will boost its profitability. 4 July,

5 Exhibit 4: 16% Revenue CAGR over FY E Exhibit 5: 39% Net Profit CAGR over FY E ( ` cr) 2,500 2,000 1,500 1, ,088 1,444 1,645 1,919 2,231 (` cr) FY2012 FY2013 FY2014 FY2015 Net Sales FY2016 FY2017E FY2018E FY2012 FY2013 FY2014 FY2015 PAT FY2016 FY2017E FY2018E Source: Company, Angel Research; Note: - 9MFY2016 annualised number Source: Company, Angel Research; Note: - 9MFY2016 annualised number 4 July,

6 Outlook and Valuation Going ahead, we expect PMFL to report a top-line CAGR of ~16% over FY E to ~`2,231cr owing to strong growth in value added product sales and shift in mix in favor of organized market in the dairy products segment. Further, the company has a diversified product basket, strong brands and wide distribution network. On the bottom-line front, we expect the company to report ~39% CAGR over FY E on account of higher margins availed from a better product mix. Further, the company is also reducing its debt significantly, which will lead to cost savings. At the current market price, PMFL trades at a P/E of 21.4x its FY2018E EPS. We initiate coverage on the stock with a Buy recommendation and target price of `336, indicating an upside of ~21% from the current levels. Risks Milk procurement: The company relies on procuring raw milk at competitive rates from milk farmers in the milk procurement belt. Inability to procure sufficient good quality raw milk at commercially viable prices may adversely impact the operation as milk is a key raw material for all dairy products. Intense competition: The dairy industry is highly competitive with multiple players sourcing milk from the same region. Such competition can have an impact on raw milk prices. Regulatory risk: The company is subject to various regulations relating to product liability, particularly relating to food safety of its products. Product contamination or similar occurrences can result in regulatory actions against the company and impact the business performance. Threat of Patanjali: Indian and multinational FMCG companies are expected to face competition from the strongly emerging Patanjali brand. Patanjali has significant presence in the ghee segment which comprises ~20% of PMFL s total turnover. 4 July,

7 Company background PMFL is one of the leading manufacturers and marketers of dairy-based branded foods in India. The company has evolved from primarily being involved in collection and distribution of milk in 1992 to being a branded foods player now. Its presence spans across the entire dairy chain, ie from collection of milk to dairy to producing value added products like ghee and butter (marketed under Gowardhan brand), cheese and cheese products, UHT milk, curd and fruit yogurts, etc (under its Go brand) and premium cow milk (Pride of Cows) and flavored milks (Topp Up). A significant portion of its product range includes long shelf-life food and beverage products that enable the company to sell its products to retail and institutional (QSR chains- Taco Bell, Domino s, etc) customers across India. The company has a pan India network of 15 depots, 104 super stockists and over 3,000 distributors as of February 29, Its manufacturing facilities are located at Manchar (Pune district, Maharashtra) and Palamaner (Chittoor district, Andhra Pradesh), with processing capacities of 1.2mn litres per day and 0.8mn litres per day, respectively. The company s cheese plant at Manchar facility has raw cheese production capacity of 40MT per day, which is the largest in India as per a report by IMARC. The company s has a wholly owned subsidiary Bhagyalaxmi Dairy Farm, which is a fully automated cow farm housing over 2,000 Holstein breed cows with superior quality yields. The farm-to-home premium fresh milk is marketed and sold under Pride of Cows brand in Mumbai and Pune. 4 July,

8 Consolidated Profit & Loss Statement Y/E March (` cr) FY2014 FY2015 FY2016 FY2017E FY2018E Total operating income 1,088 1,444 1,645 1,919 2,231 % chg Total Expenditure 1,006 1,337 1,498 1,741 2,017 Raw Material 836 1,062 1,178 1,416 1,633 Employee Cost Other Expenses EBITDA % chg (1.3) (% of Net Sales) Depreciation& Amortisation EBIT % chg (4.4) (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg (35.7) Prior Period & Extraord. Exp./(Inc.) PBT (reported) Tax (4) (% of PBT) PAT before MI & Adj. (reported) Extraordinary Items ADJ. PAT % chg (23.1) (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (23.1) July,

9 Consolidated Balance Sheet Y/E March (` cr) FY2014 FY2015 FY2016 FY2017E FY2018E SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Equity Application Money Shareholders Funds Minority Interest Total Loans Long-term provisions Other long term liabilities Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work in Progress Goodwill Investments Current Assets Inventories Sundry Debtors Cash Loans & Advances Other Assets Current liabilities Net Current Assets Long term loans and adv Other Non Current Assets Mis. Exp. not written off Total Assets July,

10 Consolidated Cashflow Statement Y/E March (` cr) FY2014 FY2015 FY2016 FY2017E FY2018E Profit before tax Depreciation Change in Working Capital (40) (42) (184) 108 (50) Interest / Dividend (Net) Direct taxes paid (0) (1) (19) (33) (45) Others Cash Flow from Operations (55) (Inc.)/ Dec. in Fixed Assets (59) (23) (46) (83) (63) (Inc.)/ Dec. in Investments (1) Cash Flow from Investing (59) (22) (46) (83) (63) Issue of Equity Inc./(Dec.) in loans (40) (129) (20) Dividend Paid (Incl. Tax) Interest / Dividend (Net) (50) (54) (49) (42) (34) Cash Flow from Financing 15 (42) 103 (171) (54) Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances July,

11 Key Ratios Y/E March FY2014 FY2015 FY2016 FY2017E FY2018E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS Book Value Returns (%) ROCE Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) July,

12 Research Team Tel: Website: DISCLAIMER Angel Broking Private Limited (hereinafter referred to as Angel ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. It is also registered as a Depository Participant with CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number INH Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Based on expected returns Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) over 12 months investment period): Reduce (-5% to -15%) Sell (< -15) 4 July,