Overcoming the crossover challenge in the Indian dairy market

Overcoming the crossover challenge in the Indian dairy market Presenting to Joint Managing Director Mr. Vivek Nirmal June 2016 Heinrich Heine University Ursula Hilgers, Louisa Schuessler, Johannes Gerlach, Hannes Kurz

Mandate Create one of the most profitable dairy companies in India, servicing a large community of diary farmers at the one end and addressing the growing needs of consumers of downstream dairy products at the other June 2016 Heinrich Heine University 2

Recommendation 1. Expand to Madhya Pradesh via opening own stores. 2. Tackle distribution issue via a new distribution in the North East of Maharashtra. 3. Target Tier 2 and Tier 3 areas. June 2016 Heinrich Heine University 3

Agenda 1. Analysis of the Indian market 2. Prabhat Dairy 3. Strategic alternatives to grow 4. Implementation 5. Time and Costs 6. Wrap-up June 2016 Heinrich Heine University 4

Key issues Manage rising milk procurement prices Assess potential Indian markets Balance the B2B to B2C ratio Tackle the worsening of working capital situation June 2016 Heinrich Heine University 5

The income is rising as well as the demand for dairy products Population with income higher than: $11,000 2008: 1% 2020: 9% 2030: 24% Dairy market Indian demand growth rate: 10% Indian supply growth rate: 7% Seize the current market potential June 2016 Heinrich Heine University 6

The Indian market offers huge potential for dairy producers Population: 1.254 billion 28% 72% Expected urbanization: 40% increase by 2030 39% 61% Urban areas - Tier 1 (8 cities) - Tier 2 (50,000 100,000 inhabitants) - Tier 3 (20,000 50,000 inhabitants) Rural population = 0.9029 billion = 0.3511 billion Rural population = 0.7625 billion Urban population = 0.4915 billion Uttar Pradesh, Maharashtra, Bihar, Madhya Pradesh, West Bengal: 47.9% Seize the trend of the growing urbanization June 2016 Heinrich Heine University 7

The produced milk is sold to the organized and unorganized market Produced milk 50% 50% Sold to 20% 80% Unorganized sector: Kirana stores, street vendors Organized sector: supermarkets, hypermarkets Self-consumption Market Organized sector Unorganized sector The higher potential lays within the organized sector June 2016 Heinrich Heine University 8

The Indian market offers huge potential for dairy producers Prabhat Dairy HQ: Navi Mumbai 1,200 people 28% 30% Revenues: 1,171.97 Operating Expenses: 1,023.07 71% 1% 70% Profit after Tax: 24.52 Gross margin on products: 22.4% Milk Value-added milk Value-added milk products B2B B2C Goal: ratio of 50:50 Stay in the Indian market as there is a lot of potential June 2016 Heinrich Heine University 9

Prabhat Diary s options to grow Additional tier1 cities in India Tier 2 and tier3 cities in Madhya Pradesh Less spread customers First mover advantage June 2016 Heinrich Heine University 10

Evaluation of strategic alternatives Criteria Alternative Tier 1 cities in India Tier 2 and tier3 cities in Madhya Pradesh Distribution costs Competition Market potential Internal logistics June 2016 Heinrich Heine University 11

The necessary implementation steps along the supply chain Farmer Production Distribution Stores Branding June 2016 Heinrich Heine University 13

The necessary implementation steps along the supply chain Farmer Production Distribution Stores Branding June 2016 Heinrich Heine University 14

Improve your procurement by negotiating long term contracts with farmers Contract Fixed price for cattle fodder Fixed price for milk per 500ml create security in planning for famers The issue of rising milk prices is tackled June 2016 Heinrich Heine University 15

The necessary implementation steps along the supply chain Farmer Production Distribution Stores Branding June 2016 Heinrich Heine University 16

Increase your production capacity by introducing shift system and additional farmers Two production facilities Maharashtra Introduce 2 shift system Hire 50 new employees Use current equipment Farmers New farmers for sourcing Negotiate contracts Meet the rising demand of milk products June 2016 Heinrich Heine University 17

The necessary implementation steps along the supply chain Farmer Production Distribution Stores Branding June 2016 Heinrich Heine University 18

Build up a distribution center in North East of Maharashtra Identify location Negotiate contract with landlord Construction Production facility Distribution center Retailers Restaurants and others External logistic partner External logistic partner Own outlets Reduce distribution costs by opening the distribution center near your new future markets June 2016 Heinrich Heine University 19

The necessary implementation steps along the supply chain Farmer Production Distribution Stores Branding June 2016 Heinrich Heine University 20

Open new own stores in Madhya Pradesh New stores Madhya Pradesh In total 30 new stores Same product range Create a balance between B2B and B2C ratio as well as meet the trend of urbanization June 2016 Heinrich Heine University 21

The necessary implementation steps along the supply chain Farmer Production Distribution Stores Branding June 2016 Heinrich Heine University 22

Create a higher brand awareness through communication Engage marketing agency Market research Targeted communication Foster the awareness of Prabhat of end-consumers June 2016 Heinrich Heine University 23

Worsening working capital will be tackled by factoring and more efficient internal logistics WC = Current assets current liabilities Inventory management software Reduced inventory turnover Efficient planning of stock Factoring 50% of all receivables Working capital will be improved June 2016 Heinrich Heine University 24

Time frame for implementation plan 1. Improve procurement of milk 2. Increase production capacity by introducing shift system 3. Evaluate locations for distribution center and stores - Identify locations - Negotiate contracts - Build up distribution center and stores 4. Improve inventory management - Software evaluation - Planning, implementing and debugging - Launch systme 5. Implement factoring - Negotiation contracs with possible partners - Conclude contracts 6. Branding 2016 2017 2018 2019 2020 Total time frame for implementation lasts until 2019 June 2016 Heinrich Heine University 25

Time frame for implementation plan 2016 2017 2018 2019 2020 Costs 1. Improve procurement of milk 35 mn 2. Increase production capacity by introducing shift system 175 mn 3. Evaluate locations for distribution center and stores - Identify locations - Negotiate contracts 35 mn - Renovate distribution center and stores 525 mn 4. Improve inventory management - Software evaluation 35 mn - Planning, implementing and debugging - Launch system X 5. Implement factoring 28.7 mn - Negotiation contracs with possible partners - Conclude contracts 6. Branding Total required investment: Rs. 833.7 mn June 2016 Heinrich Heine University 26

Improve Probhat Dairy s Working Capital Situation Current Working Capital: - Current Assets 374.25 - Current liabilities 101.76 = 272.49 Improve Working Capital situation: - Reduce inventory by 15% 4.545 - Sell 50% of receivables to factor 57.4 Assumptions: 90% Cash in for selling receivables - 90% cash in for selling receivables - Costs of factoring: 5% of sold volume - Constant sum of total balance sheet Working Capital after implementation: 210.545 Working Capital Ratio before implementation: 41% Working Capital Ratio after implementation: 31% Working Capital Ratio improves by 10 percentile offering improved liquidity that can be used June 2016 Heinrich Heine University 27

Total required investment and financial forecast 20000.0 18000.0 16000.0 14000.0 12000.0 10000.0 8000.0 6000.0 4000.0 2000.0 0.0-2000.0 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e Revenue PAT Revenue PAT 2016 11719.7 245.2 2017e 12071.3-142.5 2018e 12674.9-175.5 2019e 13308.6 245.8 2020e 13974.0 270.4 2021e 14672.7 297.4 2022e 15406.4 321.2 2023e 16176.7 346.9 2024e 16985.5 374.7 2025e 17834.8 404.6 After the investments in 2017 and 2018 your company will be profitable and grow sustainable from 2019 onwards June 2016 Heinrich Heine University 28

Risk and contingency Impact 2 1 3 Probability 1. Milk price volatility derivatives 2. Increased demand vs. existing production capacity additional third shift 3. Competition from abroad already existing knowledge (experience from Mumbai) + first-mover advantage June 2016 Heinrich Heine University 29

Wrap-up 1. Expand to Madhya Pradesh via opening own stores. 2. Tackle distribution issue via a new distribution in the North East of Maharashtra. 3. Target Tier 2 and Tier 3 areas. Manage rising milk procurement prices Assess potential Indian markets Balance the B2B to B2C ratio Tackle the worsening of working capital situation June 2016 Heinrich Heine University 30

Thank you.