Highlight- Prabhat dairy ties up with Denmark based animal nutrition major DLG
- Plans to produce mineral pre-mixes for an increase in milk productivity
- Growth expectation for Animal/Feed nutrition market runs into double-digit- Expected milk price improvement to aid earnings in the near term
Prabhat dairy has forayed into animal nutrition segment in a joint development agreement with Denmark-based DLG. The company aims to produce mineral pre-mixes that help in improving cattle milk productivity. While it is already in cattle feed business, mineral pre-mixes not only extends the animal feed business but also opens it to relatively higher margin business. Given the farmers base for its milk sourcing business, a new business might be a tad easy to scale up. At present, the company aims to run a pilot of 4-6 months.
Animal/Feed nutrition market expected to grow in double-digits
Management of Prabhat Dairy expects the animal feed industry to be worth $30 billion by 2020. Within the industry, the cattle feed business is undergoing a transformation in terms of incorporation of global best practices. To participate in this transformation, foray into animal nutrition is a crucial step, according to the management.
Broadly, the animal nutrition market comprises of natural antibiotics, nutritional additives and anti-fungal additives with the end applications for cattle and poultry. As per CRISIL Research, this segment is expected to grow in double digits in the medium term on account of the expanding food processing industry and a rising awareness about healthy end consumer products.
New players eyeing specialty feed nutrition business
Animal/Feed nutrition as a business opportunity has garnered attention from companies across sectors. Fine Organic Industries, a leading manufacturer of plastic and food additives, offers existing application of feed nutrition additives with a focus on the poultry industry. Here the applications tend to substitute antibiotics and improve nutrition for poultry. This product has been recently commercialised which it intends to export to selected international markets like Europe and the United States.
Fine Organics has also developed a nutrition additive, mainly targeted for exports, that increases milk yield from cattle. The company is targeting a couple of new markets where regulatory approval process is completed as required by those countries.
DLG’s India entry is a follow up on global consolidation
Globally, the animal feed business has witnessed a series of M&A activities. Archer Daniels Midland (ADM), Tyson and Cargill have acquired Neovia, Proteins Inc and Integral Nutricao, respectively in recent times and each one is looking at the growth opportunity India has to offer. DLG’s tie-up with Prabhat Dairy is an attempt to harness Indian market. DLG Group’s Premix & Nutrition business division comes under Vilofoss brand.
Though still in early stages for Prabhat dairy, diversification to animal nutrition could be a new growth driver and likely more margin accretive.
The stock of Prabhat Dairy has corrected by about 60 percent from its all-time high and currently trading at a level closer to what was prevailing in end CY2016. In the last few quarters, stock price performance remained weak across the dairy sector due to a higher supply of milk resulting in a price correction. In the case of Prabhat Dairy, Q2 sales growth was 8.5 percent year-on-year (YoY) despite 26 percent volume growth. For the Q2 period, milk prices had corrected by 17 percent YoY on average.
However, now news flow suggests milk demand-supply balance has normalised. December quarter supply has been lower and therefore, milk prices are expected to rebound from here. Further, stocks of skimmed milk powder are already low due to export opportunities and hence prices have already increased by about 15 percent in last one month.
The stock is currently trading at 14x FY20e (estimated) earnings. Key trends that make it a stock worth watching for are a higher share of value-added products of 45 percent (excluding milk powder) and rapid improvement in retail reach. The company plans to more than double retail revenue (B2C segment) in the next two years.Follow @anubhavsays