Dairy stocks were trading higher on Wednesday with Prabhat Dairy hitting upper circuit, followed by Kwality that has risen over 11 per cent intraday and Parag Milk Foods gaining over 9 per cent. At 1.37 pm, Kwality Limited was trading 8.69 per cent up at Rs 134.40, while Parag Milk Foods was trading 3.65 per cent up at Rs 336.10 and Prabhat Dairy soared 20 per cent to Rs 118.20.
Among these dairy stocks, brokerage house KR Choksey Shares & Securities is bullish on Kwality Ltd as it feels that the organised dairy sector is growing at a fast pace. Kwality was incorporated in 1992 as Kwality Dairy (India) Ltd and was set up as a backward integration unit of Kwality Ice Creams India. It is one of the fastest growing private sector dairy company with a new range of innovative products and enjoys a large presence in Northern India. It has six processing plant with 3.2 million litre capacity per day.
The brokerage house has recommended ‘Buy’ rating on the stock with the target price of Rs 263. We take a look at the reason why the brokerage house is bullish
1. Kwality is in the business of B2B where it caters to institutional clients and it wants to transform and focus its business from institutional to retail. Currently the ratio of institutional & retail is 70:30 and it wants retail business to take over its institutional and reverse the ratio to 30:70 due to better margins in the segment, capacity expansion, increasing distribution base and faster growth with the value added products.
2. The dairy company is shifting its business to B2C segment where it is enhancing its portfolio in value added products so to meet its need. It plans to increase procurement of milk, ensuring consistent quality and taste. Currently it has strong network for procurement from farmers, it is procuring 18% of the milk directly and wants to improve it further to 50% in next 3 years.
3. Value added product have gained importance in last few years and it is expected to rise going forward due to increase and changing habits of young population. There is also an increase in demand from retail chains and coffee shops. Kwality ltd produces a range of quality milk products and it is enhancing and rebranding itself as a dairy product company with the introduction of more and more value added products to retail customers like Paneer, Flavored yogurt , butter, daily whitener, SMP, Chaas, etc. which will help to gain in better realisation than liquid milk.ins.
4. Kwality is also focusing on international markets through its export turnover of Rs 5,725 million in FY15. It has emerged as largest exporter of dairy products from India and currently it is exporting to continents like Asia, Africa, Australia and more than 28 countries like Japan, UAE, Seychelles, etc. To trade for various milk products it has obtained trading license. To focus on international trade it has also set up 100% subsidiary at Jebel Ali Free Zone, Dubai.
5. The brokerage house remains positive on the stock as it feels shift from B2B to B2C player would help expand margins. Its key strategy and focus remains on procurement model, developing branded products & brand development. We are expecting the growth to be around 10-12% in FY17E and FY18E with improvement in EBIDTA margins to 6.8% in FY18E from 6.1% in FY16.