New plant to slash utility costs in FY17: Prabhat Dairy

Prabhat Dairy's gross margins were down by 250 basis points in the fourth quarter of FY16.  The on-going drought increased raw material procurement prices, which had put pressure on the gross margins, said Vivek Nirmal, Joint MD of the company. Its topline growth went up by 10 percent to Rs 1,171.9 crore and Nirmal expects a steady growth for the company in FY17. Capital expansion is on the cards for the company as its co-generation unit, which is to be commissioned in FY17, will help bring down utility cost, he added.Cogeneration through combined heat and power is the simultaneous production of electricity.Below is the verbatim transcript of Vivek Nirmal’s interview with CNBC-TV18's Sonia Shenoy and Latha Venkatesh. Sonia: The gross margins have contracted about 250 bps. Do you expect more pressure from raw materials and will your margins continue to be in the single digits in the first half of FY17? A: In last quarter as we have seen the state is experiencing second consecutive year of drought. That is why the raw material prices are up and that has definitely created some pressure on the gross margin but overall if you see last year has been good for us. Overall we have grown to around 10 percent interest on top line, around Rs 172 crore has been the topline of the company against Rs 1,004 crore in 2015-16 and even the earnings before interest, taxes, depreciation and amortisation (EBITDA) has grown to around Rs 120 crore against Rs 104 crore against Rs 104 crore in FY15-16. But this quarter, last quarter particularly, since we have approached summer seasons we have seen some increase in the raw material procurement costs. Latha: But that would be seasonal, isn't it? Your raw material costs go up every summer and usually dairy products get expensive in summer as well. So, should we assume that you will be able to overcome this weakness at all in FY17? What kind of revenues are your projecting, what kind of EBITDA are you projecting? A: We are projecting a steady growth as we have grown in the last year. While we will be definitely experiencing challenging season in the coming year because of two years of drought but we are procuring milk from outside of the states as well to see that our volume is maintained because we have a lot of orders from our ingredient as well as consumer product segment client. So, we expect a steady growth in coming year as well. Sonia: What about your expansion plans, how are they currently, what do they entail and will they lead to better margin and revenue performances in FY17? A: Yes, we are actually expanding in terms of sales for our value added products even in the last year. Value added products like ghee, curd, ice cream and lassi have seen a lot of increase in sales. As well as our ingredient business of speciality milk powders has also increased. In terms of capital expansion we have already undertaken plans for funding cogeneration unit which will bring down our utility cost, that is already in progress. We expect that to be commissioned in the coming year 2016-17 as well as we are also undertaking expansion of some value added products line which will be seen going through in 2016-17. Latha: What will be your long term debt be at the end of FY17? And what will be your annual outgo? A: Long term debt is around Rs 38 crore as of now and we don't plan to increase it in FY16-17. However our interest cost if you see in the last year have been pretty stable while we have reduced the debt but in 2014-15 we got benefit of capitalisation in 2015-16 there was no interest which was capitalised since all the plans are up and running. That is why we see that our interest costs have remained steady or gone slightly up. Latha: And they will remain unchanged in FY17? A: No, the interest cost in FY17 will definitely go down because our debt has mostly been reduced in the last quarter. Latha: So, your net margins should improve in FY17? A: Yes, net margins should definitely improve in FY17.