Product mix driving margins; eye 15% revenue by FY19: Parag Milk

While the quarterly results might fluctuate, Parag Milk Foods is confident of achieving 15 percent revenue growth over next three years. Speaking to CNBC-TV18, Bharat Kedia, CFO of the company said the mix of value added products is driving earnings before interest, tax, depreciation & amortization (EBITDA) margin expansion. The company reported a 54 percent increase in net profit at Rs 10.81 crore in the first quarter as against Rs 7.20 crore in year-ago period while the total income from operations rose to Rs 383.46 crore.The company has been upgrading its production facility of whey, which is its second highest product after ‘Pride of Cows’. Kedia expects the fresh milk business to continue to grow strongly.Below is the verbatim transcript of Bharat Kedia's interview to Reema Tendulkar and Nigel D'Souza on CNBC-TV18.Reema: In the past when we have spoken to you, you did indicate that a company should do a revenue compounded annual growth rate (CAGR) of 14-15 percent but Q1 was a bit subdued, your Q1 revenues were only up 2.5 percent, could you give us the reason for that and would you perhaps like to reassess you guidance. How would growth look like in FY17?A: Quarter by quarter results may fluctuate and it did. Q1 of the year for us is small quarter. It is a quarter filled with vacations due to summer vacation and it is a smaller quarter for us and therefore even though the overall growth rate looks smaller, the growth rate for products and fresh milk was 9 percent plus and still we believe that we would be able to catch up to the growth rate that we are anticipating for the next 3 years.The guidance that we have given out in terms of the growth rate to the market for the next 3 year is a compound annual growth rate (CAGR) growth of 14 percent plus for topline and margin expansion with the profit after tax (PAT) margin, which was 2.9 percent last year would go to 5 percent plus. We still believe that one quarter cannot create a jerk for our journey and we would be very much there.Nigel: On a quarter on quarter (QoQ) basis your margins fell by around 100 basis points (bps) or thereabouts, though they did increase on a year on year (YoY) basis, what is the outlook for the margins going ahead and also was there any particular reason for the sequential decline?A: What we are doing is our mix for value added products is growing and that has a highest level of margins that is driving our earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expansion. We are able to optimise more and more cost in our other production facilities and that leverage is driving out margin improvements and we are at the same time also able to move some of the cost effectiveness between this promotional spent to the advertising spent and that is driving the volume and value growth without putting an additional buck into the market and thereby we are able to drive the EBITDA margin growth.In addition to the EBITDA margin, we are also able to drive growth PAT margin because the finance costs are coming down.Reema: Could you give us a sense of what the updated debt on the books currently looks like and is there scope to reduce it further?A: So the company has been financed as it gone into the consumer goods business has been financed in 3 different ways, private equity investments came into two different tranches, then an international borrowing came IFC and some local borrowing scheme in terms working capital requirement.The company has consolidated some of these and now the borrowing has come down. From a debt equity ratio of the company a few years ago to the debt being 4 times the equity, today our debt is less than half time the equity. We have done a significant amount of debt reduction.Today, our debt number is about Rs 310 crore on our balance sheet as compared to about Rs 418 crore that we had pre-IPO. We have reduced the debt level, our equity has increased and that is going in the right direction.Nigel: Then what is your share currently of value added products what is it likely to be by the end of this year?A: So our share of value added products in our total revenue is about two-third. We have about 20 percent of our business is fresh milk, about 12-14 of our business is commodity, which is skimmed milk powder and about two-third is the product business. We believe the trend in which we are moving, our fresh milk business would continue to ramp up, our commodity business will continue to decline as a share of pie in the total revenue and therefore our product business will take higher share of the pie. The commodity business, which is about 12-14 percent, we believe over a period of 3 year, will move between 8-10 percent.Reema: What percentage of business currently comes in from Whey and do you plan to increase that going forward and what would be the margins you enjoy on that?A: Whey is a by-product of cheese. We enjoy a very good product. We have upgraded our production facilities therefore the Whey powder is now converted into Whey protein being sold to pharma and baby food companies. This was about 3-3.5 percent of our revenue as we speak. We believe that Whey business will continue to grow.We would be launching Whey in consumer products. We have, through IPO, generated certain proceeds to set up production facilities to produce this product. Once we are into the consumer value added products with Whey, our business in terms of Whey would further grow.The important piece on Whey is more than revenue is the margin. Whey is our highest margin product as of now after Pride of Cow and therefore we believe that driver of Whey would expand margin more than revenue.Nigel: Could you give us two numbers then what is your FY17 revenue as well as profits likely to be?A: As I stated before, we are looking for more long term than just the FY17. We at the end of 3 years that is FY19, we would be able to drive our revenue at a CAGR growth of 14 percent and we would be able to drive our margin expansion from a 2.9 percent PAT to 5 percent. If you specifically look at FY17, I would request the focus would be a longer term, because this is the industry in which the dynamics are very different on a short term, but they were very stable on medium to long term.