b8ddce08-7bb1-4801-bea2-063844f21802.pdf (3.6 MB)
Parag milk results out,
Any views guys?
Based on recent price action, I beleive market was expecting good results…
Hi Pratik - my two bits below
In summary, whichever way you look at it the results are not good. While this may be explained due to mitigating factors, it is tricky at this stage to know whether there is something broken in the business or it is indeed at the low end of the cycle about to turn. Details as below
1. Mitigating factors:
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Most of Parag’s revenues come from Maharashtra and modern retail trade plays a significant role in sales (ecommerce is nearly non-existent for them due to the cold chain nature of products). ~15% of revenues come from the HORECA segment. So a lockdown has multiple adverse effects on the business - drop in HORECA, less shopping in modern retail. Maharashtra was the first to be hit in the second wave and this has probably had a direct impact on the business
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Not only were sales affected, but an acceleration in cost of milk means that margins have also been dampened resulting in a loss this Quarter. As per their press release, milk prices are normalising so possible there is a turnaround in progress. High debt has not helped (read on for possible improvements in the business)
2. Is something broken in the business (Bear case)?
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Looking at total sales may not be the best way to understand the business - as there is a direct impact on 15% of HORECA sales, the company has consciously reduced sale of low margin liquid milk (reduction of Rs 60 cr QoQ - you have to track revenue by segment from information provided in each quarter). However, what is of concern is the sale of Milk Products (which is ~70% of revenues). Even if I compare the sale of milk products in Q4 FY21 to Q1 FY21 (which was the worst lockdown quarter), it would seem there is a decline in revenues. This is a key red flag to clarify with the investor relations as the management has always maintained that the revenues in the residential segment has been growing
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Recent investments have been in the Danone factory (3 or so years ago), Avaatar and an additional Lactose plant which is a B2B product and by-product of cheese production. Danone factory is at least a year behind in terms of profitability (again perhaps covid is a mitigating factor) and information on Avaatar remains thin
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Inventories continue to remain stubbornly high. The nature of the cheese business is that it takes a long time to mature which naturally results in higher inventory holding. As you may be aware they are the #2 player in cheese in India. However, despite their ongoing commitments to reduce inventories, it remains at nearly 700 crores (do the maths on inventory days!). Again something to follow up with the investor relations
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Clarity on strategy remains an issue. Up to 2 years ago, the management had a 5 year plan that they used to set out what they were doing and strategy they were following. There has not been an update on this - and the concern is whether the management (which is now the promoter group after a few failed attempts at external management for various reasons) is being too tactical (or is it innovative?)
3. Is this the bottom before a turnaround (Bull case)?
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Macro factors turning: If one believes that unlocking in Maharashtra is sustainable then we will see a restart of modern retail and HORECA which will be a huge boost in revenues. However this will only happen in Q2 FY22 - you will have to sustain another quarter of brutal results as Q1 FY22 is likely to be a similar washout. If milk prices are indeed stabilising / falling, we should also see a reduction in CoGS and therefore normalisation of margins. Just a quick comparison with FY19 or early quarters of FY20 will tell you what sort of uptick you can see
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Debt reduction to boost profitability. Parag has recently raised Rs 316 crore (~Rs 205 crore from IFC and Sixth Sense and the remaining as an option from promoters as far as I can see). Previously investor relations had indicated a reduction in debt of Rs 65 cr in FY22 - you can do the maths on the debt reduction impact on PAT. Remainder for capacity expansion - not yet clear what this is to be. Again something to check with investor relations. Also the funds ensure that the business should remain comfortably solvent (the cash position at the end of the quarter does not reflect the fund raise)
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Competitive valuations: Multiple triangulations of valuations would imply a not very expensive price at this point in time - if indeed this is the bottom of a turnaround there seems to be significant upside
4. What will I do - sharing only to demonstrate the difficulty in making a decision - please do not assume this constitutes a suggested approach for anyone else as I have a specific role for Parag in my portfolio
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I have a reasonably sized position in Parag and am a very patient investor. However, I am feeling uncomfortable as each quarter the number of questions increase. Even though they do not do quarterly calls - the investor relations have been very responsive and this a good sign
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My decision options are Sell all, Hold all or Sell some and review. I will most likely be doing sell some (10% position reduction) and will decide next course of action after I have had a chance to get further feedback from investor relations to my questions. The answer to my questions will also determine whether I will reinvest dividends (which is my normal practice) or not.
Hope this provides an additional view to your decision making.
Disc: In case it is not obvious, I am invested and will likely be struggling with multiples biases!
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Hi Amrish,
A key issue that has been missing for the last one year is professional external management. There have been multiple changes in CEO over the past 5 years, but no stable vision on where the company is headed.
Was hoping that the recent fund infusion would help mitigate some of the issues that Parag is going through. Their products are of good quality however I feel they have over-diversified their product portfolio instead of focusing on their key strength viz. cheese, curd and ghee.
Not invested but tracking this company.
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Hi Vernon
You are correct - I think they would benefit from this. I had big hopes when Venkat Shanker joined from Britannia - as he was talking of a lot of good things (portfolio rationalisation, strategy articulation etc). However, for personal reasons he had to leave (I think there is an unwell family member). As per their investor relations, Venkat continues to advise the management - but obviously not on a full time basis.
Hopefully your point about the new investors pushing for this comes through 
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Parag posted very decent results. Margins have improved and also PAT. @phreakv6 would like to listen your views on results and what you think about future
Great results by parag milk foods , hopefully margins can be maintained(according to managment it can but will take that with a pinch of salt).The only reason i don’t like the company is poor use of cash by launching new products and incurring debt instead of reducing it ,unfortunately the management idea hasn’t changed as in the recent interview mangment they will be using the recent fund raised to partially reduce debt and partially use it to launch more new products .Parag Milk has a target to grow by 15-18% this year: Devendra Shah, Chairman | Zee Business. would have loved if funds and cash cow cheese business money was used reduce debt as would reflect in the bottom line.
Tried the pride of cows milk ,talked with an employe and even the delivery guy ,i ordered the milk in delhi and out of 120 rs the bottle at which it retails at 30 rs goes to shipping alone as milk is shipped via indigo flight ,according to employee this is soon going to be reduced as they will be using the danone plant in harayana according to him,reducing transportation cost .Delhivery guy told me there are a lot of takers for this milk specially among embassy crowd and hni living in gurgoan.
i am not a taker at 120 rs a litre but if they are able to reduce the prices to 80 to 90 ish level with economies of scale i might switch my whole milk consumption to it tasted different plus with so much harmful injection injected this might be a good solution, plus they were very proud of how there cows were treated .Another thing i didn’t like was for a premium product it was shipped in a plastic bottle instead of glass.
Disc :invested will hold onto it for a couple of quarters waiting how debt is handled and margins and if sales can reach pre covid levels
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Liquid milk is the key to success in dairy business. Unfortunately for parag in maharashtra big giants like Gokul, Warna, chitle etc dominate the liquid milk business and Amul is gaining marketshare big time in liquid milk also apart from product.
In products business Amul sets the price trend and others just follow.
In one of the AGMS I had suggested Mr shaha to leverage milk rich brand for biscuits and try Britania way.
Just by milk products it is very very difficult to take on Amul in West India.
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Q2 results are out great results
- margin at 10% highest ever
- bottomline almost at pre-covid levels meaning this trades at an almost at 10 to 15 pe on future earnings ,stock looks cheap considering on average it has traded at an average pe of 25
- Runway for growth specially the pride of cow milk which i have tried are extremely high and earnings growing i don’t see why people would not spend 30 rs extra for a litre of milk which is free from pesticides and chemicals ,combined with already a strong cheese brand it has a good margin of safety .
some red flags
Inventory level are at the highest level almost touching 900 cr which is pretty high for a company with a market cap of 1300 cr ,plus it doesn’t give comfort that shelf life of milk and milk products it trades in is not pretty high.(if some can shed some light on why inventory level are this high would be great).
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Hi Rakshit
Regarding the inventory there are two drivers
a. The cheese business generally requires a high level of inventory as it takes time to mature - and since they have a large market share for cheese, it is likely to be a large share of their milk product portfolio
b. However, the inventory (both absolute as well as inventory days) has been increasing over the last 4 quarters. As per the management, the main driver for this is purchase of milk at 1.5 mn ltrs vs typical 1-1.2 mn – due to increase in availability due to unorganized sector not buying. When asked whether there was a risk of perishability of inventory, management was not concerned as they convert the milk to SMP / Butter which can either be sold as is or converted back to milk for other products. The expectation is that inventories should start coming down in Q3 with the festival season. HORECA / Institutional sales generally contributes 20-22% of revenues (pre-covid) so the opening up should also help
The reduction in inventories should also enable them to further reduce debt and therefore see lower finance costs.
Please note that this is information provided after Q1 so this is not based on the recent quarterly results - but they had indicated even then that they do not expect inventories to come down in Q2. For the last couple of years the management feedback generally has been more bullish than what was actually achieved (or if you want to be kind to them it could be said that circumstances always ended up being worse than their base case - first milk shortage, then national covid, then Maharashtra covid etc).
Hope this helps
Disc: Invested so likely to be biased
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IT Raid
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Keen to know how fellow investors are acting upon this news. As a discl, I exited completely yesterday. Can always reassess again post better clarity.
Did the same with Antony Waste post the IT raids last month.
Thanks
Is IT raid any criteria to sell any stovk? I have never heard of it.
it’s not a small amount ….
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To each its own. Corp governance issues!!
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They found total of Rs 2.50 cr and rest amount is alleged.
Hi Amrish
You seem pretty knowledgeable about the company ,so would like to know you opinion on what i think
Do you think Parag will be like itc? creating unnecessary business on the expense of there cash cow business that is go cheese .I have ordered there pride of cow milks and found that there cows produces milk protein A1 which is cheaper and in the long run is not as beneficial as A2 milk and has severe side effects like diabetes or heart complications(Which milk is better - A1 or A2? | Deccan Herald) .Although there milk is pure but they charge 120 rs for that milk which a selected few can afford and if they can afford to spend 120 a litre i am sure they can spend 150 to 160 for pure A2 milk found in indian cows.
i also went to gym supplement store and the shopkeeper had no clue about avvtar branded whey protein a quick amazon search also shows most of there products don’t sell much as most products have zero or very few reviews compared muscle blaze which is a popular whey protien brand and has a good reputation and cost the same.
The company has redirected a lot of cash in these business either by internal accruals or by debt and i am not very bullish on these business in the future.
disc:invested but confused whether to hold for long run or not.
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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
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the same reason if i have invested in for market cap 1100 cr minus 800 cr inventory then you also get the go chese brand which did pre covid sales of 100 cr(already visible in q2 sales) then this makes it trade at a 3 pe for me which is significantly undervalued for a company having such market share in cheese.
let’s hope this becomes a value buy then value trap.
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Have posted my reg flags here 2 years back.
Isn’t it odd for a dairy company to have nearly 50% of sales struck in Inventory, its too much by any standard.
3 years average profit precovid is less than 100cr.
Just think, they need to invest 800cr+ in inventory to double their sales.
Disclosure: Not invested
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