Aiming for a branded dairy play; Not Rated May 11, 2016 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating Not Rated Price Rs106 Target Price NA Implied Upside NA Sensex 25,773 Nifty 7,888 (Prices as on May 10, 2016) Trading data Market Cap. (Rs bn) 10.4 Shares o/s (m) 97.7 3M Avg. Daily value (Rs m) 18.9 Major shareholders Promoters 44.24% Foreign 4.59% Domestic Inst. 26.46% Public & Other 24.71% Stock Performance (%) 1M 6M 12M Absolute (8.5) (24.9) Relative (11.4) (25.7) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 NA NA NA 2018 NA NA NA Price Perf. (RIC: PRDA.BO, BB: PRABHAT IN) (Rs) 180 160 140 120 100 80 60 40 20 0 Sep 15 Oct 15 Nov 15 Source: Bloomberg Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Prabhat Dairy (PDL) has marquee B2B clients like Mondelez, Abbott, Britannia and Mother Dairy and have strong processes and quality enabling them to have double digit margins, above the industry average. PDL is aiming to increase its share of B2C segment from current 25% to 50% in the coming 3 5 years by focusing on its brands (Prabhat, Milk Magic and Flava) in segments like Paneer, Flavoured Milk, Lassi, Buttermilk and Ghee. Profit growth should accelerate given 1) Rs2.4bn debt reduction and 2) commissioning of cheese unit and significant headroom (upto Rs18bn) to increase sales from existing infrastructure. The stock trades at 33.1X TTM EPS of Rs3.19. NOT RATED. Key takeaways from the meeting SMP, Pouch Milk and Condensed Milk are 82% of sales: 82% of PDL s revenues are contributed by three main product segments i.e. Milk powders (SMP, WMP and DW 30%), Condensed and Concentrated Milk (28%) and Processed and pouched milk (24%). PDL is looking at increasing sales of other value added products like Cheese, Paneer, Curd, Flavored Milk, Ghee etc. in the coming years. Aiming for 50% branded sales in 3 5 years: PDL derives 70% of sales from B2B segment (85% in FY13) and is a supplier to Mondelez, Abbott, Britannia Inds and Mother Dairy etc. PDL is focusing on brand building and increasing retail sales under its brands like Prabhat, Milk Magic and Flava. It is aiming for 50% contribution from retail sales in the next 3 5 years. Direct Milk procurement and B2B business enables higher margins: PDL has above industry average EBITDA margins of 10 10.5% due to 1) direct milk procurement from farmers within 70 80km of its Ahmednagar unit 2) lower advertising spend due to higher B2B sales and 3) cost plus pricing with B2B customers. Major Capex over, debt unlikely to increase from current levels: PDL has commissioned cheese unit and has repaid Rs2.4bn debt which would reduce interest cost and improve profits. Although working capital intensity will remain in line with industry, limited capex requirements, increasing share of B2C will improve financials and return ratios in the coming years. Key financials (Y/e March) 2012 2013 2014 2015 Revenues (Rs m) 4,830 6,411 8,567 10,008 Growth (%) NA 32.7 33.6 16.8 EBITDA (Rs m) 487 1,037 1,463 1,641 PAT (Rs m) 95 450 763 835 EPS (Rs) 31.8 3.1 4.5 3.0 Growth (%) NA (90.4) 46.7 (34.3) Net DPS (Rs) Profitability & Valuation 2012 2013 2014 2015 EBITDA margin (%) 10.1 11.4 10.6 10.2 RoE (%) 8.5 9.8 9.6 9.1 RoCE (%) 8.4 5.9 6.5 6.2 EV / sales (x) 0.6 0.4 0.4 0.5 EV / EBITDA (x) 5.7 3.9 3.5 4.5 PE (x) 3.3 34.5 23.5 35.8 P / BV (x) 0.3 1.3 1.0 2.2 Net dividend yield (%) Source: Company Data; PL Research Visit Note Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Key takeaways from meeting We met the management of PDL, an integrated milk and dairy products company with production facilities at Srirampur (Ahmednagar) and at Navi Mumbai. It has an aggregate milk processing capacity of 1.5m liters per day and procures 900k liters of milk directly from milk farmers, registered vendors and milk collection centers. It has strong B2B clients like Mondelez, Abbott, Mother Dairy and Britannia. It retails products under the brand Prabhat to the consumers. The key takeaways from meeting are: SMP, Pouch Milk and Condensed Milk is 82% of sales: PDL produces a wide range of products like Skimmed milk powder (SMP), Whole milk powder (WMP), Ultra high temperature milk (UHT), pasteurized milk, Sweetened condensed milk, Flavored milk, Dairy whitener, Yoghurt, Curd, Lassi, Chaas, Clarified butter (Ghee) and ingredients for Baby foods. However, 82% of revenues are contributed by three main product segments i.e Milk powder (SMP, WMP and DW 30%), Condensed and concentrated Milk (28%) and Processed and pouched milk (24%). PDL s contribution from other value added products is just 18% of sales. However, PDL is focusing on increasing sales in value added products like Paneer, Ghee, Curd, Cheese and Flavored milk. Exhibit 1: SMP, Pouch Milk and Condensed Milk is 82% of sales SMP, WMP, DW* 30 Others 1 Processed & Pouched Milk 24 Ice Cream 1 Ghee 11 Flavoured Milk 0.1 Source: PL research, Company Data Curd 2 Condensed and concentrated Milk 28 B2B segment dominates with 72% of sales: PDL has established relationships with marquee clients like Mondelez, Abbott Healthcare, Britannia Dairy and Mother Dairy etc. B2B segment, thus, contributed to 85% of sales in FY13 and 80% in FY15 and is likely to be ~72% in FY16. Out of this, ~36% of the revenues were contributed by its Top 5 clients in FY15. PDL supplies specialty milk powder for Baby food to Abbott India, SMP, WMP and Sweetened condensed milk for Mondelez, Ghee and Curd for Britannia and Ice cream for Mother Dairy. Association with some of these large players have enabled PDL to achieve strong focus on quality and establish systems and processes in the organisation. May 11, 2016 2
Exhibit 2: PDL has marquee clients like Mondelez, Abbott, Heritage and Britannia Institutional Products Concentrated Milk, SMP, WMP Specialty ingredient products Sweetened condensed Milk Specialty Milk powder for Baby Food Dairy Whitener, Curd (Dahi); Butter Milk Curd (Dahi) Co Manufactured products Clarified Butter (ghee), Curd Ice cream; Milk Ice; Milk Candies Clients Mondelez India Foods Pvt. Ltd Abbott Healthcare Pvt. Ltd Heritage foods Britannia Dairy Private Limited Mother Dairy Fruit & vegetable Pvt. Ltd Source: PL research, Company Data PDL is aiming for 50% branded sales in five years: PDL is focusing on moving up the value chain by increasing sales of higher margin value added products like Paneer, Cheese, Shrikhand and Flavoured milk. PDL has three brands i.e. Prabhat, Milk Magic and Flava. Prabhat is used for most of its products while Milk Magic is used for sweetened condensed milk and Flava for flavoured Milk. It aims to increase the share of branded sales from existing 30% to ~50% in the next five years by 1) leveraging on its brand, 2) increasing product availability in existing markets, 3) entering new markets across India through distribution expansion, and 4) increased marketing and brand building. Retail focus of PDL is expected to remain confined to Western and Central India due to its plant locations and shorter shelf life of several of its products. Exhibit 3: PDL has brands like Prabhat, Milk Magic and Flava in Retail segment Retail Consumer products Pasteurized milk, Clarified butter, Dairy Whitener, SMP, WMP, Curd, Lassi and Chas Sweetened Condensed milk Flavored milk Clients Brand name: Prabhat Brand name: Milk magic Brand name: Prabhat Flava Source: PL research, Company Data Direct Milk procurement and specialty B2B business enables strong margins: PDL s EBITDA margins are 10 10.5% which are above industry average of mid single digit margins. Higher margins are due to: PDL has a cost + mark up agreement with most of its B2B clients that helps it to pass on increase in raw material prices. Prabhat makes specialty milk powders for Abbott and significant part of condensed milk requirements of Mondelez, which ensures steady growth and margins. It procures bulk of its milk requirement directly from the farmers and has around 450 milk collection centres, 100 bulk coolers and 30 chilling plants which help it to save on agent s commission. PDL sources most of milk requirement within 70 80kms of its plant location, thereby, helping to save on logistics cost. May 11, 2016 3
Since bulk of its manufacturing takes place at a single location, it is able to achieve cost optimisation and efficiency in operations. Since bulk of its sales are to institutional clients, spends on advertising, sales promotions and brand building is lower than its peers. PDL to benefit from rising demand for ghee: Ghee is one of the fastest growing businesses for PDL with sales CAGR of 31.6% between FY12 15. In addition to selling ghee under its own brand, it is a supplier of butter to Patanjali Ayurved. Patanjali is the fastest growing brand in ghee and its campaign on benefits of pure cow ghee has accelerated the growth in the segment. PDL is getting benefit on two counts being supplier of butter to Patanjali and also selling cow ghee under its brand Prabhat. Cheese plant to scale up gradually, branded entry unlikely in near term: PDL has commissioned its Cheese plant in June 2016 which involved a capex of Rs1.5bn, Prabhat is manufacturing Mozzarella and Cheddar Cheese and is catering to institutional segment. It is supplier to HORECA (Hotel, Restaurants and Caterers) and has received orders for supply of cheese to McDonalds and Dominos for supplying Paneer and Cheese. It is already selling Paneer in the retail segment, but does not have plans to launch retail packs of cheese. It is targeting gradual ramp up in cheese segment and is looking at revenues of Rs500m by FY17. Major capex over, debt unlikely to increase from current levels: PDL has completed major capex activity post the commissioning of the cheese plant and it doesn t expect any significant capex for the next three years. PDL can achieve sales of Rs18bn with 80% capacity utilisation as against FY15 sales of Rs10bn. PDL has repaid Rs2.4bn of its long debt out of the IPO proceeds and is left with Rs370m of long debt and has working capital requirement of close to Rs1.4bn. Its working capital requirements are expected to remain stretched due to nature of the industry; however, it doesn t expect its total debt levels to cross Rs2.5bn for the next three years. Sales likely to grow at 15 20% CAGR: PDL registered a turnover of Rs10bn (CAGR 27% over FY12 15) and a net profit of Rs210m (30% CAGR over FY12 15). Parag expects a 15 20% volume growth in the next three years. PDL has achieved 20% YoY sales growth in 9MFY16 despite milk and SMP prices correcting sharply in FY16. Gross margins expanded 150bps from 20.9% in FY12 to 22.4 in FY15 mainly aided by increasing share of value added products and lower prices of liquid milk. P AT has grown at a CAGR of 30.3% over FY12 15. Tax rate will range between 20 25% for three years. May 11, 2016 4
Income Statement (Rs m) Net Revenue 4,830 6,411 8,567 10,008 Raw Material Expenses 3,819 5,036 6,726 7,762 Gross Profit 1,011 1,375 1,841 2,246 Employee Cost 102 66 77 154 Other Expenses 422 271 302 451 EBITDA 487 1,037 1,463 1,641 Depr. & Amortization 165 244 335 344 Net Interest 184 297 330 412 Other Income 8 8 10 10 Profit before Tax 146 504 808 894 Total Tax 51 55 45 59 Profit after Tax 95 450 763 835 Ex Od items / Min. Int. Adj. PAT 95 450 763 835 Avg. Shares O/S (m) 2.99 30.0 30.0 71.4 EPS (Rs.) 31.8 3.1 4.5 3.0 Cash Flow Abstract (Rs m) C/F from Operations 535 557 86 14 C/F from Investing (1,171) (1,102) (611) (533) C/F from Financing 648 574 503 691 Inc. / Dec. in Cash 12 29 (23) 173 Opening Cash 11 23 52 29 Closing Cash 23 52 29 202 FCFF NA 346 (242) 634 FCFE NA (97) (450) 1,414 Key Financial Metrics Growth Revenue (%) NA 32.7 33.6 16.8 EBITDA (%) NA 49.6 24.7 11.9 PAT (%) NA 47.9 47.7 1.3 EPS (%) NA (90.4) 46.7 (34.3) Profitability EBITDA Margin (%) 10.1 11.4 10.6 10.2 PAT Margin (%) 2.0 2.2 2.4 2.1 RoCE (%) 8.4 5.9 6.5 6.2 RoE (%) 8.5 9.8 9.6 9.1 Balance Sheet Net Debt : Equity 2.2 1.0 0.8 1.1 Net Wrkng Cap. (days) 25.0 34.0 49.0 63.0 Valuation PER (x) 3.3 34.5 23.5 35.8 P / B (x) 0.3 1.3 1.0 2.2 EV / EBITDA (x) 5.7 3.9 3.5 4.5 EV / Sales (x) 0.6 0.4 0.4 0.5 Earnings Quality Eff. Tax Rate 34.8 27.9 17.8 21.9 Other Inc / PBT 0.1 0.0 0.0 0.0 Eff. Depr. Rate (%) 6.3 8.1 10.5 11.8 FCFE / PAT NA (0.2) (0.6) 1.7 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 1,134 2,374 3,181 3,385 Total Debt 2,517 2,417 2,574 3,815 Other Liabilities 127 151 181 178 Total Liabilities 3,779 4,942 5,936 7,378 Net Fixed Assets 3,039 3,416 4,109 4,518 Goodwill Investments 0 0 1 1 Net Current Assets Cash & Equivalents 29 62 44 215 Other Current Assets 1,691 2,239 2,912 3,688 Current Liabilities 1,014 812 1,132 1,126 Other Assets 34 39 1 83 Total Assets 3,779 4,942 5,936 7,378 Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Net Revenue 2,837 2,686 2,886 3,048 EBITDA 286 269 354 291 % of revenue 10.1 10.0 12.3 9.5 Depr. & Amortization 64 82 124 88 Net Interest 130 126 150 78 Other Income 4 5 5 2 Profit before Tax 96 66 85 126 Total Tax 25 34 27 51 Profit after Tax 71 32 58 75 Adj. PAT 71 32 58 75 Source: Company Data, PL Research. May 11, 2016 5
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