Parag Milk Foods IPO hits market today: Should you invest?

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Updated: May 9, 2016 8:57:44 AM

Parag Milk Foods Ltd (PMFL) public offer hit capital markets on May 4 to raise Rs 753-767 crore from the equity market at a price band of Rs 220-227 per equity share.

parag-ipo660Parag Milk Foods IPO: The company is coming out with an initial public offering (IPO) today to raise Rs 753-767 crore from the equity market at a price band of Rs 220-227 per equity share. (Photo:www.paragmilkfoods.com)

Parag Milk Foods Ltd (PMFL) public offer hit capital markets on May 4 to raise Rs 753-767 crore from the equity market at a price band of Rs 220-227 per equity share. The offer is being made through a mix of offer for sale (OFS) of 2.057 crore shares and a fresh issue of 1.33-1.37 crore shares based on the upper end and the lower end of the price band. IDFC PE and IBEF & IBEF I (private equity funds of Motilal Oswal) are selling 0.83 and 0.6 crore shares respectively under the OFS option.

The issue will close on May 6. Shares of the company will be listed on BSE as well as NSE. The face value of the share is Rs 10 and is priced 22 times its face value on the lower side and 22.70 times on the higher side.

Read more: Parag Milk extends IPO by 3 days; revises price band

Below are 10 things to know before investing in Parag Milk Foods IPO:

1) About the company: The company is one of the leading manufacturers and marketers of dairy-based branded foods in India. It commenced business in 1992 with collection and distribution of milk and have now developed into a dairy-based branded consumer products company with an integrated business model, manufacturing a diverse range of products including cheese, ghee (clarified butter), fresh milk, whey proteins, paneer, curd, yoghurt, milk powders and dairy based beverages targeting a wide range of consumer groups through several brands. Its major brands are “Gowardhan”, “Go”, “Pride of Cows” and “Topp Up”. Devender Shah, Pritam Shah and Parag Shah are promoters of PMFL.

2) About the issue: Parag Milk Foods has fixed price band from Rs 220 to Rs 227 per equity share to raise around Rs 750 crore through its initial public offer (IPO). The firm is making an offer for sale of up to 20,572,573 equity shares comprising 14,286,449 equity shares by the investor selling shareholders namely Motilal Oswal and IDFC PE. Its initial share-sale programme will open for subscription on May 4 and close on May 6.

3) Objective of the issue: The company will use the issue proceed for meeting the capital expenditure requirements in relation to expansion and modernisation of existing manufacturing facilities of the company at Manchar (the – Manchar Facility) and Palamaner (the – Palamaner Facility), and improving the marketing or distribution infrastructure (the – marketing infrastructure and together with the capital expenditure requirements for the expansion and modernisation of the Manchar Facility and the Palamaner Facility, the -Expansion and Modernisation Plan); investment in subsidiary for financing the capital expenditure requirements in relation to the expansion and modernisation of the Bhagyalaxmi Dairy Farm; partial repayment of the working capital consortium loan; and general corporate purposes.

4) Shareholding Pattern:

shareholding pattern parag milk foods

5) Lead Managers: The book running lead managers to the issue are Kotak Mahindra Capital Company, JM Financial Institutional Securities, IDFC Securities and Motilal Oswal Investment Advisors, while the compliance officer for the issue is Rachana Sanganeria.

6) Financials: Parag Milk’s revenues and EBITDA have increased at a compounded annual growth rate (CAGR) of 22 per cent and 21 per cent, respectively through FY11-15. It has turned from a net loss of Rs 0.4 crore in 2010-11 to net profit of Rs 26 crore in 2014-15. For 9MFY16, its revenues stood at Rs 1230 crore while net profit was Rs 31.9 crore.

7) Strength and Opportunities: According to market experts, integrated business model, focus on high margin value added products, well established and popular brands, robust operating performance and increasing share of organised players are some of the positives for Parag Milk Foods.

swot analysis parag milk

8) Risks: Possible interruption in availability of quality milk at reasonable prices and rising competition are some of the key risks for the company.

9) Valuation: According to Sharekhan, at a price band of Rs 220-227, the issue is priced at 56.1-57.8x its price-earnings (PE) ratio for FY2015 consolidated earnings per share (EPS) of Rs 3.9. Despite similar margin profile, Parag Milk Foods Ltd’s valuations at the offer price are at a premium to some of its nearest peers. The improvement in profitability and operating cash flows will be the key performance drivers for the company in the near to medium term.

Reliance Securities in a research note said, “At the upper end of the price band, the issue is priced at price earnings ratio of 44.7x based on annualised FY16 net profit and diluted equity base, while peers like Prabhat, Hatsun and Heritage Foods trade at 49 times, 47 times and 24 times, respectively. However, on EV/EBITDA basis, Parag Milk would trade at 15.6 times compared to 9.3 times for Prabhat and 9.9 times for Heritage Foods based on annualised FY16 performance. Similarly, its ROCE at 12.3 per cent would be lower compared to Hatsun (18.1 per cent) and Heritage Foods (19.6 per cent).”

10) Should you invest?: According to Prabhudas Lilladher, sustained 15-20 per cent sales growth, debt repayment of Rs 100 crore and improvement in cash flows will enable the company achieve 30 per cent net profit CAGR over FY16-18. The stock at 37 times FY16E would offer limited listing gains. Long-term prospects look encouraging with scope of decent returns over the coming 2-3 years. The brokerage house has ‘Subscribe’ rating on the IPO.

KR Choksey Institutional also has ‘Subscribe’ ratings for long term perspective on Parag Milk Foods IPO.

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