Dairy Industry: Premium Products Help Tide Over Low Margins | CORPORATE ETHOS

Dairy Industry: Premium Products Help Tide Over Low Margins

By: | February 27, 2018
dairy products

India is the largest producer and consumer of dairy products worldwide but the organized industry struggles to gain a foothold in the market dominated by co-operatives and regional players.  The industry has attained a size of Rs 7916 bn. In view of the socio-economic development ushered in by the dairy sector, India government has introduced various schemes for rural employment from time to time. The Operation Flood launched in 1970 by National Dairy Development Board headed by Varghese Kurian could help increase milk production drastically and improve rural incomes which received worldwide recognition.

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Basic dairy products such as standardized toned milk, ghee, butter, paneer and branded ice creams account for 95% of the India market. According to analysts, the urban consumer preference for convenience, health and wellness products could lead to increased premiumizaton of the industry by private players. The sector is likely to attract global investments in view of the potential for value added and premium products.

Amidst the changing dynamics of dairy sector, here is a look at the major players in the industry:
#Hatsun Agro Products Ltd ( BSE: 531531, NSE: HATSUN) Category: Mid Cap

Hatsun Agro Products, established in 1986 in Chennai, is now reached over a million homes with its branded milk products such as Arokya Milk, Hatsun Curd, Hatsun Paneer, Ghee, Dairy Whitener and Arun Icce Creams. It exports dairy ingredients to 38 countries across the world. Arun Ice Creams are famous in Seychelles and Brunei.

The company reported a turnover of Rs 4205.28 cr in 2016-17 compared to Rs 3140 cr the previous year while net profit was Rs 279.56 cr compared to Rs 167.57 cr the previous year. Net profit margin has risen to 3.19% while return on networth rose to 38.59%.  The company produces a range of products including ghee, flavored milk, yourts, butter, cheese and curd.

The company has reported 48% annualized fall in net profit for Q3FY18 at Rs 14.98 cr while sales has rsien 7.20% to Rs 1,012.94 cr. The scrip is trading at a price earnings ratio (PE) of 89.23. Near term returns are negative but six month return of 20.12% and yearly returns of 67.17% is attractive. Financial ratios present a mixed picture with return on equity of 4.93%, assets of 0.59% (both below industry average) and net profit margin of 0.24% which is better. Liquidity ratios are below industry average while cash flow appears better.

On technical charts, Relative Strength Index (RSI) of 41.08 indicates bearishness while ADX of 21.46 indicates range bound trading and MACD line has witnessed a bullish crossover.  The scrip has recovered from a recent low of 747 and seen consolidating at 770 levels in the near term.
Target: 800            Duration: 4 weeks.

#Kwality Ltd (BSE:531882, NSE: Kwality) Category: Mid Cap
Kwality Ltd was established in 1992 by backward integration of Kwality Icecreams India Ltd and now has six manufacturing units spread  across North India. It sold its ice cream brand to Hindustan Unilever in 1994.

Kwality owns six milk processing units in Uttar Pradesh, Haryana and Rajasthan, and retails products under its Dairy Best brand. Kwality also supplies to Mother Dairy, Cadbury’s and ice -cream makers Vadilal Enterprises Ltd and Cream Bell. The company has a processing capacity of 4.3 mn litres of milk daily.  The company has enlarged its business from B2B supplying to Amul and Brittania to successful B2C business with an aim to become a global leader in dairy food business.

The company reported a growth of 7.96% in sales at Rs 6885.5 cr in 2016-17 while net profit  rose to 194 cr from Rs 164 cr the previous year. The company had launched a new brand campaign with a unique positioning of “Zindagi Non-Stop” with Akshay Kumar as the Brand Ambassador.

The company reported 53.56% drop in net profit in Q3 FY 18 while sales grew 12.02% to Rs 1,773.27 cr. The scrip is trading at a PE of 19.69 indicating lower valuation by market.
On technical charts, RSI of 36 indicates bearishness while ADX of 30 indicates uptrend and MACD line has witnessed a bullish crossover signaling buying opportunity. After a recent fall to 82.6, the scrip is in recovery mode.
Target: 98    Duration : 3 weeks.

#Parag Milk Foods Ltd (BSE: 539889, NSE: PARAGMILK) Category: Mid Cap

Parag Milk Foods was established in 1992  by Devendra Shah and family as one of India’s elite private sector dairy company with diverse portfolio of 15 consumer products. It is strategically located at Manchar, Maharashtra and Palamner in Andhra Pradesh.
It has dairy farms set to global standards, a modern fully automated cheese plant with state of the art technology, a ghee plant with traditional way of making ghee and UHT milk processing plant. The brands Gowardhan, Go, Topp, Up & Pride Cows have become famous. Product portfolio includes ghee, fresh milk, skim milk powder, whole milk powder, paneer, an array of processed and natural cheese, cheese spreads, butter, dahi, dairy whitener and gulab jamun mix under the brand name of Gowardhan and Go.

The company reported a net profit of Rs 25.48 cr in Q3FY 18 while sales rose 16.41% to Rs 519.28 cr . it is trading at a PE of 31.33 indicating a moderate valuation by market.

On technical charts, RSI of 50.58 indicates neutral, ADX of 13 indicates range bound trading and MACD line has witnessed a crossover signaling a change of direction. A Head and Shoulders pattern is visible in charts and set for consolidation before next upward move.
Target : 300    Duration 3 weeks.

Summary
India’s dairy sector is going through a transitional phase with branded players gaining market presence with premium products targeting at the growing middle and upper middle class segments. The presence of global brands has created variety offerings for consumers. The focus on value added products such as cheese, yogurt, probiotic drinks, chocolate help overcome the low margins in the milk procurement and processing phase. The market is set to attain a size of Rs 18,599 billion recording a compounded annual growth rate (CAGR) of 15% from 2018-2023.

The rollout of GST is expected to benefit the dairy sector as the majority of the products fall within the lower tax slab of 0%, 5% or 12%. GST will also help in the formalization of the unorganized segment and help improve operational efficiencies through the reduction of complexities in logistics, compliance and inventory management, according to Sanjay Dhingra, Managing Director of Kwality Ltd. Investors can gain through selective exposure to dairy sector stocks.