CMP 33.00

Target Price 38.00

ISIN: INE775B01025

Dec 7th

, 2012

KWALITY DAIRY (INDIA) LTD Result Update: Q2 FY13

BUYBUYBUYBUY

Stock Data

Sector Packaged Foods

BSE Code 531882

Face Value / Div. Per Share 1.00

52wk. High / Low (Rs.) 47.95/25.25

Volume (2wk. Avg ) 248000.00

Market Cap ( Rs in mn ) 6705.27

Annual Estimated Results (A*: Actual / E*: Estimated)

Years FY12A FY13E FY14E

Net Sales 23946.30 33524.82 41570.78

EBITDA 1652.65 2347.65 2910.91

Net Profit 909.86 1362.33 1787.26

EPS 4.48 6.70 8.80

P/E 7.37 4.92 3.75

Shareholding Pattern (%)

1 Year Comparative Graph

BSE SENSEX KWALITY DAIRY (INDIA) LTD

Source: Company Data, Firstcall Research

SYNOPSIS

Kwality Dairy (India) Ltd India's Premier

Dairy Foods Company focuses on building

leadership positions in branded and value

added markets across the dairy sector.

During the Second quarter, the robust growth

of Net Profit is increased by 65.72% to

Rs.268.44 million.

Kwality taken franchise two new plants

during the year are located in Amritsar in the

state of Punjab and Ajmer in the State of

Rajasthan.

Fitch Ratings has assigned Long-Term rating

of Fitch BBB+ (ind)' with Stable Outlook & A2

as short term rating to KDIL's overall

Working Capital facilities.

The company has strengthened brand “Dairy

Best” with launch of new products in market

viz, Paneer, Dahi and Milk in three variants

Kwality plans to have the Milk Products

Processing Unit in Dubai to process various

milk powders and dairy ingredients.

Net Sales and PAT of the company are

expected to grow at a CAGR of 37% and 56%

over 2011 to 2014E respectively.

Peer Groups CMP Market Cap EPS P/E (x) P/BV(x) Dividend

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Kwality Dairy (India) Ltd 33.00 6705.27 4.48 7.37 3.73 10.00

GlaxoSmithKline Consumer Health care 3773.00 158969.90 101.35 37.30 13.89 350.00

Nestle India 4818.50 464150.10 117.68 40.91 36.43 485.00

Hatsun Agro Products 87.35 9406.90 3.44 25.39 8.74 130.00

Investment Highlights

Results updates- Q2 FY13,

Kwality Dairy (India) Ltd, India's Premier Dairy

Foods Company focuses on building leadership

positions in branded & value added markets across

the dairy sector, reported its financial results for the

quarter ended 30th Sep, 2012. The Second quarter

witnesses a healthy increase in overall sales as well

as profitability of the company.

Months Sep-12 Sep-11 % Change

Net Sales 8893.15 5144.13 72.88%

PAT 268.44 161.98 65.72%

EPS 1.32 0.80 65.72%

EBITDA 549.17 388.51 41.35%

The company’s net profit jumps to Rs.268.44 million against Rs.161.98 million in the corresponding quarter

ending of previous year, an increase of 65.72%. Revenue for the quarter rose 72.88% to Rs.8893.15 million from

Rs.5144.13 million, when compared with the prior year period. Reported earnings per share of the company

stood at Rs.1.32 a share during the quarter, registering 65.72% increase over previous year period. Profit before

interest, depreciation and tax is Rs.549.17 millions as against Rs.388.51 millions in the corresponding period of

the previous year.

Expenditure :

During the quarter Total Expenditure rose by 75 per

cent mainly on account of increase in Other

Expenses along with consideration of Employee

Cost in the rupee impact. Total expenditure in Q2

FY13 was at Rs.8369.35 million as against

Rs.4780.34 million in Q2FY12. Employee Benefit

Expenses Rs.33.26 against Rs.17.14 millions in the

corresponding period of the previous year. Other

Expenses was at Rs. 191.55 million & Cost of

Material Consumed is Rs. 8035.41 million in Q2FY13

are the primarily attributable to growth of

expenditure.

Latest Updates

• The company taken franchise two new plants during the year are located in Amritsar in the state of Punjab

and Ajmer in the State of Rajasthan. These ventures help the Company to achieve mission in future.

• Fitch Ratings has assigned Long-Term rating of Fitch BBB+ (ind)' with Stable Outlook and A2 as short term

rating to KDIL's overall Working Capital facilities.

• Company made entry into direct procurement of milk through Producer Based Milk Procurement System by

setting up Milk Chilling Centers (MCC) at different locations in North India.

• The company has planned to increase the number of milk chilling centers in future to procure clean, hygienic

and wholesome good quality of raw milk.

• The Company plans to have the Milk Products Processing Unit in Dubai to process various milk powders and

dairy ingredients.

• During the Financial year 2011-12, company has strengthened brand “Dairy Best” with launch of new

products in market viz, Paneer, Dahi and Milk in three variants.

Company Profile

Kwality Dairy (India) Ltd India's Premier Dairy Foods Company focuses on building leadership positions in

branded and value added markets across the dairy sector is instrumental in providing dairy products at par with

international standards at a very low input cost. Incorporated in the year 1992,is growing at a fast pace with a

turnover of 1054 crore in 2009-10 & growth of 81 percent in the current financial year. 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. KDIL 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 company organizes various animal health and fertility camps and village level meetings on an ongoing basis

to discuss the requirements of the farmers. Further, these camps also educate the farmers on the general

improvement in the quality of life and hygienic living standards, other social issues are also subsequently

addressed. 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.

� Products

• 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

Clients:

• Nestle India Ltd.

• Hindustan Lever Ltd.

• Metro Dairy (Kolkata)

• Mother Dairy (Kolkata)

• Vadilal

• Cadbury's

• Mother Dairy (Delhi)

• Parle Products Pvt. Ltd

• Britannia.

� Manufacturing Facilities

Kwality Dairy India Limited

It 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.

Financial Highlight

Balance sheet as at March31st, 2012

(A*- Actual, E* -Estimations & Rs. In Millions)

Particulars March (Rs.in.mn) FY12A FY13E FY14E

1.Shareholder’s Funds

a) Capital 203.19 203.19 203.19

b) Reserves & Surplus 1593.53 2955.86 4743.12

Total Net worth 1796.72 3159.05 4946.31

2.Loan Fund

a) Secured loans 5508.30 6417.17 6673.86

b) Unsecured loans 1001.90 1132.15 1200.08

c) Differed Tax liability 4.73 5.20 5.62

Total Liabilities (1+2) 8311.65 10713.57 12825.86

1.Fixed Assets

a) Gross block 891.30 1069.56 1208.60

b) Depreciation 251.20 276.32 292.90

c) Net Block 640.10 793.24 915.70

d) Capital Work in Progress 0.90 0.97 1.02

Total Fixed Assets 641.00 794.21 916.72

2. Investments 14.30 15.73 16.52

3.Current Assets, Loans & Advances

a) Inventories 987.40 1234.25 1431.73

b) Sundry Debtor 6562.40 8531.12 10322.66

c) Cash & Bank Balance 88.88 126.25 157.81

d) Other Current Assets 1.54 1.62 1.73

e) Loans & Advances 581.29 668.48 735.33

Total Current Assets 8221.51 10561.72 12649.26

Less: Current Liabilities & Provisions

a) Liabilities 410.56 492.67 582.95

b) Provisions 154.60 165.42 173.69

Net Current Assets 7656.35 9903.63 11892.62

Total Assets( 1+2+3) 8311.65 10713.57 12825.86

Annual Profit & Loss Statement for the period of 2011 to 2014E

Value(Rs.in.mn) FY11 FY12 FY13E FY14E

Description 12m 12m 12m 12m

Net Sales 16075.36 23946.30 33524.82 41570.78

Other Income 1.11 0.86 0.91 0.96

Total Income 16076.47 23947.16 33525.73 41571.73

Expenditure -15079.75 -22294.51 -31178.08 -38660.82

Operating Profit 996.72 1652.65 2347.65 2910.91

Interest -354.14 -650.95 -768.12 -860.30

Gross profit 642.58 1001.70 1579.53 2050.62

Depreciation -35.09 -74.97 -82.47 -86.59

Profit Before Tax 607.49 926.73 1497.06 1964.03

Tax -133.65 -16.87 -134.74 -176.76

Net Profit 473.84 909.86 1362.33 1787.26

Equity capital 203.19 203.19 203.19 203.19

Reserves 707.29 1593.53 2955.86 4743.12

Face value 1.00 1.00 1.00 1.00

EPS 2.33 4.48 6.70 8.80

Quarterly Profit & Loss Statement for the period of 31st Mar, 2012 to 31st Dec, 12E

Value(Rs.in.mn) 31-Mar-12 30-Jun-12 30-Sep-12 31-Dec-12E

Description 3m 3m 3m 3m

Net sales 7532.36 8152.09 8893.15 9071.01

Other income 0.50 0.39 0.19 0.17

Total Income 7532.86 8152.48 8893.34 9071.19

Expenditure -7041.29 -7606.94 -8344.17 -8472.33

Operating profit 491.57 545.54 549.17 598.86

Interest -190.28 -201.96 -216.41 -227.23

Gross profit 301.29 343.58 332.76 371.63

Depreciation -25.67 -24.28 -25.19 -25.95

Profit Before Tax 275.62 319.30 307.57 345.69

Tax 100.37 -29.30 -39.13 -17.28

Net Profit 375.99 290.00 268.44 328.40

Equity capital 203.19 203.19 203.19 203.19

Face value 1.00 1.00 1.00 1.00

EPS 1.85 1.43 1.32 1.62

Ratio Analysis

Particulars FY11 FY12 FY13E FY14E

EPS (Rs.) 2.33 4.48 6.70 8.80

EBITDA Margin (%) 6.20% 6.90% 7.00% 7.00%

PBT Margin (%) 3.78% 3.87% 4.47% 4.72%

PAT Margin (%) 2.95% 3.80% 4.06% 4.30%

P/E Ratio (x) 14.15 7.37 4.92 3.75

ROE (%) 52.04% 50.64% 43.12% 36.13%

ROCE (%) 20.00% 20.80% 24.31% 24.72%

Debt Equity Ratio 4.67 3.62 2.16 1.45

EV/EBITDA (x) 10.97 7.94 5.71 4.72

Book Value (Rs.) 4.48 8.84 15.55 24.34

P/BV 7.36 3.73 2.12 1.36

Charts

Outlook and Conclusion

� At the current market price of Rs.33.00, the stock P/E ratio is at 4.92 x FY13E and 3.75 x FY14E respectively.

� Earning per share (EPS) of the company for the earnings for FY13E and FY14E is seen at Rs.6.70 and Rs.8.80

respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 37% and 56% over 2011 to 2014E

respectively.

� On the basis of EV/EBITDA, the stock trades at 5.71 x for FY13E and 4.72 x for FY14E.

� Price to Book Value of the stock is expected to be at 2.12 x and 1.36 x respectively for FY13E and FY14E.

� We expect that the company surplus scenario is likely to continue for the next three years, will keep its

growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.38.00 for Medium to Long term investment.

Industry Overview

The food services sector in India is expected to witness a 50 per cent increase in investments in 2012 to about

US$ 750 million, as food suppliers and retail companies plan to scale up business and stay competitive by tapping

the large potential of the domestic market. Of the total investments of US$ 750 million in 2012, about US$ 165

million has gone into purely front-end retail, such as fast moving consumer goods (FMCG), food and beverage

firms.

India is the world's largest milk producer, accounting for around 17 per cent of the global milk production,

according to RNCOS research report titled, 'Indian Dairy Industry Analysis'. The study anticipates that the milk

production in India will grow at a compound annual growth rate (CAGR) of around 4 per cent during 2011-2015.

Further, India has emerged as one of the largest potential markets for organic food consumption globally. The

organic food is invariably catching up pace among the Indian retailers, especially with the niche retailers owing

to wide awakening among Indian consumers towards leading a healthy life, as per RNCOS research report titled,

'Indian Organic Food Market Analysis'. We anticipate that the sector will post significant growth during 2011-

2013, growing at a CAGR of 15 per cent.

Indians spend US$ 64 billion annually on eating out, which includes $13 billion on eating in quick-service

restaurants (QSRs) such as McDonald's and Costa Coffee, propelling the industry to grow at 25-30 per cent

annually, according to Euromonitor.

Key Players

The major players operating in the Indian food and beverages industry include Dabur India Ltd, Godrej

Industries Ltd, Hindustan Lever Ltd, Britannia Industries Ltd, ITC Ltd, Nestle` SA, PepsiCo, Inc, Cadbury

Schweppes PLC, Future Group, RPG Enterprise and Godrej Agrovet Ltd.

Among recent investments, World Bank arm IFC has reportedly put in US$ 6.5 million into food-supply chain firm

Snowman Logistics. Other similar investments include Swastik Roadlines (India Equity Partners) and JICS

Logistics (IL&FS Private Equity) and Staragri Warehousing and Collateral Management Ltd (IDFC Private Equity).

The world's largest fast-food chain - Mc Donalds, is shedding its familiar red and yellow colors for more muted

tones as it goes for its biggest and costliest revamp in India, in line with its global strategy of attracting more

adults. The red and yellow company logo will be replaced with white across 240 restaurants.

Food Processing Industry

With a huge agriculture sector, abundant livestock, and cost competitiveness; India is fast emerging as a sourcing

hub of processed food. India's food processing sector covers fruit and vegetables; spices; meat and poultry; milk

and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product

groups such as confectionery, chocolates and cocoa products, soya-based products, mineral water, high protein

foods etc.

India has emerged as world's top rice exporter overtaking traditional leaders, Vietnam and Thailand. India's total

rice export in 2011-12 is expected to be 6.5-7 million tonnes (MT), which is around 7 per cent of the country's

total production. However, with a bumper harvest in excess of 100 MT in 2011-12 and record stocks of a little

over 34 MT in state-run warehouses, India will continue to remain a major player in the global market till at least

June 2013.

The food processing industries attracted foreign direct investments (FDI) worth US$ 1,409.60 million between

April 2000 to March 2012, according to the latest data published by Department of Industrial Policy and

Promotion (DIPP).

Beverages

Food and beverage contributes a big portion to the revenues of hotels in India. "This is as much as 30-40 per cent

in some five-star hotels, compared to 15-20 per cent internationally," says Dilip Puri, Managing Director of

Starwood Hotels India.

According to a report titled 'Indian Non-Alcoholic Drinks Forecast to 2012' by research firm RNCOS, the Indian

non-alcoholic drinks market was estimated at around Rs 216 billion (US$ 3.88 billion approximately) in 2008

and is forecasted to grow at a CAGR of around 15 per cent during 2009-2012. The report covers numerous

factors driving the growth of non-alcoholic drinks market in India.

The report highlights that the highest growth will be seen in the fruit/ vegetable juice market, which is estimated

to grow at a CAGR of around 30 per cent in value terms during 2009-2012, followed by the energy drinks

segment at a CAGR of around 29 per cent during the same period.

Green Mountain Coffee Roasters (GMCR) and Eight o' Clock Coffee Company, a Tata Global Beverages brand, have

announced a multi-year agreement to make Eight o'Clock Coffee, Tetley Tea, and Good Earth Tea available in

different formats throughout the US and Canada by next year.

Investments

• Britannia Industries Ltd is planning on a global expansion drive to continue with its growth story. The

company has registered 19 per cent growth in top line at Rs 5,400 crore (US$ 969.48 million), derives around

Rs 250 crore (US$ 44.88 million) from global operations and is considering all vectors to expand its presence

overseas

• Indian food catering firm Travel Food Services (TFS) has entered into a joint venture (JV) with Gate Gourmet,

a subsidiary of Swiss giant Gategroup, to provide in-flight on-board catering services. The JV has tied up with

Jet Airways as a first move and will cater to 500 Jet flights a day

• The US-based foods chain Dunkin' Donuts has launched its first store in New Delhi. The company plans to set

up eight to 10 stores in Delhi during this financial year and around 100 stores in the country in the next five

years. The stores will be wholly-owned by Jubilant FoodWorks Ltd

• Himalaya Industries Ltd has launched India's biggest food processing plant set up at an investment of Rs 170

crore (US$ 30.52 million) at Vadnagar, Gujarat. The plant will process eatables such as mushroom, yoghurt,

milk cheese and potato chips, French Fries etc

• India Hospitality Corp has bought UK-based Adelie Food Holdings Ltd-which supplies quiches, salads,

sandwiches and assorted ready to eat food to retail-chains, for Rs 1,800 crore (US$ 323.16 million) from PE

firm Duke Street Capital

Government Initiatives

According to the recently announced Union Budget 2012-13 following initiatives will be taken by the

Government under the National Mission on Food Processing:

• A new centrally sponsored scheme titled 'National Mission on Food Processing' to be started in 2012-13

in co-operation with State Governments

• Steps taken to create additional food grain storage capacity in the country

• Subsidies fully provided for effective administration of the proposed Food Security Legislation

• To promote private sector activity and invite foreign investments in the sector the Government allows

100 per cent FDI in the food processing & cold chain infrastructure

Some of the other initiatives include:

• Canada wants to collaborate with Andhra Pradesh (AP) in the manufacturing sector. It has identified

chemical-based and food processing industries in particular, according to Steward Beck, Canadian High

Commissioner in India

• The Mexican 'King Avacado' (fruit) will be available in India. Buoyed by huge demand, Mexico is trying to

push avacado exports to India. "We are working on the logistics aspects with the Government of

Karnataka, and hope to use the State's knowledge or solution to reduce the transit time of shipments,"

said Aldo Ruiz, Investment and Trade Commissioner, Ministry of Economy, Mexico

• Coconut Development Board (CDB) and the Republic of Trinidad and Tobago have signed a memorandum

of understanding (MoU), to encourage and develop technical collaboration between the two countries for

the development of the coconut industry. This is the first time the Board is entering into an agreement

with a commonwealth country for transfer of technology

• Spice Board of India plans to promote exports of spices by establishing 25-30 spice parks in different

parts of the country. This will help in achieving export of spices worth Rs 30,000 crore (US$ 5.39 billion)

by 2020, as per Dr G K Vidyashankar, Deputy Director (Marketing), Spices Board. These parks would give

a common platform for farmers, traders and exporters

Road Ahead

According to the latest trend it has been observed that more and more Indians spend a fortune on luxurious

items that includes food as well. "Indians today have an experimental palate. People want to be able to have

dining options they would choose in New York, Tokyo or London," as per Aishwarya Nair, Head of Corporate

Food and Beverage, Leela Hotels. India is one of the fastest growing branded restaurants markets in the world,

where the organised eating-out market is estimated at US$ 2 billion and growing at a CAGR of 25 per cent. With

massive scope for value addition, growing trend in the consumption pattern of processed food products in India

and many fiscal incentives being planned by the Government, this sector is capable of maintaining the growth

momentum in the future.

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

C.V.S.L.Kameswari Pharma

U. Janaki Rao Capital Goods

K. Jagadhishwari Devi Diversified

A.Nagaraju Cement, Reality & Infra, Oil & Gas

Ashish.Kushwaha IT, Consumer Durable & Banking

Abdul Khabeer Diversified

Anil Kumar Diversified

A.Ravi Diversified

Firstcall India also provides

Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO’s, QIP’s, F.P.O’s,Takeover

Offers, Offer for Sale and Buy Back Offerings.

Corporate Finance Offerings include Foreign Currency Loan Syndications,

Placement of Equity / Debt with multilateral organizations, Short Term Funds

Management Debt & Equity, Working Capital Limits, Equity & Debt

Syndications and Structured Deals.

Corporate Advisory Offerings include Mergers & Acquisitions(domestic and

cross-border), divestitures, spin-offs, valuation of business, corporate

restructuring-Capital and Debt, Turnkey Corporate Revival – Planning &

Execution, Project Financing, Venture capital, Private Equity and Financial

Joint Ventures

Firstcall India also provides Financial Advisory services with respect to raising

of capital through FCCBs, GDRs, ADRs and listing of the same on International

Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and

other international stock exchanges.

For Further Details Contact:

3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai 400 071

Tel. : 022-2527 2510/2527 6077/25276089 Telefax : 022-25276089

E-mail: info@firstcallindiaequity.com

www.firstcallindiaequity.com