Parag Milk Foods that own brands like ‘Gowardhan’ and ‘Go’ brands of milk products is ready to hit the market with its initial public offering (IPO) on 4th May 2016.
Update: Parag Milk IPO is extended till Wed (11-May) and the IPO band is revised to Rs 215-227
Issue Details
- IPO Open : 4th May to 6th May 2016 (closing date extended to 11-May)
- Issue Price band: Rs 220 – Rs 227 per share (revised to Rs 215 – 227)
- Issue Size – Rs 325 crore
- Market lot : 65 shares and in multiples of 65 shares
Background:
Incorporated in 1992, Parag Milk Foods Ltd is Pune based dairy-based branded food producer. Company is involve in collection, distribution of milk and producing dairy-based branded consumer products including cheese, ghee, whey proteins, paneer, curd, yoghurt, milk powders and dairy based beverages. All products of the company are made from cow milk.
Company’s manufacturing facilities are located at Manchar in the Pune district of Maharashtra and Palamaner in the Chittoor district of Andhra Pradesh. Company’s supply chain network includes procurement from 29 districts across Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu, through over 3,400 village level milk collection centres.
Company offers three different supply chain logistics for the product lines viz. ambient, chilled and frozen. Parag, under the brand “Go”, is second largest cheese player in India with 32% market share and competes with Amul which enjoys 65% 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% 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% 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.
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.
Company plans to spend to the tune of 8-9% of sales on brand building, of which 2.5% will be direct advertising and rest via promotional activities.
Competitors: 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.
Industry growth:
India is the second largest milk producer and milk production is expected to grow at a CAGR of 4.2 % over CY2015-20, more than double the growth rate of other top milk producers. The domestic dairy market is expected to be worth $145 billion by 2020. The organised dairy market, currently 30% of the total market is expected to grow at CAGR of 19.5%.
Promoters holdings:
Parag is looking to raise up to about Rs 300 crore by offering a fresh issue of 1.33-1.37 crore shares, while existing shareholders will sell 2.05 crore shares worth about Rs 464 crore (at the upper end of the price band) in an offer for sale (OFS). IDFC PE (83 lakh shares), private equity funds of Motilal Oswal (60 lakh shares), promoters (31 lakh shares) and other shareholders (32 lakh shares) will also put their shares on the block.
Objective of the issue:
The company intends to utilise the money raised from fresh shares to expand and modernise existing manufacturing facilities at Manchar and Palamaner and improve its marketing and distribution infrastructure by investing Rs 147.70 crore.
The company also intends to use Rs 100 crore for partial repayment of a consortium loan for working capital, Rs 50 crore for general corporate purposes and company’s share of issue expense and Rs 2.30 crore for investment in Bhagyalaxmi Dairy Farm.
IPO Issue Allocation
- Qualified institutional buyers (QIBs) are allowed to bid for 75 per cent of the total issue size.
- Non-institutional investors (NIIs) may bid for not more than 15 per cent of the issue size.
- The retail quota limit in the issue has been fixed at 10 per cent.
- A discount of Rs 12 will be offered to retail individual investors (RIIs) and employees (quota limit: 3 lakh shares).
- The lot size is 65 shares.
Financials:
- The Company has grown at a CAGR of over 21.6% 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% 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.
Anchor Investors:
Parag Milk Foods on Tuesday raised nearly Rs.343 crore from anchor investors ahead of its IPO and allotted shares to the anchor investors at Rs.227 apiece. Anchor investors include Abu Dhabi Investment Authority, Alberta Teachers Retirement Fund Board, Copthall Mauritius Investment Ltd, Government Pension Fund Global, Morgan Stanley Mauritius Co. Ltd, Nomura India Investment Fund, Mother Fund and Tata Balanced Fund.
Valuation as compared to its peers:
Based on annualised performance for the first nine months of FY16 and fully diluted shares at the upper end of the price band, the price earnings ratio of Parag Milk stands at 44.7 times compared with 49.1 for Prabhat Diary and 23.9 for Heritage Foods.
On an annualised market cap-to-sales basis, Parag Milk is priced at 1.2 times sales compared with 0.9 times for Prabhat Dairy and 0.5 times for Heritage Foods.
Annualised RoCE for Parag Milk is 12.3 % for FY16E vis-a-vis 19.6% for Heritage Foods, 18.1 % for Hatsun and 9.5 % for Prabhat Dairy.
At the upper end of the price band at Rs 227, stock is available at 50.4 times FY15 EPS and 34.9 times FY16E EPS, while the industry average currently stands at 29.8 times.
Parag Milk’s IPO is expensive compared with its direct competitors such as Hatsun Agro, Heritage Foods, Kwality Dairy and Prabhat Dairy.
Peer Comparison on listed space:
| Companies | Sales | CAGR from FY13-15 | EBITDA Margin % | PAT Margin % | D/E | P/E | EV/ EBITDA | ROE | ROCE | MCap/Sales | P/BV |
| Heritage Foods | 2,292 | 13.80% | 5.2 | 2.2 | 0.4 | 23.6 | 10.2 | 21.8 | 26.6 | 0.5 | 5.1 |
| Hatsun Agro | 3,322 | 16.42% | 8.7 | 2.6 | 2 | 57.1 | 18.8 | 30.7 | 21.9 | 1.5 | 17.5 |
| Kwality | 5,644 | 19.60% | 6.2 | 2.6 | 1.6 | 18.8 | 10.8 | 20.1 | 17.8 | 0.5 | 3.7 |
| Prabaht Dairy | 1,146 | 24.91% | 10.5 | 2 | 0.2 | 46.6 | 9.8 | 3.6 | 10.7 | 1 | 1.7 |
| Parag Milk Foods | 1,642 | 24.71% | 8.8 | 2.6 | 0.6 | 44.9 | 13.1 | 7.2 | 11.7 | 1.2 | 3.2 |
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Analysts believe the issue may offer only limited listing gains given its stretch valuation, but may be good if you are willing to remain invested for medium to long term,
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