IPO

Monday, May 02, 2016 Click here for Rating Reckoner
Parag Milk Foods
Caters to full range of dairy products
CM RATING43/100
Parag Milk Foods, promoted by Devendra Shah, Pritam Shah and Parag Shah, is one of the leading manufacturers and marketers of dairy-based branded foods in India. The company commenced its business in 1992, with collection and distribution of milk and has now developed into a dairy-based branded consumer products company with an integrated business model, manufacturing a diverse range of products including cheese, ghee (clarified butter), fresh milk, whey proteins, paneer, curd, yoghurt, milk powders and dairy based beverages targeting a wide range of consumer groups through several brands.

A significant portion of product range includes long shelf-life food and beverage products that enable it to sell products to retail and institutional customers across India. The company derives all of its products only from cows' milk. The company's aggregate milk processing capacity is 2 million litres per day and its cheese plant has the largest production capacity in India, with a raw cheese production capacity of 40 million tonnes per day (source: IMARC Report). Gowardhan and Go are its flagship brands, and they are among the leading ghee, cheese and other value added product brands in India.

The company's brands and products under each brand

  1. Gowardhan
    • Fresh milk in variants such as Vital, Gold, Fresh and T-Star
    • Curd products such as curd, trim curd and buttermilk
    • Ghee
    • Paneer
    • Butter
    • Milk powders such as dairy whitener, milk, skimmed milk powder and whole milk powder
    • Whey proteins and whey permeate powders
    • Gulab jamun mix
    • Shrikhand
  1. GO
    • Cheese products including processed cheese blocks, pizza cheese, cheese spreads, cheese wedges, cheese angles, cheese slices, cheezoo tubes, nacho sauce, filler cheese, shredded natural cheese, mozzarella, cheddar, mild cheddar, orange cheddar, gouda, emmental, parmesan, colby and monterey jack cheese, cream cheese, cheese chutney slice
    • UHT milk: Go Milk, Go Slim Milk and Go Supremo Milk
    • Fresh milk: Go Kidz
    • Curd
    • Fruit yoghurts in six flavors
    • Fresh cream
    • Beverages such as lassi, buttermilk in two flavours, and badam milk
  1. Pride of Cows
    • Premium cow milk: farm-to-home concept of milk
  1. Topp Up
    • Milk in six flavors

The company's manufacturing facilities are strategically located at Manchar in the Pune district of Maharashtra and Palamaner in the Chittoor district of Andhra Pradesh, which have a high population of dairy cows, with milk processing capacities of 1.2 million liters per day and 0.8 million liters per day, respectively. The company produces cheese and whey products only at its Manchar facility, UHT products only at its Palamaner facility, and other products at both facilities.

As of February 29, 2016, the company employed 1618 personnel across its operations. Significant emphasis is on quality control and product safety at each step of the manufacturing process, right from the procurement of raw milk until the final product is packaged and ready for distribution. It has obtained several quality control certifications and registrations for its facilities.

The supply chain network includes procurement from 29 districts across Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu, through over 3,400 village level milk collection centers. The company procures milk from milk farmers and through chilling centers and bulk coolers. The average daily milk procurement for the nine months ended December 2015 and 2014, and the financial years 2015, 2014 and 2013 was approximately 1.00 million liters, 1.00 million liters, 1.05 million liters, 0.77 million liters and 0.85 million liters. The company has an extensive sales and distribution network, which covers 15 depots, 104 super stockists and over 3,000 distributors as of February 29, 2016, spread across most states and union territories in India. The company also has dedicated sales and marketing team comprising 560 personnel based in key distribution centers. Some of its leading institutional customers include leading restaurant and cafe chains such as Yum! Restaurants (India) Pvt Ltd (for Pizza Hut, Taco Bell and KFC), Jubilant Foodworks (for Domino's Pizza) and Sankalp Recreation Pvt Ltd (for Sam's Pizza).

In 2005, the company set up Bhagyalaxmi Dairy Farm at Manchar to educate farmers about best practices of breeding, feeding, animal management and improving productivity. The dairy farm is fully automated and houses over 2,000 holstein bred cows with higher yields of superior quality milk. The company supplies farm-to-home premium fresh milk from its Bhagyalaxmi Dairy Farm, which it markets and sells under the Pride of Cows brand in Mumbai and Pune.

Financial Highlights

The company's net sales for nine months ended December 2015 (9M FY 2016) stood at Rs 1230.60 crore. The OPM stood at 8.7%. The net profit stood at Rs 31.92 crore

For 9M FY 2016, gross fresh milk stood at Rs 250.34 crore, accounting for 20% of the total revenues. Skimmed milk powder and dairy whitener stood at Rs 124.47 crore, which accounted for 10% of the total revenues. Ghee, butter and cream stood at Rs 351.03 crore, which accounted for 29% of the total revenues. Cheese/paneer stood at Rs 230.72 crore, which accounted for 19% of the total revenues. UHT products stood at Rs 58.99 crore, which accounted for 5% of the total revenues. Whey products stood at Rs 36.19 crore, which accounted for 3% of the total revenues. Other products, which include curd, fruit yoghurt, gulab jamun mix and flavored milk, stood at Rs 60.79 crore, which accounted for 5% of the total revenues.

The company's net sales for the year ended March 2015 (FY 2015) increased by 32% to Rs 1438.70 crore. The OPM decreased by 20 basis points (bps) to 7.4%. The net profit has increased by 63% to Rs 25.97 crore due to rise in net sales and flat depreciation and amortization expenses.

In FY 2015, gross fresh milk sales grew by 14% to Rs 262.79 crore, which accounted for 18% of the total revenues. Skimmed milk powder and dairy whitener sales grew by 48% to Rs 301 crore, which accounted for 21% of the total revenues. Ghee, butter and cream sales grew by 32% to Rs 266.98 crore, which accounted for 18% of the total revenues. Cheese/paneer sales grew by 32% to Rs 266.98 crore, which accounted for 19% of the total revenues. UHT products sales grew by 87% to Rs 46.77 crore, which accounted for 3% of the total revenues. Whey products sales grew by 1% to Rs 22.51 crore, which accounted for 2% of the total revenues. Sales of other products, which include curd, fruit yoghurt, gulab jamun mix and flavored milk, grew by 137% to Rs 166.03 crore, which accounted for 12% of the total revenues.

Issues Size and Purpose

The company is coming out with an initial public offering (IPO) amounting to Rs 300 crore at an price band of Rs 215- 227 per share of face value Rs 10 each. Out of Rs 300 crore, the company will spend Rs 147.7 crore on expansion and modernization plan; Rs 2.3 crore on investment in subsidiary for financing the capital expenditure requirements in relation to the expansion and modernization of the Bhagyalaxmi Dairy Farm; Rs 100 crore for partial repayment of the working capital consortium loan; and remaining for general corporate purpose.

Beside the fresh issue of shares, there is also offer for sale of 2.05 crore equity shares, comprising 1.43 crore equity shares by the investor selling shareholders (IDFC PE, India Business Excellence Fund I and India Business Excellence Fund) and 62.86 lakhs equity shares by the other selling shareholders. The offer for sale size at the lower price band of Rs 215 per share works out to Rs 442.25 crore and at the higher price band of Rs 227 per share works out to Rs 466.94 crore.

There is a discount of Rs 12 on the price band of Rs 215- 227 per share for retail investors and eligible employees.

Strengths

The company sells its products under the Gowardhan, Go, Pride of Cows and Topp Up brands, which are well recognized and have been developed to cater to the various sections of the market for dairy based food and beverage products.

The company has a diversified product portfolio and customer base. The diversified product portfolio consists a range of products including fresh, premium fresh and UHT milk, ghee, cheese, milk powders, whey proteins, dairy based beverages, curd, paneer, shrikhand, fruit yoghurts and fresh cream. The company sells its products to several customer categories such as retail customers, hotels, restaurants, institutional customers and caterers. The company is one of the leading suppliers in India of whey protein to consumer product companies such as Nestle India Limited and UTH Beverage Factory Pvt Ltd. The company also sells its skimmed milk powder, whey products, cheese and other products to customers such as McCain Foods India Pvt Ltd, MTR Foods Pvt Ltd, Mother Dairy Fruit & Vegetable Pvt Ltd and Jubilant Foodworks , which utilise its products as ingredients in their operations.

The company is increasing its value-added products portfolio. It recently launched flavored milk with higher protein content under the Topp Up brand and buttermilk under the Go brand with a few variants each. The company has also introduced milk variants on the basis of specific end-use and introduced its T-Star milk to be used to make tea and coffee and introduced Go Kidz milk with high protein content for growing children.

The company has established a pan-India distribution network, which comprised 15 depots, 104 super stockists and over 3,000 distributors as of February 29, 2016. Its depots are present in 13 states and union territories in India and assist in supplying its products to a wide network of retail stores.

Sales tax incentives are granted to the company under the Package Scheme of Incentives (PSI), 2007, from the Government of Maharashtra, Directorate of Industries. Pursuant to the PSI and subject to certain approvals, the company is entitled to refunds on the value added tax paid by it based on capital investment and employment commitment made by it in the Manchar area. The manufacturing facility at Manchar is also entitled to certain income tax incentives pursuant to Section 80(IB) of the Income Tax Act, 1961. The company is entitled to claim deductions of 100% for the first five years (which was till FY2013-14) and 30% for the next five years (till FY2018-19). Further, the company has received an in-principle approval for certain additional tax incentives with respect to its expansion plans at the Manchar facility, subject to compliance with certain conditions. Similarly, the company is entitled to claim deductions of 100% for the first five years (which was till FY2013-14) and 30% for the next five years (till FY2018-19) for its Palamner , Andhra Pradesh plant.

Weaknesses

The dairy products industry is intensely competitive.

The manufacturing facilities and procurement operations are concentrated in a few regions and any adverse developments affecting these regions could have an adverse effect on business, results of operations and financial condition

The company has a substantial amount of outstanding debt, which requires significant cash flows to service, and limits its ability to operate freely. As of February 29, 2016, the total indebtedness based on secured and unsecured funds was Rs 394.79 crore and secured non-funds Rs 0.63 crore.

The business operations are dependent on supply of large amounts of raw milk and the inability to procure adequate amounts of quality raw milk at competitive prices could adversely affect results of operations.

Improper storage, processing or handling of raw milk and dairy products may result in spoilage of and damage to, such raw milk and dairy products which may adversely affect business prospects, results of operations and financial condition.

The company has in the past entered into transactions with entities in which its employees are interested and likely do so in the future, which may potentially involve conflicts of interest with the equity shareholders.

Valuation

At the lower price band of Rs 215 per equity share of Rs 10 face value, the P/E works out to 42.8 times the annualized EPS of Rs 5 (on post-IPO equity) for the nine months ended December 2015 and the P/E works out to 69.9 times the EPS of Rs 3.1 (on post-IPO equity) for the financial year ended March 2015 . At the upper band of Rs 227, P/E works out to 44.6 times the annualized EPS of Rs 5.1 (on post-IPO equity) for the nine months ended December 2015 and the P/E works out to 73.1 times the EPS of Rs 3.1 (on post-IPO equity) for the financial year ended March 2015.

Comparable companies such as Hatsun Agro Product, Heritage Foods and Prabhat Diary are trading at P/E of 47.89x, 23.59x and 50.2x on the annualized EPS for the nine months ended December 2015 and 126x, 41.5x and 52x on the EPS for the financial year ended March 2015.

Parag Milk Foods: IPO Highlights 

Fresh shares offer size (in Rs crore)300
No. of fresh shares on offer at Rs 220 per share (crore)1.36
No. of fresh shares on offer at Rs 227 per share (crore)1.32
Price Band (Rs)*215-227
Offer for share sales (in crore)2.05
Offer for share sales size at Rs 220 per share (in Rs crore)452.54
Offer for share sales size at Rs 227 per share (in Rs crore)466.94
Total issue size (Rs crore)752-767
Post issue equity at Rs 220 per share(Rs crore)84.05
Post issue equity at Rs 227 per share(Rs crore)83.63
Post-issue promoter and promoter group stake at Rs 220 per share (%)47.52%
Post-issue promoter and promoter group stake at Rs 227 per share (%)47.76%
Issue open date4th May 2016
Issue close date11th May 2016
ListingNSE & BSE
Rating:43/100

*A discount of Rs 12 for retail investors and eligible employees

Parag Milk Foods: Consolidated Financials

Particulars1203(12)1303(12)1403(12)1503(12)1512(09)
Net Sales899.77925.041088.251438.701230.60
OPM (%)9.19.07.67.48.7
OP82.2783.4182.31106.35107.46
Other Income0.782.111.251.820.59
PBDIT83.0485.5283.56108.17108.05
Interest40.0040.2743.7349.3934.93
PBDT43.0545.2539.8358.7873.12
Depreciation and Amortization22.5426.1227.5327.5323.65
PBT before EO20.5119.1312.3131.2549.47
EO0.000.000.000.000.00
PBT after EO20.5119.1312.3131.2549.47
Tax1.61-1.65-3.665.2817.55
PAT before MI and share from associates18.9020.7715.9725.9731.92
MI0.000.000.000.000.00
Share from associates0.000.000.000.000.00
Net Profit18.9020.7715.9725.9731.92
EPS (Rs)*2.22.51.93.15.0
EPS (Rs)**2.32.51.93.15.1
* Annualised on post-issue Equity of Rs 84.05 crore; Face value Rs 10 (issue price Rs 215)
** Annualised on post-issue Equity of Rs 83.63 crore; Face value Rs 10 (issue price Rs 227)
Figures in crore
Source-Capitaline corporate database

Parag Milk Foods: Sales breakup

1303(12)1403(12)1503(12)1512(09)
Sales within India876.91937.351394.091210.44
Outside India49.49149.6946.7420.16
Total926.401087.041440.831230.60
Figures in crore
Source-Capitaline corporate database

Parag Milk Foods: Segment breakup

Manufactured Goods1303(12)1403(12)1503(12)1512(09)
Gross fresh milk200.65230.69262.79250.34
Skimmed milk powder and dairy whitener185.62203.00301.00124.47
Ghee, butter and cream217.39206.78262.90351.03
Cheese/Paneer174.06201.60266.98230.72
UHT products8.9925.0546.7758.99
Whey products20.4522.2322.5136.19
Other products79.1769.98166.0360.79
Total886.33959.321328.981112.54
Traded Goods
Fresh milk1.3115.5926.580.00
Milk products7.2863.7722.6485.34
Total8.5979.3649.2385.34
Grand Total894.921038.681378.201197.87
Figures in crore
Source-Capitaline corporate database

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