Prabhat Dairy Q1FY17 Research Report By Edelweiss

Prabhat Dairy (Prabhat) reported sales growth of 9% YoY to INR2.9bn, driven by growth in SMP (40%), ghee (60%) and curd (22%). However, EBITDA fell 8% YoY with margins dipping to 8.5% (10% in Q1FY16) due to gross margins contracting 125bps YoY to 19.2%, as milk procurement prices increased on droughts conditions in Maharashtra. Driven by fall in interest cost and lower tax, PAT surged 64% YoY. Given expected 20% EBIDTA CAGR (led by increase in value-added sales), strong 72% earnings CAGR, and 387bps jump in adjusted pre-tax RoCE to 15.1% (17.1% including incentives) over FY16-18E, we maintain ‘BUY’ with an unchanged target price of INR144.

Revenue growth driven by SMP, curd and ghee; cheese picking up Prabhat reported revenue of INR2.9bn, up 9% YoY (versus 2% growth reported by Parag and 5% growth in dairy sales reported by Heritage Foods). This was driven by strong growth in SMP (surged 40% YoY) and ghee & butter (soared 60% YoY), led by pick up in Maharashtra and northern parts of India. Similarly, curd also posted 22% YoY growth this quarter. Distribution for curd also ramped up significantly. Earlier available through 7-8,000 outlets, distribution has expanded to >10,000 outlets. The company also launched the Prabhat ‘Ghar jaisa dahi’ campaign during the quarter. It made good progress in cheese. Prabhat received orders from Yum Brands and also began exporting cheese to the Middle East. Current utilisation in cheese stands at ~15% and the company plans to take this to 35-40% in FY18 and ~65-70% in FY19.

Margins fall; procurement to pick up, targets 17% CAGR (FY16-18) The average milk procurement prices increased from INR21/litre last quarter to INR25/litre (Q1FY16: INR18/litre). Further, procurement also fell to 0.76mn litres/day compared to 0.93mn litres/day in Q1FY16. As a result, gross margins corrected by 125bps YoY to 19.2%. However, management expects procurement to scale back to 1mn litres in coming quarters, and to 1.4mn litres over the next 2-3 years.

Outlook and valuations: Story intact; maintain ‘BUY’ We estimate Prabhat to clock revenue/PAT CAGR of 17%/72% over FY16-18, with adjusted pre-tax RoCE of 15.1% (17.1% including incentives) in FY18. In light of robust earnings visibility and strong growth in the organised dairy space, we continue to value the stock at 18x FY18E EPS with an unchanged target price of INR144.