Milk is a mystery; for some it is the most pious food but for some it is something which makes the life of milk producing animals a Hell and some wonders why this magical food is getting so costly. However the real magic is how humans can digest it at all. No other offspring of any other mammal except human consumes milk after a certain age or infancy…but human beings are consuming the milk of other mammals even in old age let alone the infancy. Well the secret is not that we are smarter and doing this with our choice. In reality, our bodies were not designed to digest lactose after infancy period (up to 5 years, period when we can’t create our own food). This happens because during infancy our bodies have the service of a bacteria Lactase which helps us in digesting lactose in milk which is a sugar. But after we crossed the infancy period and can eat other foods there is no need for Lactase Bacteria and so our bodies are designed to shut off the gene producing the Lactase bacteria.
Mother Nature has made this law in order to save the mother otherwise the infant will go on Eating the mother like a parasite and one day both will be dead. This rule was also inbuilt into us, the humans, and it is still within us as around 60% of humans can’t digest milk as their bodies do not produce Lactase bacteria to digest the lactose. We call these people Lactose intolerants however they are more natural than us. Our ancestors were also Lactose intolerants as adults just like other mammals. But something happened to us around 20000 years ago when a genetic mutation switch on the Lactase producing gene in some humans which those humans passed on to their children.
But why that happened is still a mystery. However there are some explanations. But one which I feel as most likely is the failure of agriculture or during the periods of famine; our ancestors had no option but to survive on milk. Agriculture in those days was not a culture but a vulture which could hit us anytime. So farmers had to change something in them in order to survive that period of famine and they had milk. There are high chances that some humans might have the mutated gene and they passed it to following generations. Also there are high chances that most of Lactose intolerant humans died during those famines.
But mystery does not end here. To consume milk we need Lactase Bacteria but not for consuming processed milk products like Curd and cheese. Curd does not have lactose and our ancestors knew this and they were making curd and cheese for thousands of years. So what made them to consume milk instead of cheese is quite a mystery as they could have consumed curd/cheese even during the periods of agriculture failure. Can we say that it is because of the need to consume the fresh produce out of the cow as they might be dying due to famine or some aliens or angels did some genetic experiment on us. So life was and is not something which is defined by the path we humans have travelled. Even the path, we think we have travelled, is a mystery and only we might have crossed it but not the LIFE.
However one thing about which I am not in mystery is that Parag Milk Foods is not about milk. It is about processed milk. Although market is comparing it with commodity milk players. Parag is the second largest Cheese producer in india with 34% market share. It has the largest cheese producing facility in asia at a single place. Some studies keep Amul at first with 40% share but this may be due to high share of Paneer which is a desi and lighter form of Cheese. Promoters of Parag very wisely anticipated the coming demand of cheese in india due to rising consumption of Pizza etc. in india. When they were conceptualizing their cheese plans in 2008, Domino’s was having around 70 outlets in India which are now around 600-700. Now they are the biggest supplier of quality cheese to the biggies like Domino’s, Pizza hut, five star hotels etc. in India and the demand for these will further grow like anything. Cheese is yet to create its place in the refrigerators of indian kitchen although it has more versatile uses and tastes. Cheese has around 4000 varieties across the globe with india having only 30-40.
Parag Milk foods were always very sure about their business plan which was about premium processed milk products rather than generic commodity products like milk and curd. Their margins reflect this. On a likely turnover of around 1700 cr their operating profit will be around 110-115 cr while much bigger player Hatsun agro is having op profit of around 180 cr on turnover of 3300 cr. I could not analyze the financials of Hatsun fully but something looks very strange like their abysmally low figures of debtors (around 12 cr) and inventory (250 cr) which are not comparable with other industry players. Also on a gross asset base of 1000 cr their turnover is 3000 cr while Parag is having a turnover of 1700 cr on assets base of 300 cr!! There may another face of it as where there is Milk there is Mystery :).
Moreover Parag is on the starting phase of its high growth period. It has brands like Gowardhan for traditional dairy products like milk, Curd, GO for new age products like Cheese, UHT milk and Topp up etc. It has superior margins, more brand power, bigger clients, high technological expertise, niche products…all these are more than enough for it to command premium valuations as compared to commodity players like Hatsun, Prabhat. Unlike other dairy companies, which see 25-30 percent of their top line coming from value-added products, Parag generates 75 percent of revenues from cheese, flavoured yoghurt and ghee, all of which are value-added products. Even our old Horse Heritage food is focusing big on value added products like Ice cream than milk and Curd. At the upper end of 227/- Parag is commanding a pe ratio of around 45 which some analysts are describing as very high. But commodity player like Hatsun is having a pe ratio of 60 and smaller one like prabhat is around 100 pe.
India is the biggest producer of milk globally but our share of value added products is just 35%of our total dairy production; it will be even smaller if we remove paneer from this list. So scope of scale is way too big as unorganized sector control the most of our dairy sector. It is all about regional small players barring Amul which is the only national player. Parag is asking a valuation of 2000 cr, Hatsun is at 4700 cr, Heritage foods is at 1200 cr….this is too small for a big country like india. I still remember when I picked up branded rice players KRBL and LT Foods in their infancy (at 18 and 50); as the scale was huge they are still growing at fast pace (CMP 240 and 230) and still a long way to go for these.
Even Milk is not a commodity for Parag
Parag has created a premium milk brand “Pride of cows “which is priced around Rs. 80 per litre and their customers include the likes of Mukesh Ambani, Sachin Tendulkar, Hrithik Roshan etc. Parag has developed the most hygienic and advanced dairy in india with the breeding of 2000 Holstein Friesians cows. In cowsheds spread over 15 acres, the cows listen to soothing music of Lata mangeshkar, lie on soft mattresses, are kept cool with water sprays and have scrubbers to clean themselves. At a rotating platform, cows are trained to enter an electronic and automated milking station. All it takes is six workers to complete the milking process. These cows, on an average, yield 14 litres of milk a day compared to 7 litres for the average Indian cow. No other company except Parag and Schreiber Dynamix is having its own dairy farm of a some size in india. All the players like Amul source the milk from farmers so they have not full control over the quality of milk. Western dairy business is different in this regard as most of players have their own dairy farms. Parag is also following sourcing route for 90% of its business but their attempt in establishing their own dairy farm and brand shows their acumen and thrust for quality.
The demand for this pride of cows brand is rising fast and Parag is planning to launch the same in other cities also. No doubt this is another potential cash cow for the company due to top quality milk. It is also venturing into whey protein powder production which is a byproduct of cheese production. Whey protein has high demand from sportsmen and Bodybuilders and company has already started the production and supply of the same to pharma companies.
Company is looking to garner around 750 cr from the IPO while 450cr will go to the investors, 300 cr will be used for the expansion, debt reduction which is good. Promoters are not selling big chunk of their shares.
Most of the readers of this Blog are also holding Heritage foods which was shared via email around 360. Heritage is still cheap at pe ratio of 23 and can be added further at CMP of 510. But for value added and branded play on indian milk story, Parag looks like a best play and should be added at every fall. I'll post more details about indian dairy industry and some dairy stocks like Heritage, Godrej Industries in another post as today night i am already very late.
Mystery of Milk is still unsolved but even Lactose Intolerants can taste and like Parag as it is not about Milk but cheese.