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. Also 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 milk is procured through milk collection centres situated at Fatehabad and Rania. The quantity of milk procured from each centre on an average is 25,000 litres 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.
Today, India is the world’s largest milk producer, accounting for more than 17% of the world’s total milk production. It is a cost effective place for manufacturing of dairy products like ghee, cheese, curd, butter, etc. Also, there are import restrictions in place which promote and protect domestic dairy producers. In addition, the urban market for packaged milk is expected to grow by 33% to 43 500 crore in 2015.
With the removal of ban on the export of Skimmed Milk Powder in June'2012 and Whole Milk Powder & Dairy Whitener in November'2012, Kwality started exporting it's products to various countries including: Algeria, Afghanistan, Bangladesh, Iran, Japan, Jordan, Lebanon, Togo, Pakistan, Saudi Arabia, Seychelles, Syria, Turkey, UAE, Yemen and is planning to export to other countries viz Australia,Netherland, Singapore, Netherlands etc.
Kwality Limited 5-year financials and margin summary:
Kwality has a market cap of 852 Rs.Cr., and trailing 12-moth earnings of 126 Rs.Cr., translating to a P/E of 6.7 and P/S of 0.23. I believe investors are not taking into account the immense growth prospects of the company, even in the presence of intense competition.
I have done a three-stage DCF model with the following assumptions:
- Kwality will grow earnings by 10% in the next 5 years, 5% in years 6-10 and 2% thereafter
- 12-month trailing profit is 126 Rs.Cr.
- Discount rates used are 8%, 10% and 12%
• Great potential for export of milk products.
• Expanding domestic market for dairy products.
• Increasing demand for milk as well as value added consumer products.
• By products utilization for import substitution.
• Liberalized Government policies in dairy sector.
• Availability of diverse germplasm of cattle and buffaloes that have unique features like heat tolerance, disease resistance, draft
ability and ability to survive, breed and produce under stress conditions.
• Availability of animal production technologies for faster development and effective implementation.
• Market information intelligence system for milk and milk products.
b) Increase in input costs change in tax structure, change in interest rates, change in Government polices /laws of land , development and stability of Indian economy against the negative external and internal forces may also impacts the overall performance of the company.
c) Profitability may be affected on account of competition from existing and prospective manufacturers of the company products.
d) Dairy business is primarily influenced by monsoon. Unfavorable monsoon may affect the milk availability.
Kwality Limited is a fast-growing dairy company which is significantly undervalued according to my metrics. There is intense competition in the field, but the company is executing well and is positioned to gain from India's growing milk market. Those who missed buying Hatsun Agro stock might consider this a great opportunity to capitalize on the dairy growth trend.