Milk spills onto the street, dairy stocks fall upto 10%

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Mumbai, July 20, 2018: Shares of dairy products makers Prabhat Dairy and Parag Milk Foods declined on Wednesday in the wake of the ongoing dairy farmers’ agitation in Maharashtra, and analysts said the increase in procurement prices from farmers effective July 21 would impact their margins.

Prabhat Diary declined 10 per cent to Rs 152 on the BSE while Parag Milk Foods plunged 5 per cent to Rs 289.35.

Due to protests led by dairy farmers, the milk supply is severely hit in major cities of Maharashtra. The state government has fixed the procurement price of milk at Rs 27 per litre, but farmers allege that they barely get Rs 17 per litre. Private and co-operative milk unions in Maharashtra announced a raise in the procurement price by Rs 3 per litre effective July 21.

Although the state government is likely to provide subsidy to the extent of the hike in procurement price to private and co-operative milk unions, in case of any disparity in terms of passing of subsidy, Parag’s profitability will be relatively less impacted compared to Prabhat, said analysts.

“While the impact on Parag Milk will be relatively lower as compared to Prabhat Dairy since two-thirds of Parag’s product portfolio comprises of value-added products where gross margins are much higher, compared to 30 per cent for Prabhat,” said Mehul Mehta, senior research analyst, Sharekhan according to economictimes.indiatimes.com. 

“Parag Milk’s gross margin in FY18 was 30 per cent compared to 22.2 per cent for Prabhat Dairy. Prabhat is targeting 50 per cent of revenue from value-added products by FY20 by channelising gross margins improvement primarily driven by fall in raw milk prices over last 12 months and strengthening its distribution network which is not the case with Parag Milk,” he added.

Shares of Prabhat Dairy are currently trading at a forward PE of 23.05 times FY19 earnings compared to its twoyear average PE of 20.10. Parag Milk is traded at a forward PE of 23.14 in par with its three-year average.

Prabhat Diary is transitioning from a B2B to B2C company in the coming few years and is investing heavily in manpower, procurement infrastructure, distribution and brand building, which will impact margins till it achieves scale, said analysts.

“The company’s effort to balance the portfolio with liquid milk and ghee on one side for higher turnover and cheese and value-added fresh dairy products on the other side for higher margins will enable it to reach double digit margins in the next 2-3 years as procurement and distribution efficiency and higher capacity utilisation kicks in” said Amnish Aggarwal, analyst, Prabhudas Lilladher.

 

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