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DAIRY INDUSTRY RUPESH TATIYA

DAIRY INDUSTRY RUPESH TATIYA. Disclaimer.

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DAIRY INDUSTRY RUPESH TATIYA

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  1. DAIRY INDUSTRYRUPESH TATIYA

  2. Disclaimer The views expressed here are my personal views. It is a safe to assume I am personally invested in some of the stock ideas that may have been referred to in the presentation. It is also possible that I may have exited or may exit from these positions in future without prior notification. My views will be biased. This is NOT a stock recommendation. Kindly do your own due diligence and/or consult a registered investment advisor before making any investment decisions.

  3. Why Invest In Private Dairy Industry? • Indian Demographic • Large Vegetarian Population => ~30%, most important source of protein • Urban Population Growth => Move towards packaged milk & milk products against loose products • Rising Incomes Levels => Rise in consumption of milk & milk products • Unorganized to organized move • Low threat of disruption

  4. Why Invest In Private Dairy Industry? • Market share gain by private players • 40% market share of organized market by private players compared to co-operatives since 1992 liberalization • Largely Localized market • Fresh milk can/should not be transported beyond 300 kms • Largely small farmer driven milk supply but • Value Added Products (VADP) & technologies like UHT & packaging changes can change this • High RoCE with negative/small working capital cycle for liquid milk & some VADP like Curd, Paneer, Flavored Milk etc.

  5. Parameters for Strong Dairy Business • Ability to access fresh milk in dry season • Milk production is seasonal in nature => surplus in flush season, deficit in dry season. • The consumption of milk & milk products is counter cyclical • Access to fresh milk from farmers in dry season is one big competitive advantage • Building farmer network with trust is slow process & difficult to dislodge these players with big capital • De-linking business from SMP price volatility • Quasi-sugar like scenario where SMP is internationally traded commodity but milk prices are determined by local factors (2014: 4800$/T, 2016: 1800$/T, 2018: 2400$/T) • Milk can be recreated by adding SMP to butter fat. • Some examples • If SMP prices are low in dry season, it is much cheaper to import SMP & add butterfat to create milk products. • If SMP prices are low in flush season, players procuring surplus milk might face losses. The price drop gets passed onto farmers resulting into farmer distress (current scenario)

  6. Parameters for Strong Dairy Business • De-linking business from SMP price volatility (contd…) • SMP prices depends upon surplus production in EU, NZ & amount imported by Russia, China • SMP can be stored for up to a year. So it is better to consume own SMP & not depend upon SMP price volatility at all. • Low SMP prices is an acute problem with co-operative players because procurement is much larger for these players • Ability to defend market share against co-operatives • Co-operatives: No profit motive, state support (Nandini – 5Rs. Subsidy, Amul – Export Subsidy for SMP) • How to defend MS against co-operatives? • Always procure complete milk from farmers in dry/flush season • On time payment with transparency in measuring fat content (e.g. 8% fat => 45 Rs./Liter, 7.8% fat => 40 Rs./Liter) • Build strong operation efficiency by virtue of density so that you can withstand price wars • Build strong brands with high quality products so that switching cost is high in the mind of consumers • Procure local, sell local => Co-operatives have obligation to procure in home state

  7. Parameters for Strong Dairy Business • Ability to pass on milk price fluctuations to end consumer • Difficult to pass on price hikes in liquid milk in general, stronger brands like Arokya have a little better ability than Heritage • VADP • VADP play an important role in protecting margins • VADP can be divided into 2 categories – capital efficient ones (curd, ice-cream, paneer) & capital inefficient ones (cheese, ghee, butter etc.) • Higher % of capital efficient VADP helps to maintain steady margins • Serving institutional clients is another way to pass on price fluctuations but these come with very high working capital

  8. Private Players - Snapshot

  9. Hatsun – The Strongest Private Player • Strengths • Strongest procurement network with 30LLPD procurement from 3.5-4L farmers • Focus on liquid milk & capital efficient VADP like curd, ice-cream, flavored milk etc. Largely stayed away from capital inefficient VADP. • Strong brands in Liquid Milk – Arokya, Ice-creams – Arun. Trying to develop Ibaco brand for premium ice-creams & Oyalo for Pizza • Strong distribution network with 2800+ stores • Strong density (procurement & sales) & operational efficiency • Negligible dependence on SMP • Risks • High levels of debt • Concentration in TN • Can brand Arun/Arokya/Ibaco/Oyalo travel pan-India? • Missing out on faster growing VADP market?

  10. Heritage • Strengths • Similar to Hatsun in many aspects but lesser density • Very strong balance sheet, owns 3.65% of Future Retail (lock-in of 3 years, 1 year passed) • 22% share of VADP (do not count butter, Ghee etc. in VADP like Parag) • Target of 6000Cr sales & 40% VADP contribution by 2022 • Net SMP consuming company • Launched Alpenvie – ice cream brand • JV with French major – Novandie, plant in Mumbai, product sales to start in April 2020 • Risks • Management with political roots • Can we trust 25 years of wealth creation record will continue in future? • N Brahmini (daughter-in-law of ncbn) getting hands on. Good to have promoter getting interested in business? • Important to maintain clean farmer friendly image in Heritage as political repercussions will be high? • Strategy to expand into 10+ states will work?

  11. Prabhat • Strong institutional client base like Mondelez, Britannia etc., can pass on RM price fluctuations • But very high WC, focusing on retail, plan to have 50% contribution from B2C by 2020 • Aim to be regional brand by 2020, Brand Prabhat • Third largest cheese processing capacity after Amul & Parag

  12. Parag • Focused on VADP – 70% contribution • Owns corporate dairy – Bhagyalaxmi, founded in 2005 • Strong brands in Paneer – Gowardhan Paneer & Go Cheese • Decent brand portfolio – Go/Gowardhan/Avatar etc.

  13. Updates from Heritage AGM • RIL Acquired business update • Rationalizing the business as procurement > sales • Reduced # of routes by 50% • 20 bulk coolers, chilling centers closed • Milk procurement down from 2.4 LLPD to 1.5 LLPD, closed 800 milk collection centers • Exited Gwalior, Nagpur, Vellore, Agra markets • Losses: FY18 => (20)Cr, Q1FY19 => (1)Cr • Sale at acquisition: 1.5LLPD (25,000L bulk sale), today: 1LLPD • Strategy for 6000Cr sales by 2022 • Increasing infrastructure for milk procurement, chilling, processing, distribution • Processing capacity: Haryana (0.75 LLPD -> 2LLPD), Chandigarh: 2LLPD, Looking at Jaipur. Procurement: 1.1 LLPD. • Target to handle 30LLPD from current 14-15LLPD. Need processing capacity of 40LLPD due to seasonality. • Approaching more villages for milk procurement & increasing retail sale points – slow process. • Looking at inorganic growth opportunities, engaged consultant

  14. Updates from Heritage AGM • Brand Strategy • Brand Heritage is perceived as liquid milk brand, trying to create awareness about other products • Will continue to use RIL’s Dairy Life brand in select North markets where it has good penetration • Launched Alpenvie brand in ice-creams. Started late last year, this year needs to be tracked. • Will leverage Novandie’s brands (Bonne Mamman etc.) for JV products like flavored Yoghurt • Trying to create different brands for different categories & different geographies • Milk Procurement (Why only 13-15LLPD volume vs. Hatsun despite same # of farmers) • Claimed – “First Preferred Choice of Farmers” for milk supply • See no challenge in milk procurement, as sales go up – procurement will go up • Claimed – “very fair to farmers” in transparency & payment • Milk analyzer – testing done in front of him

  15. Updates from Heritage AGM • 1LLPD UHT Plant • Cash & carry sale, claimed economics – similar to liquid milk • 90 days storage, price 2Rs more than liquid milk • Milk availability is low in outer urban areas due to storage/electricity etc. issues. Due to 90 day storage, allows for efficient logistic + storage. • Vizag has highest potential for UHT milk & plant located in Vizag. • Want to be B2C player, not looking to take advantage of SMP price crash • Decision to use capital from FRL stake will be taken after lock-in period is over. A lot of innovation in retail space, if it makes sense to hold on to stake – we will hold. If funds are required, we might sell as well. • Claimed – “First dairy company to implement S4HANA SAP” • Buffalo milk Prices ~= 2 x cow milk prices • Looking at cheese & whey products

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