Umang Dairy Picks Up Momentum

Uttar Pradesh-based Umang Dairy is currently witnessing a good response on the bourses and the share price has also strongly appreciated. Though the company is relatively small, it is backed by the well-known J K Group. On the bourses, about 0.7 per cent of the total floating share capital changes hands. This company has not been on the radar of the analysts to that extent, also for the fact that it rarely, if ever, finds itself in the news. We believe that the company is a re-rating candidate and would therefore like to recommend it to our investors. 

The company, after being in operation for more than 20 years, had to go through a financial reconstruction process through the Board for Industrial and Financial Reconstruction (BIFR) in FY10. In that year, the company posted losses due to the high milk prices. This was the year when there was drought in the country which impacted milk production and pushed the milk prices to almost unaffordable levels. Since the company is still going through financial reconstruction, its tax slab for a few years has been revised while some electricity-related costs have been exempted for seven years. Its share capital was halved to adjust the losses. And now just in two years, the company has been posting positive results. 

A primary reason for the increasing demand for milk and milk-related packaged products is the changing lifestyle of the Indians. Even though India is the largest milk producing country and the per capita milk production in the country is very less, the trend of consuming milk products is on the rise. In India, the milk production per animal is also below the world average. The area available for fodder for animals has not grown over the last 60-70 years and hence the production of milk has not been growing in line with the population growth, thereby leading to a demand-supply gap. 

Umang Dairy, broadly speaking, is a milk products company with a major base in North India and a few parts of Maharashtra. It produces products such as ghee, butter, milk powder and liquid milk. Its brands are White Magik, Dairy Top and Milk Star. The company has two factories located in the milk surplus state of Uttar Pradesh and has 300 villages and 12,000 farmers in its village level collection (VLC) network. Besides the above mentioned milk products, Umang also sells tea and coffee vending machines and commands a leadership position in this segment. This segment, however, does not add significantly to the topline. 

What we have liked about the company is that its capacity utilisation has been growing consistently for the last three years. In its drying plant, the capacity utilisation has touched 55 per cent from 21 per cent in FY10 while in liquid milk packaging, the capacity utilisation has touched 87 per cent from 39 per cent in FY10. In FY13, Umang expects to further improve its capacity utilisation on the assurance that the demand for milk and milk-based products will increase. Besides, due to growth in organised retail, there is also a hike in demand for products such as butter and packaged milk. As such, the revenue growth of the company may continue with the pace set in FY12.

Financially the performance of the company has improved in FY11 and FY12. In FY12, its top line grew by 46%. Its net profit however grew by 318% with expansion of the operating profit margins. The higher revenues and margin improvement came due to the higher capacity utilization. The company, as part of BIFR was not paying tax until it returned to profit. Last year it carried losses of Rs 3.43 crore which will get wiped after FY13 profit hence we believe it will start paying taxes by FY14. We however believe that FY13 would not be taxable. There is also exemption from certain electricity related expenses by UP government for next few years which will keep its operating costs lower.

Until FY11, company was carrying negative net worth which has turned to positive by FY12. Currently it has debt to equity ratio of over 1x but that will come down as it will add more profit in FY13.

Company has exceeded its guidance of FY12 revenues of Rs 130 crore. The shares of the company are currently trading at the PE of 7x of FY12 EPS 6.29. The stock is re-rating candidate as it is seeing huge jump in the sales due to higher demand of the milk related products. Considering the higher growth rates we expect the FY13 EPS to be Rs 9.5 which will command share price of Rs 65 giving returns of nearly 50% on CMP. We would advice our readers to enter the counter for better capital appreciation.