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Why dairy stocks are losing their flavour

Why dairy stocks are losing their flavour

Why dairy stocks are losing their flavour
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By Mousumi Paul  Sept 6, 2019 2:56:57 PM IST (Published)

The dairy industry, over the past few years, has witnessed the entry of private companies which are now going through a turbulence phase. The organized dairy market is worth Rs 1,00,000 crore, growing at 10 percent, but its profitability has been low and value-added growth story hasn’t panned out as expected. The recent price hike in the cost of raw milk by the state government has further aggravated worries for milk manufacturers. Let's take a quick glimpse of the sector:

The dairy industry, over the past few years, has witnessed the entry of private companies which are now going through a turbulence phase. The organized dairy market is worth Rs 1,00,000 crore, growing at 10 percent, but its profitability has been low and value-added growth story hasn’t panned out as expected. The recent price hike in the cost of raw milk by the state government has further aggravated worries for milk manufacturers. Let's take a quick glimpse of the sector:

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Raw material price hike:
In July this year, the state government announced a Rs 5 per litre subsidy to dairy companies on one condition: The subsidy was available only if dairy companies bought raw milk from farmers at Rs 25 per litre as compared to milk procurement of Rs 17-18 per litre. This made the dairy companies pay Rs 2-3 litre extra to avail the subsidy, which meant lower net profit for them.
Dairy stocks performance: Shares of Prabhat Dairy have fallen 17.82 percent, Parag Milk Foods has plunged 59.08 percent while Heritage Foods rose merely 1.22 percent. Only Hatsun Agro Products shares reported a near 87 percent surge in the last three years. So far this year, Prabhat Dairy and Parag Milk Foods shares fell 13.65 percent and 44.94 percent respectively, while that of Hatsun Agro Products and Heritage Foods declined 1.29 percent and 28.92 percent, respectively.
Dairy stocks valuations: Parag Milk Foods stands at a comfortable position amongst its peers, with price-to-earnings (P/E) at 9.41x and return-on-equity of 13.40 percent. The company’s June quarter net sales grew at 14.62 percent but net profit growth fell by 2.69 percent. Foreign investment in the company improved 2.8 percent on the year, the highest amongst its peers.
As compared to its peers, Hatsun Agro remained the expensive one with P/E at 75.72x followed by Prabhat Dairy at 22.81x and Heritage Foods at 21.53x. In terms of earnings, Hatsun Agro was ahead with net profit growth of 35.21 percent YoY and net sales growth of 15.18 percent. Also, the RoE was the highest at 20.46 percent. Therefore, Parag Milk Foods looks like a good bet followed by Hatsun Agro and Heritage Foods. Meanwhile, Prabhat Dairy’s board of directors are already considering delisting of the shares on September 10.
Crisil's view on the sector: Crisil is positive on the sector.  It said that there has been a sharp decrease in skimmed milk powder inventory in the past few months which could lead to an increase of Rs 1-2 a litre in domestic prices over the next few quarters. This is expected to improve the sector's operating profitability by 30-40 basis points.
Edelweiss top picks: The brokerage retained ‘buy’ on Parag Milk Foods at a price target of Rs 276 per share.
It said that sales in Mumbai shot up 18-22 percent YoY in Q1FY20 and 37 percent YoY in July. The company aims to cover 1,50,000 outlets in Mumbai and Delhi in Phase-1 over the next one year from 50,000 currently and expand its overall coverage from 300,000 to 800,000 outlets over the next four-five years.
It believes a robust value-added products portfolio, product launches and distribution will log sales/profit before tax CAGR of 14 percent/12 percent over FY19-21E.
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