Growing very quickly in cheese segment: Bharat Kedia, Parag Milk Foods
In an exclusive interview with ET Now , Bharat Kedia , CFO, Parag Milk Foods , said the company is investing a lot in expanding the cheese business. Excerpts
ET Now: What are the plans for expanding the foot print on the distribution side and what are the new products which are there in the pipeline for cheese business?
Bharat Kedia: So cheese has been the major product for us. This is about one-fifth of our total revenue in the company. We have introduced cheese about seven to eight years ago when we launched production facilities about 40 metric tonnes per day, that is the largest production facility in India for any cheese company and this has been our stellar performance. We have been actually have all more than 60 SKUs already in cheese, so we have been growing very fast.
We have been coming up new innovations in cheese. Very recent one that you might have seen in the market that was the chutney cheese slice that we came up about three to four months ago that has gone very hit in the mothers’ recipe because they love to give it to the kid who go down to the school in his tiffin. So this has been the success of cheese.
What we are doing in order to grow cheese, we are actually investing in whey. Whey is a byproduct of cheese. Every time we invest on a whey, we are able to filter the whey powder into high level of protein, that high level of protein is used in various pharma, baby food companies. Now what this adds is actually gives momentum to cheese because it has been a byproduct, every revenue and profit that we can generate out of whey we can redeploy back in cheese for cheese growth and that is our expectation on growth.
In terms of the capacity, we are very close to its utilization and therefore we are increasing our cheese and paneer capacity from a 40 metric tonne now, we are going up to 80 metric tonne that is doubling of the capacity which would again be very large compared to an Indian market which is right now still not that close.
ET Now: Will the focus area be the B2C which is the consumer facing segment or probably you are looking at more institutional sales to hotels or probably catering when it comes to the cheese procurement and going forward with the integration on the B2B and B2C market?.
Bharat Kedia: So basically when it comes to cheese, you have to drive habit of consumption. Cheese is a new product for Indian cuisine. It was not part of Indian cuisine. It has become part of Italian and western cuisine that has come into the flavor and taste of Indians and therefore you have to drive the test through every occasion of consumption. So we are not as much looking whether it is B2C or B2B. We are more looking an occasion of consumption.
People get used to cheese when they go out QSRs and they go out to restaurants that is the time they consume cheese and then when come back home, they bring those slices of cheese with them because they have developed their taste. So what we do is actually drive the consumption occasion through our B2B as we call and then pull the B2C consumption.
Our business right now is about half and half total cheese business between B2B, B2C. We see the growth momentum actually spreading and equally moving forward because Indian consumption out of home is increasing compared to in home specifically for western cuisine and therefore our momentum to continue.
ET Now: What are the expansion plans on ex-cheese market? Are you looking at railways at this point in time as a big market for your flavored milk? How do you take that part of the business forward?
Bharat Kedia: Perfect. Flavored milk is a large business in India. It is mostly unorganised business in India. Mothers’ love to make something out of milk at home, handover to the child so that he does not drink some fizzy, other drinks so they are very health conscious and milk has a very high nutritional value and perceived value.
So this adds to flavour milk a lot of category. What we are looking at coming up into the flavour milk with the products which are not only flavoured but have natural essences and products in it and that would change the game for us going forward, so we are actually setting up a complete new facility in southern plant to go into beverages full blown. We already entered into the beverage market right now with lassi, with buttermilk, with southern spice, with badaam milk, so we have actually gone into that market but we have gone slow and steady which we want to go further down the line. What we see that this market actually does not have a lot of players and does not have an intense competition and therefore we think getting in early would help us great way.
ET Now: Do you also plan to do a lot of value add to the milk products and the cheese business? Can we expect better margins on the operating side for your company?
Bharat Kedia: So the company’s margins are primarily divided into three easy to understand divisions; one is the fresh milk business, second is the skimmed milk powder business which is the B2B commodity business for us and then the value added products business. If you look at the margin profile of these three businesses value added consumer product business has a margin profile highest of the three, then the fresh milk which has a modest margin profile and then you have a commodity part of the business which is skimmed milk powder which has the lowest margin profile.
Our business, if you look– go back to the last five years, our business has actually been growing at a rapid momentum in the consumer value added products business. That is how we have slowly and gradually converted ourselves being a dairy company to an FMCG company and that trend to continue we do not see and believe there is any reason for us not to continue that trend of a growth in the consumer value added products. As the consumer value added product business grows naturally the margin profile will improve for the company.
ET Now: How do you plan to fund the working capital and how will the debt to equity look after the money comes into the balance sheet?
Bharat Kedia: So this company has grown from promoters to full time a dairy business that was generated in that business was redeployed, however the growth of the company was faster than the profits being generated and therefore we had gone out and borrowed certain funds to build the momentum of growth. We set up a plant in south of India in Palamaner, we needed further money to deploy so we had borrowed money from International Finance Corporation and from our local bankers.
We believe as of now our debt-equity ratio is on higher side for any FMCG company because our benchmark now goes into the FMCG and therefore as we raise money through the IPO about 100 crore of that money that we raised through IPO we are going to repay the debts. That repayment of debts will actually take the debt-equity ratio down to about 0.5, that is the ratio at which we would love to stay and get better with time. Now what happens is that as you repay the debt into the company, not only the debt-equity ratio comes down, it actually adds value to your bottom line and ROCE and both of that will help the growth of the company.