Hi Sahil
Some additional thoughts for your consideration. Disclosure: I have now a significant holding (as per my portfolio) but have some red flags that I am monitoring very closely. First all the good news
a. From a market growth perspective there is significant potential (unorganised to organised, coop to private, consumption habits to value added, etc). @dineshssairam shared some valuable data sources you could review if you are interested
b. From a market structure perspective, it is very fragmented. Even Amul (which is a goliath in this market is potentially ~10% of the total market). In balance I would say this is a good thing because it is a growing market and private players (with strong regional presence - Hatsun, Heritage) can add market share if they execute well. Milk procurement is both a challenge as well as a moat once you have it
c. Company strategy and financials: They have been innovative (as have other private dairy players) in their approach - they pushed the concept of cow’s milk rather than buffalo, new business models like Pride of Cows subscription, investment in cheese as a category and now 2nd in the market, new categories like Avvatar whey (which is a by product of cheese),etc. As a result their share of value added products to liquid milk is one of the highest in the market - which I think is better for an ‘FMCG-like’ player and generally reflects in higher margins compared to others. The growth in the last few quarters has slowed because of shortage of milk and the market seems to have been disappointed that growth will not pick up until the next flush - which will be from Sep onwards. Of course the business has some covid protection due to being essential so should be ok even during these trying times. Single digit PE ratio at this point seems undervalued given the expected profit growth and ROCE of 15-20%
d. From a promoter perspective, there has been a overhang on the promoter pledge shares and there is now a commitment from the management to reduce the pledge to zero (90 days from March 02 2020). They had a total outstanding of Rs 33 crores on March 02 which is down to Rs 10 crores as of now. Not long to go for 90 days - could be a short term trigger either ways. I also like the fact that the promoter’s daughter has a senior role in the business having worked her way through. This could cut both ways - but for me it is an indication of the promoter trying to build something more permanent to pass on to the next generation
Now for the flags or the bad news
a. Their product and brand strategy worked well as they were growing (more of a shotgun approach) but they need to be concentrating their firepower now (look at Amul - they are spending like crazy in this downturn). Specifically, Go and Gowardhan make sense as brands with their portfolios. Perhaps even Pride of Cows as a premium brand. But then why launch another premium ghee brand called Aurum (which I think they have withdrawn) - and not under Pride of Cows (see https://www.whytefarms.com/ ). Is Topp Up necessary as another brand? If they want to be an FMCG company they need to build brands (along with distribution). To do this they need a more coherent branding strategy - it feels like they are focused on innovation and while that is a good thing, they need consolidation for growth as well. Pride of Cows current offering is difficult to scale (they own they dairy farm) and yet they decided to start selling this in Singapore some time back? This seems more opportunistic than brand oriented. Thankfully they have pulled back from this
b. Professionalizing the management. They have now made two efforts at this. In Jun 2018 they brought in a new CFO, COO, Sales etc. Most if not have all left in a year or so. They then got in a new CEO - who said all the right things (at least from my perspective) and after not attending the last call due to medical reasons now has his linkedin profile saying he is on a sabbatical. He may very well be unwell but a request for clarification to their investor relations brought no response.
c. Update on key initiatives. There are two key initiatives they have been talking about - Vector Consulting in Mumbai using theory of constraints to improve their distribution systems. Results are now overdue by a quarter (they keep saying next quarter). The acquisition of the Danone plant and how that is doing in the NCR region - milk procurement, products, sales. I think they last updated a few quarters ago indicating approx Rs 7 crores / month exit in Q419. Need to see whether they have been able to make this work - else they will remain a regional player with others attacking them
In conclusion, for me the company looks very interesting in terms of innovation, portfolio and market opportunity. But if I keep seeing red flags on scaling up the business to the next level, it could be a sign to exit. Wish you the best