Hi Rakhsit
I think you highlight some of the business risks quite appropriately. My take on risks vs opportunities
Risks
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I think the description of Parag like ITC is an interesting one - in terms of capital allocation. They seem to be very focused on innovation as a result of which there is a constant flurry of product launches and brand extensions. I understand the food business requires this level of innovation (whether it is an Amul or a Britannia / Nestle), and they have created new categories as a result - subscription premium milk and whey protein (Avvatar) as you mention. However, I am concerned sometime that there are too many products and spread thinly in terms of marketing support
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Have seen the discussion on A1 vs A2 - not sure I can comment on this other than that they should be aware of this as well. Perhaps it might explain why Pride of Cows is now becoming a broader brand - going to premium ghee, paneer, curd. I think the brand is very interesting in the premium part of the segment (at least from anecdotal customer information I have) and they do very interesting marketing around this - but am not sure if there is a capital efficient way to expand the brand (they are talking about expanding cows under Bhagylaxmi dairy). To be clear - I don’t understand whether the economics make sense or not - not that it does not work
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On Avvatar, they are trying to create a new category - against imported players. They stopped providing progress on this during the pandemic. The explanation was that the primary distribution channel is gyms - which were shut. They claim that this is restarting now. Not aware of Muscle Blaze in terms of which regions they sell in - but I suspect having two companies trying to build this category might be better in some ways
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I remain concerned on the ability of the a regional player to compete in the longer term - specially as other milk producers are coming into Maharashtra. Their own expansion into the north with the old Danone plant is still slow
Opportunities
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The business remains one of the more interesting in the dairy space given the large runway expected as well as the higher share of value added products - this implies that they are less impacted by swings in milk pricing - although they always will have some impact
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They have struggled to induct professional management - that might curtail their excessive innovation and prioritise their efforts - however with the recent induction of Sixth Sense Venture and IFC into the Board, I hope some investment discipline is added. I don’t get the impression this is a stubborn management - just not focused enough
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My own valuation indicates the business is significantly undervalued. Just the HORECA segment coming back in Q3 should have a big impact (I suspect the ongoing omicron effects will be in Q4). I would find it hard to get similar gains from other investments in the short term even if they move to a fraction of intrinsic value
Conclusion
- I normally do not decide on business investments on a QoQ basis - but Parag is definitely on a quarterly review cycle - if some of the concerns do not get alleviated, I will gradually reduce my position in time at better prices. Please note this could even be over a 1-2 year period
Disc. Invested with a reasonable position size so likely to be biased. Am not a financial advisor so the above is just a rationale of my thinking and not advice