23-Jun-2020 : Can Parag Milk regain its previous valuation? In May, 2018, it reached its life time high of Rs 368.95 at NSE. After that it consistently lost its value. And during the outbreak of Covid 19, it reached a low of Rs 48.50. Though, it gained more than 100% from its low, it is far away from its lifetime high. Many investors are stuck at higher valuation. The perennial question for them whether it will ever reach its lifetime high.
To understand its potential, let us find out its strength and weakness.
The first and foremost important point is the presence of its first generation promoter. Mr. Devendra Shah and Mr. Pritam Shah both are actively associated with the company. They have nurtured the company from the very beginning. We have lot of confidence on them. We believe that they will be sail through any kind of storm.
Parag Milk has inducted Mr. Venkat as CEO, who has experience in senior role in various FMCG companies. His last endeavor was with Britannia as the VP and Head of the dairy business. With his introduction, the promoters can spend their time effectively in other activities and oversee the progress of the company.
Parag Milk emphasized much on the pan India distribution. Currently they have more than 3.5 lakhs outlets, more than 3000 distributors and more than 140 stockists. They also brought Vector consultancy to stress upon efficient and quality distribution of their products. We believe that in the long run, we can see the result of this initiative.
Product diversification is one of the most core strengths of the company. Go Cheese is one of the popular cheese in the markets and can be found in almost all big retail and on-line store. Parag Milk is the second largest cheese producer in India with 35% market share. They also have premium brands like Avatar, which is a product for health enthusiast. Overall, they have products to cater different customer groups. As the products are all made from milk, it helps to increase human immunity system. As doctors are now suggesting to increase immunity power to fight with Covid-19, the products of Parag Milk should also see higher demand.
Recently, the promoters have released most of their pledges, which was one of the reason for continuous fall of the share price. With the release of pledged shares, the stock price has already seen a jump of 100% from its all-time low. With the release of pledged shares, promoter’s interest toward the company has been re-established.
However, there are some weakness for the company as well.
On the external front, it has bigger competitor like Amul, Britannia. Some other MNCs are also planning to venture into the dairy business. With the increased competition, there may be pressure on the margin. The profitability of the company will much depend on its share of value added products.
The fluctuating milk price is another worry for the company. Though it has its own subsidiary Bhagya Lakshmi, they need to procure substantial amount of milk from the market, which is subjected to constant volatility.
All in all, the company has good potential and growing market but higher competition and volatile milk price pose a risk on the profitability of the company. The current valuation, PE of 7, is much below its historic level. It should double from here (CMP Rs 98 as on 23rd June, 2020) with in next 12 months. But apart from the other operational risks, the share price will also be subjected to volatile market condition. Volatile market, increased infection rate of Covid-19 will also keep the valuation subdued for longer period of time. So as a strategy, it will be wise to move in and out from the stock using the market volatility.
BSE Code : 539889
NSE Code : PARAGMILK
Written by Research Analyst (SEBI Registered) Suvendu Manna
Disclaimer : The research analyst has position in the stock as on the date of writing this article.
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