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August 20, 2012

Indian Consumption Play : Umang Dairies Ltd

Note : I have sold entire holding in Umang Dairies Ltd to buy Olympia Industries Ltd in July2015 at avg rate of Rs 65 (against my avg price of 27). I feel Olympia Industries is multibagger from this level while Umang Dairies Ltd will give only decent return.

           Being a value investor , I don’t like to invest in leveraged company, When I saw debt equity ratio of  Umang Dairies Ltd as 1.32 , I was going to dump this stock idea but when I dig further I came to know that debt equity ratio of 1.32 is deceptive. It is deceptive because Umang Dairies Ltd was went into BIFR and its book value was negative . Even “Reserves & Surplus” is negative in the balance sheet of Umang Dairies Ltd  for  FY12 . Due to negative “Reserves & Surplus” Total Shareholder’s Funds came to 11.16 crores and debt is 15.62 crores. Last year company has PAT of 13.83 ,If we assume that the company perform same this year and all of this PAT transfer to reserve (trend of earlier years) and company do not take any new debt , then debt equity ratio will be drastically come down to 0.62 (Reserves 11.16+13.83 = 24.99 crores and debt 15.62 crores) and if company perform better , then debt equity ratio will also improve along with that. If we analyze debt in other terms like comparing with PAT then it comes around last year’s PAT .( Debt 15.62 and PAT was 13.83 )

           Umang Dairies Ltd  was incorporated on 2 Dec.'92 by Straw Products and J K Industries by the name of J K Dairy & Foods . Not many people know Umang Dairies Ltd is a JK group of company .  The company was making losses and went into BIFR . BIFR scheme was implemented in 2009 and after BIFR scheme implementation majority stake is acquired by JK group company Bengal & Assam Co Ltd . Bengal & Assam Co Ltd has a stake of 45 % in Umang Dairies Ltd and total promoter holding of JK group is around 75 % .

            It is trading around price of 42 (market cap of 92 cores) .

           Bengal & Assam Co Ltd  promotes few other companies including Fenner (India) Ltd and LVP foods Pvt Ltd.  Promoter JK group (Bengal & Assam Co Ltd) has successfully turnaround Umang Dairies Ltd  to profitable one .  There are only a few companies which get turnaround after BIFR scheme implementation one of them is Symphony Ltd. . There are differences in Umnag dairy and Symphony like the business model of Symphony is superior, attractive return on capital employed and it has all India presence etc. But there are few similarities between them . Umang Dairies Ltd  may not achieve similar heights but it is on the same path of Symphony Ltd.

1.      Both companies have had a financial trouble history , negative book value , negative net worth etc.
2.      Both companies went into BIFR.
3.      Both companies got turnaround after BIFR implementation .
4.      Both companies provided amazing return after BIFR implementation and turnaround .  Symphony Ltd was trading as low as 3 ( around 14.5 before the split)  and currently trading at around 380 . It has given a return of almost 130 times from that low level . Umang Dairies Ltd  also traded at as low as 3 and now trading at 42 . Around 14 times return from low level and may be still some steam is left .
5.      Mr Market took some time to forget about past of Symphony and was giving a PE of single digit for first 3-4 years after the turnaround .  Now it is trading around PE of 25 .  Umang Dairies Ltd  is trading on the low valuation ( PE around 6 ) and would be re rated in future if the company continue good performance for next 3-4 years.
6.      Both are Indian consumption play stories and got turnaround  after BIFR implementation due to rising disposable income of Indian and Indian consumption story.
7.      Promoter holding in both the companies is around 75%.
8.      One time Symphony Ltd also had deceptive debt equity ratio of 2.15 in FY08.  Umang Dairies Ltd  is  now having a deceptive debt equity ratio of 1.32 .

Dairy Industry : Demand for milk based products has outstripped milk production in recent years. Every year , per capita consumptions of milk is increasing in India. Milk production continues to increase by 3.5 to 4% YOY and demand is growing at 5 to 6% YOY. According to NDDB estimates, demand for milk will go up to 172 Mn MT by 2021-22 . Concerned by likely shortage of milk in coming years, Government of India has launched National Dairy Plan (NDP) in 12th 5 Year Plan. It has been formally launched on 19th of April 2012 and envisages an expenditure of Rs.2242 crores. The project aims to increase the productivity of milch animals and provide India’s 70 million small rural milk producers with greater access to the organized milk processing sector.

Comparison with peer :  Umang Dairies Ltd   is available at attractive valuation as compared to its peers.

Comparison with Peers
Kwality Dairy
Hatsun Agro
Umang Dairies
1080.63/45.94 = 23.50
Debt/Equity Ratio
Debtor Turnover Ratio
Net Profit Margin
Promoter Shg. Pledged
3 Yr CAGR Sales growth
108.20/ 25.64=4.21

Note : - Next year Umang Dairies Ltd expected to have low debt/equity ratio, same time Net Profit Margin of company is going to hit by the tax . The company was loss making so it was not paying taxes on profit , till the accumulated loss crossed accumulated profit . Last year it has carried down P & L Bal of -3.43 crores which will exhaust this year but company can enjoy tax exception on accumulated depreciation against that loss making period , may be around 8-10 cores additional benefit out of total depreciation of 22.54.

Reason of turnaround after BIFR  :-  As per my analysis followings are reason for company’s turnaround after BIFR.

1.      The company was belong to reputed JK group .
2.      Promoter Bengal & Assam Co Ltd  was having the experience of running a dairy business by running company LVP foods Pvt. Ltd.
3.      All most all the companies in consumption sector are seeing an increase in demand from the last few years which played a crucial role , there is mismatch in demand supply of milk based products.
4.      During the FY09-10, Company collaborated with M/s LVP Foods Pvt. Ltd. to put up a facility to process and pack liquid milk in poly pouches and commercial production commenced on September 2009.
5.      Bharti Wal-Mart has contracted to buy Umang Dairies Ltd’s Ghee under their private label "Great Value". Products offered at Walmart through the Great Value brand are claimed to be as good as national brand offerings, but are typically sold at a lower price because of minimal marketing and advertising expense. As a house or generic brand, the Great Value line does not consist of goods produced by Walmart, but is a labelling system for items manufactured and packaged by a number of agricultural and food corporations one of them is Umang dairy .
6.      Mother Dairy Fruit & Vegetables Pvt. Ltd. who is the main party for whom the Company used to do the contract manufacturing job before BIFR. This activity used to last only 1-2 months. Company change that policy.
7.      The Company also increased its focus on the sale of SMP and Butter to institutional buyers.
8.      A Rehabilitation Package was sanctioned by BIFR on 03.08.2009. Most of the long term lenders of the Company were settled and paid off by promoter group companies.
9.      Increase in capacity utilization of plant every year from Sep 09 . Capacity Utilization of Drying Plant improved from 39% in 2010-11 to 55% in 2011-12. Under Contract Manufacturing arrangements Utilization of Liquid Milk Plant increased from 60% in 2010-11 to 87% in 2011-12. As per the company, Capacity Utilization in Liquid Milk Plant will be very close to 100% in 2012-13.

Positive Points :

1.      Umang Dairies Ltd  is available at an attractive valuation and it is backed by JK group. The dairy industry is having lots of potential, Amul targeting to increase its turnover to 30,000 crores by 2020 .Sahara group is also planning to enter into the dairy business . DANONE is also bullish on Indian’ dairy Industry and expanding very quickly and giving strong competition to Nestle.
2.      Balance sheet looks good to compare with peers.
3.      The company does have pricing power and pass increasing in milk price to consumers .Company used  to pass input price hike in the past , but it used to impact volume . But now due to increase in the disposable incomes of the families , I believe the volume will not be decrease that much.
4.      The company does have some brands of milk product .
5.      Umang Dairies Ltd  has received “Supplier of the Year” Award 2011 – Private Brands category from Bharti Wal-Mart , which speak quite well for the company . Expansion by  Bharti Wal-Mart will also help company to grow. I have not visited  Bharti Wal-Mart stores to see available products of Umang Dairies Ltd  , but that will be good exercise . Any volunteer ?
6.      Over the years, the Company has built up a Village Level Collection (VLC) network including Chilling Centers and collects milk from over 300 villages comprising about 12000 farmers twice a day. The milk so collected is not only of better quality but is also cheaper as compared to the milk purchased from the Contractors. It is not an easy task to new entrant competitor to start Village Level Collection of this level.
7.      Gajraula Plant location is only 110 km from Delhi.
8.      Capacity Utilization in Liquid Milk Plant will be very close to 100% in 2012-13 but the scope of increase in capacity utilization of Drying Plant is still there.
9.      The government has banned export milk products since there is mismatch in demand and supply in India. The government in Jun 2012 notified lifting of the ban on exports of skimmed milk powder to improve the finances of dairy firms and help milk producers. This will help company in short term , but lifting and imposing ban on skimmed milk powder is on-going phenomena .

Risk / Concern :-

1.      I have not figured out any red flag in annual reports but any corporate governance issue is the risk which is applicable to all the stocks including HDFC bank and Infosys.
2.      Capacity Utilization in Liquid Milk Plant is going to reach 100% in 2012-13 . What is after that ? What is plan of management ? How they are going to finance expansion ?
3.      Umang Dairies Ltd  may have to pay little or no tax this year ,but from next year they will have to pay tax . It will reduce the figure of PAT , then comparable figure will PBT .
4.      Rainfall is not good this year in India including western UP where the company has a Village Level Collection (VLC) network. The prices of milk may get increase and company have to pass this cost.
5.      During the FY09-10, Company collaborated with M/s LVP Foods Pvt. Ltd. ( Promoter Bengal & Assam Co Ltd  ) to put up a facility to process and pack liquid milk . Whether it was just life support given by group company or this relationship is going to expand and continue in the future ?
6.      In an interview with CNBC-TV18 on 18 July 2011, RC Periwal, director, Umang Dairy said, the has ambition to be a Rs 1,000 crore company. We hope to reach about Rs 500 crore this year. After three months on  11 Oct 2001 RC Periwal again said expect to see a 20% growth in volume and Rs 130 crore revenues this fiscal year. How much variance this is ?
7.      Promoter holding is close to 75% and Bengal & Assam Co Ltd  has all the subsidiary companies as unlisted . If the company decides to delist Umang Dairies Ltd , then we may get 50 -100 % return in no time but that will be quite less to long term prospect of this company.

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Disclaimer :  Please treat this post as starting point of your research and not conclusion to invest in it. As always , please take the advice of a financial adviser . 

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