Umang Dairies: Turn around company by JK Group

India remains the largest milk producing and consuming market in the world. Milk prices registered significant inflation during the year, impacted by increased cattle feed costs at a domestic level as well as external economic and regulatory factors. While liquid milk consumption continues to drive the industry, there has been a significant shift in the dynamics of the value added segment of dairy with access to milk, portfolio strategies and increasing investments determining the right to succeed.

The dairy industry continues to benefit from an array of factors including increased per capita income driving the need for value added products, economic activity on the rise in the metro cities and the emergence of modern format retail with increased emphasis on cold chain infrastructure. Demand for Dairy products is expected to remain robust. With increased purchasing power in the hands of Indian populace, more particularly rural one, larger number of people are likely to opt for milk products for better nutrition. Consumer preference is likely to be for long shelf life products. With increased awareness of hygiene /nutrition, packaged milk will progressively continue to replace loose milk. Value added dairy products are expected to grow at about 20%.

Umang Dairies Ltd was incorporated on 2 Dec.'92 by Straw Products and J K Industries by the name of J K Dairy & Foods . Not many people know Umang Dairies Ltd is a JK group of company . The company was making losses and went into BIFR . BIFR scheme was implemented in 2009 and after BIFR scheme implementation majority stake is acquired by JK group. Bengal & Assam Co Ltd has a stake of 45 % in Umang Dairies Ltd and total promoter holding of JK group is 74%

Umang Dairies, is a dairy product company of JK Organisation, which has medium-sized businesses in cement, tyre and paper with a turn over exceding $1.5 Billion. Umang’s key brands are White Magik, Dairy Top and Umang Ghee. In January 2014, it launched its liquid milk in Lucknow under the brand name JK Milk. Umang also makes products for private labels. It is managing a facility to process and pack liquid milk in poly-pouches for Mother Dairy.

The company has a drying plant (300,000 litres per day) and a liquid milk packaging plant (500,000 litres per day), both in Uttar Pradesh. Utilisation of the drying plant was just 55% in 2011-12; it is now up to around 75%. The liquid milk plant is operating at nearly full capacity now. Umang has 300 villages and 12,000 farmers in its milk collection network.

Demand for milk is outstripping production. However, demand does not easily translate into sales and profits. To quote from the Umang’s annual report, “Pressure on land resources is increasing. There is no way to increase the availability of land for fodder production. (The) Answer lies in the usage of high-yield fodder crop techniques and simultaneously replacing low yield breed of milch animals by high yield ones.”

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Umang was in a bad financial shape until two years ago. But it turned around after restructuring and revenues went up from Rs150.22 crore in 2011-12 to over Rs216 crore in 2013-14. For the quarter ended December 2014, sales were Rs69.96 crore (Rs55.20 crore) and the net profit was Rs2.60 crore (Rs1.26 crore). For the year ended March 2014, sales were Rs216.38 crore (Rs173.80 crore) and net profit was Rs5.96 crore (Rs12.30 crore). The net profit for this quarter came at Rs 3.57cr, exactly same as last year. There is a drop in sales this qaurter but this due to the upgradation process which will increase produciton by 25%. Howevever the company managed to bring down raw material costs by 28% and this resulted in overall costs coming down by 23%. Consequently, EBITDA came in at Rs. 7cr, up 17%.

Over the past five quarters, the average growth in sales of Umang has been 44% and the average growth in operating profit was 119%. The return on net worth is 28%.The return on capital employed is 27% with a debt-equity ratio of 0.72. The cash earnings per share were Rs3.39. Valuation is low. The 3 year average return on equity stands at 390%.Umang’s market-capitalisation is 0.5 times sales.

The face value of the share is Rs5. Umang has distributed dividends of 20% in September 2014 for FY13-14 and 15% in July 2013 for FY12-13. The share is trading at around Rs56, at a PE of 14 with industry PE at 40. This company would also be an excellent takeover candidate, in case the Singhanias (the promoters) decide to exit. One recent development is Groupe Lactalis SA (Lactalis) (which is the worlds largest dairy player) has shown serious interest to buy Umang diaries. Bengal & Assam Co Ltd has all the subsidiary companies as unlisted . If the company decides to delist Umang Dairies Ltd , then we may get 50 -150 % return in no time but that will be quite less to long term prospect of this company.

There are only a few companies which get turnaround after BIFR scheme implementation one of them is Symphony Ltd. There are few differences in Umnag dairy and Symphony like the business model of Symphony is superior, attractive return on capital employed and it has all India presence etc. But there are many similarities between them . No doubt, there is enough competition in the dairy sector. Good promoter backing and comfortable debt to equity may help the company grow big. Umang Dairies Ltd may achieve similar heights and it is on the same path of Symphony Ltd. The stock is worth buying for the long term.

Umang Diary Annual report

What makes this a better choice than Kwality ltd?

Kwality is more attractively priced

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Two trigger points which came to my notice. Please let me know if you have any further information.

  1. Milk power prices have increased by 30%, as per CNBC anchor. This should bring back sales and company should start producing bulk milk powder. They stopped production due to oversupply and glut in pricing.

  2. CWIP in Mar16 balance sheet has increased to 17Cr from last year of 1.4 Cr. This happens mostly on expansion. This will move to fixed asset. Their long term borrowing has increased from 3.63 Cr to 8.94Cr ( approx 5 Cr), Rest 12 cr comes from internal accruals. I am not able to find what expansion , they are doing. Need to wait for AR 16 to read and understand. Tried reaching CS, he asked to contact CFO. If any of you come to know, please let me know.

They do face challenges in getting milk supply. The main trigger would to be see which product line expansion are happening. I liked the fact their they could sail thru sales despite of reducing powder production.

Disclosure:- I have the stock in my portfolio and adding more to it after reading Mar 16 balance sheet.

How did you find this company can you share your way to find this company