Parag Milk Foods (PMFL) is one of the leading manufacturers and marketers of
dairy-based branded foods in India. The company has well recognized brands
like “Gowardhan” and “Go” in its portfolio and has a pan-India network comprising
of 15 depots, 104 super stockists and over 3,000 distributors. It has also been
growing in the cheese segment where it currently has a market share of 32%.
Shift in market in favor of organized sector to aid growth: The Indian dairy
industry is currently valued at ~Rs4,061bn and is mainly dominated by the
unorganized sector (accounting for 80% share). Industry reports indicate that the
Indian dairy industry is expected to grow at a CAGR of 14.9% over FY2015-20E
to ~Rs9,397bn within which the organized segment is expected to grow at a faster
pace than the unorganized segment. The share of organized players is expected to
improve from 20% to ~26% in FY2020E, thus benefitting branded players like PMFL.
Low consumption of cheese in India presents opportunity for PMFL: The cheese
segment is in its nascent stage with it accounting only for a fraction of the total
dairy industry as household penetration of cheese in the country is very low
compared to other developed countries. Going forward, we expect cheese
consumption to increase on account of increase in home consumption due to
increasing disposable incomes, sizable growth expected in the Indian fast food
market, and shift in food consumption trends in tier II and III cities. Considering
PMFL’s strong branding (Go Cheese) and distribution network, we believe that the
company will benefit from an increase in the overall consumption of cheese in India.
High-margin branded product sales to boost overall margins: The company
derives approximately two-thirds of its revenue from sale of high margin branded
consumer products like ghee, cheese, UHT, whey products etc. We believe the
company will be able to continue its strong growth in the above products on the
back of its strong branding and distribution network.
Outlook Valuation: At the upper end of the issue price band, the company is
seeking a P/E multiple of 37.6x its 9MFY2016 annualized earnings based on preissue
outstanding shares. This is lower than its close peer Prabhat Dairy’s
valuation, which is trading at a higher multiple of 49.8x its 9MFY2016 annualized
earnings (despite of PMFL’s better return ratios). Further, retail investors will be
given a discount of Rs12/share. Considering the company has a diversified product
basket, strong brands and wide distribution network, we believe that the company will
continue to perform well on both the top-line and the bottom-line front. Hence we
recommend investors to Subscribe to the issue from a longer term perspective.

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