India Equity Institutional Research |DAIRY

Sales Note

Kwality Ltd

INR 124
BUY

Exports on cards: Kwality is focusing also on international markets with its export
turnover of INR 5725 Mn in FY15. It has emerged as largest exporter of dairy products
from India and currently it is exporting to continents like Asia, Africa, Australia and more
than 28 countries like Japan, UAE, Seychelles, etc. To trade for various milk products it
has obtained trading license. To focus on international trade it has also set up 100%
subsidiary at Jebel Ali Free Zone, Dubai.
Outlook: We remain positive on the stock with the growth and changing strategy from
B2B to B2C player. As this would help expand margins. Its key strategy and focus
remains on procurement model, developing branded products & brand development. We
are expecting the growth to be around 10-12% in FY17E and FY18E with improvement
in EBIDTA margins to 6.8% in FY18E from 6.1% in FY16. We assign PE of 15x to its
FY18E EPS of INR 17.5 and recommend BUY rating on the stock with the target price of
INR 263 and an upside of 112%.

FY13

FY14

FY15

FY16E

FY17E

FY18E

39296.8

50110.0

58783.0

64141.0

70555.1

79021.7

EBITDA

2231.7

2934.0

3499.0

3888.0

4586.1

5373.5

PAT

Sales

Mkt Cap (INR Mn)

28968

52 Wk H/L (INR)

153/68

Volume Avg (3m K)

940.82

Face Value (INR)

Bloomberg Code

KLD IN

Market Info:

28523

SENSEX

8775

NIFTY

Price Performance

200

160

120

Sensex

Jul-16

Sep-16

80

Kwality Ltd

Shareholding pattern (%)

Particulars

Jun16

Mar16

Dec15

Promoters

64.95

64.95

67.95

FIIs

1.37

0.29

1.88

DIIs

0.08

1.51

0.06

33.61

33.26

30.12

100

100

100

Others
Total
Source: BSE

Name of Analyst:
Nirvi Ashar
Nirvi.ashar@krchoksey.com

Key Financials:
Particulars

234.3

May-16

Enhancing product portfolio: Value added product have gained importance in last few
years and it is expected to increase going forward due to increase in young population,
population seeing changing habits, increase in usage of the products, also increase in
demand from retail chains and coffee shops. Kwality ltd produces a range of quality milk
products and it is enhancing and rebranding itself as a dairy product company with the
introduction of more and more value added products to retail customers like Paneer,
Flavored yogurt , butter, daily whitener, SMP, Chaas, etc. which will help to gain in
better realization than liquid milk. Going ahead it has plans to change the share of
product mix which would involve higher share of value added product and this will help
in gaining margins.

234.27

EquityCap (INR Mn)

Mar-16

Increasing direct procurement: Company is shifting its business to B2C segment

where it is enhancing its portfolio in value added products so to meet its need Kwality
plans to increase procurement of milk and also ensure its consistent quality and taste.
Currently it has strong network for procurement from farmers, it is procuring 18% of the
milk directly and wants to improve it further to 50% in next 3 years. Its network
includes 300000 farmers which are spread across 4500 villages and around 22 milk
chilling centers. Its chilling plan is in north across UP, Rajasthan and Haryana.

Shares Outs (Mn)

Jan-16

Investment Rational:
Shifting business model from B2B to B2C: Indian organized dairy sector is growing
faster in pace and is expected to grow at around CAGR of 19%. Kwality currently is in
the business of B2B where it caters to institutional clients and it wants to transform and
focus its business from institutional to retail. Currently the ratio of institutional & retail is
70:30 and it wants retail business to take over its institutional and reverse the ratio to
30:70 due to better margins in the segment, capacity expansion, increasing distribution
base and faster growth with the value added products.

Market Data

Nov-15

Kwality Ltd. (Kwality) was incorporated in 1992 as Kwality Dairy (India) Ltd. The
company was set up as a backward integration unit of Kwality Ice Creams India Ltd and
was acquired by Dhingra Family in 2002. Kwality is one of the fastest growing private
sector dairy companies with a new range of innovative products and enjoys a large
presence in Northern India. It has six processing plant with 3.2Mn liter capacity per day.

Sep-15

Play on B2C market

1115.7

1449.0

1665.0

1736.0

2246.2

3926.2

EBITDA Margins %

5.7%

5.9%

6.0%

6.1%

6.5%

6.8%

PAT Margins %

2.8%

2.9%

2.8%

2.7%

3.2%

5.0%

EPS

5.5

7.1

7.6

7.8

10.0

17.5

ROE

31.0%

28.8%

25.0%

20.1%

20.9%

26.8%

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September 21, 2016

BUSINESS OVERVIEW

Business Model

Company Brief

Kwality

Ltd.

(Kwality)

was

incorporated in 1992 as Kwality Dairy

It produces a range of milk and milk products such

as toned milk, skimmed milk powder (SMP) and
value-added products such as standardized &
pasteurized milk, full cream milk and double toned
milk, curd, Desi ghee, Paneer, Chaas, Flavored
yogurt, etc.

(India) Ltd. The company was set up

as a backward integration unit of

Strategic Positioning

KLD is one of the largest private sector dairy

players in North India with six milk processing
plants and a total processing capacity of 3.2mn
liters of milk/day. With a gradual shift in consumer
preference towards high-quality branded dairy
products, players such as KLD will be key
beneficiary as it has huge processing capacities, a
solid milk procurement network and a range of
products.

Competitive Edge

B2C transformation in progress with branded

products sale gone up to 39% in FY15. Also its
Institutional: Retail client mix is around 69:31 in
2015. KLD is constantly building on its distribution
network for catering to both institutional and retail
customers across North India. Key success through
Milk procurement through its models and increased
Manufacturing facilities.

Financial Structure

It Revenue growth of CAGR 28%, EBIDTA margins

of 6.1% which will improve to 6.8% in FY18E and
PAT margins which is at 2.7% will improve to
around 5% in FY18E. Its ROCE is at 18.6% and
ROE at 20.1%.

Key Competitors

Unlisted player Amul and listed players like

Heritage foods, Hatsun Agro, Parag milk foods,
Prabhat dairy.

Industry Revenue

Milk procurement through farmers, change in

product mix with higher share from value-added
products and increase in manufacturing Capacity.

Kwality Ice Creams India Ltd and was

acquired by Dhingra Family in 2002.
Kwality is one of the fastest growing
private sector dairy companies with a
new range of innovative products and
enjoys a large presence in Northern
India. It has six processing plant with
3.2Mn

liter

capacity

per

day.

Its

brands it products under Kwality

and Dairy Best

Drivers

September 21, 2016

ANALYST CERTIFICATION:
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September 21, 2016