ParagMilkFoods_020516

7/25/2019 ParagMilkFoods_020516

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sharekhan ipo fash Parag Milk Foods

Sharekhan May 02, 20161

Parag Milk Foods

IPO Flash

Visit us at www.sharekhan.com May 02, 2016

About the issue

Parag Milk Foods Ltd (PMFL) is coming out with an initial

public offering (IPO) to raise Rs753-767crore from the

equity market at a price band of Rs220-227 per equity

share. The offer is being made through a mix of offer for

sale (OFS) of 2.057 crore shares and a fresh issue of 1.33-

1.37 crore shares based on the upper end and the lower

end of the price band. IDFC PE and IBEF & IBEF I (private

equity funds of Motilal Oswal) are selling 0.83 and 0.6

crore shares respectively under the OFS option. On the

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before investing.

other hand, funds raised through fresh issue of shares will

be largely utilised for expansion and modernisation of

existing manufacturing facilities and partial repayment

of working capital debt.

Selling shareholders details

No. Name of sellingshareholder

No. of equityshares offered

1 IDFC PE 8,259,928

2 IBEF I 3,917,2383 IBEF 2,109,283

4 Promoter group individuals 3,100,000

5 Others 3,186,124

Total OFS 20,572,573

Objects of the issue

The net proceeds from the issuance of the fresh issue

will largely be utilised for expansion and modernisation

at existing facilities and repayment of working capital

loans.

Objects of the issue Rs in crore

Expansion and modernisation plan 147.7

Investment in subsidiary for nancing capital

expenditure

2.3

Partial repayment of working capital loan 100

General corporate purpose 50

Funds raised through fresh issue 300

IPO details

Issue opens Wednesday, May 4, 2016

Issue closes Friday, May 6, 2016

Price band Rs220-227 per share

Discount of Rs. 12 for retail bidders

and employees

Issue size Rs749.93Rs764.33 crore

Type of issue Fresh issue and offer for sale

Fresh issue 1.33-1.37 crore shares

Offer for sale 2.057 crore sharesOffer size 3.38-3.42 crore shares

Face value Rs10

QIB portion Not less than 75% of the Issue size

Non-institutional

portion

Not more than 15% of the issue size

Retail portion Not more than 10% of the issue size

Employee

reservation

0.3mn equity shares

Shareholding patternPre- & Post-issue (%)

Shareholding pattern Pre-issue Post-issue at Rs220 Post-issue at Rs227

Promoters (A) 33.8 28.4 28.5

Promoters group (B) 27.8 19.6 19.7

Promoters and promoters group (A+B) 61.6 47.9 48.2

IDFC PE, IBEF & IBEF I 29.6 7.8 7.8

Others & public 8.8 44.3 44.0

Total number of shares 100.0 100.0 100.0


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Company background

Parag Milk Foods Ltd (PMFL) is one of the leading

manufacturers and marketers of dairy-based branded

foods made from cow milk only, with a pan-India

presence. The company commenced operations in

1992 and has evolved from a mere milk collection and

distribution company to dairy-based branded consumer

products company, manufacturing a diverse range of

products including cheese, ghee, fresh milk, whey

proteins, paneer, curd, yoghurt, milk powders and dairy-

based beverages. PMFL operates through two plants

located at Manchar (Pune district-Maharashtra) and

Palamaner (Chittoor districtAndhra Pradesh). Both these

plants have milk processing capacities of 1.2 million

litres per day and 0.8 million litres per day, respectively,

while cheese is manufactured only at Manchar plant,

which has a raw cheese production capacity of 40 metric

tonne (MT) per day. The ultra heat treatment (UHT)products are manufactured at Palamaner plant only and

all other products are made at both the facilities. Milk

is one of the key ingredients for manufacturing all PMFL

products which is procured from 29 districts across the

Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu.

PMFLs products are marketed through four brands,

Gowardhan, Go, Pride of Cows and Topp Up, through

which the company targets specic end user segments.

The above mentioned products are distributed pan-India

through the companys extensive sales and distribution

network.

Key positives

Fully integrated business model

PMFLs operations encompass the processes of dairy

farming, milk procurement, processing, distribution

and branding, thus resulting into a fully integrated

business model. PMFLs supply chain network does milk

procurement from 29 districts across Maharashtra,

Andhra Pradesh, Karnataka and Tamil Nadu, through over

3,400 village level milk collection centres. The average

milk procurement for the period April-December 2015

stands at 1 million litre, which is up from a level of 0.77

million litre as of FY2014. Well established relationships

with farmers in the proximity of collection and chilling

centres, ensure consistent and un-interrupted supply of

milk (key input) for the company which signals at a strong

procurement base. Both the plants have automated

equipments which bring in operational efciencies,

quality control and lower production losses. Therefore, a

fully integrated business model offers exibility in terms

of planning and strategising which augurs well for the

company.

Capacity details

Products UnitsCapacities# *Capacity utilisation (%)

Manchar Palamaner Total Manchar Palamaner

Milk processing Litres/day 120,000 80,000 200,000 74 66

Milk powders (includes dry capacity for

whey powders and dairy whiteners)

MT/day 70 40 110 65 86

Liquid milk in pouches Litres/day 200,000 175,000 375,000 62 41

Flavoured milk Packs/day 30,000 70,000 100,000 28 16

UHT products Litres/day 0 165,000 165,000 0 33

Cheese paneer MT/day 40 0 40 81 0

Ghee MT/day 40 30 70 72 13

Butter MT/day 50 25 75 17 81Curd (includes pouch curd, cup curd,

fruit yoghurt and shrikhand)

MT/day 20 40 60 43 75

Whey processing Litres/day 400,000 0 400,000

Source: PMFL RHP

* As per nine months ended December 2015

# As per IMARC Report, dated as of July 30, 2015, relating to the production capacities at PMFLs facilities, for the products specied


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under the brand Pride of Cows is directly delivered to

the retail users and is sold only in Mumbai and Pune. Withrespect to the other products with a low unit price, thecompany has a separate route to market which focuseson tier-3 cities and rural areas in India. Therefore, a wellpenetrated and a structured distribution network resultsin an efcient sale of the companys products and also

promotes brand visibility. Going ahead, the company hasplans to add up six more depots during FY2017, of whichtwo each would be in the north and the south region andone each in the west and the east region. The increasingnumber of depots will enable improved supplies to

retailers and increase the penetration in existing markets.

Region-wise distribution network

Region Depots Super

stockist

Distributors

(greater than)

Mumbai 1 2 250

North 5 31 450

East 2 17 300

West 4 28 800

South 3 26 1,200

Financial statement gradually improving

PMFL has exhibited an improved top-line growth with de-cent nancial track record. For FY2011-15, the top lineregistered a compounded annual growth rate (CAGR) of21.6% wherein the top line grew from the level of Rs658crore in FY2011 to Rs1,438.7 crore in FY2015. The top linestands at Rs1,230.6 crore as of M9FY2016. The earnings

before interest, tax, depreciation and amortisation (EBIT-DA) CAGR for FY2011-15 is at 20.7% wherein the operatingprot for FY2015 stands at Rs106 crore which is up froma level of Rs50 crore as of FY2011. The operating protfor the period M9FY2016 stands at Rs107.5 crore. The netprot for FY2015 stands at Rs26 crore as against a loss ofRs0.4 crore for FY2011, while it has substantially improvedto Rs31.9 crore for M9FY2016. PMFLs debt-equity ratio hasdemonstrated signicant improvement and is down to alevel of 1.3x (debtRs365.2 crore) as of M9FY2016 from ahigh of 7.7x (debtRs300 cr) as of FY2011.

Diversied product portfolio helps address the needs

of a diverse customer segments

PMFL over the years has built a diversied product

portfolio which includes a variety of milk-based products

manufactured using cow milk. The products can be

broadly classied into the following segments;

Some of the key products include fresh, premium

fresh and UHT milk, ghee, cheese, milk powders, whey

proteins, dairy-based beverages, curd, paneer, shrikhand,

fruit yoghurts and fresh cream. In addition to these, the

company has recently introduced dairy-based products,

which focus on consumer health and nutrition. PMFL sells

its products to a variety of end users across the business-

to-business (B2B) as well as business-to-consumer (B2C)

categories. While the B2B category constitutes around10-12% of the revenues, the balance is constituted by the

B2C category. In the B2B segment the key clients include

Nestle, MTR Foods, Mother Dairy Fruits & Vegetables and

Jubilant FoodWorks Pvt Ltd. In the B2C segment fresh

milk, ghee and cheese are some of the key products

preferred by the customers. PMFL has a 32% market

share in the domestic cheese market and also has the

largest cheese plant in the country with a capacity of

40MT per day. Thus, a diversied product portfolio and

a diverse range of customers help PMFL to tide over the

concentration risks associated with operations in specic

product and customer segments.

Extensively spread out distribution network across India

In order to cater to the geographically spread out customer

base, PMFL has established a well diversied pan-India

sales and distribution network, which consists of 15

depots, 104 super stockists and over 3,000 distributors.

The companys depots are present in 13 states and union

territories in India, which facilitates in supplying products

to a wide network of retail stores including modern day

trade channels like super markets, hypermarkets and

smaller format retail stores. The premium fresh milk sold

Improving nancials

Source: Company

-2%

0%

2%

4%

6%

8%

10%

0

200

400

600

800

1000

1200

1400

1600

FY11 FY12 FY13 FY14 FY15 9M FY16

Net sales (Rs Cr - LHS) OPM (% - RHS) NPM (% - RHS)

Diversied revenue portfolio

Source: PMFL RHP

20.30%

10.10%

28.50%

18.70%

4.80%

7.90%

9.70%

Fresh Milk Skimmed Milk Ghee Cheese / Paneer UHT Whey Others


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Key concerns

Inability to procure adequate quantity of good qualitycows raw milk at competitive prices

The cows raw milk is one of the primary raw materialsused to manufacture all the products made by thecompany. Further, there is no formal arrangement

the company has entered into with the milk farmers,collection and chilling centres for the supply of milk andso they are not obligated to supply milk to the companyand may choose to sell to anyone as per their discretion.Also, in the absence of an arrangement the procurementprice and quantities may be affected, thus having anadverse effect on PMFLs operations.

Competition

Some of the key products manufactured by PMFL arefresh milk, cheese and skimmed milk powder, in which itfaces stiff competition from players like Amul, Britannia

and Nestle. The company has a 32% market share in thecheese segment in India and is next only to the marketleader Amul. If the competitive pressure increases (either

by the way of aggressive pricing or marketing activities),PMFLs market share could come under pressure.

Leverage position

PMFL had a very high debt-equity ratio of 7.7x as ofFY2011 which the company has gradually reduced to 1.3xas of December 2015. Going ahead, the company plans

to further improve the leverage position to below 1x byFY2017. Further, PMFLs larger portion of debt is towardsworking capital loans. In the event if the company isunable to generate adequate cash in the future to meetthe working capital needs, than the debt levels could risegoing ahead.

Valuation

At a price band of Rs220-227, the issue is priced at 56.1-57.8x its price-earnings (PE) ratio for FY2015 consolidatedearnings per share (EPS) of Rs3.9. Despite similar marginprole, PMFLs valuations at the offer price are at a

premium to some of its nearest peers. The improvementin protability and operating cash ows will be the keyperformance drivers for the company in the near tomedium term.

OPM (%) RoCE (%) P/E (x)

Company FY13 FY14 FY15 FY13 FY14 FY15 FY13 FY14 FY15

Prabhat Dairy 11.4 10.7 10.3 10.7 10.4 10.2 24.3 16.1 38.1

Kwality Dairy 5.6 6.0 6.2 20.2 20.6 19.7 23.6 17.1 16.1

Parag Foods at Rs220 9.3 7.6 7.4 12.6 9.6 13.7 61.8 91.5 56.1

Parag Foods at Rs227 9.3 7.6 7.4 12.6 9.6 13.7 63.8 94.4 57.8Source: Company nancials; Bloomberg

P&L account (consolidated) Rs in cr

Particulars 2011 2012 2013 2014 2015 M9FY16

Total revenues 658.3 899.8 925.0 1,088.2 1,438.7 1,230.6

Materials 514.1 700.6 687.9 835.9 1,100.9 921.4

Employee cost 19.2 29.9 39.8 47.8 57.5 50.8

Other expenditure 74.9 87.0 111.1 122.3 174.0 150.9

Total operating cost 608.1 817.5 838.8 1,005.9 1,332.4 1,123.1

Operating prot 50.1 82.3 86.2 82.3 106.3 107.5

% of sales 7.6 9.1 9.3 7.6 7.4 8.7

other income 0.2 0.8 2.1 1.2 1.8 0.6

PBIDT 50.4 83.0 88.3 83.5 108.2 108.0

Interest 22.5 40.0 40.3 43.7 49.4 34.9

PBDT 27.8 43.0 48.0 39.8 58.8 73.1

Less depreciation 18.1 22.5 26.1 27.5 27.5 23.7

Prot before tax 9.8 20.5 21.9 12.3 31.2 49.5

Tax 10.2 1.5 -1.6 -3.7 5.3 17.5

Reported prot after tax -0.4 19.0 23.6 15.9 26.0 31.9

% of sales -0.1 2.1 2.5 1.5 1.8 2.6

Peer comparision


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Disclaimer

This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This document may contain condential and/or privileged material and is not for any type of circulation andany review, retransmission, or any other use is strictly prohibited. This document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any nancial instrument or as an ofcialconrmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.

The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently veried the accuracy and completeness of the said data and hence it should not be relied upon as such.While we would endeavour to update the information herein on a reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (SHAREKHAN and afliates) are under no obligation to update or keep the informationcurrent. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and afliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investmentdecision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can g o down as well. The user assumes the entire risk of any use made of this information. Each recipientof this document should make such investigations as he deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his ownadvisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Afliates of SHAREKHAN may have issuedother reports that are inconsistent with and reach different conclusion from the information presented in this report.

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Sharekhan and its associates are involved in distribution of the IPO of the Company.

Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Dos and Donts issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Please refer disclaimer for Terms of Use.

Compliance Ofcer: Ms. Namita Amod Godbole; Tel: 022-6115000; e-mail: [email protected] Contact: [email protected]

The views expressed in this report are our views only and have been arrived at after analysis of the public offering details. This is not

a recommendation under our Stock Idea category. It may/may not be included in the Stock Idea by our analysts at a later date.

Balance sheet (consolidated) Rs in cr

Balance sheet 2011 2012 2013 2014 2015 M9FY16

Liabilities

Equity capital 15.8 15.8 16.0 16.0 16.0 66.2

Reserves and surplus 23.2 42.1 65.3 81.2 107.2 211.3

Net worth 39.0 57.9 81.2 97.2 123.2 277.5

Deferred tax liabilities 9.0 10.0 7.5 3.8 5.8 8.9

Total loans 300.3 376.6 455.8 520.5 429.9 365.2

Long-term borrowings 141.7 163.6 232.7 272.6 172.6 129.1

Short-term borrowings 158.6 213.0 223.2 247.9 257.2 236.1

Capital employed 348.3 444.5 544.5 621.5 558.8 651.7

Assets

Fixed assets 233.6 253.2 249.7 279.3 317.1 342.2

Investments 0.0 0.0 0.3 0.3 0.3 0.3

Current assets 239.7 351.8 441.5 543.3 605.5 627.6

other current assets 4.5 26.2 37.3 40.1 52.5 31.8

Inventories 117.0 139.4 139.5 190.3 211.9 226.8

Sundry debtors 85.6 118.7 147.3 163.5 171.5 246.1

Cash and bank balance 1.3 1.8 2.2 4.2 5.6 25.0

Loans and advances 31.2 65.6 115.2 145.3 164.1 97.9

Less: Current liabilities and

provisions

125.0 160.4 146.9 201.4 364.1 318.4

sundry creditors 59.4 85.0 92.2 124.9 180.3 147.1

other current liabilities 44.8 56.5 53.1 76.1 182.9 162.3

Provisions 20.7 19.0 1.6 0.4 1.0 9.1

Net current assets 114.7 191.3 294.6 341.9 241.4 309.2

Capital employed 348.3 444.5 544.5 621.5 558.8 651.7

ParagMilkFoods_020516

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