Stock Pick From The Food & Beverages Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is from the food and beverages sector. It is a small company that has shown a remarkable turnaround from financial difficulties to report profits this year and trade at a discount to its larger peers.

Milked For Its Worth: Umang Dairies

HERE IS WHY:

• Higher demand for milk and milk products is driving growth.
• Its capacity utilisation has been growing consistently for the past three years, enabling higher revenues with good earnings.
• The financial reconstruction has yielded success, with handsome growth in the topline and profits in the past two years.

Uttar Pradesh-based Umang Dairies (UDL) seems to be attracting a good number of investors currently. The simple reason for this is that it is a superb example of how a troubled company, if steered by a good management, can get back on track. Though the company is relatively small, it is backed by the well-known J K Group. Following the financial difficulties that it faced two years ago, UDL has successfully reported profits this year. We believe that since it is trading at a discount to its larger peers, this is a re-rating candidate.

UDL has been operating for more than 20 years, and went through a financial reconstruction process through the Board for Industrial and Financial Reconstruction (BIFR) in FY10. In that year (FY10), the company posted losses as milk prices rose sharply and the cost of higher inputs could not be passed on to the consumers. Under the BIFR plan, its tax slab has been revised and some electricity-related costs have also been exempted for seven years by the UP electricity board. The BIFR reconstruction has yielded success within two years, with the company posting handsome growth in its topline and profits in the past two years.

UDL, has presence across 12 states with strong foot prints in Eastern and Northern India and a few parts of Maharashtra. The company is engaged in the production of ghee, butter, milk powder, etc. and has brands like White Magik, Dairy Top, Milk Star, etc. It has two factories in UP and a milk collection network spanning across 300 villages and 12000 farmers.

What we liked about the company is that its capacity utilisation has been growing consistently for the past three years. In last two years, its capacity utilisation at its two main plants has doubled. In FY12, the capacity utilisation in the drying plant stood at 55 per cent, while that in the liquid milk packaging stood at 87 per cent. In FY13, it expects a further improvement in capacity utilisation, which will yield higher revenues with good earnings. The demand for milk products is also increasing due to the growth in the organised retail sector, which we believe will help UDL to garner more revenues.

On the financial front, the performance of the company has improved over the last two years. In FY12, its topline grew by 46 per cent to Rs 150 crore and the net profit grew by 318 per cent to Rs 14 crore. Its EBITDA margins also saw an improvement of 500 basis points due to higher capacity utilisation. The company, as a part of the financial reconstruction process, is currently not paying taxes, due to which there will be no tax outflow in FY13 – this will change from FY14 onwards. Further, as the company enjoys exemption from certain electricity-related expenses for a few more years, we expect that the margins will either remain at the current levels or will show further improvement.

Due to its past losses, UDL’s net worth had turned negative. However, this has changed in FY12. We expect an improvement in its financial performance ahead, which will lead to an increase in its net worth and bring down its debt-to-equity ratio below 1x. Its shares are currently trading at a PE of 6.4x its annualised EPS of Rs 6.9 1. Considering the higher growth rates, we expect the FY13 EPS to be around Rs 8, which will yield a share price of Rs 51. We would advise you enter this counter at the CMP.