IPO Review Rating matrix Rating : Subscribe Issue Details Issue Opens 4-May-16 Issue Closes 6-May-16 Issue Size ( Crore) 752-767 Price Band ( ) 220-227 Total no. of Shares on Offer (crore) 3.42-3.38 QIB (%) 75 Non-Institutional (%) 15 Retail (%) 10 Minimum lot size (No. of shares) 65 Objects of the Issue Objects of the Issue Amount OFS for exit of IBEF (Motilal Oswal PE) & partial exit of IDFC PE & promoter 452-467 crore Fresh issue proceeds 300 crore - Expansion & modernisation plan of its existing manufacturing facilities 147.7 crore - Investment in its subsidiary, Bhagyalaxmi Dairy Farm, for expansion & modernisation purposes 2.3 crore - Partial repayment of working capital consortium loan 100 crore - General corporate purposes 50 crore Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 61.1% 47.6% Institutional 0.0% 0.0% Non-institutional 38.9% 52.4% Financial Summary Crore FY11 FY12 FY13 FY14 FY15 9MFY16 Net sales 658.3 899.8 925.0 1088.3 1438.7 1230.6 EBITDA 50.4 83.0 85.5 83.6 108.2 108.0 EBITDA margin (%) 7.7 9.2 9.2 7.7 7.5 8.8 Net profit -0.4 18.9 20.8 16.0 26.0 31.9 Diluted EPS NA 2.3 2.5 1.9 3.1 3.8 Valuation Summary (at 227 ;upper price band) (x) FY11 FY12 FY13 FY14 FY15 P/E NA 100.5 91.4 118.9 73.1 Mcap/Sales 2.9 2.1 2.1 1.7 1.3 EV/EBITDA 43.6 27.4 27.5 28.9 21.5 Research Analyst Sanjay Manyal sanjay.manyal@icicisecurities.com Parth Joshi parth.joshi@icicisecurities.com Banking on opportunity in dairy space May 3, 2016 Parag Milk Foods (PMF), established in 1992, is in the business of manufacturing and marketing dairy-based branded food products. PMF has production facilities in Manchar near Pune and Palamaner in Andhra Pradesh. The company has an aggregate milk processing capacity of 2 million litre per day. PMF also has the largest cheese plant in India with a production capacity of 40 tonnes/day. Gowardhan and Go are the flagship brands of PMF. Its other brands include Pride of Cows and Topp Up. Investment Rationale Strong brand equity The company has strong brands like Gowardhan, Go, Pride of Cows and Top Up in its portfolio. PMF enjoys strong brand equity especially in the cheese category. Its Go brand of cheese enjoys 32% market share and is second only to Amul. Rising distribution network The company has a strong distribution network, comprising 15 depots, 104 super stockist and more than 3000 distributors. The products are available across ~175000 outlets across India. PMF also sells its premium product fresh milk Pride of Cows directly to its retail customers in Mumbai and Pune. In terms of milk sourcing, the company procures ~1 million litre raw milk per day from 29 districts across Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. Presence across all verticals of value pyramid PMF has a well positioned portfolio of products sold in more than 160 SKUs spread across various segments of the value pyramid. While Gowardhan is a mass market brand, Go and Topp Up are positioned as aspirational brands targeted towards youth. At the same time, PMF also caters to the need of the affluent class at the top of the pyramid with its Pride of Cows milk. Concerns Parag Milk Foods Price band 220-227 Pledged shares by promoters substantially high Competition from established players and new entrants like ITC Fragile margins vulnerable to RM price fluctuations Good long term prospects for company in domestic dairy industry Parag Milk Foods is available at 73x its FY15 earnings and at 44x its FY16E earnings (annualised from 9MFY16 earnings) at the upper end of the price band of 220-227. India being the largest milk producer and consumer in the world, we believe in the long term prospects of the domestic dairy industry. It has immense potential for growth for PMF. We believe PMF is available at fair valuations considering the opportunity size lying ahead of the company in the dairy industry that is constantly in the process of evolution from raw milk to focus towards value added milk and milk products. Also, the discount of 12 per share on final issue price for retail investors being on offer, it increases the attractiveness of the company for long term investors. We recommend SUBSCRIBE rating for the IPO.
Company Background Parag Milk Foods (PMF), established in 1992, is in the business of manufacturing and marketing dairy-based branded food products. PMF s production facilities are in Manchar near Pune and Palamaner in Andhra Pradesh. PMF has an aggregate milk processing capacity of 2 million litre per day. It also has the largest cheese plant in India with a production capacity of 40 tonnes per day. Gowardhan and Go are the flagship brands of PMF. Its other brands include Pride of Cows and Topp Up. For milk procurement, the company has an established supply chain network of ~250000 milk farmers across 29 districts in Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu with an average daily milk procurement of ~1 million litre. The company also owns a fully automated dairy farm that houses over 2000 Holstein breed of cows. PMF markets and sells the milk produced from its dairy farm under the Pride of Cows brand to ~12000 customers in Mumbai and Pune. The total issue size is ~ 760 crore out of which fresh issue of shares aggregates up to 300 crore. Pre-issue holdings of promoters, IDFC PE and IBEF (Motilal Oswal PE) is at 61.1%, 23.5% and 9.5%, respectively. Post issue, promoters, IDFC PE and IBEF would hold 47.6%, 9.9% and 0.8% stake, respectively, in the company. Exhibit 1: Various brands, products sold by company Brands Products sold under the brand Target segment Gowardhan Fresh milk, curd, buttermilk, ghee, paneer, butter, milk Household consumption powders (skimmed milk powder, whole milk powder), whey proteins, gulab jamun mix, shrikhand Go UHT milk, curd, fruit yoghurts, fresh cream, buttermilk, lassi, cheese products including processed cheese blocks, cheese spreads, cheese slices, pizza cheese, shredded cheese, mozzarella, cheddar, cream cheese Children and youth Pride of Cows Premium cow milk Household consumers seeking premium quality cow milk. Milk is directly delivered from the company's farm to the consumer's door step through a subscription model Topp Up Flavoured milk available in six variants Youth, on-the-go consumption Exhibit 2: Financial Summary Crore FY11 FY12 FY13 FY14 FY15 9MFY16 Net sales 658.3 899.8 925.0 1088.3 1438.7 1230.6 EBITDA 50.4 83.0 85.5 83.6 108.2 108.0 EBITDA Margin (%) 7.7 9.2 9.2 7.7 7.5 8.8 Depreciation 18.1 22.5 26.1 27.5 27.5 23.7 Finance Cost 22.5 40.0 40.3 43.7 49.4 34.9 Tax 10.2 1.6-1.6-3.7 5.3 17.5 PAT -0.4 18.9 20.8 16.0 26.0 31.9 Diluted EPS (post issue) NA 2.3 2.5 1.9 3.1 3.8 Page 2
Strong brand equity The company has strong brands like Gowardhan, Go, Pride of Cows and Topp Up in its portfolio. The company sells fresh milk, ghee, butter, cheese, curd, milk powder, paneer and gulab jamun mix under Gowardhan Brand, which is largely targeted at direct home consumption. Similarly, it also sells UHT milk, fresh cream, cheese, yogurt and beverages such as butter milk, lassi under Go brand. The brand is largely targeted at children and youth generation mainly for direct consumption. The company spends 1-2% of the sales as A&P spend. PMF sells one of the other brands Pride of Cows milk in Mumbai and Pune. This milk is procured from company s own dairy farm at Manchar, Pune. This is a fully automated farm with 2000 Holstein breed cows and 4x better than average yield. PMF enjoys strong brand equity, especially in the cheese category. The estimated size of the cheese market was ~ 1170 crore in 2014. Its Go brand of cheese enjoys 32% market share and is second only to Amul. Exhibit 3: Market share of cheese category in 2014 (%) Dynamix 7% Others 10% Britannia 9% Amul 42% Parag Milk Foods 32% Exhibit 4: Segment wise revenue ( crore) Product FY14 FY15 9MFY16 Gross fresh milk 230.7 262.8 250.3 Ghee, butter and cream 206.8 262.9 351.0 Cheese/Paneer 201.6 267.0 230.7 UHT products 25.0 46.8 59.0 Whey products 22.2 22.5 36.2 Skimmed milk powder and dairy whitener 203.0 301.0 124.5 Others (curd, yoghurt, flavoured milk, gulab jamun mix) 70.0 166.0 60.8 Total revenue 1089.5 1440.5 1231.2 Rising distribution network The company has a strong distribution network, comprising 15 depots, 104 super stockist and more than 3000 distributors. The company s products are available across ~175000 outlets across India. Though it has a presence in 13 states in India, large part of the revenues come from Maharashtra and Andhra Pradesh due to close proximity to the company s two plants in Manchar and Palamaner. The company also sells its premium product fresh milk Pride of Cows directly to its retail customers in Mumbai and Pune. In terms of milk sourcing, the company Page 3
procures ~1 million litre raw milk per day from 29 districts across Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. Exhibit 5: Total production capacity across PMF s two plants Dairy product Capacity unit Manchar Palamaner Total capacity Processing of milk litres per day 1200000.0 800000.0 2000000.0 Milk Powders tonnes per day 70.0 40.0 110.0 Liquid milk in pouches litres per day 200000.0 175000.0 375000.0 Flavoured milk packs per day 30000.0 70000.0 100000.0 UHT products litres per day - 165000.0 165000.0 Cheese / Paneer tonnes per day 40.0-40.0 Ghee tonnes per day 40.0 30.0 70.0 Butter tonnes per day 50.0 25.0 75.0 Curd tonnes per day 20.0 40.0 60.0 Whey litres per day 400000.0-400000.0 Presence across all verticals of value pyramid PMF has a well positioned portfolio of products sold in more than 160 SKUs and spread across various segments of the value pyramid. While Gowardhan is a mass market brand, Go and Topp Up are positioned as aspirational brands targeted towards youth. At the same time, PMF also caters to the need of the affluent class at the top of the pyramid with its Pride of Cows milk. An illustration of the company s strategy can be observed from the milk portfolio it sells under each of these brands. It retails Gowardhan milk at 38-40 per litre while the realisation of Go milk is at 60 per litre. PMF also sells Pride of Cows milk as a premium quality farm milk at 80 per litre through a subscription model. Higher contribution of value added products The company deals in milk and milk related products. Milk and skimmed milk powder, which is a low margin business contributes almost one-third to revenues. However, value added products like cheese, ghee, curd, butter, paneer; flavoured milk and shrikhand contribute two-third to revenues. The company is increasing its contribution of value added products mainly to aim to expand in higher margins. Exhibit 6: Milk required to produce 1 kg of different dairy products: Dairy product Milk required (liters) 1 kg of Whey 500.0 1 kg of Ghee 42.0 1 kg of Paneer 6.5 1 kg of Skimmed milk powder 6.5 1 kg of Cheese 10.0 Source: Industry, ICICIdirect.com Research Page 4
Exhibit 7: Revenue trend ( crore) Exhibit 8: EBITDA margin trend (%) 1600 1400 1200 1000 800 600 400 200 0 1438.7 1230.6 1088.3 899.8 925.0 658.3 FY11 FY12 FY13 FY14 FY15 9MFY16 10 8 6 4 2 0 9.2 9.2 8.8 7.7 7.7 7.5 FY11 FY12 FY13 FY14 FY15 9MFY16 Revenue ( crore) EBITDA margin (%) Exhibit 9: PAT Trend ( crore) 35 30 25 20 15 10 5 0-5 31.9 26.0 18.9 20.8 16.0 FY11-0.4 FY12 FY13 FY14 FY15 9MFY16 PAT ( crore) Page 5
Key risks and concerns Pledged shares by promoters substantially higher Currently, the promoter shareholding is at 61.13%. According to the Red Herring Prospectus, 55.17% of this stake held by promoters is pledged. Post issue, it implies that ~28.6% of the total number of shares of PMF would remain pledged. We remain cautious on the fact that such a substantial portion of the company stake would remain pledged. Competition from established players and new entrants like ITC PMF is still an emerging player in the overall milk and dairy products market in the Indian landscape. This industry is already cluttered with the presence of major national players (Amul, Nestlé, Britannia), major statebased cooperatives (Karnataka Milk Federation, Rajasthan Co-operative Dairy Federation, Orissa State Co-operative) and numerous private players (Hatsun, Tirumala). Besides, domestic FMCG giants like Godrej and ITC are in the fray to corner substantial business in the Indian dairy industry. Given the size and scale of PMF vis-à-vis the incumbent competition, we believe PMF would face an uphill task in the process of expansion of its market share in the dairy industry. Fragile margins vulnerable to RM price fluctuations Being a commoditised business, the Indian milk industry is an industry with low entry barriers and dominated by unorganised players. The performance of the business is also highly susceptible to fluctuation in milk prices. RM cost as percentage of sales for PMF was at 76.8% and 76.5% in FY14 and FY15, respectively. Further, raw milk constituted 81.4% and 84.7% of total RM cost in FY14 and FY15, respectively. Thus, any adverse fluctuations in milk prices may impact the already thin operating margins of the company. Page 6
Valuation Parag Milk Foods is available at 73x its FY15 earnings and 44x its FY16E earnings (annualised from 9MFY16 earnings) at the upper end of the price band of 220-227. India being the largest milk producer and consumer of the world, we believe in the long term prospects of the domestic dairy industry. It offers immense potential for growth for PMF. With the company s persistent focus towards increasing the sales contribution from high margin value added milk products in its portfolio (currently value added products contribute ~66% to its sales) and enhancing its presence in the retail space, we expect the margins of the company to improve in future from the present level of 8.8% in 9MFY16. We believe PMF is available at fair valuations considering the opportunity size ahead of the company in the dairy industry that is constantly in the process of evolution from raw milk to focus towards value added milk and milk products. Also, the discount of 12/share on final issue price for retail investors on offer increases the attractiveness of the company for long term investors. We recommend SUBSCRIBE on the IPO. Exhibit 10: Peer valuation (FY15) FY11-15 Sales CAGR EBITDA margin P/E Mcap/Sales EV/EBITDA RoE RoCE Parag Milk Foods 21.6% 7.5% 73.1 1.3 21.5 21.1% 11.7% Heritage Foods 17.3% 4.0% 26.7 0.6 15.7 14.7% 16.2% Hatsun Agro 21.3% 6.8% 125.0 1.7 27.2 17.7% NA Prabhat Dairy 36.7% 10.2% 37.1 1.1 14.3 6.2% 9.5% Page 7
Financial Summary Exhibit 11: Profit and Loss Statement ( Crore) FY11 FY12 FY13 FY14 FY15 9MFY16 Net revenue 658.3 899.8 925.0 1088.3 1438.7 1230.6 Other income 0.2 0.8 2.1 1.2 1.8 0.6 Total Revenue 658.5 900.5 927.1 1089.5 1440.5 1231.2 Cost of raw material consumed 514.1 700.6 690.7 835.9 1100.9 921.4 Employee benefits expense 19.2 29.9 39.8 47.8 57.5 50.8 Other expenses 74.9 87.0 111.1 122.3 174.0 150.9 Total Operating Expenditure 608.1 817.5 841.6 1005.9 1332.4 1123.1 EBITDA 50.4 83.0 85.5 83.6 108.2 108.0 Interest 22.5 40.0 40.3 43.7 49.4 34.9 Depreciation 18.1 22.5 26.1 27.5 27.5 23.7 PBT 9.8 20.5 19.1 12.3 31.2 49.5 Total Tax 10.2 1.6-1.6-3.7 5.3 17.5 Net profit before minority interest -0.4 18.9 20.8 16.0 26.0 31.9 Minority interest - - - - - - Net profit -0.4 18.9 20.8 16.0 26.0 31.9 Exhibit 12: Balance Sheet ( Crore) FY11 FY12 FY13 FY14 FY15 9MFY16 Share Capital 15.8 15.8 16.0 16.0 16.0 66.2 Reserve & Surplus 23.2 42.1 65.3 81.2 107.2 211.3 Total Shareholders funds 39.0 57.9 81.2 97.2 123.2 277.5 Minority Interest 0.0 0.0 0.0 0.0 - - Long term borrowings 141.7 163.6 232.7 272.6 172.6 129.1 Deferred tax liabilities 9.0 10.0 7.5 3.8 5.8 8.9 Other long term liabilities 0.4 0.4 0.4 11.2 16.1 17.0 Long term provisions 0.0 0.0 0.2 0.3 0.5 0.5 Total non-current liabilities 151.1 174.0 240.7 287.9 195.0 155.5 Short term borrowings 158.6 213.0 223.2 247.9 257.2 236.1 Creditors 59.4 85.0 92.2 124.9 180.3 147.1 Other current liabilities 44.4 56.1 52.7 65.0 166.7 145.3 Short term provisions 20.7 18.9 1.4 0.1 0.5 8.5 Total current liabilities 283.2 373.0 369.5 437.8 604.8 537.1 Total liabilities 473.3 605.0 691.4 822.9 923.0 970.1 Fixed assets 233.6 253.2 249.7 279.3 317.1 342.2 Non-current investments 0.0 0.0 0.3 0.3 0.3 0.3 Long term loans & advances 28.1 57.0 93.8 103.0 66.5 46.9 Other non-current assets 1.6 0.7 1.0 1.6 1.8 1.1 Total non-current assets 263.4 311.0 344.7 384.3 385.8 390.4 Inventory 117.0 139.4 139.5 190.3 211.9 226.8 Debtors 85.6 118.7 147.3 163.5 171.5 246.1 Cash & bank balances 1.3 1.8 2.2 4.2 5.6 25.0 Short term loans & advances 3.1 8.6 21.5 42.2 97.6 51.1 Other current assets 2.8 25.5 36.3 38.4 50.6 30.8 Total current assets 209.9 294.0 346.7 438.6 537.2 579.7 Total assets 473.3 605.0 691.4 822.9 923.0 970.1 Page 8
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com Page 9
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