Markets keep on surprising us and the recent turmoil in secondary market seems to have seriously jolted the IPO market. However, scheduled IPOs can’t be cancelled for this reason and thus, the IPO of Prabhat Dairy will open tomorrow. The IPO of Ahmednagar-based dairy products company will remain open till 1 September and investors can bid in a price band of INR140 – 147 per share. Depending on the bidding process, Prabhat Dairy IPO will mobilize funds between INR505.8 crore and 516.1 crore. The issue will be managed by Edelweiss Financial Services Limited, Macquarie Capital Securities (India) Private and SBI Capital Markets Limited.
IPO Central scanned more than 500 pages of its red herring prospectus (RHP) to find out if it is good for subscription. But before the analysis, here is a quick snapshot of the IPO.
| IPO dates | 28 August 2015 – 1 September 2015 |
| Price band | INR140 – 147 per share |
| Issue size | INR505.8 crore – INR516.1 crore(Fresh issue – INR300 crore, OFS – 1.47 crore shares) |
| Category allocation | QIB – 50%, NII – 15%, Retail – 35% |
| Lead managers | Edelweiss Financial Services Limited, Macquarie Capital Securities (India) Private and SBI Capital Markets Limited |
| Minimum lot | 102 shares and in multiples thereafter |
| Minimum investment | INR14,280 – INR14,994 |
IPO structure
As with most other IPOs this year, the IPO will include an offer of sale (OFS) from existing shareholders. 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). Among the selling investors are Rabobank and Proparco which will be partly offloading their shareholding through the IPO. Rabobank’s India Agri Business Fund (IABF) holds 1.62 crore or 22.73% stake in Prabhat Dairy. Proparco – a subsidiary of Agence Française de Développement – holds 1 crore shares or 14.19% stake. Both investors would be offloading substantial chunk of their shareholding.
Use of funds – debt repayment, what else?
Debt reduction is a popular theme in IPOs this year and Prabhat Dairy is no exception. 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.
Prabhat Dairy’s financial performance – steady but low margins
Prabhat Dairy is integrated milk and dairy ingredients producer, with a long list of big clients including Mondelez India Foods (Cadbury’s), Britannia, Danone, Mother Dairy, Abbott Healthcare, and Nestle. Having this impressive list of clients ensures material off take is high and wastage is low. The company also offers its own products under the Prabhat, Milk Magic, and Flava brands. Currently accounting for nearly 25% of total revenues, the company plans to boost the retail business to 50% in coming years.
In the recent years, Prabhat Dairy’s business has grown consistently with revenues doubling in the last four years. In the same timeframe, profits have also kept pace and have increased from INR9.5 crore to INR21 crore. However, margins have remained thin in the range of 2-2.5% so far.
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Prabhat Dairy’s consolidated financial performance (INR crore) |
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| FY 2012 | FY 2013 | FY 2014 | FY 2015 | |
| Total revenues | 483.8 | 641.9 | 857.6 | 1,001.7 |
| Expenses | 469.2 | 622.4 | 832.4 | 974.8 |
| Restated profit after tax | 9.5 | 14.1 | 20.8 | 21 |
| Net margin (%) | 2.0 | 2.2 | 2.4 | 2.1 |
Source: Prabhat Dairy’s Red Herring Prospectus
Valuations not consistent with margins
First up, Prabhat Dairy is the only third IPO this year to offer discount to retail investors. However, this discount of INR5 per share is no big deal as valuations appear to be on the higher side. On a fully diluted basis and after considering the discount for small investors, Prabhat Dairy’s IPO price band values the company in the price by earnings (P/E) range of 45.7 – 48.1 times. Even in the case of profits continuing at the pace seen in recent years (FY 2015 was flat though), these valuations are high enough to warrant caution.
There are few listed players with which Prabhat Dairy can be compared but Hatsun Agro is mentioned as a peer in the prospectus. Hatsun Agro trades at lofty P/E valuation of 72.4 but also offers better margins and higher revenues.
Conclusion
We like the steady growth of Prabhat Dairy but valuations of are evidently high as they have been in IPOs this year. This is another example of steep IPO pricing that can leave investors high and dry in volatile market conditions. A recent example is Power Mech Projects which had a poor listing yesterday. The discount for small investors in Prabhat Dairy IPO is a positive but investors are likely to get better opportunities going forward.
