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Q3FY19 Earnings Report : Results in Long Term Multicap Portfolio


Parag Milk foods announced its Q3FY19 results on last Saturday, 2nd Feb and had a conference call on 4th Feb. Below is the snapshot of the results and takeaways from the conference call.

Q3FY19 Earnings Report : Results in Long Term Multicap Portfolio

Revenues have increased by 16% at Rs 601 Cr in Q3FY19 versus Rs 519 Cr Q3FY18. The above chart shows the break up of the revenues. Milk products which include products like – cheese, paneer, ghee, UHT and flavoured milk recorded stellar growth of 19% – Rs 405 Cr versus Rs 341 Cr. Milk products contributed 68% to total revenues in this quarter as compared to 66% in Q3FY18.

Gross profits have increased by 23%, faster than the top line. This is due to mixture of

• Increase in share of milk products in the whole revenue pie and

• Lower commodity prices

Gross profit margins (GPM) improved by 200 BPS at 33% versus 31% in Q3FY18.

The operating profits or EBIT have grown by 7%, way below the top line growth. It is mainly because

• Employee benefit expenses have increased by 23% – Rs 25.4 Cr versus Rs 20.6 Cr

• Other expenses have increased by 35% – Rs 108 Cr versus 80 Cr

If one looks at the PAT – it has grown by 21% at Rs 31 Cr versus Rs 25 Cr. It has grown faster than the top line and way above the operating profits or EBIT. We will have to look at the interest, tax expenses or any exceptional item that the company records below the EBIT line. EBIT margins were 8% versus 8.7% in Q3FY18.

Interest expenses have decreased by 6% – so it is not interest that has lead to the faster growth in bottom line. Tax expenses recorded in this quarter were Rs 7.9 Cr on a higher base as compared to Rs 11.4 Cr in Q3FY18. The effective tax rate (Tax/EBT) for this quarter was 20% as compared to 31% in Q3FY18. PAT margins were 5.1% versus 4.9% in Q3FY18. If we were to assume that the tax outgo was 30% the profits would have been Rs 27 Cr, recording growth of 6%. Tax rates need to be seen on an annual basis that tracking them on a quarterly basis. As per the management the tax rate will stabilize at 24%.

Key takeaways from the Conference Call

We attended the conference call conducted yesterday and below are our notes

Other expenses can be divided into two components – variable costs like logistics and factory overheads, which increase with change in sales and fixed expenses like depreciation and interest.

Other expenses increased by Rs 28 Cr, if we were to assume that variable costs increased in line with increase in sales, then increase in variable costs would be 50-55%.

The rest would be increase in fixed costs – advertising expenses which is part of the fixed expenses were 3% of sales as compared to 2.6% of sales in Q3FY18. The company would maintain this run rate – 2.2 – 2.9% of sales on advertising in the near future.

At the end of the quarter company had 3 lakh retail outlets, 20 depots and 3000 distributors. Parag is present all across the country, however it is seeing tremendous growth in North and East India.

Company is upbeat on the health and nutrition segment where it has a presence through the Avvatar brand. Currently this segment contributes 3.5% to revenue. Management is looking to take it to 7% of sales by 2021. Assuming full year revenues of Rs 2,000-2,200 Cr in FY19, this segment should contribute Rs 70 – 80 Cr. If we were to assume sales grows by 20% in the next two years – the company will record sales of Rs 3,000 – 3,200 Cr, this segment should have sales of Rs 200-225 Cr, if the company is able to achieve its objective. This segment has GPM of 40%.

There are new products that are to be launched under the Avvatar brand. The WHEY market is Rs 1,500 Cr in the B2C segment and Rs 1,000 Cr in the B2B segment. In the B2B segment – 33% of the demand is catered by local players and rest of the demand is met by imports. The market that the company can capture is huge, as it has a negligible presence. The company is clear that it does not want to compete on price in this segment.

In the value added market – ghee and cheese are the fastest growing segments, however there is no breakup that the company provides.

Working capital days or the cash conversion cycle (Inventory + Receivable – Payable days) were 60 at the end of December, 2018. This is an improvement from working capital of 72 days at the end of FY18. Going forward the company wants to decrease the inventory days, while keeping the receivable and payable days constant.

We feel that this matrix is important to track as working capital days of the company are higher than the other players – Hatsun and Heritage. Parag has a different product mix – share of value added products is higher, whereas in the case of Hatsun and Heritage it is liquid milk. Lot of questions in the conference calls were also around working capital of the company. We will continue to track this matrix closely.

Guidance for EBIDTA margins is 12% from 10% currently. Margins will be driven by sale of value products – they are already at 68% of sales, we feel the company will have to increase penetration of its products and create a strong brand – where consumers preferred choice of a diary product comes from Parag. This is tall task as the competition is high, but we will continue to track the same.

The company also is running an external project with a consultant – where they intend to achieve efficiencies in production – theory of constraints. This should also help in increasing the margins.

CAPEX of the whole year was Rs 60 Cr, the nature of the business is such that maintenance CAPEX required is less, hence adjusting the  working capital with the operating profits will give a sense of the cash generating capability of the company.

We feel that the results are decent with both topline and bottomline growth in higher double digits. We will keep a close track on the working capital and monitor how the company is progressing on the business front. We continue to like the stock which is part of our Capitalmind Long Term Multicap Portfolio

NOTE: As a disclosure some Capitalmind authors may own the above company in their stock portfolios. There is no other relationship between Capitalmind and the above company. Please do not consider this article as a recommendation, It is purely for informative purpose only.

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