Update (1st September 2015, 7:25 pm): Due to extremely poor under-subscription of barely 28% (37% in QIB category, Nil in HNI and 26% in retail category), IPO price band of Prabhat Dairy has been revised downward to Rs. 115 to Rs. 126 per share, keeping retail discount of Rs. 5 intact. The IPO will now close on Friday 4th September 2015.
The IPO price band has now been lowered by 14-18%. Net cost at the upper end will be Rs. 121 per share, at which, retail investors can apply.
By Geetanjali Kedia
Prabhat Dairy is entering the primary market on Friday 28th August 2015, to raise Rs. 300 crore, via fresh issue and offer for sale of 1.47 crore equity shares of Rs. 10 each, worth Rs. 206-216 crore, both priced in the band of Rs. 140 to Rs. 147 per share. After a long time, it is good to see a retail discount of Rs. 5 being offered to retail shareholders. Thus, the total IPO is sized between Rs. 506 crore to Rs. 516 crore, comprising fresh issue of 2.04 crore to 2.14 crore equity shares of Rs. 10 each, at upper and lower end of the price band. The issue, representing 38.24% of the post-issue paid up capital at the upper end, closes on Tuesday 1st September.
Prabhat Dairy sells cow milk and dairy products, under brands Prabhat, Milk Magic and Flava, through its 350 distributors across western India. Having 2 production facilities near Ahmednagar and Navi Mumbai, with aggregate milk processing capacity of 1.5 million litres per day, company has, in FY16, commenced 30,000 kg per day cheese/paneer/shrikhand manufacturing facility. It is aiming to increase retail share in sales mix, which was split between retail and institutions in the ratio of 25:75 in FY15, up from 15:85 in FY14 and FY13.
For FY15, company’s consolidated revenue rose 17% YoY to Rs. 1,002 crore. Dairy business having wafer thin margin, being 2.1% for the year gone by, net profit stood at Rs. 21 crore, leading to an EPS (diluted) of Rs. 2.95, on equity of Rs. 71.43 crore. Although EBITDA rose 12% to Rs. 103 crore, EBITDA margin slipped to 10.2% in FY15, from 10.7% in FY14. High interest cost of Rs. 41 crore (as against Rs. 33 crore in FY14) also restricted FY15 PAT growth to just 1.3% YoY. Outstanding debtors, which represented 1.5 months sales, as of 31-3-13, jumped to 2.5 months of sales, as of 31-3-15. Thus, with increasing topline, company had to borrow more, to fund the rising working capital needs – a trend which is likely to continue going forward, to support growth.
Company’s net worth, as of 31-3-15, stood at Rs. 339 crore. Promoters currently hold 61.42% stake, which will reduce to 44.3% post IPO, as they are also selling their ~7% holding via offer for sale. 3 foreign investors – Rabobank, Real Trust and French Govt’s Proparco - holding 37% stake, are part-exiting, which will shrink their holding to 16.2% post issue. Company had total consolidated debt of Rs. 412 crore, as of 31.3.15, of which, Rs. 185 crore will be re-paid via issue proceeds. Another Rs. 35 crore from funds raised will meet capital expenditure till FY17, comprising construction of 3 MW captive co-gen facility and automation of existing manufacturing processes.
Rabobank and Real Trust had invested Rs. 80 crore and Rs. 28 crore respectively, in the company in Sep 2012, at an effective price of Rs. 49 per share, while Proparco had, in June 2013, put in Rs. 60 crore at Rs. 59 per share. In 2 years, from FY13 to FY15, company has reported topline and bottomline CAGR of 25% and 22% respectively. However, asking price now, even after considering the discount, at Rs. 142 per share, is up by 55% in two years, from June 2013. Even if we give benefit of the capex being undertaken during this time, a 40-45% growth rate would have been considered reasonable and fair, as benefit of reduced interest expense and lower power cost will accrue only now, with the help of the IPO proceeds.
At Rs. 147 per share, Prabhat Dairy is being valued at historic (FY15) EV/EBITDA and PE multiple of 15.2x and 50x respectively. Assuming a 30% EBITDA growth in FY16 due to higher capacity and product mix and doubling of profits, due to lower interest outgo, EV/EBITDA multiple is 11.5x while PE multiple is 27x, based on FY16 estimates, which looks stretched, in comparison to peers as well as the fact that this is a primary market offering.
- Kwality, having 3 million litres per day of milk processing capacity which is double of Prabhat, across 6 units in North India, with sales nearly 6 times at Rs. 5,900 crore, given its healthier product mix (milk powder, ghee and curd accounted for 49% of FY15 topline) coupled with exports, is ruling at EV/EBITDA and PE multiples of 7x and 10x respectively, based on FY16 estimated earnings.
- Heritage Foods, with current milk processing capacity of 1.45 million litres per day and value added products accounted for 20% of the dairy revenue, which mirrors Prabhat’s FY15 performance, has the dairy segment accounting for 75% of topline and all of the operating profits. It is ruling at EV/EBITDA and PE multiples of 8x and 20x respectively, based on FY16 estimated earnings.
- Another larger peer, Hatsun Agro, with a topline of 2.5x of Prabhat and facilities across 10 locations coupled with export presence in 38 countries, is ruling at EV/EBITDA and PE multiple of 15x and 38x respectively, based on FY16 estimated earnings.
Besides, all three – Kwality, Heritage and Hatsun having older plants, have double digit RoCEs vis-à-vis Prabhat’s single digit RoCE. Moreover, Prabhat will largely remain a regional play going forward. Thus, Kwality and Heritage are both ruling much cheaper in relation to Prabhat, while Hatsun being larger and having better returns is ruling higher.
To conclude, despite healthy growth expected, Prabhat’s IPO is richly valued, especially in relation to peers. All the future financial benefits seem to have already been priced in, leaving little room for growth, on pure fundamentals. Had the pricing been in the range of Rs. 120-125 per share, it would have been attractive. Over the long term, the stock holds promise, but the IPO pricing has left little money on the table for prospective investors, that too in this volatile and scary secondary market.
Disclosure: Not applying in the IPO.