ICICI Securities Prabhat Dairy (Prabhat) has continued to pass on entire benefit of reduction in milk procurement prices to B2B consumers. Considering the subsidy mechanism in Maharashtra, we do not expect any further reduction in milk procurement prices. Hence, the only route to expand margin is via price hikes or improvement in B2C revenue share. While B2C revenue share expanded from 30% in FY18 to 34% in Q2FY19, passing on benefits of lower milk prices to B2B consumers restricts further scope to expand margin. We note at current EBITDA margin of 9.2%, the RoE will be less than 10% (way below cost of capital). We cut FY19 and FY20 earnings estimates by 6.2% and 7%, respectively. With lower earnings growth and single digit RoE, we trim the target multiple from 20x FY20E to 15x FY20E. Though the value creation will be curtailed, 30% fall in stock price over past 3 months offers comfort on valuations. Hence, we retain ‘add’ rating on the stock with revised target price of Rs 116 (15x FY20E).
Prabhat reported revenue growth of 8.5% in Q2FY19, YoY. The management indicated that the milk prices have declined by 22.2%, YoY and the volume growth was 26%. The B2C business has reported revenue growth of 17%, YoY. The revenue share of B2C products was 34% in Q2FY19. Milk procurement prices have corrected by 22.2% Y-o-Y and it has helped the company to improve gross margins by 141bps and EBITDA margin by 119bps. We do not expect milk procurement prices to decline in next 2-3 quarters due to subsidy in Maharashtra and hence, expect EBITDA margin expansion to be restricted in H2FY19. Prabhat reiterated its strategy to focus on B2C business; it plans to aggressively expand the distribution network. It has increased number of distributors from 1,406 at end of Mar 2018 to 1,566 at end of Q2FY19. The modern trade outlets have also increased from 320 to 329 over same timeframe. As of now the distribution is largely in Maharashtra but the company plans to expand distribution in rest of India in H2FY19 and FY20.