IPO Analysis: Parag Milk Foods

After Prabhat dairy, Parag Milk Foods is hitting the markets with its IPO offer comprising a fresh issue of shares of 133 -137 lacs and offer for sale of 205.7 lacs shares in the price band of Rs 220-227 per share. This IPO will raise an estimated Rs 750 -764 crore. The lot size is 65 equity shares. Retail investors will be allotted only 10 per cent of the shares, which will be sold at a discount of Rs 12 per share. Excluding the shares reserved for employees, the retail investors will get an opportunity for subscribing to only 3.078 lacs shares.

Company will use 50 per cent of funds raised by fresh issue for expansion, 33 per cent for repayment of working capital loan, 16.6 per cent to meet the IPO related expenses and rest for expansion of Bhagyalaxmi farms.

Company Background:

Parag Milk Foods offers products - liquid milk, cheese, ghee and whey which contribute 20.3, 18.7, 28.5 and 7.9 per cent respectively to the revenue. It has very strong urban presence across brands in states like Gujarat and Maharashtra. It competes with Prabhat dairy and Amul in these states and competes in southern states with Hatsun Agro, Heritage Foods, Tirumala Milk Products and cooperative dairies. Company has two plants located in the milk producing belts in Manchar, Maharashtra; and Palamner, Andhra Pradesh with installed capacity of 2 million litres per day.

Company plans to spend to the tune of 8-9 per cent of sales on brand building, of which 2.5 per cent will be direct advertising and rest via promotional activities. Company offers three different supply chain logistics for the product lines viz. ambient, chilled and frozen. Parag Milk Foods wants to spread its reach across PAN India unlike southern region based companies Hatsun and Heritage. For this they are in the process of strengthening distribution and stockist network to directly reach 125000 outlets across the country. They are also exploring the opportunity for setting up plant in the Eastern part of the country. Company will like to grow its portfolio of value added products to improve margins.

Parag, under the brand “Go”, is second largest cheese player in India with 32 per cent market share and competes with Amul which enjoys 65 per cent market share. Company has plans to double its cheese-making capacity in India. Parag also locked on big institutional clients like Dominos, Pizza Hut and Papa John’s.

Parag markets ghee under the Gowardhan Ghee brand, which contributes 28.5 per cent to the revenue of the company with market size of Rs 61,800 crore. In India, close competitors for ghee are Patanjali and Amul. Parag targets the youth under brand “UHT” and WHEY which have contributed 7.9 per cent and 4.8 per cent in revenue respectively. Both these brands are growing at the rate of more than 80 per cent for the company, albeit from a small base. Parag’s farm to household fresh milk product (Pride of cow) is a strategic offering with a market size of Rs 2,62,100 crore and is currently not making profit. This product has strong reach in Tier 1 and 2 cities of the west and the south.

Industry Outlook:

Parag Milk Foods Ltd. belongs to Indian Consumer Food- Dairy sector focusing on cow milk based product mix which has low margin business. Any profit that comes in, is through scale of operations, offering value added products and by extensive spending on brand building. There is limitation on the price for liquid milk however value added products can enjoy competitive pricing.

Talking about Global Dairy Industry, demand for cow milk is seeing more traction and is likely to outgrow supply in most of the Asian and African region. Currently India is second largest milk producer and consumer and is expected to grow by CAGR of 4.2 per cent over 2015-2020. The organised dairy market, currently 30% of the total market is expected to grow at CAGR of 19.5 per cent.

Financial Front:

The Company has grown at a CAGR of over 21.6 per cent over FY11 to FY15 and has posted revenue of Rs 1440.5 crore in FY15 and Rs 1231 crore in the first nine months of FY16. The earnings (EBITDA) CAGR of nearly 21.05 per cent has resulted in operating profits of Rs 108.2 crore in FY15; and Rs 108 crore in the first nine months of FY16. Bottom-line has been reported at Rs 26 crore in FY15; and Rs 31.9 crore in the first nine months of FY16. On the margin front, the company reported EBITDA margin is around 8.8 per cent in 9MFY16 as against 7.6 per cent in FY11 and PAT margin is around 2.6 per cent in 9MFY16 as against 2.1 per cent in FY12.

Valuation:

On the valuation front, company at higher price band is available at P/E of 45x on post issue as we annualised 9MFY16 earnings; whereas Prabhat Dairy is currently trading at P/E of 46.6x on TTM basis with EPS of Rs 2.4. In our analysis, we see that company looks costly against other peers except Hatsun Agro which is trading at a PE of 57 and Mcap/ sales of 1.5x its trailing four quarters' revenues.

For retail investors, the sweet spot will be the discount of Rs 12 which will provide instant listing gains. Looking at the company’s fundamentals and valuation we would recommend a long-term perspective to subscribe for this IPO.

Peer Comparison on listed space:

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