sharekhan ipo flash

Parag Milk Foods

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May 02, 2016

Parag Milk Foods

IPO Flash

other hand, funds raised through fresh issue of shares will

be largely utilised for expansion and modernisation of
existing manufacturing facilities and partial repayment
of working capital debt.

IPO details

Issue opens
Issue closes
Price band

Wednesday, May 4, 2016

Friday, May 6, 2016
Rs220-227 per share
Discount of Rs. 12 for retail bidders

Issue size
Type of issue
Fresh issue
Offer for sale
Offer size
Face value
QIB portion
Non-institutional
portion
Retail portion
Employee

Selling shareholders details

and employees
Rs749.93Rs764.33 crore
Fresh issue and offer for sale
1.33-1.37 crore shares
2.057 crore shares
3.38-3.42 crore shares
Rs10
Not less than 75% of the Issue size
Not more than 15% of the issue size

No.

Name of selling
shareholder

No. of equity
shares offered

IDFC PE

8,259,928

IBEF I

3,917,238

IBEF

2,109,283

Promoter group individuals

3,100,000

Others

3,186,124

Total OFS
Not more than 10% of the issue size
0.3mn equity shares

20,572,573

Objects of the issue

reservation

The net proceeds from the issuance of the fresh issue

will largely be utilised for expansion and modernisation
at existing facilities and repayment of working capital
loans.

About the issue

Parag Milk Foods Ltd (PMFL) is coming out with an initial
public offering (IPO) to raise Rs753-767crore from the
equity market at a price band of Rs220-227 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 1.331.37 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. On the

Objects of the issue

Rs in crore

Expansion and modernisation plan

147.7

Investment in subsidiary for financing capital

2.3

expenditure
Partial repayment of working capital loan
General corporate purpose

100
50

Funds raised through fresh issue

300

Shareholding patternPre- & Post-issue (%)

Shareholding pattern

Pre-issue

Post-issue at Rs220

Post-issue at Rs227

Promoters (A)

33.8

28.4

28.5

Promoters group (B)

27.8

19.6

19.7

Promoters and promoters group (A+B)

61.6

47.9

48.2

IDFC PE, IBEF & IBEF I

29.6

7.8

7.8

8.8

44.3

44.0

100.0

100.0

100.0

Others & public

Total number of shares

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May 02, 2016

sharekhan ipo flash

Parag Milk Foods

Company background

The above mentioned products are distributed pan-India

through the companys extensive sales and distribution
network.

Parag Milk Foods Ltd (PMFL) is one of the leading

manufacturers and marketers of dairy-based branded
foods made from cow milk only, with a pan-India
presence. The company commenced operations in
1992 and has evolved from a mere milk collection and
distribution company to dairy-based branded consumer
products company, manufacturing a diverse range of
products including cheese, ghee, fresh milk, whey
proteins, paneer, curd, yoghurt, milk powders and dairybased beverages. PMFL operates through two plants
located at Manchar (Pune district-Maharashtra) and
Palamaner (Chittoor districtAndhra Pradesh). Both these
plants have milk processing capacities of 1.2 million
litres per day and 0.8 million litres per day, respectively,
while cheese is manufactured only at Manchar plant,
which has a raw cheese production capacity of 40 metric
tonne (MT) per day. The ultra heat treatment (UHT)
products are manufactured at Palamaner plant only and
all other products are made at both the facilities. Milk
is one of the key ingredients for manufacturing all PMFL
products which is procured from 29 districts across the
Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu.
PMFLs products are marketed through four brands,
Gowardhan, Go, Pride of Cows and Topp Up, through
which the company targets specific end user segments.

Key positives
Fully integrated business model
PMFLs operations encompass the processes of dairy
farming, milk procurement, processing, distribution
and branding, thus resulting into a fully integrated
business model. PMFLs supply chain network does milk
procurement from 29 districts across Maharashtra,
Andhra Pradesh, Karnataka and Tamil Nadu, through over
3,400 village level milk collection centres. The average
milk procurement for the period April-December 2015
stands at 1 million litre, which is up from a level of 0.77
million litre as of FY2014. Well established relationships
with farmers in the proximity of collection and chilling
centres, ensure consistent and un-interrupted supply of
milk (key input) for the company which signals at a strong
procurement base. Both the plants have automated
equipments which bring in operational efficiencies,
quality control and lower production losses. Therefore, a
fully integrated business model offers flexibility in terms
of planning and strategising which augurs well for the
company.

Capacity details
Products

Units

Capacities#

*Capacity utilisation (%)

Manchar

Palamaner

Total

Litres/day

120,000

80,000

200,000

74

66

MT/day

70

40

110

65

86

Litres/day

200,000

175,000

375,000

62

41

Flavoured milk

Packs/day

30,000

70,000

100,000

28

16

UHT products

Litres/day

165,000

165,000

33

Milk processing
Milk powders (includes dry capacity for

Manchar

Palamaner

whey powders and dairy whiteners)

Liquid milk in pouches

Cheese paneer

MT/day

40

40

81

Ghee

MT/day

40

30

70

72

13

Butter

MT/day

50

25

75

17

81

Curd (includes pouch curd, cup curd,

MT/day

20

40

60

43

75

Litres/day

400,000

400,000

fruit yoghurt and shrikhand)

Whey processing
Source: PMFL RHP
* As per nine months ended December 2015
# As per IMARC Report, dated as of July 30, 2015, relating to the production capacities at PMFLs facilities, for the products specified

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May 02, 2016

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Parag Milk Foods

under the brand Pride of Cows is directly delivered to

the retail users and is sold only in Mumbai and Pune. With
respect to the other products with a low unit price, the
company has a separate route to market which focuses
on tier-3 cities and rural areas in India. Therefore, a well
penetrated and a structured distribution network results
in an efficient sale of the companys products and also
promotes brand visibility. Going ahead, the company has
plans to add up six more depots during FY2017, of which
two each would be in the north and the south region and
one each in the west and the east region. The increasing
number of depots will enable improved supplies to
retailers and increase the penetration in existing markets.

Diversified product portfolio helps address the needs

of a diverse customer segments
PMFL over the years has built a diversified product
portfolio which includes a variety of milk-based products
manufactured using cow milk. The products can be
broadly classified into the following segments;
Diversified revenue portfolio

9.70%
4.80%

7.90%

20.30%

Region-wise distribution network

10.10%
18.70%

Region
28.50%

Fresh Milk

Skimmed Milk

Ghee

Cheese / Paneer

Depots

Mumbai

UHT

Whey

Others

Source: PMFL RHP

Some of the key products include fresh, premium

fresh and UHT milk, ghee, cheese, milk powders, whey
proteins, dairy-based beverages, curd, paneer, shrikhand,
fruit yoghurts and fresh cream. In addition to these, the
company has recently introduced dairy-based products,
which focus on consumer health and nutrition. PMFL sells
its products to a variety of end users across the businessto-business (B2B) as well as business-to-consumer (B2C)
categories. While the B2B category constitutes around
10-12% of the revenues, the balance is constituted by the
B2C category. In the B2B segment the key clients include
Nestle, MTR Foods, Mother Dairy Fruits & Vegetables and
Jubilant FoodWorks Pvt Ltd. In the B2C segment fresh
milk, ghee and cheese are some of the key products
preferred by the customers. PMFL has a 32% market
share in the domestic cheese market and also has the
largest cheese plant in the country with a capacity of
40MT per day. Thus, a diversified product portfolio and
a diverse range of customers help PMFL to tide over the
concentration risks associated with operations in specific
product and customer segments.

Distributors

stockist

(greater than)

250

North

31

450

East

17

300

West

28

800

South

26

1,200

Financial statement gradually improving

PMFL has exhibited an improved top-line growth with decent financial track record. For FY2011-15, the top line
registered a compounded annual growth rate (CAGR) of
21.6% wherein the top line grew from the level of Rs658
crore in FY2011 to Rs1,438.7 crore in FY2015. The top line
stands at Rs1,230.6 crore as of M9FY2016. The earnings
before interest, tax, depreciation and amortisation (EBITDA) CAGR for FY2011-15 is at 20.7% wherein the operating
profit for FY2015 stands at Rs106 crore which is up from
a level of Rs50 crore as of FY2011. The operating profit
for the period M9FY2016 stands at Rs107.5 crore. The net
profit for FY2015 stands at Rs26 crore as against a loss of
Rs0.4 crore for FY2011, while it has substantially improved
to Rs31.9 crore for M9FY2016. PMFLs debt-equity ratio has
demonstrated significant improvement and is down to a
level of 1.3x (debtRs365.2 crore) as of M9FY2016 from a
high of 7.7x (debtRs300 cr) as of FY2011.
Improving financials
1600
1400
1200
1000
800
600
400
200
0

Extensively spread out distribution network across India

In order to cater to the geographically spread out customer
base, PMFL has established a well diversified pan-India
sales and distribution network, which consists of 15
depots, 104 super stockists and over 3,000 distributors.
The companys depots are present in 13 states and union
territories in India, which facilitates in supplying products
to a wide network of retail stores including modern day
trade channels like super markets, hypermarkets and
smaller format retail stores. The premium fresh milk sold
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Super

10%
8%
6%
4%
2%
0%
-2%
FY11

FY12

Net sales (Rs Cr - LHS)

Source: Company

May 02, 2016

FY13

FY14

OPM (% - RHS)

FY15

9M FY16

NPM (% - RHS)

sharekhan ipo flash

Parag Milk Foods

Key concerns

by the way of aggressive pricing or marketing activities),

PMFLs market share could come under pressure.

Inability to procure adequate quantity of good quality

cows raw milk at competitive prices

Leverage position

The cows raw milk is one of the primary raw materials

used to manufacture all the products made by the
company. Further, there is no formal arrangement
the company has entered into with the milk farmers,
collection and chilling centres for the supply of milk and
so they are not obligated to supply milk to the company
and may choose to sell to anyone as per their discretion.
Also, in the absence of an arrangement the procurement
price and quantities may be affected, thus having an
adverse effect on PMFLs operations.

PMFL had a very high debt-equity ratio of 7.7x as of

FY2011 which the company has gradually reduced to 1.3x
as of December 2015. Going ahead, the company plans
to further improve the leverage position to below 1x by
FY2017. Further, PMFLs larger portion of debt is towards
working capital loans. In the event if the company is
unable to generate adequate cash in the future to meet
the working capital needs, than the debt levels could rise
going ahead.
Valuation

Competition

At a price band of Rs220-227, the issue is priced at 56.157.8x its price-earnings (PE) ratio for FY2015 consolidated
earnings per share (EPS) of Rs3.9. Despite similar margin
profile, PMFLs 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.

Some of the key products manufactured by PMFL are

fresh milk, cheese and skimmed milk powder, in which it
faces stiff competition from players like Amul, Britannia
and Nestle. The company has a 32% market share in the
cheese segment in India and is next only to the market
leader Amul. If the competitive pressure increases (either

Peer comparision
OPM (%)
Company

RoCE (%)

P/E (x)

FY13

FY14

FY15

FY13

FY14

FY15

FY13

FY14

FY15

Prabhat Dairy

11.4

10.7

10.3

10.7

10.4

10.2

24.3

16.1

38.1

Kwality Dairy

5.6

6.0

6.2

20.2

20.6

19.7

23.6

17.1

16.1

Parag Foods at Rs220

9.3

7.6

7.4

12.6

9.6

13.7

61.8

91.5

56.1

Parag Foods at Rs227

9.3

7.6

7.4

12.6

9.6

13.7

63.8

94.4

57.8

Source: Company financials; Bloomberg

P&L account (consolidated)

Rs in cr

Particulars

2011

2012

2013

2014

2015

M9FY16

Total revenues

658.3

899.8

925.0

1,088.2

1,438.7

1,230.6

Materials

514.1

700.6

687.9

835.9

1,100.9

921.4

Employee cost

19.2

29.9

39.8

47.8

57.5

50.8

Other expenditure

74.9

87.0

111.1

122.3

174.0

150.9

608.1

817.5

838.8

1,005.9

1,332.4

1,123.1

50.1

82.3

86.2

82.3

106.3

107.5

Total operating cost

Operating profit
% of sales

7.6

9.1

9.3

7.6

7.4

8.7

other income

0.2

0.8

2.1

1.2

1.8

0.6

PBIDT

50.4

83.0

88.3

83.5

108.2

108.0

Interest

22.5

40.0

40.3

43.7

49.4

34.9

PBDT

27.8

43.0

48.0

39.8

58.8

73.1

Less depreciation

18.1

22.5

26.1

27.5

27.5

23.7

Profit before tax

9.8

20.5

21.9

12.3

31.2

49.5

Tax

10.2

1.5

-1.6

-3.7

5.3

17.5

Reported profit after tax

-0.4

19.0

23.6

15.9

26.0

31.9

% of sales

-0.1

2.1

2.5

1.5

1.8

2.6

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May 02, 2016

sharekhan ipo flash

Parag Milk Foods

Balance sheet (consolidated)

Balance sheet

Rs in cr
2011

2012

2013

2014

2015

M9FY16

Liabilities
Equity capital

15.8

15.8

16.0

16.0

16.0

66.2

Reserves and surplus

23.2

42.1

65.3

81.2

107.2

211.3

Net worth

39.0

57.9

81.2

97.2

123.2

277.5

Deferred tax liabilities

Total loans

9.0

10.0

7.5

3.8

5.8

8.9

300.3

376.6

455.8

520.5

429.9

365.2

Long-term borrowings

141.7

163.6

232.7

272.6

172.6

129.1

Short-term borrowings

158.6

213.0

223.2

247.9

257.2

236.1

Capital employed

348.3

444.5

544.5

621.5

558.8

651.7

233.6

253.2

249.7

279.3

317.1

342.2

Assets
Fixed assets
Investments
Current assets

0.0

0.0

0.3

0.3

0.3

0.3

239.7

351.8

441.5

543.3

605.5

627.6

other current assets

Inventories

4.5

26.2

37.3

40.1

52.5

31.8

117.0

139.4

139.5

190.3

211.9

226.8

85.6

118.7

147.3

163.5

171.5

246.1

1.3

1.8

2.2

4.2

5.6

25.0

31.2

65.6

115.2

145.3

164.1

97.9

125.0

160.4

146.9

201.4

364.1

318.4

59.4

85.0

92.2

124.9

180.3

147.1

Sundry debtors
Cash and bank balance
Loans and advances
Less: Current liabilities and
provisions
sundry creditors
other current liabilities

44.8

56.5

53.1

76.1

182.9

162.3

Provisions

20.7

19.0

1.6

0.4

1.0

9.1

Net current assets

114.7

191.3

294.6

341.9

241.4

309.2

Capital employed

348.3

444.5

544.5

621.5

558.8

651.7

The views expressed in this report are our views only and have been arrived at after analysis of the public offering details. This is not
a recommendation under our Stock Idea category. It may/may not be included in the Stock Idea by our analysts at a later date.
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