Corporate Governance in this Company had been a concern and smart investors are very well aware of this. At any value I consider this stock as a value trap.
Disclosure : Views are personal and Not invested but following this company for gaining knowledge on financial shenanigans.
Good observation, milk products and such perishable food products dont last very long. Even if we take maximum shelf life of 90 days, then at max the inventory shall be 90days/365 days = 25% of annual sales.
I check the trend, these high inventory levels started from 2017 and kept on increasing.
(IPO also launched in same FY17 In month of May 2016)
Also it isnt like they have been stocking up for June quater. June quarter sales are more or less same as march quater sales.
Also i checked with other dairy companies such as hatsun agro, they dont even have 10% of their annual sales as inventory.
Checked with Heritage foods, same result not even 10% of sales is in inventory.
Checked dodla dairy (from FY16 - 21 on screener) got the same result.
For Parag dairy
10% Inventory level based on FY21 sales should come to 184 crores. Inventory of 881 crores means we should expect 697 odd crores of inventory “gone bad”
Parag milk having such huge inventory is a BIG RED FLAG.
In future we could expect them to come with a big quaterly loss stating that ‘we have to write off our inventory’
Adding a bit on inventory / risk of write-offs as this has been a topic of debate in all management discussions and also had some uncomfortable moments in the last quarterly call - for an additional perspective on the business needs
Multiple investors have challenged the management on the high level of inventories being a barrier to Parag becoming a truly FMCG company. However, you cut it - inventory numbers are uncomfortable and specially in the last 1.5 years the number of inventory days have been increasing alarmingly - with ongoing challenges for working capital. Below is the summary of inventory days calculated on CoGS (it is a little better if you use sales (HYFY22 is 166 days on a revenue basis vs 235 days on CoGS) - but I though CoGS is a better metric as it is relatively high margin business)
FY17 FY18 FY19 FY20 FY21 HYFY22
125 119 102 127 186 235
However, there are several factors that imply higher inventory days for Parag compared to other dairy companies - as the management has explained (please take as such - some of it makes sense to me at least). Please note this only explains why Parag might have higher inventory compared to other dairy companies
- Parag has a very low share of fresh milk sales - has been at 10% for the last 1.5 years. Most of its revenues are from value added products. Other dairy companies have a much higher share of fresh milk - which you can imagine is a very low inventory product. Parag used to be at 18-20% of total sales from fresh milk and this is the one segment that has not recovered yet
- Two products - Cheese / Ghee - constitute two-thirds of all inventory. Fresh cheese takes 3-4 months of ripening so will always be a high inventory business. Given they are number 2 in India on cheese, this is a curse of that success. Ghee has a high inventory as they have to store fat to manage cycles (e.g. festival season). This inventory has lower risk of write off due to shelf life
- They have been procuring milk at 1.5x their normal run rate and therefore way ahead of their own requirements. The management says that there has been an excess of milk availability in the last 1.5 years due to covid - whereby small dairies have closed due to covid and to strengthen farmer relations for the future, they have not turned away excess milk (see below discussion on implications for perishability). Again procurement is an important moat to the business - so perhaps there is a logic to this - I give the management the benefit of doubt as I don’t know better
Risk of write-offs due to perishability. This was again raised with the management - both in terms of high holding inventory as well as purchase of excess fresh milk. Management again explained this is not a concern as excess milk is converted to milk powder that can be stored - and can either be ‘converted’ back to milk for use in value added products or sold as milk powder (SMP). SMP sales in this half year have been close to Rs 198 cr against a FY21 Rs 276 cr). Please note that selling SMP is not a long term strategy but just tactical (prices are determined by market demand so you can end up in the wrong side of commodity prices). So perishability may not be a high risk - although inventory loss could be. At this point, this seems relatively low because the milk procurement prices were depressed over the last 1.5 years
Management has provided some guidance that inventory will start declining from Q3 FY22 as festive demand ramps up and will be at more ‘normal’ levels of Rs 700 cr by Mar 23 - with commensurate reduction in WC requirements. Please note that while Rs 700 cr inventory will be at the level of FY21, but on an expected higher revenue base of FY22 (so lower in terms of days), this does not look like a ‘normal’ level to me compared to previous years - so this remains a red / amber (or whatever danger) flag to the business profitability to continue to track
The business still has a lot of areas of concerns - @mmvravindra has raised historical issues of bad debt (which seems to be better in FY21 but requires further investigation, @AKV has flagged the recent CFO resignation announcement which needs to be understood (Parag has put a positive spin on this - not unlike the management which always is bullish!!) and we still haven’t heard on the outcome of the tax raids
In the midst of this all this chaos the management also launched two products last Q, Milko (non pure milk based cheese targeted at Tier2/3) and Go Milkshake - so take your own read on whether this is good or just further evidence of the craziness.
Please take onboard as you see fit - I can see that for some investors these many red flags is sufficient grounds to exit / stay away. Just wanted to add my understanding on some of the issues so that the information is as complete as possible for your individual decisions. My approach has been clarified in my previous post - for the avoidance of doubt. Just to reiterate disclosure - am invested so likely to be biased
frequent CFO resignation is the biggest red flag…
with all my wisdom gained from this forum I request all investors invested in this company to revisit their investment thesis in this Company…
Q3 results are good demand from HoReCa segment is coming back (Milk procurement prices to rise in Q4: Report) this is a great article from livemint ,i belive going forward the results will be great specially in the topline with schools and hotels reopening .
1 red flag i still see is this quarter interest payment have been the highest @14cr despite a stake sale and holding good amount of cash which effects the bottom line quite badly ,there interest coverage ratio is just a touch above 2.
disc:holding have increased holding at 100 levels.
Warning signs were visible ,yet i held the stock considering the inventory vs the firm valuation.Things like these are predictable but one often denies these assumptions due to investor bias.No point in holding such company as once investor loses confidence in the promoter most retail and institutinal investors will reduce stake on price rise (hard to predict stock movement but this is what i have seen with krbl).It takes decades to win investor confidence back
Have sold half of position at almost 40% loss still holding half to get out better valuation or will invest i find something undervalued.
A Mega-Trend…
15% of India’s population is now Prediabetic.
I have been reading abt this subject since last few months.
As its widely known its a progressive disease, that is if someone is a diabetic normally Drs starts with a basic drug like Metformin which helps our pancreas increase insulin secreation and this helps reduce glucose from our blood.
But overtime more and more amt of dosages of same or different drugs gets introduced to do so which finally goes down to injecting insulin as pancreas simply can’t make enough insulin itself. The major reasons for this metabolic disorder it seems is highly processed foods that we have in our day to day lives.
One of the ways to effectively manage this metabolic disorder is to go for a Low Carb High Protein High Fat diet.
This diet was first proposed by Dr. Richard Brenstein a 90yr endocrinologist who himeself was diagnosed with Type 1 diabetes at age 12 in 1946
Following a LCHF diet I have seen many people manage their T2 Diabetes with reduced/without the support of pills and some even reverse this condition.
What this diet says is to reduce/eliminate all the processed carbs (grains, sugars, cereals, juices, starches etc) from our diet.
and increase our reliance on more Proteins and Fats.
Since almost 40% of Indian population is Vegetarian, we rely more of our protein intake on Paneer, Curd, Daals etc which hardly helps to meet our daily protein intake. As a result, 65% of the population are protein deficient.
Over time I believe as LCHF diet gets more prominence in India and globally, demand for both Protein and Fat foods may increase exponentially.
Sixth Sense India Opportunities bought 6.8 lakh shares at Rs 121.23 apiece, pushing the stock price to 52 week high.
Disc: No positions.
Parag Milk Foods Strengthens Management Team with Nine Key recent Appointments.
As per the Company press release:
#1 - Operations:
Mr. Bheemanappa Manthale – President – plant operations: : Having extensive experience of more than two decades Mr. Manthale has worked with CocaCola, MTR Foods and Cargil etc.
Mr. Gajanan Patil – GM Operations:
He is Mechanical Engineer and completed his MBA from IIM- Calcutta. He has more than two decades of work experience and worked with organizations like CocaCola, Marico and Mondelez etc.
#2 - Sales:
Binod Das – Head of Sales
As Head of Sales, he draws from impactful roles at TATA Consumer Products Ltd and ITC Ltd,
reflecting two decades of expertise.
Lakshya Rastogi – Head of Modern Trade Business
He has spent the last ten years of his FMCG career working with Zydus Wellness and Fonterra Group. After receiving his engineering degree in computer science from Vishvakarma Institute of Technology, he got his MBA in sales and marketing at SCMHRD
#3 Finance:
Biswajit Mishra- Sr. VP Finance
CA By Education, MBA in finance and financial management, has worked with organisations like Future Group, Milk Mantra, Aussee Oats to name the few. He has domestic as well as overseas experience in the field of Financial Management
Anand Sharda – GM- Finance: – CA by profession, with 17 years of work experience, he had worked with RBL Bank, DCB bank, Publicis group etc
Amol Sawant – GM- Finance
Worked with Vector Green Energy Pvt Ltd, SKS Power Generation LTD . He is qualified CA with 20 years of work experience.
#4
Strategic planning
Mr. Abhinav Gupta – Head of strategic Projects: Mr. Abhinav Gupta takes on a pivotal role as Head of strategic Projects, bringing over 12 years of versatile expertise from prominent FMCG and retail roles.
In his previous stint, he has worked with esteem organisations like Reliance, Mother Dairy and Star Bazaar – A TATA and Tesco Enterprise to name the few.
Mr. Vivek Rathod – Head of Business Intelligence, Transformation, Analytics & Assurance
In his previous stint he has worked with E & Y and come with more than 15 years of work experience.
Observations:
Change is required to take the company to next level, Not sure who is driving these changes looks good at least on the paper.
The company looks innovative in creating the new products but there was no structured approach, hopefully these changes bring some order and professional approach.
Previously also they try to bring-in new persons in different roles but they did not last long, even CEO and CFO were also resigned sometime back, hopefully this new team should stay.
However, only time will tell whether the infusion of new blood will improve the prospective or it will be a burden.
Press release document:
Parag Milk Foods Strengthens Management Team with Nine Key recent Appointments.pdf (593.8 KB)
Parag Milk Foods Limited (PMFL) has reported strong financial results for the second quarter of fiscal year 2024. The key highlights includes:
Financial Performance:
Business Segments:
Distribution and Reach:
Brand Building Initiatives:
Procurement:
Strategic Initiatives:
Chairman’s Statement:
Parag Milk Foods has announced a strategic collaboration with the Boston Consulting Group (BCG) to embark on a comprehensive transformation journey. The goal is to achieve sustainable growth and implement cost-effective practices throughout the organization. The partnership with BCG, known for its corporate strategy expertise, aims to optimize existing business processes and identify new opportunities for growth and efficiency.
Key Points:
1. Purpose of Collaboration:
2. BCG Expertise:
3. Chairman’s Statement:
4. Strategic Partnership Goals:
