What Should You Do With Prabhat Dairy IPO

Issue
Prabhat Dairy integrated milk and dairy products company based out of Maharashtra (Shrirampur, Ahmednagar). It is entering the capital market with an initial public offering of fresh issue aggregating up to Rs 300 crore and an offer for sale of up to, 14,706,000 equity shares (comprising of 3,151,000 equity shares by Nirmal Family Trust, up to 6,580,000 equity shares by the India Agri Business Fund, up to 23,000 equity shares by the Real Trust, and up to 4,952,000 equity shares by Societe de Promotion et de Participation pour la Cooperation Economique). The total issue size will comprise around 38 per cent of the post issue or expanded equity. The price band has been fixed at Rs 140-147 and there is discount of Rs 5 per share for retail bidders. 

The IPO proceeds will be utilised for part pre-payment of loans to the tune of Rs 185 crore and to meet capital expenditure to the tune of Rs 35.1 crore.

• Issue Opens on : Friday, August 28th, 2015
• Issue Closes on : Tuesday, September 1, 2015
• Public  Offer: Fresh Issue of 2.04-2.14 crore shares and offer for sale of 1.47 crore shares
• Price Band : Rs. 140 to Rs. 147 per Equity Share, Rs 5 discount for retail bidders
• Lot Size: 102 equity Shares and in multiples of equity shares thereof

Company
Prabhat Dairy was incorporated in 1998 by Mr. Sarangdhar R. Nirmal and is an integrated milk and dairy products company in India with aggregate milk processing capacity of 1.5mn litres per day, catering to institutional and retail customers. The company produces fresh, dry, frozen, cultured and fermented dairy products, including pasteurized/ flavoured/ sweetened condensed/ ultra-pasteurised or ultra-high temperature milk, yoghurt, dairy whitener, clarified butter, milk powder, ingredients for baby foods, lassi and chaas. Company procures a majority of its raw milk requirements directly from milk farmers and registered milk vendors in Maharashtra. The company employs procurement partners called “Prabhat Mitras”, who coordinate the milk procurement process and also educate farmers on cattle breeding/ feed and medication/ finance and insurance, as well as the delivery and storage of milk at collection centres. As on February 28, 2015, the company had 350 distributors, 450 milk collection centres, over 15 milk chilling plants and over 80 bulk milk coolers. Milk processing takes place from the company’s 2 manufacturing plants at Shrirampur at Ahmednagar (1.1mn litres/day) and Navi Mumbai (0.4mn litres/ day).

The segregation of company’s current revenue in terms of institutional and retail is 76 % and 24 % respectively. The rise in retail proportion from 11 per cent to current level has been achieved in last three years.  

Financials
On consolidated basis revenue of company has increased at a CAGR of 27.45 per cent for the four year ending FY15 and stood at Rs 1001.73 crores for FY15. The net profit in the same period increased at annualised rate of 30.3 per cent and for FY15 stood at Rs 21 crore.  In terms of product categories, Condensed and concentrated milk (CCM) contributed 29% of total sales followed by Processed and pouch milk that contributed 25% at the end of FY15. What is discouraging is that high margin CCM share has declined from 37 per cent at the end of FY13 to current level. 

Valuation
If we talk about the valuation, Prabhat Dairy’s shares are discounting FY15 consolidated diluted EPS of Rs 2.95 at 64.13 times at higher price band on the expanded equity and without considering Rs 5 discount to retail bidders.  If we compare it with other listed players in the same field such as Hatsun Agro which is available at PE higher than 100, this issue may look cheap. Nonetheless, if we look at return ratios that are one of the parameters that determine this valuation, there is wide difference between both companies. While RoCE and ROE for Hatsun Agro at the end of FY15 stands at 14.7 per cent and 19.5 per cent for FY15 the figures for Prabhat Dairy in the same period is 7.3 per cent and 6.4 per cent respectively. Therefore, the issue price seems to be little bit stretched and hence we advice our readers to skip the issue.