Prabhat Dairy Limited (PDL) is tapping the capital markets with its IPO which consists of a fresh issue of Rs 300 crs and an offer for sale of 1,47,06,000 shares in a price band of Rs 140 -147. The issue has opened on Friday the 28th of Augusta and closes on Tuesday the 1st of September 2015. The total issue size would be between Rs 506 crs to Rs 516 crs.
Objects of the issue
The objects of the issue are to repay loans of Rs 185 crs and meet capital expenditure of Rs 35 crs besides general corporate purposes and issue expenses.
Business
The company PDL as the name suggests is in the dairy industry. The company is an integrated milk and dairy products company catering to institutional as well as retail customers. PDL produces fresh, dry frozen, cultured and fermented dairy products including pasteurised milk, flavoured milk, and 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. The company has recently commenced commercial production of cheese, paneer and shrikhand in Fiscal 2016. We sell our products under our retail consumer brands as well as ingredient products or as co-manufactured products to a number of institutional and multinational companies. As of June 30, 2015, PDL had an aggregate milk processing capacity of 1.5 million litres per day.
The integrated business model encompasses almost all aspects of the dairy industry value chain, including cattle feed supply, engaging with farmers on cattle health and milk production, procurement of raw milk, and the production, supply and sale of a range of processed milk and dairy products. The company believes that the integrated business model enables us to leverage the dairy industry value chain, ensure efficiency in costs and operating margins and exercise more control over the production process resulting in quality products.
What is important to note is that the plant/dairy is located at ShrirampurMaharashtra which is the largest cow milk producing belt in the country. They also have a unit at Turbhe in Navi Mumbai to cater to the MMRDA markets of Mumbai, Navi Mumbai and Thane. Milk has its own inherent problems where it is a highly perishable product and has a very short life unless processed. Milk collection and then chilling it on receiving the same is a key to increasing the life of the product.
India is not a rich country and so to for its farmers. Majority of the farmers have a couple of cows and the average milk collection is less than 30 litres per cow per day and this is in two instalments morning and evening. Collection of milk is a tedious process and one where the trust of the farmer in getting a fair deal a key requirement. PDL ensures this through its PrabhatMitra which are welfare centres aimed at training and assisting the farmers in maximising his investment in the business of dairy production.
Over the years the association and co-branding with marquee names such as Britannia, Mondelez International (Cadbury and Kraft) Mother Dairy and Heritage foods. The supply of products to these wellknown brands has ensured quality and credibility to PDL. This also assures the modern retail trade in accepting products manufactured by PDL under its own brand.
The capex for the new products such as cheese, paneer and Shrikhand has been completed and a sum of Rs 159 crs appears as work in progress in the financial statements for the year ended March 2015. This amount is in comparison to the total fixed assets including work in progress of Rs 452crs.
This means roughly 1/3rd of the assets are yet to be commissioned by the company and are not reflected in the turnover of Rs 1000 crs plus reported by the company. Further these are value added products and also earn substantially higher margins when compared to other products.
Financials
PDL’s total consolidated revenue in Fiscal 2012, 2013, 2014 and 2015 was ₹4,838.21 million, ₹6,419.39 million, ₹8,576.58 million and ₹10,017.38 million, respectively. It’s EBITDA in Fiscal 2012, 2013, 2014 and 2015 was ₹494.58 million, ₹736.14 million, ₹917.22 million and ₹1,025.50 million, respectively, while profit after tax, in such periods was ₹95.13 million, ₹140.66 million, ₹207.79 million and ₹210.45 million, respectively. As of March 31, 2015, the reserves and surplus was ₹2,671.11 million while the net worth was ₹ 3,385.39 million. The debt to equity ratio as of March 31, 2015 was 1.22.
Valuations
The company is primarily in the dairy industry selling products from fresh milk to high value added items like dahi, yoghurt, ice-cream, paneer, shrikhand and cheese. Currently 75% or 3/4th of its sales are “B to B” and 1/4th to “B to C”. Going forward while sales will grow in both categories the ratio would change with B To C moving up and probably in a couple of years becoming about half and half. In this process or journey the company has been selling many of its products like milk, milk powder, condensed milk, flavoured milk, dahi and also shrikhand in its own name. The margins at EBITDA level are around 10% and are expected to improve significantly going forward on three reasons. Firstly the capex on new facilities of cheese, paneer and shrikhand have been commissioned only towards the end of the first quarter of June 2015 and would now contribute to the topline and bottomline. Secondly when higher value added products are made compared to say liquid milk, the margins improve significantly. Thirdly and most importantly gradual shifting of focus towards the B to C segment assures significantly higher margins.
The EPS of PDL based on March 2015 consolidated results and fully diluted is Rs 2.95 per share. This translates into a P.E. of 47.46 to 49.83 at the price band depending on where the issue is priced. The price band is Rs 140-147 with a discount of Rs 5 per share for retail investors. If one looks at the current P.E. of Hatsun Agro the same is 111. This is based on consolidated results for the year ended March 2015 where the company reported an EPS of Rs 3.62 and the current price is Rs 403. If one were to compare these valuations PDL is less than half that of Hatsun but on the flip side one has to consider the fact that Hatsun is a branded player unlike PDL which is 3/4th B To B and 1/4th B to C.
Conclusion
The opportunity in the business is considerable. PDL has constructed the facilities and the infrastructure required to take it to the next phase of growth. With a combined facility having milk processing and handling capacity of 1.5 million litres per day it is well equipped to handle increased milk supplies/procurement and even higher market share of milk procurement over the next 3-4 years. Having a unit at Navi Mumbai ensures the proximity to the key consuming centre of Mumbai, Thane and Navi Mumbai where all products are in demand be it milk or value added products like paneer shrikhand and cheese. Considering the prospects and valuation at less than half that of the competitor, investment may be considered for the longer term. There may not be any immediate upside as results would start flowing in a couple of quarters as the company ramps up its production in the new capacity commissioned.
SEBI Disclaimer: – I intend to apply for the minimum lot in the retail category.
