Edelweiss Thinks Milk Is Good For You
A mix of factors such as growth, rising consumer maturity and the shift to more value‐added products makes the Indian dairy sector a “very white, bright and freely flowing opportunity”, according to an Edelweiss report.
Owing to the size of the dairy sector (Rs 4.5 lakh crore) and around 15 percent compound annual growth rate over 2016 to 2020, more possibilities will come up, the report said.
Sectoral trends such as a high vegetarian population and huge unorganised market led by fresh dairy products augurs well for the sector and brings more investment opportunities to the fore, said Edelweiss.
The sector will drive growth and profitability for the market leaders as it is poised for an earnings CAGR of over 20 percent and return on capital employed over 25 percent, said Edelweiss. The brokerage firm also forecasts meaningful stock returns for the investors in the sector.
Edelweiss initiated coverage on two companies from this sector:
- Parag Milk Foods: Initiated at 'Buy' with a target price of Rs 340, implying 40 percent upside.
- Hertiage Foods: Initiated at 'Buy' with a target price of Rs 976, implying 28 percent upside.
Parag Milk Foods
- Leading market share in high margin value-added products.
- Second position in cheese and largest cow ghee brand.
- Value added products’ shares in sales will rise to catapult to 70 percent from 64 percent currently over financial years 2017 to 2020 on sustained innovation and investment.
- Operating income to jump 2.3 times and return on capital employed will rise to 19 percent over financial years 2017 to 2020.
- Revenue growth at 14 percent and net profit's compound annual growth rate at 49 percent over financial years 2017 to 2020.
- Edelwiess initiates coverage with 'Buy' and a target price of Rs 340, implying 40 percent upside.
- Five of the nine analysts tracked by Bloomberg have a 'Hold' rating, three have 'Buy and only one has 'Sell' on the company's stock.
- Strong private player in Andhra Pradesh with 10 percent organised market share.
- Strong franchisee in liquid milk.
- Target of 40 percent sales, potential of nearly 34 to 40 percent sales CAGR over financial years 2017 to 2022.
- High return on capital employed pouch milk and high‐growth & margin curd, yogurt, ice‐cream segments.
- Hence it has the highest pre‐tax return on capital employed in the industry at 42 percent (adjusted) with strong 23 percent sales and 21 percent EBIT CAGR over financial years 2017 to 2020.
- Edelwiess initiates coverage with 'Buy' and a target price of Rs 976.
- Currently all seven analysts tracked by Bloomberg have a 'Buy' rating on the stock.