Parag Milk Foods Ltd IPO : Should you Subscribe

Dairy firm Parag Milk Foods Ltd is seeking a valuation of about Rs 2,000 crore through an initial public offering that opens next week. Founded in 1992 as a milk distributor, Parag Milk has developed into a dairy-based branded consumer products company. It makes product
s such as cheese, ghee, fresh milk, whey protein, paneer, curd, yogurt, milk powder and dairy-based beverages. ‘Gowardhan’ and ‘Go’ are its ghee and cheese brands in Indiaparag

IPO Details
IPO Size : The IPO comprises a fresh issue of shares to raise Rs 300 crore and an offer for sale of about 20.05 million shares that could mobilise almost Rs 470 crore for the sellers. Parag IPO will raise an estimated Rs 770 crore.
Issue Price : Rs. 220 – 227
Retail Discount : Rs. 12 per share
Issue Date : Wednesday 4-May-2016 – Friday, 6-May-2016
Lead Managers : Kotak Mahindra Capital, JM Financial institution, IDFC Securities and Motilal Oswal Securities.
Registrar : Karvy Computershare Private Limited
About the Company
Business : Parag Milk foods manufacturing facilities are located at Manchar, Maharashtra and Palamaner, Andhra Pradesh, and its supply chain network includes procurement presence in 29 districts across Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. Of the proceeds of the fresh issue, the firm plans to use Rs 150 crore for expansion and modernisation of its manufacturing facilities at Manchar, near Pune, and at Palamaner in Andhra Pradesh. It also plans to use the funds to repay working capital loans of Rs 100 crore and for general corporate purposes.
Promoters & Venture Funds : Parag Milk Foods Pvt Ltd was promoted by Devendra Shah, Chairman & Managing Director, who has a Bachelor of Commerce degree from Pune University. IDFC Alternatives and Motilal Oswal PE hold 19.21 per cent and 9.11 per cent stake in the company, respectively, besides convertible debentures that will be converted into equity. Both are part-exiting. Post issue promoters stake shall be around 61%.

Financials : Parag Milks Foods income has grown at 20% CAGR.

The Latest figures for 9 months ending Dec2016 are indicated below. The FY15 figures are indicated in brackets.

* Figures in Rs. millions
income 12,148 (14,212)
EBIDTA 1,056 (1,072 )
PBT 339 (187 )
Net Profit 335 (303)
Annualized EPS(Post Issue) 5.3(3.6)
NPM 2.8( 2.1)

Market Prospects: Currently India is 2nd largest milk producer and consumer and market is expected to grow by CAGR of 4-5% in next few years. The organised dairy market, is expected to grow at 19-20%.
Plus Points: This is second issue after Prabhat Dairy in recent times from a established company in dairy sector with better financials & product portfolio.
Risks & Negative Factors:
1) Prolonged draught may affect Milk production
2) There are criminal proceedings outstanding against the Company. These are related to contravention of Food Safety and Standards
3) France International Trade (FI) has filed a special civil suit against our Company in relation to a marketing collaboration and a settlement agreement entered into between FIT and Parag Milk. FIT has alleged that the goods exported by our Company did not meet their requirements, which resulted in alleged pecuniary losses.

Overall Assessment:
1) The organised dairy market, is expected to grow at 19-20% CAGR for next few years
2) Parag Milk will be the second dairy firm to float an IPO after Prabhat Dairy Ltd IPO in September last year which was first not subscribed and price band was brought down. Prabhat received a poor response and its shares made a weak debut on the stock markets. Shares of Prabhat Dairy have not changed much since listing
3) Parag is coming at a PE of around 43. In sept 2015, Prabhat Dairy had come with an IPO at a PE of about 62. Prabhat made a weak debut on bourses and is currently quoting at Rs 111/- against issue price of Rs. 115/- and the PE presently stands > 100. Thus Parag issue has been priced more reasonably.
4) PAT margin of Parag Milk is around 2.0 in FY15 & is expected to improve to 3.0 in current year. PAT Margin (%) of Prabhat is poor at .44 for the last quarter
5) Retail investors will be allotted only 10 per cent of the shares, which will be sold at a discount of Rs 12 per share.
6) Parag has strong brands in Cheese (Go) & Ghee (Gowardhan) & it offers new generation products like Whey, UHT milk, yogurt etc. Parag generates a higher percent of revenues from value-added products like cheese, flavoured yoghurt and ghee.

7) Parag Milk was a early mover in Cheese & yesterday its cheese has been allowed for export to Russia.
8) India Business Excellence Fund promoted by Motilal Oswal has been an investor in the co. & is part exiting.
9) There are certain cases against the company by foreign companies & Tax authorities & could result in financial loss in case of adverse judgement.
10) Another large player Hatsun Agro enjoys good market confidence & has a PE of about 57. Hatsun however has a well proven management.
11) Overall the issue is better priced than Prabhat Dairy and should have a positive listing and looks reasonable.
Disclosure: – I am not a research analyst. Please take advice from your financial advisor before investing

Post Extension of issue till 11/5/2016

Despite good prospects for  Indian dairy industry  and  Parag Milk Foods had made a reasonable foray into
value-added products, the IPO failed to attract institutional support. The Issue was priced more reasonably than Prabhat dairy but was costly compared to Heritage Foods and Kwality. Perhaps the PE asked is on the higher side and confidence in management is not high.  For now the issue is a non starter but subsequent activity in the counter cannot be ruled out but Parag will have to walk the extra mile to convince investors.


Leave a Reply