IPO Note | Dairy Products

August 27, 2015

Prabhat Dairy Limited

AVOID

Issue Open: August 28, 2014

IPO Note

Issue Close: September 1, 2015

Prabhat Dairy (Prabhat) is an integrated milk and dairy products company

catering to institutional as well as retail customers. The company sells its products

under retail consumer brands (which account for ~24% of the revenue) as well as

Issue Details

ingredient products and co-manufactured products to a number of institutional

Face Value: `10

and multinational companies (accounting for ~76% of total revenue). It procures

Present Eq. Paid up Capital: `71.4cr

majority of its milk from milk farmers and registered milk vendors; as of June 30,

2015, its milk collection facilities included more than 450 milk collection centers,

O ffer Size: 3.6cr Shares

over 15 milk chilling plants and over 85 bulk milk coolers with aggregate milk

Post Eq. Paid up Capital: `93.1cr

processing capacity of 1.5mn litres per day. The processing and production

facilities are located at Shrirampur (Ahmednagar) and at Navi Mumbai. The company

Issue size (amount)**: `503cr - `514cr

has recently added production capacities for several new dairy products including

Price Band**: `140-147

mozzarella cheese, cheddar cheese, processed cheese, cottage cheese (paneer) and

shrikhand and has commenced production of these products in FY2016.

Post-issue implied mcap**: `1,304cr-1,354cr

Robust milk procurement system: Prabhat has built a strong relationship with local

Promoters holding Pre-Issue: 61.4%

milk farmers, which enables it to procure a large portion of its raw milk

Promoters holding Post-Issue: 43.7%

requirement directly from milk famers and registered milk vendors. Continuous

Note:**at Lower and Upper price band respectively

engagement, knowledge, and infrastructure support have enabled Prabhat to

secure supply of quality raw milk and contain procurement costs. Additionally, it

has introduced automated milk testing facilities that provide transparency to the

Book Building

pricing of milk purchased by the company.

QIBs

At least 50%

Shift towards a balanced mix: Historically, institutional sales have accounted for a

Non-Institutional

At least 15%

major chunk of its business. However, this share has declined from 85.4% in

Retail

At least 35%

FY2013 to 75.8% in FY2015. The company plans to focus on growing its retail

consumer business by increasing its marketing expenditure, strengthening its

existing brands, and introducing new products and brands amongst others. The new

Post Issue Shareholding Pattern

product launches like cheese, paneer and shrikhand have higher margins which will

Promoters Group

43.7

improve its profitability as well as reduce its dependence on the Institutional business.

MF/Banks/Indian

Outlook and Valuation: Though the company has posted a CAGR of 27.5% and

FIs/FIIs/Public & Others

56.3

30.3% in revenue and net profit respectively over FY2012-15, it is still expensive

in terms of valuation. On pre-issue outstanding shares, the stock is valued at

47.5x its FY2015 EPS and at EV/EBITDA multiple of 13.7x on the lower end of the

price band. Its peer Heritage Foods trades at 29.4x its FY2015 earnings and at

EV/EBITDA multiple (FY2015) of 11.4x. Hence on account of higher valuation we

recommend to Avoid subscribing to the issue.

Key Financials

Y/E March (` cr)

FY2013

FY2014

FY2015

Net Sales

641

857

1,001

% chg

32.7

33.6

16.8

Adj. Net Profit

% chg

47.9

47.7

1.3

OPM (%)

11.4

10.6

10.1

EPS (Rs)

2.0

2.9

P/E (x)

71.1

48.1

47.5

P/BV (x)

4.2

3.1

3.0

RoE (%)

8.0

7.5

6.4

RoCE (%)

10.3

9.9

9.6

Milan Desai

EV/Sales (x)

2.0

1.5

1.4

+91 22 4000 3600 Ext: 6846

EV/EBITDA (x)

17.4

14.2

13.7

[email protected]

Source: Company, Angel Research; Note: *The above numbers are considering subscription at the

lower end of the price band and on pre-issue outstanding shares

Please refer to important disclosures at the end of this report

Prabhat Dairy | IPO Note

Company Background

Prabhat is an integrated milk and dairy products company in India catering to

institutional as well as retail customers. The company sells its products under

retail consumer brands (Prabhat, Milk Magic and Flava) as well as ingredient

products and co-manufactured products to a number of institutional and

multinational companies.

Its marquee clients include Mondelez India Foods Pvt Ltd (formerly known as

Cadbury India Ltd) and Abbott Healthcare Private Ltd for specialty ingredient

products and Britannia Industries Ltd, Mother Dairy Fruit & Vegetable Pvt Ltd

and Heritage Foods Ltd for co-manufactured products. Retail consumer

products are distributed in the Mumbai metropolitan area and nearby cities

and towns to a large number of retail outlets through more than

350

distributors and 100 Prabhat mini stockists.

As of June 30, 2015, its milk collection facilities included more than 450 milk

collection centers, over 15 milk chilling plants and over 85 bulk milk coolers

with aggregate milk processing capacity of

1.5mn litres per day. The

processing and production facilities are located at Shrirampur (Ahmednagar)

and at Navi Mumbai.

Institutional Products

Prabhat produces a range of milk and dairy products including milk-based

specialty ingredient products and co-manufactured products for a large number of

Indian and multinational companies.

Specialty ingredient products: The company’s specialty ingredient products are

used in the production of other milk and food products by its institutional

customers. These agreements are typically for a term of one to two years and are

subject to renewal either by such customer or as may be mutually agreed between

parties.

Exhibit 1: Specialty Ingredient Products

Customer

Products

Partially skimmed milk sugar concentrate; skim milk

Mondelez India Foods Private

powder; skimmed milk preparations; full cream milk

Limited

powder

Abbott Healthcare Private Limited

Specialty milk powder for baby food

Other multinational and Indian

Specialty milk powder & sweetened condensed milk

companies

Source: Company, Angel Research

Co-Manufactured Products: Prabhat is in an agreement with certain

institutional customers for the production and packaging of various dairy products

such as specialty milk powders, curd (dahi), clarified butter (ghee), dairy whiteners,

yogurts, processed and concentrated milk, and ice creams, which are sold by

institutional customers under their own brands.

August 27, 2015

Prabhat Dairy | IPO Note

Exhibit 2: Co-Manufactured Products

Customer

Products

Heritage Foods Limited

Dairy whitener; curd (dahi); butter milk

Britannia Industries Limited

Curd (dahi)

Britannia Dairy Private Limited

Clarified butter (ghee)

Mother Dairy Fruit & Vegetable Private Limited

Ice cream; milk ice; milk candies

Source: Company, Angel Research

Retail consumer products

The company’s retail consumer products include pasteurized milk, UHT milk,

flavoured milk, sweetened condensed milk, dairy whitener, milk powder, lassi, curd

(dahi), chaas, and clarified butter (ghee), sold under the Prabhat, Flava and Milk

Magic brands. Its long shelf life products such as UHT milk, dairy whiteners,

skimmed milk powder and whole milk powder are sold in states outside of

Maharashtra.

Exhibit 3: Retail Product Portfolio

Brand

Products

Pasteurized milk, UHT milk, clarified butter, dairy whitener, skimmed

Prabhat

milk powder, whole milk powder, curd, lassi and chaas

Milk Magic

Sweetened condensed milk

Flava

Flavoured milk

Source: Company, Angel Research

The company has recently added production capacities for several new dairy

products including mozzarella cheese, cheddar cheese, processed cheese,

cottage cheese (paneer) and shrikhand and has commenced production of

these products in FY2016. The company initially plans to focus on the Quick

Service Restaurant (QSR) segment.

Subsidiaries

Prabhat has a wholly owned subsidiary ie Cheese Land Agro (India) Pvt Ltd

(CLAIPL) and a step down subsidiary - Sunfresh Agro Industries Pvt Ltd (SAIPL).

CLAIPL is involved in the business of manufacturing and dealing in dairy

products and incidental and ancillary activities while SAIPL is involved in the

business of procurement and processing of milk and manufacturing and

selling of various milk products including, sweetened condensed milk,

skimmed milk powder, cream, and butter.

August 27, 2015

Prabhat Dairy | IPO Note

Issue details

The issue comprises of fresh issue of equity shares of `10 each in the price band of

`140-`147 aggregating up to `300cr; and offer for sale by Nirmal Family Trust

(Promoter), IABF, REAL and Proparco of 1.47cr shares aggregating to `206cr (at

the lower end of the price band). The issue constitutes 38.4% of the post issue

paid-up equity share capital of the company.

Exhibit 4: Share Holding pattern

Particulars

Pre-Issue

Post-Issue

No. of shares

(%)

No. of shares

(%)

Promoter and Promoter Group

4,38,75,000

61.4

4,07,24,000

43.7

Nirmal Family Trust

4,05,00,000

3,73,49,000

Sarangdhar Ramchandra Nirmal

11,25,000

Vivek Sarangdhar Nirmal

11,25,000

Kishor Ramchandra Nirmal

11,25,000

IABF

1,62,38,895

22.7

96,58,895

10.4

REAL

57,030

0.1

34,030

0.0

Proparco

1,01,32,785

14.2

51,80,785

5.6

Others

11,25,000

1.6

3,75,37,349

40.3

Total

7,14,28,710

100

9,31,35,059

100

Source: Company, Angel Research

Objects of the Fresh Issue

 Part pre-payment of loans availed by the company and its wholly owned

subsidiary, SAIPL amounting to `185cr.

 Utilize `35cr for meeting capital expenditure, subject to receipt of relevant

approvals, consents, and licenses, for: (I) construction of 3 MW co-generation

captive power facility by the subsidiary, SAIPL, and (II) enhanced automation of

some of the existing manufacturing processes at the facilities of SAIPL.

 The balance, which is contingent upon the issue price will be utilised for

general corporate purpose.

August 27, 2015

Prabhat Dairy | IPO Note

Investment Arguments

Robust milk procurement system

Prabhat has built a strong relationship with local milk farmers which enables it to

procure a large portion of its raw milk requirement directly from milk famers and

registered milk vendors. It procures its raw milk requirement from Ahmednagar,

Pune, Nashik and adjoining districts in the state of Maharashtra. It also sources

from select contract milk suppliers at competitive prices. The proximity of the milk

procuring belt to the processing center and its key clients and retail consumer

market enables the company to curtail its transportation expenses and ensure easy

raw milk availability. It continuously engages with milk farmers and provides

assistance in terms of cattle breeding, nutrition and medication, veterinary and

para-veterinary support, cattle insurance and financing and other welfare activities.

These activities have enabled the company to build strong relationship with such

farmers over the years, ensuring continued association and procurement of raw

milk at competitive prices. Additionally, it has introduced automated milk testing

facilities that provide transparency to the pricing of milk purchased by the

company.

Increased focus on Retail business

Historically, the Institutional business has accounted for a major chunk of its

revenues. Although the share of the Institutional business has been declining over

the past three years (from 85.4% in FY2013 to 75.8% in FY2015), it still accounts

for a significant portion of the overall revenues. The company plans to focus on

growing its retail consumer business by increasing its marketing expenditure,

strengthening its existing brands, and introducing new products and brands

amongst others. The Management indicated that EBITDA margins are currently in

the range of 10.0% for both businesses (retail and institutional); while newer

products like cheese, paneer and shrikhand will command higher margins. The

Management foresees the mix to be more even in the longer run, thus reducing

dependence on the Institutional business.

Lower Debt Quantum to add to bottom-line

The company’s main objective of coming out with the IPO is to reduce its debt

level. As of FY2015, the net debt stood at `390cr while the interest expense was

`41cr. Interest expense seems considerably high against EBIT of `67cr, eroding

most of the operational profits. The company intends to utilize `185cr from the IPO

proceeds to lower its debt, which will result in significant interest cost savings and

result in higher bottom-line.

August 27, 2015

Prabhat Dairy | IPO Note

Key risks/concerns

Milk procurement and competition: The company has laid out plans to grow its

business by expanding its product portfolio for institutional as well as its retail

business with slightly higher emphasis on the latter. The business performance will

depend on the company’s ability to procure sufficient good quality raw milk at

commercially viable prices. Inability to do so may adversely impact the operation.

Additionally, the dairy industry is highly competitive, which can also impact raw

milk prices.

Regulatory Risk: The company is subject to various regulations relating to product

liability, particularly relating to safety of its products. Product contamination or

similar occurrences can result in regulatory actions against the company. This may

also result in loss of institutional business and damage to reputation, thus

adversely impacting the company.

Relationship with institutional customers: Although the share of institutional

business has come down to 75.8% of total revenue in FY2015, it still accounts for

a giant chunk of its business. The company’s top five customers accounted for

close to 36% of total revenues while its largest client accounted for 18.2% of total

revenue, in FY2015. The company’s supply agreements with its institutional

customers are typically for terms that vary between one and three years, and may

be terminated with immediate effect for breach of contractual terms, including in

relation to product quality and specification. These agreements may be terminated

without cause on relatively short notice of three months thus resulting in lower

volumes and lower profitability.

Outlook and Valuation

The company has exhibited strong revenue CAGR of 27.5% over FY2012-15 while

posting net profit CAGR of 30.3% over the same period. At the lower end of the

price band, the FY2015 P/E comes up to 47.5x and EV/EBITDA multiple comes up

to 13.7x based on pre-issue outstanding shares. We believe that the valuations are

expensive in comparison to its peer Heritage Foods which trades at 29.4x its

FY2015 earnings and at EV/EBITDA multiple (FY2015) of 11.4x. Hence on account

of higher valuation we recommend to Avoid subscribing to the issue.

Exhibit 5: Valuations

Mcap

Sales

OPM

PAT

EPS

ROE

P/E

P/BV

EV/EBITDA

EV/Sales

(`)

(%)

(`)

(%)

(x)

Prabhat Dairy*

1,000

1,001

10.1

2.9

6.4

47.5

3.0

13.7

1.4

Heritage Foods

833

2,073

3.9

12.2

14.7

29.4

4.3

11.4

0.5

Source: Company, Angel Research, Note*FY2015 numbers are on pre-issue outstanding shares and based on lower end of the price band

August 27, 2015

Prabhat Dairy | IPO Note

Profit and Loss (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

Net Sales

641

857

1,001

Other operating income

Total operating income

641

857

1,001

% chg

32.7

33.6

16.8

Net Raw Material

504

673

776

% chg

31.9

33.5

15.4

Personnel

% chg

13.8

66.5

32.2

Other Expenses

% chg

25.6

39.5

31.6

Total Expenditure

568

766

899

EBITDA

102

% chg

49.6

24.7

11.9

(% of Net Sales)

11.4

10.6

10.1

Depreciation& Amortisation

EBIT

% chg

50.2

18.4

17.3

(% of Net Sales)

7.5

6.7

Interest & other Charges

Other Income

(% of Net Sales)

0.1

Recurring PBT

% chg

35.4

29.9

6.9

Exceptional items

PBT (reported)

Tax

(% of PBT)

27.9

17.8

21.9

PAT (reported)

Extraordinary Expense/(Inc.)

ADJ. PAT

% chg

47.9

47.7

1.3

(% of Net Sales)

2.2

2.4

2.1

EPS (`)

2.0

2.9

August 27, 2015

Prabhat Dairy | IPO Note

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

SOURCES OF FUNDS

Equity Share Capital

Reserves& Surplus

221

291

267

Shareholders’ Funds

237

318

339

Total Loans

273

296

412

Long Term Provisions

Deferred Tax Liability (net)

Total Liabilities

526

633

769

APPLICATION OF FUNDS

Net Block

303

319

293

Capital Work-in-Progress

159

Investments

Long Term Loans and advances

102

Other Non-current asset

Current Assets

132

236

330

Cash

Loans & Advances

Inventory

Debtors

156

208

Other current assets

Current liabilities

Net Current Assets

163

249

Misc. Exp. not written off

Total Assets

526

633

769

August 27, 2015

Prabhat Dairy | IPO Note

Key Ratios (Consolidated)

Y/E March

FY2013

FY2014

FY2015

Valuation Ratio (x)

P/E (on FDEPS)

71.1

48.1

47.5

P/CEPS

26.0

18.4

18.0

P/BV

4.2

3.1

3.0

Dividend yield (%)

0.0

EV/Net sales

2.0

1.5

1.4

EV/EBITDA

17.4

14.2

13.7

EV / Total Assets

2.4

2.0

1.8

Per Share Data (`)

EPS

2.0

2.9

Cash EPS

5.4

7.6

7.8

DPS

0.0

0.1

Book Value

28.9

37.4

DuPont Analysis

EBIT margin

7.5

6.7

Tax retention ratio

0.7

0.8

Asset turnover (x)

1.5

1.7

1.8

ROIC (Post-tax)

8.2

9.3

Cost of Debt (Post Tax)

7.6

9.5

9.1

Leverage (x)

1.1

0.9

1.2

Operating ROE

8.8

9.0

9.6

Returns (%)

ROCE (Pre-tax)

10.3

9.9

9.6

Angel ROIC (Pre-tax)

11.4

11.3

11.9

ROE

8.0

7.5

6.4

Turnover ratios (x)

Asset TO (Net Fixed Assets)

Inventory / Net sales (days)

Receivables (days)

701

Payables (days)

Working capital cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

1.1

0.9

1.2

Net debt to EBITDA

3.7

3.2

3.8

Int. Coverage (EBIT/ Int.)

1.6

1.7

1.6

August 27, 2015

Prabhat Dairy | IPO Note

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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August 27, 2015