It's all systems Go: Parag Milk Foods targeting 25-35% growth

Dairy products firm Parag Milk Foods, which listed its shares on Thursday, saw a stellar listing from investors. Parag Milk Food shares surged 11 percent to Rs 239 in the first two minutes of listing. Brokerages expect the stock to perform well form here on.Speaking to CNBC-TV18, Jubil Jain of PhillipCapital said he has a subscribe rating on the stock. His confidence stems from the sales growth that the company has posted in the past few years. "Dairy industry will see very good growth in medium-term," he said. The stock can double in 3-4 years. "Return ratios for Parag Milk can improve once we see improvement in capacity utilisations," he said. He, however, cautioned investors against short-term volatility, but said he expects the company to do well.Parag Milk Foods Chairman Devendra Shah thanked investors for placing faith in the company. Shah said the company will be able to get margins of over 10 percent soon. "The goal is to achieve 25-30 percent growth in the next few years," he said. Shah said the company plans to expand its daily cheese production capacity to 60 million tonne (MT) from 40MT. Parag Milk Foods is known for Go, Gowardhan and Topp Up brands of dairy products. It garners nearly two-third of its revenue from value-added products and has a significant market share in cheese segment.The company's Rs 760-crore initial public offering (IPO), which was extended by three days, was oversubscribed 1.83 times on the final day of the offer which ended on May 11. It will utilise the proceeds of the IPO to pare debt, for expansion and modernisation, and other corporate purposes. The company will divert Rs 100 crore for partial repayment of working capital loans; Rs 150 crore for expansion and modernisation expenses, and Rs 50 crore for general corporate purposes.Below is the verbatim transcript of Jubil Jain & Devendra Shah’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: What is the expectation, I mean it has been a good listing almost 11 percent higher now what would your advice be to retail investors?Jain: I feel that the IPO will actually do quite well in the medium to long-term so there might be some short-term volatilities. However, we had issued a report and we had asked investors to subscribe to this issue. What we feel is that the dairy industry overall will see a very strong growth in the medium-term, so at least 15-20 percent and when it comes to organised players they will grow faster than the unorganised players, then the compound annual growth rate (CAGR) will be around 20 percent odd. When it comes to Parag Milk Foods majority of its portfolio is into value added products. So, it is the second largest player in cheese as well as the other products. When it comes to the different brands it has a very strong brand equity for example Gowardhan Go a very well known. So, when it comes to the brands etc it is very strong. Coming to the financials if you look at the overall growth as you had mentioned the sales growth has been very strong over the years. Latha: It is not 40 percent to give it a 42-43 price to earnings (PE) you would at least want a 40 percent growth in EBITDA or earnings that is not happening?Jain: If you look at it from FY17 perspective the PE multiple is around 25. Now if you compare it versus the FMCG players, the FMCG players are trading at around 38 times one year forward earnings. So, definitely that is a discount to the sector. Looking at the return on equity (ROE), return on capital (ROC) numbers though they are slightly lower than the FMCG players but I feel the capacity utilisation for Parag Milk Foods is slightly lower. So, if that improves then that can actually increase the return ratios for the company and they will start looking better. So, demand is definitely not a concern. So, once the capacity utilisation starts increasing we can actually see healthy growth in ROE, ROC ratios and then the PE will start looking better.Sonia: Why do you think it is that despite having such a high market share in value added product like cheese their margins are still stuck at 8.8 percent and do you think that over the years they have get to double digits margins at somepoint? Jain: In the medium-term they would be able to get to double digit margins but what I feel is that currently they are investing into their retail presence. So, the management says that around 70-80 percent of the sale comes from the retail markets. I feel once they start getting economies of scale that will definitely be seen in the margins and they will start improving. So, that might not happen in the short-term but in the medium-term we can definitely see margins at double digits. Latha: Your price target is?Jain: We had issued subscribe but if you look at the price target I feel the stock can definitely double in the next three-four years. Sonia: Amongst the peers what is your top pick?Jain: We will Parag Milk Foods but apart from Parag Milk Foods we also like Hatsun Agro Products. Hatsun Agro has a very strong business model. 70 percent of its portfolio is fresh milk which we feel is actually is very important to have a sustainable business model in to milks and 90 percent is retail. If you look at its return ratios they are actually better than Parag Milk Foods though it is trading at a premium to Parag Milk Foods. However, still we feel that going forward short-term volatility will exist, so dairy sector is something in which you will invest for the long-term. In the medium to long term you can definitely very good returns in these two stocks.Sonia: What you revenue growth will be next year?Shah: Our last past year’s history is around 20-22 percent and you know in the country the cheese and the ultra-high temperature processing (UHT) milk and milk drinks they all are moving by 25-30 percent. Our goal is that we have to achieve this 25-30 percent market share. We want to take the major share and we have to accordingly do that.Latha: What is your market share now?Shah: In the cheese business market share pan Indian 33 percent in the cheese. We are the one number in the private sector in the UHT milk player.Sonia: He spoke about 25-30 percent growth in revenues, margins of 10 percent plus. Just tell us one year down the line where do you see the stock?Jain: One year down the line, there will be some short-term volatility but the stock will continue to do well and he spoke about 25 percent growth. I feel at least 15-20 percent growth is very much doable. Now it also depends on how the company executes. So, basically if you look at Parag’s execution capabilities, the innovation capabilities they are very high. So, at least 15-20 percent growth should be doable but if they do well, if they execute it well they might even go higher than that. Latha: The important point he seems to be saying is that we are moving away from commoditised business and more in to value add which will make them like Britannia and FMCG company not really commoditised at all, so if it is 45 percent share coming from Whey and about 22 percent coming from paneer does the valuation improve?Jain: It will definitely improve but that will take some time. It will not happen in the next one or two years but definitely that will improve the valuations.