Buy Parag Milk Foods, price target Rs 321: Elara
PARAG has aligned its loyalty program,e, Bandhan, to benefit small retailers or outlets which have come under distribution recently to encourage range-building and raise frequency of orders to twice a week from once a week.
After applying Theory of Constraints (TOC) by Vector Consultants Group in Mumbai’s distribution network of 40k outlets (addressable universe: 50k) in March 2018, order taking from retailers has shifted to telecallers (100 people outsourced from Team Lease) by Parag Milk Foods. The company’s sales team and distributors will focus only on business development: 1) increase market reach, 2) reactivate dropped retailers visiting stores to identify if peers (Amul & Britannia) have introduced offers to retailers, leading to lower sales, and 3) expand products range with active retailers, the brokerage said.
Bottlenecks in terms of physical order taking by sales team were addressed as 1) a disproportionate time was spent with large retailers or higher focus on just the highest-selling SKU (Ghee), 2) outlets covered by a sales person per beat in a day was 25-30 outlets, with a 30% strike rate vs 100-odd calls made per day by each telecaller with a strike rate of 30-40%, and 3) skewed sales towards month-end to meet sales targets, which also led to dumping.
PARAG has aligned its loyalty program,e, Bandhan, to benefit small retailers or outlets which have come under distribution recently to encourage range-building and raise frequency of orders to twice a week from once a week. The schemes give equal points across SKU for the same product, thereby encouraging small retailers to stock more products and order frequently. We believe an average retailer, ordering six different SKU per bill cut and 8 times in a cycle (month), will be able to garner adequate points to win a gift of more than Rs 2,000 per year, it said.
"Initial results for Mumbai via Vector Consultants show 1) ordering of unique SKU has increased 60%, 2) total lines of sales have doubled, 3) repeat orders have gone up 130%, 4) active outlets have doubled, and 5) moving production, supply chain and inventory at the depot level on a replenishment basis has increased fill rates to 96% from 80%. In our view, cost of adding telecallers and schemes given to retailers will be ~0.4% of sales (which is not total cost of TOC) while increased sales due to range-building and higher throughput per store has added ~4-10% incrementally. The project will breakeven in 4-5 months in Mumbai (total time: 18 months)," Elara said.
"We expect a sales CAGR of 18% over FY19-21E, led by category growth and improvement in quality of distribution. The company also has hiked prices by 15% YoY by end of June’19 to pass on milk inflation of around +25-30% YoY in FY20. We reiterate a buy rating on the stock with a target price of Rs 321 at 15 times FY21E earnings," the brokerage said.