Devendra Shah turned Parag Milk Foods into one of the most profitable dairy businesses. His secret: High-value milk products, especially cheese
In early 2008, a few months before the global economy went into a tailspin, Devendra Shah, the pudgy boss of Parag Milk Foods, took his boldest bet ever. In those days, India, which produces 127 million litres of milk a day, converted just 40 tonnes of that yearly flood into cheese, according to industry estimates. Most of this was made by Amul and sold to retail consumers.
Shah, who had set up his dairy 16 years ago in 1992 in Manchar, an hour’s drive from Pune, believed that India was on the cusp of a huge jump in cheese consumption. Now, this was before Indians had begun devouring pizzas faster than companies could serve them. Dominos had only 62 stores across India, a fraction of the 576 it has today. Other pizza chains, where they existed, were relatively smaller.
But Shah could not have known about the explosion ahead or the risks. If he had gone about analysing this opportunity in a conventional way—looking at the amount that would have to be invested, the return on that investment and so on—he would probably have decided it wasn’t worth the risk. But he did what a classic entrepreneur would—he deleted the Excel sheets and took a gut call. “I realised it was now or never,” he says. He decided that there was an untapped opportunity in processed cheese and that Parag Milk Foods would ride the coming wave. And Shah didn’t want to set up a small plant. He toured Europe for the best technology and by the end of the year he’d signed on for a 40-tonne cheese plant.
Overnight, Parag Milk Foods had doubled India’s cheese-making capacity.
It’s a decision that has paid off in spades. Cheese consumption has zoomed over the years and Parag has a lock on institutional clients such as Domino’s, Pizza Hut and Papa John’s. The company’s revenues have grown at a fast clip of between 20-30 percent in the last five years. It closed last fiscal with a top line of Rs 950 crore, most of it on the back of value-added products like cheese, ultra high temperature (UHT) milk and ghee.
Parag’s success has not gone unnoticed by private equity investors, hungry to be part of a growing, healthy, profitable business opportunity. Since 2008, the company has raised two rounds of capital from Motilal Oswal Private Equity and IDFC Alternatives. In September 2012, Motilal Oswal, which put in Rs 60 crore in 2008, diluted half of its 20 percent stake in favour of IDFC. (IDFC put in Rs 155 crore for a 22 percent stake.) Motilal made a 3x return.
The big question: What is Parag doing right that few other dairy entrepreneurs have managed to? Most of the players in the dairy business have remained regional players or have portfolios limited to commodity products like milk and curd. And, more importantly, in India’s Rs 33,200 crore dairy business (as estimated by KPMG), is this dream run sustainable?
Flashback
A generation ago, Shah’s family moved to Manchar, a small town 50 km north of Pune. They came from Gujarat as cloth traders and, for two decades, continued with this traditional business. In the 1960s, Shah’s father realised that farmers in the area had very poor yields from potato, their main crop. He began trading in seeds from Shimla, which produced potatoes with less moisture content. Yields went up and Shah’s family was now looked at with respect within the community.
By the late 1980s, the family had ventured into cold storages to enable local farmers to get better and steadier prices for their produce. While the Shahs were now established and well known, they spotted another opportunity—in the dairy business. This was a time when milk production in the country had zoomed and the farmers of Manchar had few takers for their milk, with supply in the region outstripping demand.
The contrarian Shah decided to set up a small 20,000-litre dairy—but not in the crowded, commodity end of the market.
In addition to focusing on value-added products, Parag had worked hard at building a brand, Gowardhan. Parag hired Mahesh Israni as chief marketing officer from Hindustan Unilever and his efforts are showing. Since Israni’s arrival, packaging of Gowardhan products changed from the erstwhile staid and boring to stand-out and eye-ball catching. The Unilever DNA in Israni gave him the confidence to invest Rs 30 crore on advertising last year. A projected doubling of the media budget this year should help get better rates on television and print.
(This story appears in the 28 June, 2013 issue of Forbes India. To visit our Archives, click here.)