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Corporate Governance

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Step 5- Management's focus on share price

The company's management should act in the best interest of the shareholders. The next step is to evaluate the management's focus on the share price of the company.

Great businesses take time to flourish. It is the goal of every management to enhance long-term shareholder value by taking tactical decisions. The management should not be unduly concerned over the short-term implications of his decisions. 

Stock prices fluctuate daily. Some stocks are very volatile and tend to be a favorite of market punters who capitalize on these large moves. These large moves are not on account of material changes in the business prospects of the company. There are many other factors such as liquidity, government policies, public sentiments, etc in play that cause wild swings in market prices. Volatility is an inherent function of Equity investments. Patient investors must navigate the troughs & peaks of the market keeping in mind their broader investment outlook. It makes no sense for a long-term investor to track his holdings by the minute.

Likewise, the management must take bold decisions that are beneficial for all the shareholders without being influenced by the movements in its stock price. Investors must assess the past decisions of the management to check if they were motivated by long-term vision or short-term stock price fluctuations.

Analysis of Parag Milk Foods

Quick Snapshot: (Data as of Closing Prices on 18th February, 2021)

Parag Milk Foods is one of those unwonted breeds of dairy companies that have held some ground in a market dominated by Amul. The company has a strong distribution network of 19+ depots, 140+ super stockists, 3,000+ distributors & 3.5 lakh + retail touch points with a pan-India presence. Its clients include major FMCG companies,  prominent food chains, hotels & restaurants. Marquee investors like Radhakrishan Damani, Mukul Agarwal & Akash Bhansali own sizable stakes in the company. 

Product Break-Up

However, off-late things have turned sour for the company. Despite the pandemic-induced demand for milk & milk-products, the financials are not encouraging. The company is struggling to remain relevant despite a slew of product launches & a media-friendly management.  

Profit & Loss (Consolidated Figures ₹ Crores)

The company claims to be India's largest "Dairy FMCG" company. The added impetus on the word FMCG is clearly visible in all of the company's annual reports, investor presentations, conference calls & other disclosures. We found 37 mentions of the word " FMCG" in the Annual Report of the company for 2019-20.  Annual Reports of HatsunAgro & Heritage Foods, other listed peers mention this term zero and one times respectively.

We will share with you why this is such a big deal. Devendra Shah, The Promoter CEO of Parag MIlk Foods has on numerous occasions mentioned on air that the market is undervaluing his company compared to other FMCG peers. He strongly believes that his company should be valued at much higher multiples than what it is currently trading at.

Devendra Shah: Thank you very much. Before the closing I am to say that we believe that you now have a better understanding of our business. We now look forward to a True FMCG Valuation matrix for us!

- Closing comments of the CEO at Analyst Meet FY18

It is not just bizarre but also unethical for any management to discuss his company's stock price on a public forum. We wonder on what grounds does the company ask for "FMCG multiples''. The primary reasons behind FMCG companies trading at such high Price to Earnings Multiples are the stability of their financials coupled with consistent growth in revenue & profit. However, Investors find no such comfort when they observe the financials of the company. It is stunning to see a "Dairy FMCG" company operating on wafer thin gross margins of 9% compared to that of HatsunAgro which makes 15% & is " principally engaged in the business of processing and marketing of milk, milk products and ice cream"

In 2018, investor meets had become more or less a norm. The company travelled across the length & breadth of the globe to destinations such as Chicago, Frankfurt, Copenhangen, Singapore, United Kingdom & others. The company was trying so hard to sell itself that it took part in almost every investor conference & trade show that was held. Add to it regular media interviews, four conference calls a year and an annual report. The company didn't even spare its quarterly earnings release. Go through any of the fillings and you shall notice the persuasive nature of the promoter beckoning to invest in his company. In such cases, shareholders can only ponder about the time devoted to the core business operations.

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