Demonetisation-hit dairy stocks good bets

Dairy companies such as Parag Milk Foods and Prabhat Dairy among others are witnessing mixed impact of demonetisation on their business. While the fresh milk and fresh dairy products' demand have not seen much downside, value-added products such as ghee, cheese, amongst others are feeling some heat. Given that value-added products contribute just a third of Parag's revenues, the company is likely to see limited impact of demonetisation. While Prabhat derives a larger chunk (over 80 per cent) of its revenues from this category, the business-to-business (B2B) segment (wherein it supplies dairy ingredients to corporates like Britannia, Nestle, etc) forms about 70 per cent of its revenues. Given that B2B segment is relatively resilient as compared to the retail segment, the impact for Prabhat is also likely to be limited.

Unlike the staples companies, dairy players will also not see much impact on procurement of milk and supply chain as most organised companies already follow the electronic/cheque payment mechanisms. "Given Prabhat’s model of using bank transfers to pay farmers, it could be a beneficiary of the recent demonetisation exercise via increased procurement, which could impact the unorganised sector," says Shradha Sheth, analyst at Edelweiss Securities.

Positively, demonetisation provides these companies a chance to gain market share from the unorganised players. In fact, Parag has witnessed a 20 per cent increase in milk procurement post demonetisation which according to analysts indicates likely market share gains from unorganised players.

"Our initial sense is impact on dairy companies given their essential nature will likely be lower than other consumer staples categories," said analysts at IDFC Securities. 

Both these stocks have lagged the S&P BSE Midcap index post demonetisation. While Parag has fallen nearly 14 per cent since November 8, Prabhat has slipped 12 per cent as against the BSE Midcap index's decline of 5 per cent. 

After this fall, these stocks trade at attractive valuations and offer an entry point for long term investors, believe analysts. Parag trades at 24 times and Prabhat at 15 times, based on their FY18 estimated earnings. Given the former's larger revenue base and stronger presence in the retail segment, its premium is likely to continue, believe analysts. In the long-run, both the companies are poised for healthy growth given the under-penetration of organised players in the dairy segment and strong prospects to grow value-added products.

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