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Navi Mumbai-based Prabhat Dairy Limited has received regulatory approval from the Securities and Exchange Board of India (SEBI) to launch its initial public offering (IPO). The capital market regulator issued its observation on 8 June 2015 which is necessary for companies before bringing IPOs. The company plans to raise INR300 crore (USD46.7 million) through fresh issue of equity shares. In addition, existing investors plan to sell 1.47 crore shares through an offer for sale (OFS). The issue will be managed by Edelweiss Financial Services Limited, Macquarie Capital Securities (India) Private, and SBI Capital Markets Limited. Edelweiss Financial filed the draft red herring prospectus (DRHP) on company’s behalf with the market regulator on 31 March 2015.
Use of funds
Majority of the proceeds will be used towards part pre-payment of loans availed by the company and its wholly owned subsidiary SAIPL while the rest will be invested in capital expenditure and general corporate purposes. The dairy company plans to spend INR185 crore in debt repayment while another INR35 crore will go towards capital expenditure including construction of a 3 MW cogeneration captive power plant and enhancing automation of manufacturing processes at its facilities.
Rabobank invested in Prabhat Dairy through IABF private equity fund in 2012 to acquire a 22.7% stake while Proparco – French development agency Agence Française de Développement – picked up 14.2% stake in the following year. Both the investors will be partly offloading their shareholding through the offering. Of its 1.6 crore shares, IABF plans to sell 65.8 lakh shares while Proparco aims to sell 49.5 lakh shares from its total of 1.01 crore shares. Promoter Nirmal Family Trust plans to sell 31.51 lakh shares from its total shareholding of 4 crore shares.
What to watch out for
As of 28 February 2015, Prabhat Dairy had outstanding term loans aggregating INR240 crore. The company management plans to reduce this amount by using INR185 crore from the issue proceeds. These are high interest loans, attracting interest rate of as much as base rate + 3.5%. Management of Prabhat Dairy aims to substantially eliminate its indebtedness in term loans and the working capital facility by using proceeds from the IPO.
Background of Prabhat Dairy
Prabhat Dairy is an integrated milk and dairy products company whose range of products include pasteurized milk, flavoured milk, sweetened condensed milk, ultra-pasteurised or ultra-high temperature (UHT) milk, yoghurt, dairy whitener, clarified butter (ghee), milk powder, ingredients for baby foods, lassi and chaas. As of 15 March 2015, Prabhat Dairy had an aggregate milk processing capacity of 1.5 million litres per day. The company currently derives over 75% of its revenues from sales of institutional products but the portion of retail consumer products is on rise and has grown from 11.3% in fiscal 2012 to 24.6% in the six months of fiscal 2015. Among institutional products, it counts Mondelez India Foods Private Limited (formerly Cadbury India Limited), Abbott Healthcare Private Limited, Britannia Industries Limited, Mother Dairy Fruit & Vegetable Private Limited and Heritage Foods Limited among its clients.