Parag Milk Foods - Transformation Underway With Early Signs Of Success But Long Journey Ahead: Systematix
With almost 75% business coming from VAP, new age businesses, company holds potential for 20%+ revenue growth in core categories.
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Systematix Research Report
Parag Milk Foods Ltd. has an integrated business model with its presence across dairy farming, procurement, processing, distribution and ownership of brands like Gowardhan, Go, Avvatar and Pride of Cows with leadership position in ghee, cheese and whey protein.
Parag Milk Foods has created a roadmap to transform itself into a technology-driven fast moving consumer good company, differentiating itself from other dairy players. The company is now working on five strategic priorities:
strengthening and accelerating its core categories of ghee (20% share for Gowardhan Ghee), cheese (35% share for Go Cheese) and protein (Avvatar growing at 100% plus),
increasing marketing spends (campaigns in IPL and KBC and focus on influencer marketing) and innovation,
increasing retail reach from 4.6 lakh to 13-15 lakh touch points by FY27,
rapidly scale-up new age businesses of whey protein (Rs 6.6 billion market growing 20% compound annual growth rate) and pride of cows (premium dairy D2C brand now present in six cities now witnessing five times capacity expansion) and
optimising productivity via investments in SAP HANA, Sales Force Automation and restructuring of supply chain infrastructure.
Parag Milk Foods has recently strengthened its management team with nine key appointments (we expect more CXO-level appointments soon) which should be a key enabler for achieving its long-term objectives.
With almost 75% business coming from value-added products and new-age businesses, the company holds potential for 20% plus revenue growth in core categories with a combination of volume and realisation growth, supported by distribution expansion efforts.
With milk prices stabilising, gross margins should continue to move upwards towards 25% plus given an improving product mix which should help move Ebitda margins gradually towards high single digits as well, led by operating leverage benefits.
The stock has recently seen a re-rating and is currently trading at 36 times trailing twelve months earnings, with strong margin improvement and earnings growth potential over the next three-five years.
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