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Thursday, November 3, 2016


Scrip Code: 531882 KWALITY
CMP:  Rs. 140.80; Market Cap: Rs. 3,324.08 Cr; 52 Week High/Low: Rs. 159.40 / Rs. 78.50
Total Shares: 23,60,85,454 shares; Promoters : 15,21,54,714 shares – 63.50 %; Total Public holding : 8,39,30,740 shares – 35.55 %; Book Value: Rs. 34.03; Face Value: Rs. 1.00; EPS: Rs. 6.39; Dividend: 10.00 % ; P/E: 22.03 times; Ind. P/E: 60.24; EV/EBITDA: 11.82 times. Total Debt: Rs. 1,336.01 Cr; Enterprise Value: Rs. 4,626.78 Cr.
KWALITY LTD: The Company was incorporated on August 21, 1992 and based in Kolkata. Kwality Limited was prior known as Kwality Dairy India Ltd. Kwality Ltd is engaged in processing, manufacturing and trading of milk, milk products and dairy products. The Company offers products under categories, such as ghee, including pure ghee, pure cow ghee and low cholesterol ghee; butter; milk powder, including whole milk powder and skimmed milk powder; dairy whitener; milk, including full cream milk, toned milk and double toned milk, and curd, including set curd and pouched curd. Its product portfolio also includes flavored milk, sweet lassi, paneer, chaach, dairy creamer and cheese. The Company offers milk in pouches, and curd in variants, such as regular, probiotic, meethi dahi, low fat, sugar lite and raita. The Company primarily markets and sells its products under the brand, Dairy Best. The Company is an exporter of dairy products from India, exporting across continents, such as Asia, Africa and Australia, and to over 30 countries, including Japan, Seychelles, Bangladesh, Sri Lanka, Jordan, Niger and Morocco. The company gave bonus in April 19, 20010 in ratio of 5:7, and has given Split in face value of its shares from Rs. 10 to Rs. 1 on December 10, 2009. Kwality Dairy India Ltd has introduced Pure Ghee under the brand name- Dairy Best. Another Pure Ghee variant exclusively made from cow’s fresh milk is also available. The product has made a commendable impact in the Indian market and made its presence felt in Delhi, Punjab, Rajasthan, and Haryana etc. The company is ISO 22000:2005 Certified Company and the skimmed milk powder is certified with ISI by Bureau of Indian Standards. Also Pure Ghee is certified by Agmark by Directorate of Marketing and Inspection, Ministry of Agriculture, Government of India. It is poised to revolutionize the Dairy Industry with new range of innovative products with quality, integrity and technology being the hallmark of growth. Ensuring the dairy processes result in the best quality products also meet with functional and nutritional needs of the customer. Kwality Ltd has obtained the design and key equipment from Alfa Laval India Ltd (Tetra Pack Group) with design back up from APV Anhydro Pasilac AS Denmark. The Products variety of the company is Pure Ghee, 100 % Pure Cow Ghee, Livlite-Low Cholesterol Ghee, Curd, Paneer, Milk, Skimmed Milk, Dairy Mix, Wake up Instant Dairy Creamer, Pasteurized Table Butter, Yogurt, Sweet and Flavored Milk. Kwality has clients like Nestle India Ltd, Hindustan Lever Ltd, Metro Dairy (Kolkata), Mother Dairy (Kolkata), Vadilal, Cadbury's, Mother Dairy (Delhi), Parle Products Pvt. Ltd, Britannia. Kwality Dairy India Limited has built a truly ultra-modern milk processing plant located on the commercially strategic National Highway in Faridabad in Haryana which incorporates the latest in milk processing technology. The plant is also ISO 22000:2005 Certified for its Quality Management Systems. KWALITY Ltd is locally compared with Parag Milk Foods Ltd, Prabhat Dairy Ltd, Hatsun Agro Products, Anik Industries Ltd, Modern Dairies Ltd, Umang Dairies Ltd, Heritage Foods Ltd globally compared with Nestle of Switzerland, Lactalis of Italy, Danone of France, Fonterra of New Zealand, Dairy farmers of America of USA, FrieslandCampina of Netherlands, Arla Foods of Denmark, Saputo of Canada, Dean Foods of USA, Yili of China, Mengniu of China, Unilever of UK, Sodiaal of France, Kraft foods of USA, Meiji of Japan, Muller of Germany.      

Investment Rationale:
Kwality Dairy (India) Limited was incorporated as public limited company on 1992. The company was promoted by P N Ghai. Kwality Restaurant was started by I K Ghai and P L Lamba in 1941. Since ice-cream was one of the main items served in these restaurants, Ghai & Lamba group opened factory type ice-cream manufacturing units in Delhi and Mumbai around 1955. In 1995 the company started producing Ghee, Skimmed Milk Powder etc. The total cost of the above project was Rs.3600 crores and was financed by way of public issue. The company had set up a new project for manufacturing Ice Cream Mix Powder. It is now India's Premier Dairy Foods Company focusing on building leadership positions in branded and value added markets across the dairy sector & now is instrumental in providing dairy products at par with international standards at a very low input cost. The milk procurement team broadly advises and provides guidelines to the participating farmers. The milk is procured through milk collection centers situated at Fatehabad and Rania. The quantity of milk procured from each centre on an average is 25,000 liters per day. Each centre covers about 100 villages spread over 8-10 procurement routes. Every village level milk collection point has 80-90 farmers pouring milk which generates avenues for earning livelihood for about 8000 farmers, thus bringing economic upsurge in the area. India is the largest milk producing nation in the world with production of 147 mn tones in 2016, accounting for one fifth of the world’s production. Indian dairy market is worth Rs. 4.3 Trillion and among that organized sector is worth Rs. 75,000 Cr. Revenue share of organized segment is likely to reach 25 % in 2018 from 20 % in 2015 on the back of shift in consumer preference towards branded products. Out of the total production, unorganized sector has majority of the market share with 41 % and organized sector with market share of 20 %. There is another major segment which is the farmers who has 40 % market share and uses for household consumption. Indian Dairy volumes have been growing at CAGR of 4 % in last five years whereas organized sector is growing at 8 % CAGR in the same period. Evolving Indian consumerism will likely lead to volume growth of 13 % for the organized segment by 2018 whereas the sector volumes are likely to grow at CAGR of 5 %, according to Industry estimates. However, in terms of value, it has grown at CAGR of 17 % in the last five years, driven by Value Added Products (VAP) which has seen higher growth of 23 % in the same period compared to 15 % for liquid milk. Organized players are focusing more on VAP products such as paneer, cheese, curd, butter, ice cream & lassi as they get twice the margins of liquid milk products. Share of VAP as shot up to 43 % in 2016 from 35 % in 2010. Over the next few years, branded milk and VAP are likely to grow at 14 % & 23 % respectively. Domestic demand for milk is likely to increase by CAGR of 4 % annually and to reach 172 mn tons by 2022 from the current levels of 138 mn tons in 2015. Production has been increasing in order to meet the rising demand from growing Indian population. In order to ensure stable supply of milk, more number of processing centers has to be set up near procurement locations as the shelf life of products is less. More number of plants will be set up near major milk producing locations as organized players expand rapidly in next few years to ensure uninterrupted supply. North India produces 35 % of India’s milk production with the likes of major states such as UP, Punjab, Haryana & Bihar followed by west which contributes 25 % and major states include Rajasthan, Gujarat & Maharashtra. Kwality Ltd currently procures 15 % of its milk requirements through its own Milk Chilling Centers (MCCs) and remaining from large contractors. The company has developed a strong network of suppliers over the years which are key for any player in the Dairy industry. Kwality started its procurement from its MCCs in 2008 and currently set up 24 MCCs in northern states of Punjab, Rajasthan, UP & Haryana near its milk processing facilities in Haryana & UP. For procurement of quality milk, the company plans to open another 30 MCCs in next 2 years to ensure uninterrupted supply of milk and to reach the target of procuring milk from its own MCCs at 50 % in next 3 years. MCCs are likely to be in states of UP, Rajasthan & Haryana which are the top three producers of milk but the penetration level is low for organized players and the company is also planning to set up MCC with capacity of 5,00,000 LPD in Rajasthan. 
Kwality has started venturing into Value Added Products as the demand for such products is likely to grow at CAGR of 24 % for next five years. They are embarking on capacity expansion for manufacturing of VAP segment which has double the margins of liquid milk category and growing at twice the pace of the segment. The company’s share of VAP has increased from 51 % in FY13 to 45 % in FY16 and has grown at CAGR of 27 % in the last 3 years. Curd and SMP segments have been growing at very fast pace of 41 % and 42 % respectively in last 3 years. The company has set up wholly owned subsidiary in Free Trade Zone (FTZ) of UAE to increase global footprints and to cater to new markets. The company has trading license to deal with various milk based products and other dairy products from Eastern European countries including Turkey, Poland and Ukraine. Products are sold both domestically and export to other countries. Revenues of the subsidiary in Dubai grew at CAGR of 187 % in the last three years and profits grew at 147 % CAGR. The company also exports to significant amount of dairy products from India to over 28 countries including Japan, Bangladesh and Jordon etc and it constitutes close to 9 % of the total revenues and grew 189 %. Curd & butter form the majority of the VAP segment with 80 % contribution and which are likely to grow at CAGR of 18 % in next 5 years whereas UHT, flavored and butter milk would be the fastest growing segment at CAGR of 27 % over next 5 years. Curd market is estimated to be size of Rs. 25,100 Cr and is expected to grow at CAGR of 18 % in next five years and reach Rs. 49,300Cr by 2020. Butter market is next large segment in VAP with estimated size of Rs. 19,500 Cr and to grow a similar pace and reach Rs. 38,200 Cr by 2020, according to International Market Analysis Research and Consultant (IMARC) report. Major FMCG players are on the verge of entering into Dairy business, and the company is likely to be beneficiary as it has good institutional business and repetitive orders from Britannia, Mother dairy, HUL, Coffee Day and ITC. Kwality is focusing on launching products with its brand name ‘Kwality’ and has been consistently increasing its share of retail segment to 31 % of overall revenues. The company has shifted its focus to produce more branded products where it is likely to fetch higher realizations and branded share has increased to 39 % in FY15 from 28 % in FY13. Kwality Ltd being one amongst the leader in the industry has very strong footing and has strong cash flow which thrusts the growth for the company, and strong financials with sustained cash flow makes it attractive for long term investment.

Outlook and Valuation:

Kwality Ltd. is one of the largest processor of dairy products in the private sector in India. The company was incorporated in 1992 as backward integration unit of Kwality Ice Creams and acquired by the present promoters in 2003. Presently, the company has processing capacity of 3.2 million litres of milk per day with six milk processing units across Rajasthan, Haryana and UP. Presently, the company is procuring 20 per cent of milk requirement directly from more than 3,00,000 farmers spread across 4500 villages through 22 milk collection centres (MCCs). The company sells its dairy product under “Dairy Best” brand. Kwality has a sustainable and profitable growth in dairy business and this depends upon three important areas, namely, milk procurement model, robust product portfolio and retail-branded product business mix. The company is setting up a new plant (mainly focusing on value-added products) with total CAPEX of Rs. 400 Cr along with Rs. 120 crore towards building milk procurement infrastructure. Post this expansion, the company will increase direct milk procurement mix from current 20 % to 50 % over the next three years. This will ensure consistent and quality milk availability for value-added products manufacturing. After reaching certain scale in dairy business which processes 3.2 mn liters milk per day, the company is now adding products like flavored milk, UHT, milk sweets, cheese, yoghurts, table butter into the product portfolio coupled with increasing sales to consumer segment. To increase consumer business, the company has come out with a strong product pipeline of value-added products under “KWALITY” mother brand architecture with leading Bollywood actor Akshay Kumar as the brand ambassador. The targeted high milk consuming markets like Delhi, UP, Haryana and Rajasthan coupled with new and fresh dairy products will drive revenue growth, expansion in gross profit margin & EBITDA margin and substantial reduction in overall working capital requirement over the next few years. The company has engaged marketing partners for roll-out integrated marketing strategy for value-added and youth dairy products over the next few years. Marketing partners include McCANN & Cheil India for creative, Zenith Optimedia for media planning and digital Quotient in digital space. Kwality's business model is moving from low margin business-B2B segments to value-added high margin business-B2C segment over the next three years which will help to deliver structural EBITDA margin expansion. Kwality reported gross profit margin and EBITDA margin at 9.4 % and 6.1 % respectively in FY16, mirroring product mix liquid milk revenue at 53 % and business mix.  The product mix shift towards VAP with higher realizations coupled with B2C business model will expand EBITDA margin like 8-9 % over long term. However, increase in brand building cost will offset gross margin expansion in short-term. The company is also having a wholly-owned subsidiary (KDPF) in Dubai as a trading arm. Dubai subsidiary imports dairy products from India, Australia, and New Zealand and Eastern European countries and sells products, both domestically and export to Middle East, Bangladesh, China, Thailand and Africa. The Dubai subsidiary contributed Rs. 690 crore to the topline and Rs. 29.3 crore to PAT at consolidated level in FY16. Top line is expected to grow strongly at CAGR of 16 % over the next two years on the back of improving product mix from institutional to retail as well as shift towards sale of higher value added products. The company reported operating revenues, EBIDTA and consolidated PAT of Rs. 6414 crore, Rs. 389 crore and PAT Rs. 173.6 crore respectively in FY16. Out of consolidated sales, the company derives Rs. 4370 Cr from the manufacturing operation and balance as trading turnover in India and Dubai businessSale of branded products is increasing which should increase the visibility on the company’s products. In the last three years, the company’s revenue grew at CAGR of 34 %. Shift towards VAP is likely to support the margins of the company as percentage of VAP sales is on the rise. VAP products fetch twice the margins of liquid milk segment and the company has launched VAP products under its brand recently and pushing it hard through promotional activities. It is expected that the margins to improve from the current levels of 6.0 % in FY15 to 6.7 % in FY17E. Operating cash flows are likely to improve from Rs. 17 Cr in FY15 to Rs. 22.79 Cr in FY17E on the back of change in revenue mix and higher operating margins. However, on the back of capex, most of the cash is likely to be utilized for this purpose. The Company has maintained its RoCE at healthy 20 % in the last three years and is likely to stay at the similar levels going forward and expected to reach FY17E at 20.4 %. It is expected that the ratios to improve further after FY18E as the company completes its investment mode. Core working capital cycle will reduce from 101 days in FY16 to 82 days in FY19, leading strong growth in free-cash flows. The company will use free-cash flows to reduce balance sheet leverage. Debt to equity ratio will decline from 1.7x in FY16 to 0.5x FY19 driven by Rs. 745 crore debt repayment over FY17-FY19. Consequently, the interest expense to EBITDA ratio will fall sharply from 41 % in FY16 to 20.8 % in FY19, driving net profit growth. Kwality is one of the leading dairy players and is on investment mode to strengthen its backward and forward integration. The company has changed its business model towards sale of more branded products and towards retail segment. Value added products are likely to support margins for the company going forward. The promoter Mr. Sanjay Dhingra holds 64.95 % stake in the company. Recently, the company raised Rs. 60 crore from the Bennett Coleman in a preferential allotment. Apart from this, the company has received capital commitment amounting to Rs. 520 crore under structured finance from KKR PE in July 2016. At the current market price of Rs. 140.80, the stock is trading at a PE of 18.05 x FY17E and 15.47 x FY18E respectively. The company can post Earning per share (EPS) of Rs. 7.80 for FY17E and Rs. 9.10 for FY18E. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also.   

SALES ( Crs) 6414.106,2886,596.807,052.00
NET PROFIT (₹ Cr)173.60173.70203.50322.80
EPS () 7.807.809.1014.40
PE (x)16.0016.0013.608.60
P/BV (x)3.102.602.201.70
EV/EBITDA (x)11.009.908.105.60
ROE (%) 22.70 18.3017.9023.10
ROCE (%)18.5016.7017.8024.30

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*As the author of this blog I disclose that I do not hold  KWALITY LTD in any of my portfolios.

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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.





  1. Bhavik ji very good pick . This is a long term stock

  2. Very in-depth article with great analysis. Kudos Bhavikk :)

  3. Thanks for showing investors the right path. Your stock picks are of the greatest quality.

  4. Kwality is synonymous with quality and this post sure matches the name and like the unbeatable ice creams!

  5. Great research.Keep doing this good work.

  6. I was looking for something like this ,Thank you for posting the great content……I found it quiet interesting, hopefully you will keep posting such blogs…

    Stock Market Tips

  7. I found it quiet interesting ,Thank you for posting the great content?I was looking for something like this?, hopefully you will keep posting such blogs?NIFTY FUTURE TIPS


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