Parag Milk Foods - Lower B2B sales leads to revenue decline - ICICI Securities

Key reasons for weak Q1FY21 performance: (1) Steep decline in sales to B2B segment (i.e. HoReCa segment and ingredient user industry) due to lockdown. However, there was some recovery in in-home consumption, (2) Lower sales of SMP with decline in SMP prices and (3) 220bps lower EBITDA margin due to consumption of higher priced inventory carried from earlier quarters. We expect the (1) revenues of core products (paneer, cheese, ghee etc.) to gradually recover Q2FY21 onwards, (2) There will be slower recovery in HoReCa segment, (3) Liquid milk segment is expected to reported single digit growth in FY21 and (4) with reduction in milk procurement prices, EBITDA margin is likely to expand to 9.6% in FY22 from 8.7% in FY20. Maintain HOLD rating with a DCF based revised target price of Rs104 (8x FY22E EPS; earlier TP Rs100).

- Steep decline in B2B sales impacted revenues: Parag reported revenue decline of 30.8% YoY due to decline in demand from (1) HoReCa segment and (2) closure of ingredient user industry. However, there was some increase in in-home-consumption of products like ghee, cheese, paneer and UHT milk.

- Segment-wise performance: Milk products reported revenue growth of 11.2% YoY. SMP sales declined 27.7%, YoY with decline in SMP prices. Fresh milk sales were down 44.5% YoY. The company focussed more on its core business categories such as cheese, ghee, paneer and curd in Q1FY21.

- Gross margin declines in-spite of lower procurement prices: Gross margin declined 100bps YoY due to (1) change in revenue mix and (2) higher inventory carried from earlier quarters. EBITDA margin too declined 220bps due to negative operating leverage. Company initiated cost savings measures in Q1FY21. Some costs saving measures are structural in nature. PAT decline was 88% YoY.

- Expect recovery Q2FY21 onwards: With gradual re-opening of markets, the demand of consumer products like ghee, cheese, paneer and UHT is improving. Also, demand from HoReCa segment is expected to revive gradually in the coming quarters. The benefit of lower milk procurement prices (~25% reduction YoY) will be seen Q2FY21 onwards.

- Slower recovery in HoReCa: While we expect the liquid milk, cheese, paneer and ghee sales to normalise in Q2FY21, we expect slower revival in off-take from HoReCa. We expect demand from HoReCa to be lower in rest of FY21, YoY.

- Maintain HOLD: We model Parag to report revenue and PAT CAGR of 2.2% and 8.3%, respectively over FY20-FY22E. We maintain HOLD rating on the stock with DCF-based revised target price of Rs104 (8x FY22E EPS; earlier TP Rs100).

Shares of Parag Milk Foods Ltd was last trading in BSE at Rs.107.7 as compared to the previous close of Rs. 106.35. The total number of shares traded during the day was 40877 in over 729 trades.

The stock hit an intraday high of Rs. 108 and intraday low of 104.5. The net turnover during the day was Rs. 4357995.

Source : Equity Bulls

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