Steep pricing makes it a risky proposition.
When peers with much lower P/E multiple are available, comparing with the highest P/E among the industry to justify an unwarranted price is certainly not in the interest of the investing public.
|
OFFER AT A GLANCE |
|
|
Name |
Prabhat Dairy Ltd |
|
Public Offer |
Fresh Issue of 2.04 cr to 2.14 cr shares and Offer for Sale of 1.47 cr shares of Rs 10 each |
|
Offer % on Total Equity |
38.24% to 38.91% |
|
Post-IPO Promoter Stake |
43.86% to 44.34% |
|
Offer Price |
Between Rs 140 and Rs 147 |
|
Offer Amount |
Rs 505 cr to Rs 516 cr |
|
Application Quantity |
102 & Multiples of 102 |
|
Bid/Offer Opens |
August 28, 2015 |
|
Bid/Offer Closes |
September 1, 2015 |
|
Listing |
NSE and BSE |
|
IPO Rating |
Nil |
|
Book Running Lead Managers |
Edelweiss Financial, Macquarie Capital, SBI Capital |
|
Registrars |
Karvy Computershare |
The IPO
Issue of up to 3.61 cr equity shares at a price band of Rs 140-147 per share aggregating to Rs 516 cr. Retail individual bidder are being offered a discount of Rs 5 per share. The IPO consists of a Fresh Issue of up to 2.14 cr shares aggregating to Rs 300 cr and an Offer for Sale of 1.47 cr shares aggregating to Rs 216 cr, comprising of 31,51,000 shares by the promoters’ Trust (Nirmal Family Trust), 65,80,000 shares by India Agri Business Fund (IABF), 23,000 shares by REAL Trust, and 49,52,000 shares by Societe De Promotion Et De Participation Pour La Cooperation Economique (Proparco).
The Issue will constitute 38.2 to 38.9% of the post-Issue paid up capital of the company. The promoters would hold between 43.86% and 44.34% of the enlarged capital. Investors should apply for a minimum of 102 shares and multiples of 102 thereafter. For the IPO, Edelweiss Financial and Macquarie Capital have been appointed as global co-ordinators and book running lead managers. SBI Capital is acting as book running lead manager. Edelweiss Securities and SBICAP Securities play the role of syndicate members.
IPO Object
Of the net proceeds from the fresh issue, Rs 185 cr is proposed to be used for part pre-payment of loans availed by the company and its stepped down subsidiary. Rs 35 cr is earmarked for meeting capital expenditure and the balance is kept for general corporate purpose.
Background
A farmer’s son, Sarangdhar Nirmal (58), from the village Nirmal Pimpri in the Ahmednagar District of Maharashtra, after obtaining an MBA from Pune’s Symbiosis in 1978, set up a paper board factory at Shrirampur, near Shirdi, aiming to make use of the abundantly available raw material -bagasse from his sugar belt region. Fortunately or unfortunately, he did not fully succeed in the paper board business. In the late nineties, realizing the potential of milk business in his region he closed down the paper board business and started a dairy in the plot just opposite to his paper board unit. Thus was born Prabhat Dairy (PDL) in 1998.
The company commenced commercial production and sale of pasteurized and homogenized cow’s milk in plastic pouches in 1999. More than a decade later, in 2010, production of milk powder with a capacity of 30 metric tonnes per day was started. In 2012 the company received investments worth Rs 80 cr from private equity funds managed by the Rabobank Group, Netherlands. In 2013, it received another Rs 60 cr as investment from Proparco, a subsidiary of Agence Française de Développement. Same year, it commissioned a manufacturing plant with a processing capacity of 300,000 litres of milk per day at Turbhe, Navi Mumbai. In 2015 it started manufacturing cheese with a capacity of 20,000 kilograms per day at its Shrirampur facility.
Over the years the promoter had also floated hordes of companies “to save tax”. Six such companies were amalgamated in 2012 with PDL’s stepped down subsidiary, Sunfresh Agro Industries Pvt Ltd. Further, in 2014, Prabhat Agri Projects Development Pvt Ltd and Prabhat Nutritious and Frozen Foods Industries Pvt Ltd were merged with PDL with effect from April 2013. Currently the dairy products business of group is undertaken by two entities viz. PDL and Sunfresh. Why they require two companies for a related line of business? Also, why a stepped down subsidiary and not a direct subsidiary? There is no convincing answer from the promoter. Of course, as long as Sunfresh remains as a wholly-owned subsidiary of PDL’s 100% subsidiary Cheese Land Agro (India) Pvt Ltd investors need not bother about as the entire profit of Sunfresh will accrue to PDL.
|
PARENT PRABHAT vs SUBSIDIARY SUNFRESH |
|||
|
STATUS |
COMBINED |
STANALONE |
|
|
COMPANY |
PRABHAT |
PRABHAT |
SUNFRESH |
|
(in lakh) |
Mar-15 |
Mar-15 |
Mar-15 |
|
Operating Revenue |
100336 |
87432 |
12905 |
|
Other Income |
97 |
56 |
41 |
|
Gross Income |
100433 |
87487 |
12946 |
|
Operating Profit |
10255 |
4261 |
5994 |
|
Operating Margin % |
10.1 |
4.8 |
46.1 |
|
Interest |
4120 |
1905 |
2215 |
|
Depreciation |
3440 |
1653 |
1787 |
|
Tax |
591 |
314 |
276 |
|
Net Profit |
2105 |
389 |
1716 |
|
Net Oper. Cash flow |
142 |
-1415 |
1557 |
Business & Financials
Prabhat is an integrated milk and dairy products company catering to institutional as well as retail customers. It produces fresh, dry, frozen, cultured and fermented dairy products, including pasteurized milk, flavoured milk, sweetened condensed milk, ultra-pasteurised or ultra-high temperature milk, yoghurt, dairy whitener, clarified butter (ghee), milk powder, ingredients for baby foods, lassi and chaas. Recently cheese, paneer and shrikhand were added to the product portfolio. As of June 30, 2015, Prabhat had an aggregate milk processing capacity of 15 lakh litres per day.
Prabhat’s products are sold under retail consumer brands as well as ingredient products or as co-manufactured products to a number of institutional and multinational companies. In last three fiscals (2013, 2014 and 2015) sales of institutional products represented 85.4%, 85.3% and 75.8%, respectively, while sales of retail consumer products represented 14.6%, 14.7% and 24.2%, respectively. While sales of institutional products have historically contributed to a majority of the revenues, retail consumer products business has significantly grown in recent times.
The company’s consolidated revenue has increased at a CAGR of 36.7% from Rs 287 cr in fiscal 2011 to Rs 1004 cr in FY15, while profit after tax has increased at a CAGR of 22% from Rs 9.48 cr to Rs 21 cr. In the same period, EBITDA has grown at a CAGR of 48%, from Rs 21.38 cr to Rs 102.55 cr. Nevertheless, on a standalone basis, the company’s net profit amounted to just Rs 3.89 cr in FY15 on a top line of Rs 875 cr! In other words the earning per Rs 10 paid-up share was a minuscule 54 paise.
|
PRABHAT’S CONSOLIDATED FINANCIAL PERFORMANCE |
||||
|
(Amount in lakh) |
Mar-15 |
Mar-14 |
Mar-13 |
Mar-12 |
|
Total Revenue |
100433 |
85766 |
64194 |
48382 |
|
Operating Profit |
10255 |
8723 |
7362 |
4946 |
|
Operating Margin % |
10.1 |
10.1 |
11.4 |
10.1 |
|
Interest |
4120 |
3299 |
2969 |
1841 |
|
Depreciation |
3440 |
3346 |
2441 |
1646 |
|
Tax |
591 |
449 |
545 |
508 |
|
Net Profit |
2105 |
2078 |
1407 |
951 |
|
Net Oper. cash flow |
142 |
857 |
5571 |
5350 |
|
Net Cash Profit |
5545 |
5424 |
3848 |
2597 |
|
Networth |
33854 |
31313 |
23719 |
11340 |
|
Equity Cap |
7143 |
2714 |
1695 |
45 |
|
Reserves |
26711 |
28599 |
22025 |
11295 |
|
Net Block |
45179 |
41094 |
34159 |
30389 |
|
Borrowings |
38155 |
25743 |
24171 |
25172 |
Valuation
Prabhat has put a price band of Rs 140-147 which amounts to a market capitalization of Rs 1300-1350 cr. In the listed domain there are many integrated dairy products payers. Yet, Prabhat’s investment bankers have picked up only Hatsun Agro to compare with their client. Hatsun commands a market cap of more than Rs 4300 cr at an ultra high P/E multiple of 112x. If one were to discount on the basis of Hatsun’s standalone performance, Prabhat’s valuation amounts to 335 to 348 times its standalone earnings! Today, integrated players like Kwality and Heritage are discounted 12 and 31 times respectively of their earnings. Compared to these, Prabhat’s pricing is grossly unjustifiable.
It is worth noting here that the selling shareholders’ average cost will be negative post-offer for sale. The cost of private equities IABF/REAL who invested in September 2012 is Rs 49.10 per share. The cost of Proparco, who came in June 2013, is Rs 59.21 and the cost of promoters (Nirmal Trust) is only Rs 7.20. As the four selling shareholders are going to get from the IPO much more than their total investment value, their cost of residual holding (IABF 96.58 lakh share; REAL 34030 shares; Proparco 51.80 lakh shares; Nirmal Trust 373.49 lakh shares) will become negative post-offer for sale. Hence, once the lock-in is over, the counter may witness selling pressure.
|
HOW PRABHAT DAIRY COMPARES WITH PEERS |
|||||||||
|
COMPANY NAME |
MCAP |
EQ |
NB |
SALES |
NP |
P/E |
OPM |
FV |
PRICE |
|
|
(Rs Cr) |
(x) |
(%) |
(Rs) |
|||||
|
Hatsun Agro |
4,391 |
11 |
650 |
2,929 |
39 |
112.1 |
5.9 |
1 |
404 |
|
Kwality |
1,713 |
22 |
127 |
5,317 |
143 |
12.0 |
5.9 |
1 |
78 |
|
Heritage Foods |
875 |
23 |
282 |
2,007 |
28 |
30.9 |
3.6 |
10 |
380 |
|
Prabhat Dairy |
|||||||||
|
Standalone-Hi Band |
1,350 |
92 |
128 |
875 |
4 |
347.9 |
4.9 |
10 |
147 |
|
– Lo Band |
1,300 |
93 |
128 |
875 |
4 |
335.1 |
|
10 |
140 |
|
Consolidated-Hi Band |
1,350 |
92 |
465 |
1,003 |
26 |
51.9 |
10.3 |
10 |
147 |
|
-Lo Band |
1,300 |
93 |
465 |
1,003 |
26 |
50.0 |
|
10 |
140 |
Concerns
Whereas the fund support has been from the parent company (PDL), the profitability is in the subsidiaries. How the investors could guard themselves against any future attempt by the promoters to usurp the profitable subsidiary, is a moot question. The management seems to have some corporate governance issues too. In the past, the auditor had qualified his report stating that the company did not have adequate internal control mechanism. For a company going public, this is worrisome. What’s more, in the past, the company had not been regular in paying IT, VAT etc.
Under litigations listed in the offer document, there is a claim of Rs 65 cr each against the company, its main promoter and his son. The management dismisses it as some sort of black mail tactics from someone from whom they had availed service. But, how will the case be sorted out is not clear.
The company has taken land on lease from directors and their relatives. Why it could not buy it outright is a moot question. Currently the company enjoys a waiver of the rents payable to promoters. Nevertheless, such waiver is valid only till March 31, 2016, and thereafter, rents would be payable at prevailing market rate which may have an impact on the company’s financials.
As regards prospects, Prabhat’s standalone profitability is so thin (Rs 3.89 cr) that it cannot pay even 5% dividend on the post IPO equity of Rs 92.85 cr. Hence unless the subsidiary distributes, the parent company would not be in a position to pay a decent dividend in the near term. Also, the promoters have chosen to have a minority stake (44%) in the company which does not instill confidence in the minds of investing public. The company’s CFO is countering, “Which big company has promoters’ stake more than 40%”? Well, the very company that they want to compare for price discounting (Hatsun Agro) has promoters’ stake as high as 75%!