Umang Dairies - Refreshing Cuppa

Stock Opportunities
1

Had written this piece in Sept 2012, posting it here after updating CMP, etc :

Umang Dairies - Refreshing Cuppa

Umang Dairies is Uttar Pradesh based dairy products company belonging to the JK Group. It’s products include milk powder (skimmed & whole milk) , dairy creamers & whiteners, tea & coffee premixes, ghee, butter, fresh cream and liquid milk.

Its main brands are White Magik , Dairy Top, Umang and Milk Star, plus it also manufactures products under private labels for retail chains.

The Company supplies its products to major retail chains & it recently received aSupplier of the Yeara Award 2011 a Private Brands category from Bharti Wal-Mart.

The company enjoys a leadership position in Premixes for Tea & Coffee vending machines.

The company has two plants - a drying plant & a liquid milk packaging plant - located in the milk surplus state of Uttar Pradesh and has 300 villages and 12,000 farmers in its village level collection (VLC) network.

Drying Plant:

The drying plant has a capacity of 3 Lac Litres per day . Utilisation was 21% in 2009-10, 39% in 2010-11, 55% in 2011-12 & should improve further to 70-75% in the current financial year.

Liquid Milk Packaging (LMP) Plant:

Capacity utilization of the liquid milk plant was 39% in 2009-10, 60% in 2010-11, 87% in 2011-12 & should reach nearly full capacity during the current financial year.

Consequent to the steady improvement in capacity utilization of its 2 plants over the last couple of years, the financial performance has also showed a steady improvement. Sales are up from 50.57 Cr in 2009-10 to 150.22 Cr in 2011-12, and PBT is up from a loss of 2.02 Cr in 2009-10 to a profit of 13.83 Cr in 2011-12.

The company went through trying times a few years ago & had turned sick. It went through a BIFR-sanctioned restructuring process and has turned around in the last couple of years. Accumulated losses are likely to be wiped out in the current financial year, as the company moves from strength to strength.

Briefly :

Umang Dairies Ltd **- Brief Stats **
Company Website : www.umangdairies.com
BSE Scrip Id : **UMANGDAIR **
BSE Scrip Code : 500231
CMP : Rs 56.25 (closing price, BSE - 19th Nov, 2012)
FY11-12 EPS : Rs 6.29
FY11-12 Dividend : Nil

Investment Rationale :

Demand for milk & milk based products has been rising at a faster pace than production in recent years. Per capita milk (and related products) consumption in India is still on the lower side, but is rising at a brisk pace, due to lifestyle changes & higher disposable income. Organized Retail is also growing at a fast pace, leading to increased demand for milk & milk products . This will be a significant growth driver for the dairy industry going forward.

With the LMP plant approaching full utilization, and the drying plant set to follow suit in a year or so, Umang Dairies has planned for the expansion of both plants, to capitalize on the opportunity.

Expansion of the LMP plant is being contemplated from 5 Lac litres/day to 6 Lac litres/day by the end of Oct 2012, and the drying plant capacity is to be expanded from 3 Lac litres/day to 4.5 Lac litres/day by end of the current financial year. These expansions are being funded from internal accruals. Entry into flavored milk (and possibly yogurt) is also being contemplated in 2013-14.

Conclusion & Recommendation

Looking at the company’s steady progress over the last 2 years, as well as it’s current & future expansion plans, the author feels that an investment in the company has the potential to give steady returns in the medium term (3 years).

The author recommends readers of this blog to closely study & track this company going forward, and take an appropriate call based on their own conviction in this idea, after proper research.

Author : Bosco Menezes

Recommendation Date : 14.09.2012 (Updated on 20-11-2012). Note that the stock has run up in the last 2 months, so margin of safety is correspondingly less.

Disclaimer/Disclosure :
At the time of writing this article the author has a position in the stock covered by this report. The author or any of his dependent family members may make purchases or sales of the securities mentioned in the report while the report is in circulation. Readers/recipients of this report are strongly advised to do their strict due diligence, and should be aware that the value of investments can go down as well as up. The author shall not be liable for any direct or indirect losses arising from the use of the contents of this report, and readers are therefore cautioned to use the information contained herein at their own risk. In fact, readers would do well to seek the advice of a qualified independent advisor. The author certifies that all of the views expressed in this report accurately reflect his personal views about the subject company at the time of writing this report. Feedback / brickbats may be hurled at the author at boscom@gmail.com

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Anyway, after i posted my report teh 1st time , i got an interesting response from one reader which i am producing herewith (i have corrected it for typos / grammer / readability) . Note that EV of Umang would be approx 130 Cr (from 110 Cr mid-Sept 2012) after the recent run-up. Here is the message :

Umang Dairies Ltd is a candidate for re-rating . Following is milk processing capacities of peer companies and their enterprise value :
Hatsun - 25 lakh liter /day ( EV 1015 cr) ,
Kwality - 17 lakh liter /day (EV 1051 cr) ,
Umang Dairies - 8 lakh liter /day and after current planned expansion 10.5 lakh liter /day (EV 110 cr)

Hatsun is getting valuation of 40 cr for 1 lakh liter / day processing capacity .
Kwality is getting valuation of 61 cr for 1 lakh liter / day processing capacity.

Both these peer companies have their own problems . Kwality Dairy has debt/equity ratio of 4.65 (around 10 times last year PAT) and Hatsun has debt equity ratio of 1.04 but promoter has pledged around 32% shares . Umang Dairies Ltd is quite good on lot of comparison parameters .

In future if both plants run with 100% capacity , then IF market gives valuation of 50 cr EV for 1 lakh liter / day processing capacity to Umang Dairies , then on 10.5 lakh capacity it will be around 525 cr EV (400 cr EV for current capacity) against current EV of 110 cr.

Umang Dairies Ltd looks quite small compared to these peers because both these companies have sales around 1600 cr while Umang is having sale of only 150 crores i.e. around 10.5 times but capacity wise gap is not that much . This is because of Umang Dairies’ business model - THEY DO NOT SELL THE MILK DIRECTLY - they do processing for LVP Foods Pvt. Ltd .

So they just charge a processing amount .e.g if Hatsun sells milk for Rs 30 / liter then their sale will be 30 Rs for one liter but since Umang charges some amount for processing (contract manufacturing) , their sale is only the processing charge - i.e. if they charge (say) 2 Rs , then their sale will be 2 Rs/liter . So as long as this model continues they cannot catch their peers on sales part .

Market will eventually realise it (Capacity-EV comparison), re rate it and will give valuation according to that.

My comments : I have not cross-checked the figures mentioned by the writer. However, while i do not think Umang Dairies will get similar EV/Capacity valuations, at least as long as the current business model outlined above continues, i do feel that ifthe company’s improvement in numbers continues, and it executes it’s expansion as per timelines, the stock can give steady (not spectacular) returns.

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1Umang Dairies is an interesting story with quite a few positives:

. A JK group company. Other group companies include JK Lakshmi Cement, JK Paper and JK Tyres. (Chech out the parent website www.jkorg.in )

  1. A very efficient utiliser of capital. Return on average capital employed for the year March 2013 is 46.84%

  2. Reasonable valuation. Co. paid its maiden Dividend @ 15% this year.

  3. Largest seller of branded creamers after Amul & Nestle.

  4. Recently concluded expansion from internal accruals, both for drying plant as well as liquid milk.

  5. Supplier to Coca-Cola, Future group, Bharti Walmart, Spencers etc.

  6. Sells under its own brands a White magic, Dairy Top, Milk Star, Umang Pure Ghee etc.

8). Co. actively looking for inorganic growth. Looking to acquire a Dairy in South India for a Pan India presence.

The main concerns are as follows:

. Milk is a seasonal business with most of the action coming only in the second half due to supply constraints. The Co. has recently launched flavoured milk under its own brand “Doodzs” in the NCR region. The launch expenses have effected the profitability in Q1. The Co. is a contract manufacturer for “Mother Dairy” and so only receives job work charges and this is not reflected in the turnover. This creates the impression that its a relatively small player, though the job work charges gives it a regular n assured income.

Disc: Invested and looking to add more, but lacking conviction!

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There is a management interview at Prudentequity.com, posted just few days back. If you are a subscriber, you can view. But frankly, after reading the interview I kinda felt that there are huge corporate governance lapses here. The interviewer asked some very interesting and hard hitting questions, which in my opinion the management did not give satisfactory answers to. Surprisingly the management did not have clear or direct answers for some of the questions and that just put me off.

We at Valuepickr need to build more conviction on this.

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Dear Kumar,

On an unrelated topic, is it worth subscribing to prudentequity.com?

Regards

Samir

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I subscribed 8-9 months back after observing that they delivered 60% in 2012. Since then most of their calls have delivered. All calls seems to be on fundamental basis. I can’t recall any research report where any technical is mentioned. A good point is that for each recommended company, they conduct these management interviews. Even for companies not recom., management interaction is given. So for me, that gives a lead to study the company because I know a lot from management perspective. Though I missed out on Ajanta Pharma. Thought it was outside my circle of competence (It still is). But when they recommended Granules at 97, I jumped in just because of these guys track record and some frustration on missing out on Ajanta.

My experience has been good so far. Take your own call.

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Thanks

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Hi Kumar,

Can you please elaborate a little on the corporate governance lapses and other key take aways from the interview. It will help investors like me who already have a position in the stock. Thanks.

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Exactly after 2 years from the starting post, the CMP is exactly the Same - 55.

But, story seems to be getting better and better.

1). Revenues have been increasing steadily. FY15 Expected 300 cr.

2). As per below article and AR it entered into liquid milk brand and outlets - JK Milk brand

3). It seems opportunity size is huge as it covers UP and other Northern states.

4). As per AR, Doodz and JK milk brands are well received

5). May come up with 2 more brands and looking for acq

6). Dividends increased to 20% - Yield = 1.82% at CMP.

)- ives

1). Profits are not consistent. But this is the case with Heritage and Hatsun too.

2). Seasonal business and depends on Milk prices. Being low margin business it has high impact on Net profits.

Overall, it looks promising for next 2-3 years, as sales growth may catch fancy of investors and re-rating will follow.

To recognize its brand strength, it is supplier to Air lines for single use milk sachets.

Technical: Strong support at price zone 50-55, so downside is very less where as upside is huge provided re-rating and profit growth on par with sales growth.

Question: Heritage foods also offers same kind of opportunity with sales of around 2000CR ( FY15 E) and M CAP - 900 cr. Ibelieve, some time in future both of these companies’ MCAP will catch up with 1X Sales at least.

So, which of these brands will grow more?

Disl: I hold heritage.

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Umang Dairies Ltd is a candidate for re-rating . Following is milk processing capacities of peer companies and their enterprise value :

Hatsun - 25 lakh liter /day ( EV 1015 cr) ,
Kwality - 17 lakh liter /day (EV 1051 cr) ,
Umang Dairies - 8 lakh liter /day and after current planned expansion 10.5 lakh liter /day (EV 110 cr)

Comparing the current market cap:

Hatsun: 3300 cr

Kwality: 916 cr

Umang: 121 cr

Assuming that dairy companies are to be valued based on their processing capacity, Hatsun has run way too ahead of its fundamentals and Kwality/Umang are bound to catch up with it. But we probably need to account this gap by the margins these players manage on their value added products as well as Hatsun’s chain of ice cream parlours, which if successful would make it more of a FMCG player rather than a dairy company.

Disc: Invested in Hatsun. Believe its run up too much but not selling it yet as its a little too early.