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May, 15 2018

Parag Milk's robust growth prospects help Dairy stocks rally

The Parag management revealed its Vision 2020 wherein it plans to achieve revenue of Rs 2,700-3,000 crore by FY 2020, implying a CAGR of 18-24 per cent over the period FY 2018-20.

Strong development projections given by the Parag Milk management during the experts meet sparked a rally in the shares of dairy product manufacturers on Monday. Analysts are optimistic on the sector, with expectations of a normal monsoon and fall in milk procurement prices.

Shares of Parag Milk Food gained 9 per cent to Rs 337 while Umang Dairies and Prabhat Dairy gained 5 per cent each to close at Rs 90.75 and Rs 179, respectively. Tasty Dairy Specialities gained 14 per cent to Rs 49.

The Parag management revealed its Vision 2020 wherein it plans to achieve revenue of Rs 2,700-3,000 crore by FY 2020, implying a CAGR of 18-24 per cent over the period FY 2018-20.

“India’s organised dairy sector is up for accelerated growth with present share at just around 20 per cent of total dairy sector, given higher disposable incomes and low penetration of value added products (VAP),” said Mehul Mehta, senior analyst, Sharekhan.

With the Parag management significantly increasing guidance for revenue growth and operating profit margin, analysts increased their earnings estimates and expect the company’s bottom-line to register 40 per cent CAGR over FY 2018-20, led by higher contribution to revenue from value-added products.

“Rising innovation agenda, scaling up presence in health & nutrition segment, and increasing the distribution network along with a professional management team would provide greater visibility to Parag’s earnings trajectory going forward,” said Harit Kapoor, analyst, IDFC Securities.

“Further, improved profitability and minimal capex requirement will drive positive free cash flow and uptick in overall return profile, thereby driving re-rating in the stock” he added.

The stock of Parag Milk Foods has been range bound for the past few months. It is back on investors’ radar considering the company’s increasing share of value-added products, lower milk procurement cost and cheaper stock valuation.

Milk procurement prices have corrected by 8-10 per cent in March quarter from their peak in June 2017 quarter. Milk prices are expected to stabilise at lower levels for next few months considering lower fodder prices as well as decline in global SMP prices.

Analysts say they expect lower input prices to aid margin expansion of dairy firms. The trend may persist given the prognosis of a normal rainfall in the current year as well.

“With monsoons expected to be normal and the government push likely in the next few months, the firms in the dairy products and other agri related firms would get a lot more business opportunities than in the previous few years,” industry body ASSOCHAM said recently.

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