JMFL

Parag Milk (Buy)

CMP: ₹278.3

Target: ₹330

Parag Milk Foods (Parag) has created a well-diversified product portfolio and firmly established its brands in the Indian dairy industry. This has helped it become the second largest cheese player in the country, boosting its value-added products (VAP) business to 66 per cent of revenue and aiding a 567 bps GPM (gallon per minute) expansion over the past three years.

With rising consumer demand, a strong culture of innovation, robust brand portfolio and disruption effects (GST and Demonetization) now behind, we expect growth trajectory to improve after a subdued performance over the past 15-18 months.

We forecast revenue, EBITDA and net profit CAGR of 13 per cent, 15 per cent and 22 per cent, respectively, over FY17-20E. The company is also expected to be cash-generative in the next 2-3 years as a significant part of expansion capex is now out of the way. This, plus an improving growth trajectory drive our positive bias.

We initiate with ‘buy’ and a target price of ₹330 based on 24x FY20E EPS (marginally higher than its current trading multiple, which is at a discount to peers such as Prabhat and Heritage Foods). We see 22 per cent upside from the current market price. However, ROIC (return on invested capital) remains a sore point in our view, as we see a challenge for Parag to scale up beyond 20 per cent, given its high working capital requirements.

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