Edelweiss has recommended a dairy stock as one of the best stocks to buy for 2019.
The stock is Parag Milk Foods.
According to the buy recommendation in the research report, Parag Milk Foods is firing all cylinders to achieve its stated target towards growth and efficiency.
The company has strong fundamentals and good growth record.
It is expected to grow its revenue base at a CAGR of 20% over FY18-20; with margins at 11-12% and ROCE at 18-20%.
Q2FY19 Result Update
|Parag Milk Foods Ltd Rating Matrix|
|Target Period||12 months|
|Parag Milk Foods Ltd Stock Data|
|Market Capitalization||Rs 2171 Cr|
|Total Debt (FY18)||Rs 124.9 Cr|
|52 week H/L||Rs 368/ 215|
|Equity capital||Rs 8.4 Cr|
Value added drives growth; re-iterate Buy
Despite soft milk prices, Parag posted a strong 14% revenue growth driven by strong volume in the milk and the milk products segment. The soft milk price environment coupled with improving contribution from the value add product result in marked 270 bps improvement in the overall gross margin.
The EBITDA margin largely remained flat at 10.1% (vs 9.9%) on account of sharp increase in the branding, logistics and distribution expenses. Marked improvement on the working capital and thus reduction in overall borrowings resulted in lower finance cost; thus the net earnigns grew 22.5% yoy (at INR 30.5 crore; a shade higher than our estimate of INR 28 crore).
We believe that Parag is well placed to encash on the strong growth in the milk based value added categories, with its innovative arrary of products and aggression on the distribution expansion. On the back of these innitatives along with favourable milk price environment; we envisage Parag to post 15% revenue and 29% earnings CAGR over FY18-20 and thus re-iterate our Buy rating on the stock with a price target of INR 415
Q2FY19 result snapshot
Parag’s revenue/ EBIDTDA and net earnings grew at 14%/16% and 22.5% on a yoy basis ; a shade higher than our estimates.
Strong double digit 14-18% volume drove revenue growth; while soft raw material prices and continued innovation in product portfolio led to gross margin expansion.
EBITDA growth was muted at 16% on account of
(a) Increase in the ad and promotion spent
(b)Increase in the logistics cost
(c) Distribution expansion cost;
In the last 12-18 months the company has added 25-28,000 new retail touch points. Marked improvement in the working capital cycle resulted in lower borrowings and lower finance cost; aiding for 22.5% earnings growth.
Parag firing all cylinders to achieve its stated target towards growth and efficiency
The company has re-ieterated its guidance to grow its revenue base at a CAGR of 20% over FY18-20; with margins at 11-12% and ROCE at 18-20%. To achieve the stated guidance the company is aggressively expanding its footprint (For 1H added 25,000 retail touch points)-
Also entered the Delhi NCR region with its maiden milk brand –“Gowardhan, consistently improving on its product portfolio (For the quarter again it has added 3 new products), and improving efficency (For 1HFY19; improved its cash conversion cycle & reduced its borrowings).
We expect the company to post a revenue and earnigns CAGR of 15% and 29% over FY18-20
Strong proxy for changing consumption patterns; re-iterate Buy with a price target of INR 416
Parag, being an integrated dairy player with focus on value-added dairy products, is in a unique position to reap dual benefits of a dairy company coupled with a FMCG play in the long run. The company has moved up the value chain in terms of product portfolio, which is likely to improve already stellar gross margin.
Given the strong structural tailwinds, coupled with sharpening focus on branding, communication and reach along with a bouquet of innovative products makes it an attarctive investment. We re-ietrate Buy with a price target of INR 416.