IPO Note | Dairy Products

May 3, 2016

Parag Milk Foods

Issue Open: May 4, 2016

IPO Note

Issue Close: May 6, 2016

Parag Milk Foods (PMFL) is one of the leading manufacturers and marketers of

Issue Details

dairy-based branded foods in India. The company has well recognized brands

like “Gowardhan” and “Go” in its portfolio and has a pan-India network comprising

Face Value: `10

of 15 depots, 104 super stockists and over 3,000 distributors. It has also been

Present Eq. Paid up Capital: `70.4cr

growing in the cheese segment where it currently has a market share of 32%.

Fresh Issue**: 1.33cr Shares

Shift in market in favor of organized sector to aid growth: The Indian dairy

Offer for sale: 2.06cr Shares

industry is currently valued at ~`4,061bn and is mainly dominated by the

unorganized sector (accounting for 80% share). Industry reports indicate that the

Post Eq. Paid up Capital: `83.7cr

Indian dairy industry is expected to grow at a CAGR of 14.9% over FY2015-20E

Market Lot: 65 Shares

to ~`9,397bn within which the organized segment is expected to grow at a faster

pace than the unorganized segment. The share of organized players is expected to

Issue (amount): `750-765cr

improve from 20% to ~26% in FY2020E, thus benefitting branded players like PMFL.

Price Band: `220-227

Low consumption of cheese in India presents opportunity for PMFL: The cheese

Post-issue implied mkt. cap `1,851cr*-

segment is in its nascent stage with it accounting only for a fraction of the total

1,900cr**

dairy industry as household penetration of cheese in the country is very low

Note:*at Lower price band and **Upper price band

compared to other developed countries. Going forward, we expect cheese

consumption to increase on account of increase in home consumption due to

increasing disposable incomes, sizable growth expected in the Indian fast food

Book Building

market, and shift in food consumption trends in tier II and III cities. Considering

QIBs

75%

PMFL’s strong branding (Go Cheese) and distribution network, we believe that the

Non-Institutional

15%

company will benefit from an increase in the overall consumption of cheese in India.

Retail

10%

High-margin branded product sales to boost overall margins: The company

derives approximately two-thirds of its revenue from sale of high margin branded

consumer products like ghee, cheese, UHT, whey products etc. We believe the

Post Issue Shareholding Pattern(%)

company will be able to continue its strong growth in the above products on the

back of its strong branding and distribution network.

Promoters Group

47.7

MF/Banks/Indian

Outlook Valuation: At the upper end of the issue price band, the company is

FIs/FIIs/Public & Others

52.3

seeking a P/E multiple of 37.6x its 9MFY2016 annualized earnings based on pre-

issue outstanding shares. This is lower than its close peer Prabhat Dairy’s

valuation, which is trading at a higher multiple of 49.8x its 9MFY2016 annualized

earnings (despite of PMFL’s better return ratios). Further, retail investors will be

given a discount of `12/share. Considering the company has a diversified product

basket, strong brands and wide distribution network, we believe that the company will

continue to perform well on both the top-line and the bottom-line front. Hence we

recommend investors to Subscribe to the issue from a longer term perspective.

Key Financial

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

9MFY16

Net Sales

900

925

1,088

1,439

1,231

% chg

36.7

2.8

17.6

32.2

Net Profit

% chg

9.9

(23.1)

62.6

OPM (%)

9.1

9.0

7.6

7.4

8.7

Amarjeet S Maurya

EPS (`)

2.7

3.0

2.3

3.7

4.5

+91 22 4000 3600 Ext: 6831

P/E (x)

84.6

76.9

100.1

61.6

[email protected]

P/BV (x)

27.6

19.7

16.4

13.0

RoE (%)

32.6

25.6

16.4

21.1

RoCE (%)

13.7

10.7

8.9

14.3

Milan Desai

EV/Sales (x)

2.2

1.9

1.4

+91 22 4000 3600 Ext: 6846

EV/EBITDA (x)

24.0

24.6

25.7

19.0

[email protected]

Source: Company, Angel Research; Note: Valuation ratios based on pre-issue outstanding shares and at upper end of price band

Please refer to important disclosures at the end of this report

Parag Milk Foods | IPO Note

Company background

PMFL is one of the leading manufacturers and marketers of dairy-based branded

foods in India. The company has evolved from primarily being involved in

collection and distribution of milk in 1992 to now being a branded foods player.

Its operations span across the entire dairy chain from collection of milk to

development and marketing of value added products like ghee, butter (under

‘Gowardhan’ brand), cheese and cheese products, UHT milk, curd and fruit

yogurts (under ‘Go’ brand), premium cow milk (under ‘Pride of Cows’ brand) and

flavored milks (under ‘Topp Up’ brand).

A significant portion of its product range includes long shelf-life food and

beverage products that enable the company to cater to retail and institutional (QSR

chains- Taco Bell, Domino’s, etc) customers across India. The company has a pan

India network of 15 depots, 104 super stockists and over 3,000 distributors (as of

February 29, 2016).

Its manufacturing facilities are located at Manchar (Pune district, Maharashtra) and

Palamaner (Chittoor district, Andhra Pradesh), with processing capacities of 1.2mn

litres per day and 0.8mn litres per day, respectively. The Manchar facility has raw

cheese production capacity of 40MT/day, which is the largest in India as per

IMARC report.

The company has a wholly owned subsidiary Bhagyalaxmi Dairy Farm, which is a

fully automated cow farm, housing over 2,000 Holstein breed cows delivering

superior quality yields. The farm-to-home premium fresh milk is marketed and sold

under the ‘Pride of Cows’ brand in Mumbai and Pune.

Issue details

The company is raising `300cr through a fresh issue of equity shares in the price

band of `220-227. The fresh issue will constitute 15.9% of the post-issue paid-up

equity share capital of the company assuming the issue is subscribed at the upper

end of the price band. The retail participants will get a discount of `12/share. The

company is offering 2.06cr shares of which 0.31cr shares are being sold by

promoters, 1.43cr shares are being sold by investor shareholders, and the balance

by other shareholders.

Exhibit 1: Shareholding pattern

Particulars

Pre-Issue

Post-Issue

No. of shares

(%)

No. of shares

(%)

Promoters

4,30,45,822

61.1

3,99,41,189

47.7

Others

2,73,70,065

38.9

4,37,64,320

52.3

Total

7,04,15,887

100.0

8,37,05,509

100.0

Source: Company, Angel Research

May 3, 2016

Parag Milk Foods | IPO Note

Objects of the offer

Of the total issue proceeds



`148cr will be utilised towards expansion and modernisation of existing

manufacturing facilities at Manchar and Palamaner and towards improving

the marketing and distribution infrastructure.



`2cr will be invested in its subsidiary Bhagyalaxmi Dairy Farm for its expansion

and modernisation.



`100cr for partial repayment of working capital consortium loan.

 The balance will be used for general corporate purposes.

Investment rationale

Well established brands and diversified product portfolio

The company has well recognized brands in its portfolio that include ‘Gowardhan’

and ‘Go’. The company markets dairy products (milk, ghee, paneer, butter, etc)

and processed cheese blocks under the ‘Gowardhan’ brand which targets the

home consumption segment. Further, it has launched a wide range of cheese

products, UHT, fresh cream etc, since 2008 under the ‘Go’ brand targeting

younger generation and these products have gained good traction since their

launch. Media and consulting agencies have recognized ‘Gowardhan’ as the most

trusted brand in the food products category and and ‘Go’ as the most promising

brand in the FMCG category. ‘Go’ cheese has gained enormous momentum since

its launch and has been competing with Amul, a name synonymous with cheese

and butter in India for a long period of time. Its other brands include ‘Pride of

Cows‘(premium quality cow milk) and ‘Topp Up‘(beverages).

May 3, 2016

Parag Milk Foods | IPO Note

Exhibit 2: Diversified product portfolio

Brands

Products

Target Customer Groups

Gowardhan

Fresh MilK

Targeted at household consumption

Curd

Ghee

Paneer

Butter

Milk powder

Whey proteins

Cheese Products

Targeted at children and the youth

UHT milk

Curd

Fruit yoghurts

Fresh cream

Lassi, Buttermilk, Badam milk

Pride of Cows

Premium Cow Milk

Targeted at household consumers seeking premium quality cow’s milk

Topp Up

Flavoured milk

Targeted at youth and travelers as source of instant nourishment

Source: Company, Angel Research

Over the years, the company has introduced a range of value added products in

the market to cater to retail as well as institutional customers. Its manufactured

product mix comprises of fresh milk, skimmed milk powder, ghee, cheese/paneer,

UHT products, whey products and other products which account for 19.8%, 22.6%,

19.8%, 20.1%, 3.5%, 1.7% and 12.5% of revenue, respectively.

Exhibit 3: Manufactured products revenue mix FY2015

Cheese/Paneer,

20%

UHT products,

Ghee,butter and

Whey products,

cream, 20%

Other products,

12%

Skimmed milk

Fresh Milk, 20%

powder and dairy

whitener, 23%

Source: Company, Angel Research

Integrated business model

The company has an integrated business model which is present across the entire

value chain ranging from manufacturing and processing to branding and

distribution of a wide variety of products. It has a robust milk procurement network

with 3,400 village level collection centers that are present in 29 districts across the

states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. It has built

strong relationships with milk farmers through continuous engagement and its milk

May 3, 2016

Parag Milk Foods | IPO Note

procurement belt lies in close proximity to its facilities at Manchar and Palamaner.

This enables the company to procure quality milk at reasonable costs, reduce

transportation time and costs, and reduce wastages.

Growing pan-India distribution network

The company has a pan-India distribution network comprising of 15 depots, 104

super stockists and over 3,000 distributors (as of February 29, 2016). Its depots

are present in 13 states and union territories in India. It also has a dedicated sales

and marketing team comprising 560 personnel (~35% of total workforce) based

at key distribution centers. Its products with shorter life (fresh milk and milk

products) are sold in the western and southern regions of India, in proximity to its

manufacturing facilities. The company has established a separate route-to-market

to focus on the distribution of low unit price products including ghee, flavored milk,

UHT milk, dairy whiteners and gulab jamun mix in Tier 3 cities and rural areas in

India. Going forward, the company intends to appoint additional distributors and

super stockists to increase the availability of products in smaller towns in India and

introduce new low unit price products in Tier 3 cities and rural areas.

Exhibit 4: Pan-India presence

Source: Company, Angel Research

Established track record of growth and financial performance

Aided by growing popularity of its brands, the company has posted a revenue

CAGR of ~22% over FY2011-2015 to `1,439cr. This has largely been on the back

of robust sales growth in consumer driven products like cheese/paneer and UHT.

Going forward, we expect the company to be able to maintain its growth on the

back of shift in share from unorganized market to organized market for products

like ghee, paneer, curd, etc. Further, we expect the cheese segment to grow and

we believe that the company will be able to report a strong growth in the segment

where it currently has a 32% market share in India, on back of its strong branding.

May 3, 2016

Parag Milk Foods | IPO Note

Exhibit 5: 21.6% Revenue CAGR over FY2011-15

Exhibit 6: Net Profit CAGR of 11.2% over FY2012-15

1,800

40.0

80.0

1,600

36.7

63.9

35.0

62.6

32.2

60.0

1,400

30.0

1,200

40.0

25.0

1,000

20.0

800

17.6

9.9

15.0

600

10.0

400

(20.0)

200

5.0

(23.1)

2.8

(40.0)

FY2012

FY2013

FY2014

FY2015

FY2016E*

FY2013

FY2014

FY2015

FY2016E*

Revenue (LHS)

Yoy Growth (RHS)

PAT (LHS)

Yoy Growth (RHS)

Source: Company, Angel Research; Note: - 9MFY2016 annualised number

The company posted a net profit CAGR of 11.2% over FY2011-15E on the back of

strong growth in top-line and stable margins. Going forward, we expect the

company to be able to report healthy top-line and bottom-line numbers on the

back of growth momentum, favorable product mix and reduction in working

capital loans.

Outlook Valuation

At the upper end of the issue price band, the company is seeking a P/E multiple of

37.6x its 9MFY2016 annualized earnings based on pre-issue outstanding shares.

This is lower than its close peer Prabhat Dairy’s valuation, which is trading at a

higher multiple of 49.8x its 9MFY2016 annualized earnings (despite of PMFL’s

better return ratios). Further, retail investors will be given a discount of `12/share.

Considering the company has a diversified product basket, strong brands and

wide distribution network, we believe that the company will continue to perform

well on both the top-line and the bottom-line front. Hence we recommend

investors to Subscribe to the issue from a longer term perspective.

Risks

Milk procurement: The company relies on procuring raw milk at competitive rates

from milk farmers in the milk procurement belt. Inability to procure sufficient good

quality raw milk at commercially viable prices may adversely impact the company’s

operation as raw milk is key raw material for all dairy products.

Intense competition: The dairy industry is highly competitive, with multiple players

sourcing milk from the same region. Such competition can have an impact on raw

milk prices.

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

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

or similar occurrences can result in regulatory actions against the company and

impact the business performance.

Threat of Patanjali: Indian and multinational FMCG companies are expected to

face stiffer competition from the Patanjali brand. Patanjali has significant presence

in the ghee segment, thus posing competition to PMFL.

May 3, 2016

Parag Milk Foods | IPO Note

Profit & Loss (consolidated)

Y/E March (`cr)

FY2012

FY2013

FY2014

FY2015

9MFY16

Total operating income

900

925

1,088

1,439

1,231

% chg

36.7

2.8

17.6

32.2

Total Expenditure

818

842

1,006

1,332

1,123

Raw Material

701

691

836

1,101

921

Employee Cost

Other Expenses

111

122

174

151

EBITDA

106

107

% chg

64.1

1.4

(1.3)

29.2

(% of Net Sales)

9.1

9.0

7.6

7.4

8.7

Depreciation & Amortisation

EBIT

% chg

86.4

(4.1)

(4.4)

43.9

(% of Net Sales)

6.6

6.2

5.0

5.5

6.8

Interest & other Charges

Other Income

(% of PBT)

3.8

11.1

10.1

5.8

1.2

Recurring PBT

% chg

110.1

(6.7)

(35.7)

153.9

Prior Period & Extra-ord. Exp.(Inc.)

PBT (reported)

Tax

(2)

(4)

(% of PBT)

7.9

16.9

35.5

PAT before MI & Adj. reported)

Extraordinary Items

Less: Minority interest (MI)

Less: Share of Associates

ADJ. PAT

% chg

9.9

(23.1)

62.6

(% of Net Sales)

2.1

2.2

1.5

1.8

2.6

Basic EPS (`)

2.7

3.0

2.3

3.7

4.5

Fully Diluted EPS (`)

2.7

3.0

2.3

3.7

4.5

% chg

9.9

(23.1)

62.6

22.9

May 3, 2016

Parag Milk Foods | IPO Note

Balance Sheet (consolidated)

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

9MFY16

SOURCES OF FUNDS

Equity Share Capital

Reserves& Surplus

107

211

Equity Application Money

Shareholders’ Funds

123

278

Minority Interest

Total Loans

377

456

520

430

365

Long-term provisions

Other long term liabilities

0.4

11.2

16.1

17.0

Total Liabilities

445

545

633

575

669

APPLICATION OF FUNDS

Gross Block

318

335

360

437

482

Less: Acc. Depreciation

118

146

169

Net Block

246

243

242

291

313

Capital Work in Progress

Goodwill

Investments

Current Assets

294

347

439

537

580

Inventories

139

190

212

227

Sundry Debtors

119

147

163

171

246

Cash

Loans & Advances

Other Assets

Current liabilities

160

146

190

348

301

Net Current Assets

134

200

249

190

279

Long term loans and adv.

57.0

93.8

103.0

66.5

46.9

Other Non Current Assets

0.7

1.0

1.6

1.8

1.1

Mis. Exp. not written off

Total Assets

445

545

633

575

669

May 3, 2016

Parag Milk Foods | IPO Note

Cash Flow Statement (consolidated)

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

9MFY16

Profit before tax

Depreciation

Change in Working Capital

(48)

(62)

(40)

(42)

(55)

Interest / Dividend (Net)

Direct taxes paid

(3)

(13)

(0)

(1)

(6)

Others

Cash Flow from Operations

(Inc.)/ Dec. in Fixed Assets

(70)

(56)

(59)

(23)

(40)

(Inc.)/ Dec. in Investments

(1)

Cash Flow from Investing

(69)

(57)

(59)

(22)

(39)

Issue of Equity

Inc./(Dec.) in loans

Dividend Paid (Incl. Tax)

Interest / Dividend (Net)

(40)

(41)

(50)

(54)

(36)

Cash Flow from Financing

(42)

Inc./(Dec.) in Cash

(0)

Opening Cash balances

Acquisition/(sale) of business

Closing Cash balances

May 3, 2016

Parag Milk Foods | IPO Note

Key Ratios

Y/E March

FY2012

FY2013

FY2014

FY2015

Valuation Ratio (x)

P/E (on FDEPS)

84.6

76.9

100.1

61.6

P/CEPS

38.6

34.1

36.8

29.9

P/BV

27.6

19.7

16.4

13.0

Dividend yield (%)

0.0

EV/Sales

2.2

1.9

1.4

EV/EBITDA

24.0

24.6

25.7

19.0

EV / Total Assets

3.3

3.0

2.6

2.2

Per Share Data (Rs)

EPS (Basic)

2.7

3.0

2.3

3.7

EPS (fully diluted)

2.7

3.0

2.3

3.7

Cash EPS

5.9

6.7

6.2

7.6

DPS

0.0

Book Value

8.2

11.5

13.8

17.5

Returns (%)

ROCE

13.7

10.7

8.9

14.3

Angel ROIC (Pre-tax)

14.0

10.8

9.5

15.1

ROE

32.6

25.6

16.4

21.1

Turnover ratios (x)

Asset Turnover (Gross Block)

2.8

3.0

3.3

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Note: Valuation ratios based on pre-issue outstanding shares and at upper end of the price band

May 3, 2016

Parag Milk Foods | IPO Note

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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