Though the four-digit gains on this stock may appear quite mind-boggling, stock of Kwality Dairy (not related to the Kwality Walls range of ice creams which is owned by Hindustan Unilever) actually made a modest beginning at Rs 2.75 (adjusted for 5:7 bonus in 2010) three years ago.
Starting out with the ice cream business, the company forayed into other milk products such as ghee, skimmed milk powder and butter in 1995, with its manufacturing unit located at Haryana. While the branded milk and milk products business offers substantial potential, the supply chain holds the key to profitability and sustainable operations.
The company has managed to scale up its size at an impressive pace in the last five years, with its sales and net profits expanding at over 80 per cent on a compounded annual basis over the last five years. In 2010-11, the company's profits amounted to Rs 47.38 crore on sales of Rs 1,601 crore.
Operating profit margins in the milk business however have been quite thin ranging at 4-6 per cent in recent years, probably due to the steady increase in milk and milk product prices. The low profit margins make it difficult for organised players to support promotional expenses to build and sustain a brand.
Even as its profits have expanded at a fast pace, Kwality Dairy's stocks prices have risen even faster. Based on the FY-11 per share earnings of Rs 2.33, the stock trades at a PE multiple of close to 70 times. That's unlikely to be sustained over the long-term, as it is at a stiff premium to much larger established players such as Britannia and Nestle India.