Prabhat Dairy Ltd BUY - Power

STOCK POINTER

Prabhat Dairy Ltd BUY

Target Price ` 220

CMP ` 118

FY19E PE 10.7X

Index Details

Prabhat Dairy Ltd (Prabhat) has established itself as a preferred

Sensex Nifty Industry

27,643 specialty ingredient supplier to top MNC clientele. Its recent shift to 8,573 focus on the B2C segment and introduction of a complete portfolio Packaged Foods of dairy products augurs well for the next leg of growth. The strong

outlook of the organized dairy sector and boost in consumption of

VADP is expected to drive the revenues for the company. Moderate

Scrip Details MktCap (` cr) BVPS (`) O/s Shares (Cr) AvVol 52 Week H/L

1,153.6 65.7 9.77

1,45,942 167.5/72

pricing, aggressive A&P spend (1.4% of revenues) and focus on increasing distribution reach of B2C products is expected to help build the brand and drive product reach. Over the period FY16-19, we expect revenues to grow at a CAGR of 18% to Rs 1,924.6 cr while earnings are expected to grow at a faster clip (63.7% CAGR) to Rs 107.6 cr.

Div Yield (%)

0.3 We Initiate coverage on Prabhat Dairy Ltd as a BUY with a price

FVPS (`)

10.0

Shareholding Pattern

Shareholders

%

Promoters

44.2

objective of Rs 220 representing a potential upside of 86% from the CMP of Rs 118. At the CMP of Rs 118 the stock is trading at 10.7X its estimated earnings for FY19. We have assigned a PE multiple of 20X on FY19 EPS of Rs 11 to arrive at the target price.

Public

55.8 We are optimistic about the company's prospects given that:

Total

100.0

Prabhat vs. Sensex

30000

India's dairy industry is expected to maintain growth at a CAGR of

approximately 14.9% between 2015 to 2020, to reach a value of Rs 170 9,397 billion by 2020 from Rs 4,061 billion clocked in FY14.

150

28000

130 Share of the high margin VADP (value added dairy products) is

26000

expected to surge to 36% in FY19 from the existing 25%.

110

24000

90 Commissioning of its 30 tpd cheese plant (third highest capacity

22000

70 in India) is expected to be the growth lever for Prabhat going forth.

20000

50 We expect Prabhat to generate Rs 104.8 crore of revenues from

cheese by FY19.

Sep-16 Aug-16 Jul-16 Jun-16 May-16 Apr-16 Mar-16 Feb-16 Jan-16 Dec-15 Nov-15 Oct-15 Sep-15

Sensex

Prabhat

Key Financials (` in Cr)

Y/E Mar

Net Sales

EBITDA

2016 2017E 2018E 2019E

1,170.5 1,414.8 1,659.3 1,924.6

119.7 150.0 187.5 221.3

In order to downsize its dependence on B2B sales, Prabhat is constantly ramping up its B2C business over the last couple of years. Through new product launches and higher A&P spend,

PAT

24.5 59.3 82.6 107.6

EPS (`)

2.5 6.1 8.5 11.0

EPS Growth (%)

-31.0 141.7

39.4 30.3

RONW (%)

4.9 8.7 11.2 13.3

ROCE (%)

9.9 12.3 15.1 16.7

P/E (x)

47.0 19.4 13.9 10.7

EV/EBITDA (x)

10.9 8.6 7.0 6.0

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Friday, 14th October, 2016

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

share of B2C business has risen from 11.3% in FY12 to 30% in FY16 which is expected to scale upto 44% BY FY19.

Prabhat's strategy of increasing its penetration in tier II and tier III cities is a step in the right direction since the presence of top dairy player in these cities is low. With moderate pricing policy Prabhat is expected to gain market share at a brisk pace in key markets.

Prabhat has clocked highest EBITDA margins in the dairy space. With steady monsoon and firm availability of milk, we expect EBITDA margins to take an upswing 130 bps from 10.2% in FY16 to 11.5% in FY19.

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Friday, 14th October, 2016

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

 Company Background

Prabhat, incorporated in 1998, is an integrated milk and dairy producer with aggregate milk processing capacity of 1.5 mn litres per day. Over the years, the company has diversified into pasteurised milk, flavoured milk, sweetened condensed milk, ultrapasteurised or ultra-high temperature (UHT) milk, yoghurt, dairy whitener, clarified butter (ghee), milk powder, ingredients for baby foods, lassi and chaas. It sells these products under retail consumer brands as well as ingredient products or as co-manufactured products to a number of institutional and multinational companies. Prabhat commenced commercial production of cheese, paneer and shrikhand in FY16.

Prabhat's strong brand portfolio

Source: Prabhat, Ventura Research

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Friday, 14th October, 2016

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

 Key Investment Highlights

Robust sales momentum to continue over FY17-19

Aggressive growth in milk procurement volumes (CAGR 23%) has enabled Prabhat to grow at robust revenue CAGR of 25% to Rs 1,170 cr over the period FY12-16. This growth was spearheaded by sales of SMP and condensed milk products and a higher penetration among institutional clientele.

Strong sales growth trajectory

2,000 1,800

Rs in crore

1,600

1,400

1,200

1,000

800

600

400

200

0 FY12 FY13 FY14 FY15 FY16 FY17

Milk Curd Cheese

Milk Powders Ice Cream Paneer

Condensed Milk Flavoured Milk Shrikhand

Source: Prabhat, Ventura Research

FY18 FY19

Butter+Ghee UHT Others

Going forth we expect sales to grow at a CAGR of 18% to Rs 1,924.6 cr by FY 19 led by a strong push across new product categories, viz curd, UHT milk, cheese, panner and shrikhand.

Stepping up the value chain by adding VADP to product arsenal

Prabhat has a impressive list of marquee clients (Mondelez, Heritage, Britannia, Nestle, Abbot etc) which endorses its manufacturing excellence and quality assurance. The products primarily supplied to these clients are milk powder for baby foods and condensed milk.

Post FY13, to reduce its dependence on institutional business and enhance its B2C business, Prabhat forayed into Value added Dairy Products (VADP) like

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Friday, 14th October, 2016

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

ghee, butter and curd. Encouraged by the success of these forays it has now also introduced paneer, cheese and shrikhand, among others, in FY16.

Capex cycle complete

To support its foray into VADP, the management incurred heavy capex of Rs 273 cr over the period FY14-16. The capex has enhanced capacities for cheese, paneer and shrikhand which are expected to lift the revenue trajectory higher going forth.

Surge in gross block driven by aggressive capex in VADP capacity

800.0 700.0 600.0

Rs in crore

Spurt in gross block to drive VADP revenue growth

500.0 400.0 300.0 200.0 100.0

5% 15%

38% 34%

FY12

FY13

Source: Prabhat, Ventura Research

FY14

FY15

Gross Block

FY16

Entry into cheese paneer and shrikhand key to ramp up the share of VADP to overall revenues

Cheese: Prabhat, in Q2 FY16, commissioned its 30 tonnes per day (tpd) cheese plant (third highest capacity in India). The company is currently targeting the HORECA (hotel, restaurants and cafe) & B2B space which comprises ~70% of the total cheese consumption in India. This strategy goes well with management's blueprint of initially focusing on institutional and B2B sales, and ultimately launching the same in the B2C segment once the product gains steady traction. The Cheese segment offers higher gross margins compared to other dairy products. As the capacity utilization of the cheese plant gradually increases, it will have a positive impact on the overall gross margin.

Recently Prabhat received its first export order for the supply of cheddar cheese to Iraq, while the order is small (~Rs 1 cr), it is significant as it could open up new revenue streams from geographical expansion.

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Friday, 14th October, 2016

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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