With increasing population and more money in every wallet, consumption driven themes had been the flavor of this bull run. We too believe Indian consumption stories has a long long way to go and probably valued added themes are poised to do better as consumers are getting more discerning by the day.

About the Company…


A misnomer, as it may sound, Parag Milk Foods has little to do with “milk” but a lot more to do with “processed milk”. Established in 1992 in Pune by Mr. Devendra Shah, as a solution for the farmers who were facing the adversity of “milk holidays” being declared by the co-operatives in the wake of increased milk production; today PMF have come a long way, having become the second largest cheese producer in India with a staggering market share of 34% next only to Amul.

About the business
Having anticipated the increase in demand for cheese, thanks to the increasing consumption of burgers and pizzas brought about by Dominos, McDonalds and Pizza Hut, the promoters of PMF, very wisely conceptualized into the idea of making cheese. As a result of this vision, PMF today has the largest cheese producing facility in Asia at a single place, besides being the biggest supplier of quality cheese to the likes of the above mentioned QSRs.
The company has developed into a dairy based branded FMCG company with an integrated business model – encompassing the entire value chain – procurement, manufacturing, distribution and branding. Procurement of milk is done in as many as 29 districts from the states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu, having tie ups with more than 3000 village level collection centres. The average daily milk procurement is a little above 1 million litres. Processing of milk is done at two dairy plants located in Manchar and Palamaner with an installed milk processing capacity of 2 million litres a day.
Also, the company has the largest cheese producing capacity in the country. The company has a pan India distribution network with a specialized marketing and sales team. It has a diversified product portfolio catering to a wide range of customer segments. The company has established four brands, targeting specific customer segments through strategic positioning. The brands are getting stronger by the day.
Govardhan
The various products sold by the company under this brand name include fresh milk, milk powder, butter, ghee, paneer and whey proteins. It is targeted at household consumption for traditional Indian recipes to be used as a cooking ingredient
Go
Targeted at children and youth, it includes products like curd, lassi, butter milk, badam milk, fruit yoghurts and cheese products, primarily intended for direct consumption
Pride of Cows
It is the premium cow milk which is targeted at household consumers seeking a premium quality of cow milk. In my personal opinion, I believe this segment has got huge growth potential because of two reason….sooner or later these plastic packets based milk like Sudha Milk which comes in 1/2 to 1 ltr packages will go away and pave the way for cane filled of milk just like in US, we use to buy cane full of milk and keep it for 4-6 days without any problem. Also in India, in my own house I have seen we get milk from two sources, first one is a guy who brings so called cow milk in a cane (we need to provide him cane) and charge Rs 60 a lts and second one is from down stair grocery shop who sells pouch based milk at Rs 40 per ltr. I believe one organised player in needed in this milk delivery system who provides high quality milk like Pride of Cows which I think cost Rs 80 a ltr.  
Topp Up
Flavoured milk is sold under the brand name of Topp Up. It is targeted at young generation and travelers as an instant source of nourishment
Investment Rationale
Branded play in Value Added Milk Products
PMF was always focused on premium processed milk products rather than generic commoditized products like milk and curd. The company is generating more than 75% of its revenue from value added products like flavoured curd and ghee. It is on the starting phase of its high growth period, commanding superior margins, more brand power, larger client base and high on technology.
Premium Offering backed by Superior Research and Development
“The Pride of Cows” brand offer premium quality milk. In fact at Rs. 80 per litre, the clients of the company include the likes of Mukesh Ambani and Sachin Tendulkar. Hence, not much needs to be said about the quality of the offering. The company has developed one of the most hygienic and advanced dairies in India, where as many as 2,000 Holstein Friesians cows are bred. The milking process is completely automated with the cows being trained to enter an electronic and automated milking station by itself.  PMF is also venturing into whey protein powder production which happens to be a byproduct of cheese production. Premium offerings ensure that the company enjoys a high operating margin.
Growing Distribution Network
The company boasts of a strong distribution network, comprising as many as 19 depots, 104 super stockists and more than 3,000 distributors. The products of the company are available across close to 175,000 outlets all over the country. The premium product fresh milk Pride of Cows is directly sold to its retail customers in Mumbai and Pune. What is important to note is that the dedicated sales and marketing team of 560 personnel deploy product specific marketing and distribution strategy.
Experienced Management
The company is chaired by Mr. Devendra Shah who brings with himself more than 2 decades of experience in the dairy industry. Being a visionary, the management has laid various strategic milestones for the coming years based on innovation. These include introducing products like Milk based high protein drinks and colostrums products as daily supplements. Going forward the company intends to improve its profitability further by bringing about operational efficiencies by leveraging in-house technological, R&D capabilities and strengthening the distributor and stockist base to achieve higher penetration in Tier III cities as well.
Investment Concerns
  • Currently, the promoter shareholding is at 61.13%. However, a large chunk of this stake is pledged by the promoters
  • The company faces considerable competitive threats from established players like Amul and Mother Dairy besides the threat from potential new entrants like ITC and Patanjali

Views and Valuations 

Parag Milk Food is not cheap, and most probably it wont be ever. With right products in place, brands gaining traction, growing distribution and moreover IPO money will help the company to go to next level fast. We believe the price growth in stock will come more from EPS expansion and not so much from PE re-rating. As per our internal estimates we believe the business is is poised to grow 20-25% for next 5/7 years, which makes it a compelling compounder.

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