Dairy companies' shares jump on growth optimism

Share prices of dairy companies saw huge gains on Monday after manufacturers shifted focus to the value-added segment to improve profitability.

Prabhat Dairy, which announced its Vision 2020 with nearly 40 per cent compound annual growth rate (CAGR) from the business-to-consumer (B2C) segment in three years, led the growth in its share price. The company’s stock jumped 20 per cent to close at Rs 210.7. The stock of Parag Milk Foods and Kwality also moved up 9.8 per cent and nine per cent to close at Rs 268.4 apiece and Rs 110.8, respectively.

The jump in share prices was on expectations of strong growth over the past few years because of their diversification towards the value-added segment from the core business of milk packaging and retailing. Many producers in this segment have set up cheese-making plants and also enhanced their capacity of skimmed milk powder production for processing liquid milk into high-value products.

“With Prabhat Dairy enhancing the share of the B2C business, we estimate earnings CAGR of 45 per cent over FY17·19. The company’s gross margin expanded 215 bps (basis points) y-o-y (year-on-year) for the second quarter of FY18 led by higher realisations in the consumer business. Despite flat milk procurement price, Ebitda (earnings before interest, taxes, depreciation and amortisation) margins contracted 30 bps due to higher manufacturing expenses on increased cheese and ghee production and higher business promotion expense in the B2C business. Management guided for this trend to continue as gross margin expansion will be reinvested in brand building,” said Shradha Sheth, an analyst with Edelweiss Securities.