ice kwality dairy india 20120209110857

16 December 2011 1

KWALITY DAIRY Buy

INITIA

TING

COV

ERA

GE

P

Exhibit 1: Financials & Valuation metrics Rs mn

Y/E March FY09 FY10 FY11 FY12E* FY13E

Net sales 5,828 10,541 16,080 22,460 31,631

Growth (%) 75.0 80.9 52.5 39.7 40.8

EBITDA 263 501 995 1,830 2,836

OPM (%) 4.5 4.8 6.2 8.1 9.0

Growth (%) 106.4 90.7 98.5 83.9 55.0

PAT 94 179 459 860 1,438

Growth (%) 103.3 91.3 156.0 87.1 67.2

FD EPS (Rs) 0.5 1.0 2.3 3.7 5.4

Growth (%) 103.3 91.3 129.3 62.6 48.2

BV(Rs) 2 3 4 14 23

P/E (x) 63.3 33.1 14.4 8.9 6.0

P/B (x) 18.5 12.5 7.3 2.3 1.4

EV/EBITDA (x) 28.6 15.0 7.6 4.1 2.7

Dividend yield (%) 0.3 0.3 0.3 0.3 0.3

RoE (%) 33.0 45.1 66.3 41.1 30.4

RoCE (%) 18.4 15.2 18.7 18.6 17.9

D/E (x) 2.8 4.6 4.7 1.9 1.2

Source: Company, Almondz Research, *Consolidated numbers from FY12 onwards

For a ‘Butter’ tomorrow… CMP: Rs33 Target Price: Rs65

52wk H/L: Rs 215/ Rs 33

The Indian dairy industry, with an estimated size of US$116bn, is growing at 7% per annum. A primary growth driver has been the shift in demand for milk and milk products from the unorganized to organized segment. Kwality Dairy (KDIL), being one of the largest private players with 1.7mn LPD processing capacity, is well poised to take advantage of this demand shift. Growing at a robust pace, with revenue CAGR of 81% and net profit CAGR of 87% over FY07-11, the company is preparing for its next leg of growth with backward integration for milk procurement and launch of series of value-added products such as LivLite, Wake up, Kream Kountry and Good Health.

Demand shifting from the unorganized to organized segment KDIL is one the largest private players in the organized segment of the fragmented Indian dairy industry with 1% market share. The organized segment’s contribution to total milk output saw 12.8% CAGR as against the unorganized segment’s 0.9% over 2005-11E. Increasing health consciousness, rising disposable income and higher proportion of income spending on processed milk products are major growth drivers for the organized segment.

Value-added products – The game changer KDIL has built a credible reputation in the institutional dairy segment by supplying to leading FMCG brands such as Britannia, Hindustan Unilever, Parle and ITC. With this know-how, it is leapfrogging to build its own brands, “Dairy Best” and “LivLite”, across product lines. The company plans to introduce new products such as low cholesterol butter, pouched milk, milk mix, cottage cheese and yogurt, targeting the retail segment under the brand “Dairy Best”. For this, KDIL has earmarked Rs500mn for advertising over the next three years. KDIL has signed Indian celebrity Bipasha Basu as its brand ambassador.

Burgeoning procurement and distribution channels KDIL has the largest procurement channels in Northern states extending to 0.5mn farmers across 8,000 villages. The company has 10 operational Milk Chilling Centers (MCCs). KDIL is planning capex of Rs4-4.5bn to set up 146 MCCs over the next three years in addition to increasing its production capacities. KDIL has a pan-India distribution network of 59 stockists and 929 distributors, which reach out to 300 retail outlets. Quality milk procurement and strong distribution channels are likely to benefit KDIL in terms of higher volume and marketing and selling of its value-added products.

Valuation KDIL is trading at a P/E of 6x times its FY13E diluted earnings. We expect EPS to grow at 55% CAGR over the period FY11-13E. We have valued KDIL at 12x its FY13E dil. EPS, which yields a fair value of Rs65. We initiate coverage on the company with a BUY rating.

Market data

Sensex 15,491 Nifty 4,652

Stock data

Market Cap (Rs bn)# 6.6 Market Cap (USD mn) 126 Shares Outstanding (mn) 203

Free Float (%) 25.0 3M avg. daily vol.(mn) 0.5

Bloomberg Code KLD IN Reuters Code KDAI.BO

Shareholding Pattern (%)

Promoter 75.0

Institutions 0.4

Public & Others 24.6

Stock Performance

Return (%) 1m 3m 6m 12m Absolute (70.8) (80.4) (72.5) (68.8) Relative (63.1) (71.9) (58.6) (46.8)

EV/Sales(x) band

020,00040,00060,000

Apr

-05

May

-06

Jun-

07

Jul-0

8

Aug

-09

Oct

-10

Nov

-11

1.510.5

Source: Bloomberg, Almondz Research

P/E(x) band

0

100

200

Apr

-05

May

-06

Jun-

07

Jul-0

8

Aug

-09

Oct

-10

Nov

-11

42.6

28.113.7


EV/EBITDA(x) band

020,00040,00060,00080,000

Apr

-05

May

-06

Jun-

07

Jul-

08

Aug

-09

Oct

-10

Nov

-11

23.216.29.32.3


#Diluted market Cap: Rs 8.6bn

Ronald Siyoni Email : [email protected] Tel. : +91 22 6752 6640 Mobile : +91 98672 44854

16 December 2011 2

Kwality Dairy

Investment Rationale

Indian dairy industry on a strong growth trajectory The Indian dairy industry, with an estimated size of US$116bn, is growing at 7% per annum and experiencing increasing demand with milk production expected to grow at 3.7% per annum over FY10-FY22. The primary growth driver has been the demand shift from the unorganized to the organized segment. The organized segment’s contribution to total milk output saw 12.8% CAGR as against the unorganized segment’s 0.9% over 2005-2011. KDIL aims to exploit the highly unorganized dairy market (70% by 2011) and it has a vision to emerge as one of the largest organized private sector players with a national footprint.

Exhibit 2: Total Production

Exhibit 3: Domestic dairy industry market size

17 23 36

8090

84

020406080

100120140

2005 2009 2011E

Organised Unorgani sed

(mn tonnes) 12.8%CAGR 0.9%

4477

116

020406080

100120140

2005 2009 2011E

Indian da iry industry market s i ze

(USD bn)CAGR 17.6%

Source: India Dairy Profile (FAOSTAT)

Source: India Dairy Profile (FAOSTAT)

One of the largest processing capacities among private players Kwality Dairy is one of the leading private players in the highly fragmented organized segment, having about 1% market share. The segment is dominated GCMMF (Amul), which corners about 6.5% market share. Among private dairies, KDIL has one of the largest processing capacities at 1.7mn LPD. We believe KDIL is best positioned to take advantage of the demand shift from the unorganized to the organized segment, owing to increasing health consciousness, rising disposable income and higher proportion of income spending on processing milk products.

Exhibit 4: Milk Processing Capacities

0.30.40.50.91.61.73.1

12.0

0246

8101214

GCMMF MotherDai ry

Kwal i tyDai ry

Ha tsunAgro

Pa ragFoods

SchreiberDynamix

ParamDa i ry

Uma ngDa i ry

Mi lk Proces s ing capa ci ties

(mn LPD)

Source: Industry, Almondz Research

Value-added products – The game changer The domestic market for value-added products such as butter, cheese, ice cream, dairy whiteners and spreads is growing at 8-10% per annum. The current estimated market for these products is: Butter - 60,000 tonnes, branded milk powders - 27,000 tonnes, Ghee in small packs - 40,000 tonnes, Cheese - 15,000 tonnes and Infant foods - 125,000 tonnes. The butter and cheese market is growing at 8-10% annually while the infant food market is expected to grow at 10-15%. Demand for processed and packaged dairy produce in urban centers should see phenomenal growth due to growing population with higher disposable income and greater health consciousness.

Kwality Dairy

16 December 2011 3

KDIL has been selling a range of products from liquid milk, milk powders to fat-based products, mainly to institutional customers. It plans to introduce new products targeting the retail segment in a phased manner. KDIL aims to exploit the unorganized dairy market by introducing value-added products to emerge as one of the largest private players with a national footprint over the next few years. In line with its vision, the company has rebranded itself and introduced its umbrella brand ‘Dairy best’. It is undertaking large scale sales promotion and marketing campaigns. The company has earmarked Rs500mn for advertising for value-added products, including LivLite, over the next three years. It recently signed renowned Indian celebrity Bipasha Basu as its brand ambassador. After the launch of low cholesterol pure ghee, LivLite, the company plans to launch new products such as milk powders under the ‘Wake Up’ brand and packaged milk.

Exhibit 5: Market dynamics of value added products

Value added products

Market size Growth rate Major players

Curd Rs160bn in value and 5.2mn tonnes in volume

Demand has increased at 20% per annum in past 5 years, expected to maintain growth

Organised players account for 1% of the market share

Yogurt Market is 10% of the curd market size Growth estimated at 8-10% per annum Amul is the market leader followed by Nestle and Britannia

Butter Organised market size is Rs5.9bn in value and 50,000 tonnes in volume

Growth estimated at 8-10% per annum Amul is the market leader with 75% market share

Cottage Cheese

Market size is Rs1.9bn in value and 16,000 tonnes in volume

Market growth at 6-7% per annum Amul (65% market share), Mother Dairy and Verka are the organized players

Source: Company, Almondz Research

Strong procurement channels KDIL has one of the largest procurement channels in Northern states (Haryana, Uttar Pradesh, Rajasthan and Punjab) with its network extending to 500,000 farmers across 8,000 villages through contractors. The company also uses Milk Chilling Centers (MCCs) in Uttar Pradesh and Haryana for milk procurement with each center covering 120-130 villages and 80-100 farmers per village. Currently, KDIL has 10 operational MCCs and 4 under implementation. It has been consistently strengthening its reliable network of vendors and farmers to source quality milk (most important factor), which is evident from the fact that total milk procured increased over 11x from 48,472 tonnes in FY07 to 550,800 tonnes in FY11. Post the success of its MCC pilot project of setting up its procurement network in 2010, KDIL now plans to set up over 116 MCCs in Punjab, Rajasthan, Uttar Pradesh and Haryana over the next three years. We believe backward integration will ensure procurement of high quality milk and also lead to significant margin expansion, going forward.

Exhibit 6: Milk procurement over FY07-11

48,472124,353 160,714

280,764

550,800

0

100,000

200,000

300,000

400,000

500,000

600,000

FY07 FY08 FY09 FY10 FY11

Mi lk procurement

(Tonnes)


Robust distribution network KDIL has a pan-India distribution network of 59 super stockists and 929 distributors, with each distributor reaching to 300 retail outlets. The company has ten depots located in Delhi, Rajpura (Punjab), Ghaziabad (UP), Saharanpur (UP), Ranchi (Jharkhand), Jaipur (Rajasthan), Bhuvaneshwar (Orissa), Dibai (UP), Agra (UP) and Bhiwandi (Maharashtra). It has tied up with large Indian multi-brand outlets such as Big Bazaar, Reliance Retail, Bharti-Walmart, Max Hypermarket, etc.

KDIL Brands


LivLite Wake Up KreamKountry

GoodHealth

16 December 2011 4

Kwality Dairy

Exhibit 7: Distribution Network


Exploiting opportunities outside India KDIL set up a subsidiary in Dubai in Q2FY12 to focus on international trade. As Government of India has imposed a ban on export of milk powder, KDIL is setting up a processing unit with a capacity of 100 metric tonnes per day in Dubai. It plans to source milk powder from various Eastern European countries and it will process it to make customized formulations for clients based in the Middle East, Far East, Bangladesh and various other countries. The company expects significant revenue contribution from the Dubai subsidiary from the current year itself. We estimate Rs1.3bn in revenue from the Dubai subsidiary in FY12.

C&F Agents Institutions Depots (10)

Processing Plant 1.65mn LPD

Retailers Institutions Distributors Retailers Distributors

929 distributors 300 retailers

Kwality Dairy

16 December 2011 5

Financial Overview

Robust growth in net revenue and earnings KDIL registered strong revenue and earnings CAGR of 81% and 87%, respectively, over FY07-11, on the back of increased volumes and realizations coupled with expanding margins. We believe further increase in milk procurement through MCCs and increasing share of value-added products would support the next leg of growth. We estimate net revenue and net profit CAGR of 40% and 77%, respectively, over FY11-13.

Exhibit 8: Net sales growth trend

Exhibit 9: Net profit growth trend

1,496 3,3305,828

10,54116,080

22,460

31,631

-5,000

10,00015,00020,00025,00030,00035,000

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Net Sa les

(Rs mn)

CAGR: 81%

37 46 94 179459

860

1,438

-

500

1,000

1,500

2,000


Net Profi t

CAGR: 87%

(Rs mn)



Value-added products to drive EBITDA margins KDIL is focusing on expanding EBITDA margins through measures such as: a) backward integration for milk procurement via set-up of MCC infrastructure for high quality milk; b) changing product mix with focus on creation of high-value added products catering to the retail segment, in line with shifting focus from B2B to B2C segment. We believe there is a huge potential for value-added products such as pouched milk and LivLite, which is likely to earn better margins and in turn enable the company to reduce its working capital cycle. We estimate EBITDA margins to expand 196bps and 82bps during FY12 and FY13, respectively.

Exhibit 10: EBITDA margin trend

5.5

3.84.5 4.8

6.2

8.19.0

2.0

4.0

6.0

8.0

10.0


EBITDA ma rgin

(%)


Capex of Rs4 to 4.5bn over the next three years KDIL has 10 operational MCCs in Uttar Pradesh and Haryana for milk procurement with each center covering 120-130 villages and 80-100 farmers per village. It plans to set up over 146 MCCs in Punjab, Rajasthan, Uttar Pradesh and Haryana over the next three years. It will also raise production capacities to increase production of value-added products such as LivLite, 85% less cholesterol butter, among others. Consequently, KDIL intends to invest Rs4-4.5bn over the next three years, which will be funded by a mix of equity infusion and internal accruals. We have assumed Rs 3bn to be funded through equity dilution partly in FY12 and FY13 at Rs 50 per share.

16 December 2011 6

Kwality Dairy

Strong return ratios KDIL has consistently improved ROE from 20.4% in FY07 to 66.3% in FY11, with net profit CAGR of 87%. However, ROCE has been in the range of 15-19%, owing to increased borrowings to fund expansion plans. We believe ROCE would remain subdued for the next couple of years, considering the company’s aggressive expansion plans.

Exhibit 11: Return ratios trend

20.4 20.5

33.0

45.1

66.3

41.1

30.4

17.2 16.5 18.4 15.2 18.7 18.6 17.9-

10

20

30

40

50

60

70


ROE ROCE

(%)


Kwality Dairy

16 December 2011 7

Valuation

Valued at Rs65 (P/E of 12x on FY13E earnings) Recently, KDIL has corrected 71% over one month. We see this as an opportunity to invest in the company, considering its strong revenue visibility coupled with robust return parameters. We have valued KDIL at a P/E of 12x on FY13E earnings. Thus, we arrive at a fair value of Rs65. We initiate coverage on the stock with a BUY recommendation.

Exhibit 12: Relative stock performance since April 2010

20

40

60

80

100

120

140

Apr

-10

May

-10

Jun-

10

Jul-

10

Aug

-10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

KDIL Sens ex BSE FMCG


Exhibit 13: Peer Comparison

CMP (Rs) Mcap (Rs mn) TTM PE (x) TTM EV/Sales (x)TTM EV/EBITDA (x)

Kwality dairy 33 6,624 10.2 0.6 8.1 Zydus Wellness 412 16,106 25.2 5.0 17.9

Marico 138 84,819 30.5 3.3 24.6


16 December 2011 8

Kwality Dairy

Peer Comparison

We have compared KDIL with Hatsun Agro as there are not many comparable listed players.

Exhibit 14: EBITDA margin

Exhibit 15: PAT margin (%)

4.5 4.8

6.25.5

3.8

6.9

5.56.06.4

5.2

3.0

4.0

5.0

6.0

7.0

8.0


Kwal i ty Da iry Hatsun Agro

(%)

2.5

1.7

2.9

1.3

2.1

1.1

0.2

1.41.6

1.4

-

0.5

1.0

1.5

2.02.5

3.0


Kwa l i ty Da iry Ha ts un Agro

(%)



Exhibit 16: Debt/Equity Exhibit 17: P/BV

1.4

2.8

4.7

5.9

3.2

0.7

4.64.0

2.72.5

-1.02.03.04.05.06.07.0


Kwa l i ty Da iry Ha ts un Agro

(x)

22.8

13.4

22.616.2 13.4 13.1

8.0

29.834.8

39.0

-

10.0

20.0

30.0

40.0

50.0


Kwa l i ty Da i ry Ha tsun Agro

(x)



Exhibit 18: EV/EBITDA Exhibit 19: ROCE

191.4

124.4

60.331.6

15.9

4.86.26.29.78.8-

50.0

100.0

150.0

200.0

250.0


Kwa l i ty Dai ry Ha tsun Agro

(x)

15.5

12.0

28.5

17.318.7

15.2

18.416.517.2

17.8

10.0

15.0

20.0

25.0

30.0


Kwal i ty Da i ry Ha tsun Agro

(%)



Exhibit 20: ROE

20.4 20.5

33.0

45.1

66.3

25.6

4.8

24.3 26.9

45.7

-10.020.030.040.050.060.070.0


Kwal i ty Da iry Hats un Agro

(%)


Kwality Dairy

16 December 2011 9

Company Overview

Kwality Dairy was originally incorporated as a backward-integrated unit of Kwality Ice-creams founded by late Mr. P. N. Ghai and Mr. Pradeep Wig. Kwality Ice-creams was eventually taken over by Hindustan Unilever and Kwality Dairy was taken over by the existing promoters, the Dhingra family, in 2002. The present management turned around the loss-making entity at that time to a profitable enterprise in FY04 with a net profit of Rs28mn. Thereafter, the company registered explosive growth over the next five years and today it is one of the fastest growing companies in the sector with revenue CAGR of over 80% over the past five years.

KDIL is among the largest private sector dairy companies in India, engaged in the business of processing and marketing dairy products. The company produces and markets pure ghee (clarified butter), pure cow ghee, skimmed milk powder, curd and milk among other dairy products. The company has milk processing capacity of 1.65mn liters per day (LPD) with one owned and two outsourced plants. It has built a credible reputation over the years in the Institutional dairy segment by supplying to leading FMCG brands such as Britannia, Hindustan Unilever, Parle and ITC.

Exhibit 21: Product mix by volume in tones (FY11)

Exhibit 22: Product mix by value (FY11)

Ghee/Fat, 23,699 , 8%

Curd, 40,138 , 14%

Mi lk , 183,742 ,

66%

Mi lk Powder,

34,134 , 12%

Mi lk, Rs4.5bn,

28%Curd,

Rs1.0bn, 6%

Ghee/Fat, Rs5.7bn,

36%

Milk Powder, Rs4.8bn,

30%



Exhibit 23: Segment snapshot

Parameter Fat based products Milk Powder Milk Curd

Pure Ghee Skimmed Milk Powder Full Cream Milk Pouched curd

Pure Cow Ghee Whole Milk Powder Skimmed Milk Set curd Products

Low Cholesterol Ghee Dairy Whitener

Mainly B2C B2B to Institutions like ITC, Café Coffee Day, Parle

Mainly to B2B B2B End Customers

Low Cholesterol Ghee to premium segment

B2C to be launched in Q3FY12 B2C to be launched in Q3FY12

B2C to be launched soon

Dairy Best Good-Health

Kream-Kountry Key Brands

LivLite Key Competitors GCMMF, Nestle India, Schreiber Dynamix Dairies, Britannia, VRS Foods, Mother Dairy, Sterling Agro, Parag Milk Products, Hatsun Agro

Competition from established players Key Risks

Consumption is more or less same throughout the year; production is seasonal in nature leading to volatility in raw material availability.


Milk Processing Plants

Location Capacity (mnLPD)

Type

Faridabad, UP

0.9 Company owned

Amritsar, Punjab

0.3 Leased

Saharanpur, MP

0.45 Leased

Total 1.65


16 December 2011 10

Kwality Dairy

Indian dairy industry overview

Milk production to grow at 4% per annum India is the world’s largest milk producer with production of 123mn tonnes, accounting for nearly 20% of total milk production of the world, but almost all of it gets consumed domestically. Domestic demand for milk is growing at about 6mn tonnes per annum, whereas annual incremental production over the past ten years has been about 3.5mn tones per annum. The Indian dairy industry is predominantly controlled by the unorganized sector, which accounts for nearly 85%. The per capita milk availability reached 263 grams per day in 2009-10, but it is still lower than the world average of 284 grams per day. Milk production is likely to grow at 4% per annum with annual incremental output of 5mn tonnes in the next 15 years. With rapid increase in domestic demand for milk and milk-based products, the dairy industry in India is likely to reach about Rs 5trn by 2015. Milk production is likely to reach about 190 million tonnes in 2015.

Exhibit 24: Milk Production and Per Capital Availability trend 17 20 22 31

.6 53.9 80

.6

84.4

86.2

88.1

92.5

97.1

100.

9

104.

8

108.

6

112.

5

116.

2

130 126 124 128

176

217 222 224 225 233 241 246 252 258 263 270

020406080

100120140

1950

-51

1960

-61

1970

-71

1980

-81

1990

-91

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11E

100

150

200

250

300

Mi lk Production Per Capi ta Avai labi l i ty

(mn tonnes) (gra ms /day)

Source: Dept. of Animal Husbandry, Dairying & Fisheries (DAHD), Almondz Research

In India, top 12 states account for 89% of the milk production. State-wise, Uttar Pradesh is the largest milk producing state with 18% share, followed by Andhra Pradesh (9%), Rajasthan (8%), Punjab (8%) and Gujarat (8%). The Western region has the highest consumption levels of milk powder with the rest of the regions accounting for an equal share each. For Ghee, North India, mainly Rajasthan and Punjab, has the highest consumption along with its variants such as butter and fat products.

Exhibit 25: State-wise milk production as of 2009-10

20.2

10.4 9.5 9.4 8.8 7.7 7.2 6.1 6.0 5.8 4.8 4.32.5

9.7

0

5

10

15

20

25

Utt

arPr

ades

h

Andh

raPr

ades

h

Raja

stha

n

Punj

ab,

Guj

arat

Mah

aras

htra

Mad

hya

Prad

esh

Biha

r

Har

yana

Tam

il N

adu

Karn

atak

a

Wes

t Be

ngal

Kera

la

Oth

ers

(mn tonnes)

Source: State/UT Animal Husbandry Departments, Almondz Research

About 80mn rural families across India are engaged in dairy production and the rural market consumes over half of the total milk produce. Owing to conventional dietary habits of Indian households, about 60% of the milk produced is consumed in the liquid form and the rest is consumed in the form of butter, clarified butter (desi ghee), cheese, curd, paneer, ice cream, dairy whiteners and traditional sweets.

Kwality Dairy

16 December 2011 11

Exhibit 26: Supply chain model

Source: Company, Almondz Research, *CA-Collection Agent; CFA - Clearing & Forwarding Agent

Key Challenges

Adulteration in milk and milk products is a key challenge as the market is highly fragmented. Despite significant growth in milk production in the past six decades, productivity of domestic livestock

has been low compared with other developing/developed nations. The industry is largely dominated by co-operatives with limited participation from private players and

underdeveloped milk distribution and marketing systems. Bottlenecks such as limited processing capacities, inadequate access to formal credit mechanisms, and

lack of R&D further hamper growth of the industry. Lack of fodder resulting in low yield from cattle, lack of trained and skilled dairy farm labor, lack of

proper infrastructure such as cold storage facilities and lack of transparent milk pricing system are key factors affecting retail consumption of milk.

Unorganized sector85% of raw milk

Organized sector15% of raw milk

Milch Animal Households

Collection CentreCo-op or Private

Chilling centersCo-op or Private

Dairy Plant

Distributor Centers

Retailers

Consumers

Milkman

Sweet shops

Restaurants

Creamery

CA*/CFA*/Depots

RetailersWholesalers

SpecialtyProducts

16 December 2011 12

Kwality Dairy

Zydus Wellness – Potential of brand creation

Zydus Wellness (ZW), a subsidiary of Cadila Healthcare, has, over the years, created three strong brands, Sugar Free, Everyuth and Nutralite. The consumer healthcare business of Cadila Healthcare was merged with the company with effect from 1 April 2008. The company’s focus on the niche segment, brand building and marketing and advertising led to creation of three strong pillars in the form of low calorie sugar substitute (Sugar Free), skin care products (Everyuth) and low cholesterol butter substitute (Nutralite).

These brands grew robustly during FY09-11, when revenue grew 1.7x and net profit was up 2.5x, leading to 10x growth in the company’s market capitalization. We believe potential of good innovative products that are better marketed and advertised and backed by strong manufacturing and distribution capabilities is huge.

SugarFree: 26%

Nutralite: 18%

Everyuth: 57%

Revenue CAGR (FY09-11)

Sugar Free40%

Everyuth26%

Nutralite34%

Revenue mix FY091,947 2,681

3,364

-

1,0002,000

3,000

4,000

FY09 FY10 FY11

Net Revenues

CAGR: 31%, 1.7x(Rs mn)

238453 595

0

200

400

600

800

FY09 FY10 FY11

Net profit

CAGR: 58%, 2.5x (Rs mn)

0

10

20

30

Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11

Market Cap

(Rs bn)Mcap 10x

Mcap 7x

Kwality Dairy

16 December 2011 13

Exhibit 27: Co-operative structure

Dairy Co-operatives No. of dairy

plants

Capacity (mn LPD)

Brand Product range

Andhra Pradesh Dairy Development Co-operative Federation Ltd

12 2.4 Vijaya Table butter, Ultra High Temperature milk, Skim Milk Powder, Ghee, Flavored milk, Khoa, Pasteurized butter, Kulfi, Processed Cheese

Bihar State Co-operative Milk Producer's Federation

10 0.8 Sudha Pure Ghee, Butter, Ghee, Paneer, Lassi, Rasagolla, Peda, Ice-cream, milk cake

Gujarat Co-operative Milk Marketing Federation

19 6.6 Amul Infant milk food, Instant milk mix, Ice-cream, Skim milk powder, Ghee, Dairy whitener, Paneer, Sweetened condensed milk, Malai peda, Gulabjamun mix, Shrikhand, Pizza Cheese, Butter

Haryana Dairy Development Co-operative Federation

5 0.5 Vita Ghee, Paneer, Table Butter, WMP, Dahi, Flavoured milk, Milk cake

Himachal Pradesh State Co-operative Milk Producers' Federation

3 0.03 Him Paneer, Ghee, Table butter, Curd

Karnataka Co-operative Milk Producers' Federation

15 2.1 Nandini Skim milk powder, Paneer, Pure Ghee, Badam Burfi, Gulabjamun, Pasteurized butter, Pure milk khoa, Ice-cream, Toned milk curd

Kerala State Co-operative Milk Marketing Federation

9 0.9 Milma Instant dairy whitener, Ice-cream, Flavored milk, Skim milk powder, Ghee, Skimmed milk curd, Pasteurized butter, Peda

Maharashtra Rajya Sahakari Dudh Mahasangh Maryadit

29 3.8 Vikas, Mahanand, Gokul, Dhawal,

Dudh Pandri, Warana, Krishna, Katraj, Rajhans, Koyna, Shivamrut

Pasteurized Butter, Pure Ghee, Lassi, Shrikhand, Butter Milk, Flavoured Milk, Paneer, Peda

Punjab State Co-operative Milk Producers' Federation

9 1.6 Verka Ghee, Flavored Milk, Paneer, Ice-cream, SMP, WMP, Lassi, Table Butter, Sweets , Cheese

Madhya Pradesh State Co-operative Dairy Federation

5 1.0 Sneha, Sanchi Pure Ghee, UHT Milk, Lassi, Skim Milk Powder, Pasteurized Butter, Flavored Milk, Butter Milk

Orissa State Co-operative Milk Producers' Federation

5 0.1 Omfed Pure Ghee, Butter, Sweet Curd

Pradeshik Co-operative Dairy Federation (UP)

16 1.7 Parag Ghee, Milk Cake, Paneer, White Butter, Table Butter, Skim Milk Powder

Rajasthan Co-operative Dairy Federation

15 1.4 Saras Pure Ghee, Shrikhand, Flavoured Milk, Tetra Pak Milk, Cheese, Paneer, Lassi, SMP, WMP, Dairy Whitener, Table Butter, White Butter, Dahi, Shrikhand, Ice Cream, Rasgulla, Chhach, Khoa / Mawa, Peda, Kalakand

TamilNadu Co-operative Milk Producers' Federation

15 2.7 Aavin

Skim Milk Powder, Milk Khoa, Milk Peda, Pure Ghee, Butter, Cheese, Yoghurt, Table Butter, Flavored Milk , Ice-cream, UHT Standardized Milk, Curd , Butter Milk, Badam Powder, Dates Khoa

West Bengal Co-operative Milk Production Federation

6 1.3

Ben’s, Bhagirathi, HIMUL,

Midmilk, Mother Dairy, Metro

Dairy, Ben’s Torsha

Table Butter, Ghee, Ice Cream, Peda, Lassi, Paneer, Curd, Flavored Milk, Yoghurt, Misti Doi

Source: NDDB, Almondz Research

16 December 2011 14

Kwality Dairy

Financial summary (Rs mn)

Income Statement FY09 FY10 FY11 FY12E* FY13E Net sales 5,828 10,541 16,080 22,460 31,631 Other operating income - Total operating income 5,828 10,541 16,080 22,460 31,631 Less: Total operating expenses

5,565 10,040 15,085 20,630 28,795 Raw materials 5,376 9,788 14,594 19,956 27,783

Employee cost 16 22 39 67 90 SG&A 174 230 452 607 922 EBITDA 263 501 995 1,830 2,836

EBITDA margin (%) 4.5 4.8 6.2 8.1 9.0 Less: Depreciation 12 18 35 128 298 Less: Interest 111 187 356 616 741

PBT (operating) 139 297 604 1,085 1,797

Add: Other income 1 1 2 1 1 PBT 140 297 606 1,086 1,798 Less: Tax 46 118 146 227 360

Effective tax rate (%) 33% 40% 24% 21% 20% PAT 94 179 459 860 1,438

Add: Share of associate Less: Minority interest

Net income (before E.O) 94 179 459 860 1,438 Prior period items - Extraordinary income/(loss) - - - - -

Net income (after E.O) 94 179 459 860 1,438 *Consolidated numbers from FY12 onwards

(Rs mn)

Balance Sheet FY09 FY10 FY11 FY12E* FY13E

Equity capital 182 182 203 234 264 Preference capital Reserves and surplus 139 293 707 3,039 5,916 Net worth 321 475 910 3,273 6,180

Minority interest Total debt 908 2,189 4,248 6,059 7,149

Deferred tax liability 5 6 8 8 8

Total liabilities 1,233 2,669 5,167 9,341 13,337 Gross block 214 322 597 1,683 3,364 Less: Acc. depreciation 125 144 178 307 605 Net block 88 179 419 1,376 2,759

CWIP 2 4 - - -

Goodwill Investments - - - - -

Current assets 2,111 3,237 5,139 8,506 11,361 Inventories 335 486 634 1,633 2,243 Debtors 1,540 2,618 4,117 6,112 7,982

Cash 20 22 15 113 416 Loans and advances 213 110 371 646 718

Other Current assets 3 1 1 1 1 Current liabilities 968 750 393 543 785

Creditors 900 615 228 286 390 Provisions 69 135 165 258 395 Net working capital 1,143 2,487 4,746 7,962 10,576

Misc expenditure - - 2 2 2

Total assets 1,233 2,669 5,167 9,341 13,337

(Rs mn) Cash Flow Statement FY09 FY10 FY11 FY12E* FY13E Net profit 140 297 606 1,086 1,798 Depreciation 12 18 35 128 298 Working capital changes (674) (1,408) (2,294) (3,211) (2,448) Others 96 132 239 478 513 Cash flow from operations (425) (960) (1,414) (1,518) 162

Capital expenditure (17) (110) (272) (1,086) (1,681) Increase/Decrease in investments

- - - - - Others (2) (2) - 1 1

Cash flow from investing (19) (111) (272) (1,085) (1,680) Increase/Decrease in Equity - - - 1,530 1,500 Change in borrowings 565 1,281 2,059 1,811 1,089

Dividends paid (incl. tax) - (21) (24) (24) (27)

Others (119) (187) (356) (616) (741) Cash flow from financing 446 1,073 1,679 2,701 1,821 Net change in cash 1 2 (7) 98 303

Opening cash balance 19 20 22 15 113 Closing cash balance 20 22 15 113 416

(Rs mn)

Ratio Analysis FY09 FY10 FY11 FY12E* FY13E

EPS (Rs.) 0.5 1.0 2.3 3.7 5.4 EPS growth (%) 103.3 91.3 129.3 62.6 48.2

Cash EPS (Rs.) 0.6 1.1 2.4 4.2 6.6 BV (Rs. ) 2 3 4 14 23 DPS (Rs.) 0.1 0.1 0.1 0.1 0.1

Payout (%) 19.4 11.3 4.4 2.7 1.8

Valuation (x) FY09 FY10 FY11 FY12E* FY13E P/E (on adjusted FD EPS) 63.3 33.1 14.4 8.9 6.0 P/CEPS (15.6) (6.9) (4.7) (4.4) 41.1

P/BV 18.5 12.5 7.3 2.3 1.4 EV/EBITDA 28.6 15.0 7.6 4.1 2.7 EV/Sales 1.3 0.7 0.5 0.3 0.2

Dividend yield (%) 0.3 0.3 0.3 0.3 0.3

Profitability ratios (%) FY09 FY10 FY11 FY12E* FY13E RoE 33.0 45.1 66.3 41.1 30.4 RoCE 18.4 15.2 18.7 18.6 17.9

Turnover ratios FY09 FY10 FY11 FY12E* FY13E Debtors (days) 68 72 76 83 81 Inventory (days) 20 15 14 21 25

Creditor (days) 50 28 10 5 4 Net Working capital (days) 39 59 80 99 103 Asset turnover (x) 3.4 3.8 3.6 2.9 2.6

Solvency ratio (x) FY09 FY10 FY11 FY12E* FY13E

Gross debt /equity 2.8 4.6 4.7 1.9 1.2 Net debt /equity 2.8 4.6 4.6 1.8 1.1 Net debt/ EBITDA 3.4 4.3 4.3 3.2 2.4 Interest Coverage (EBIT / erest)

2.3 2.6 2.7 2.8 3.4

Growth ratios (%) FY09 FY10 FY11 FY12E* FY13E Net sales 75.0 80.9 52.5 39.7 40.8 EBITDA 106.4 90.7 98.5 83.9 55.0

PAT (before E.O.) 103.3 91.3 156.0 87.1 67.2 EPS 103.3 91.3 129.3 62.6 48.2

Operating ratios (%) FY09 FY10 FY11 FY12E* FY13E

EBITDA margin 4.5 4.8 6.2 8.1 9.0 EBIT margin 4.3 4.6 6.0 7.6 8.0 PAT margin 1.6 1.7 2.9 3.8 4.5

Other income/PBT 0.7 0.3 0.4 0.1 0.1

Effective Tax rate 33.1 39.7 24.2 21.5 22.0

Kwality Dairy

16 December 2011 15

Team Coordinates Institutional Equities Team Sector Contact No. E-mail Id

Harjit Singh Business Head 91-22-67526601/2 [email protected]

Research Team

Amit Shah Capital Goods & Power 91-22-67526648 [email protected] Ankit Jain Automobiles 91-22-67526655 [email protected] Darpin Shah Bank & NBFC 91-22-67526643 [email protected] Indrajit Mitra Economy 91-22-67526639 [email protected] Mangesh Kulkarni Manish Raj

Bank & NBFC Cement

91-22-67526642 91-22-67526656

[email protected] [email protected]

Niral Dalal Information Technology 91-22-67526645 [email protected] Parul Patel Cement 91-22-67526647 [email protected] Ronald Siyoni Shivraj Gupta

Real Estate and Midcaps Bank & NBFC

91-22-67526650 91-22-67526654

[email protected] [email protected]

Sundar Subramoney Infrastructure 91-22-67526646 [email protected]

Sales Team

Roshan Shah Director - Sales 91-22-67526675 [email protected] Nevil Dedhia Sales 91-22-67526617 [email protected] Ritesh Shah Sales 91-22-67526661 [email protected]

Shyam Gupta Sales Trader 91-22-67526662 [email protected]

Derivatives Team

Chandrashekhar Kabadi Sales Trader 91-22-67526672 [email protected]

Rameshwar Singh Sales Trader 91-22-67526671 [email protected]

Dealing Team

Chetan Lodaya Dealer 91-22-67526664 [email protected] Jignesh Vadoliya Dealer 91-22-67526663 [email protected]

Technical Team

Gurudatta Dhanokar Technical Strategist 91-22-67526669 [email protected]

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Disclaimer This Document has been prepared by Almondz Global Securities Ltd. The information, analysis and estimates contained herein are based on Almondz’s assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Almondz opinion and is meant for general information only. Almondz, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Almondz expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Almondz, its affiliates and their employees are holding or may hold positions in securities referred to herein. Almondz or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.

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