Dairy companies: Focus on premium products to boost earnings

Since the Budget announcement, shares of Kwality and Prabhat Dairy have run up 23 per cent and 47 per cent, respectively, compared to the Sensex’s six per cent gain. However, Hatsun Agro Products hasn’t seen much gains. These stocks cheered the government’s allocation of Rs 850 crore to four dairy projects over the next three-five years. The allocation, which comes after a few years, is aimed at shoring up productivity of cows. Since most companies source milk directly from farmers or via vendors, they will benefit on sourcing front.DAIRY

Hatsun, Kwality and Parag Dairy have also stepped up focus on value-added higher-margin dairy products such as flavored milk, paneer, curd, ghee, and butter, which will aid their revenue and margins. Lower penetration of organized firms (only 20 per cent) is another positive. With more and more consumers becoming brand and health conscious, these firms will benefit.

On business, both Kwality and Prabhat Dairy are focusing on increasing revenues from the retail or B2C (business to consumer) segment, against being largely B2B (business to business) firms historically. Kwality, which gets 31 per cent of its domestic revenues from the B2C segment, aims at launching more value-added products for this segment, and is investing Rs.525 core in setting up a plant for this and growing its milk-procurement infrastructure.

Prabhat Dairy is betting highly on the horeca (hotels, restaurants, and catering) segment and launching products such as matka dahi, cheese and shrikhand to drive growth in the B2C segment.

While the focus on B2C is positive, the B2B segment of these companies continues to witness healthy traction. Hatsun, too, is looking to launch premium products and further strengthen its market position in south India. Volatility in raw milk prices and competition are the key downside risks for these companies.

Most analysts are positive on these three companies due to their strong business prospects. While they expect returns of 20-22 per cent for Kwality and Hatsun, Prabhat Dairy’s trailing 12-month PE (price-earnings ratio) at over 100 times indicates expensive valuations.

Source : business-standard.com

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