Cash cow for long lerm? Analysts bullish on Parag Milk Foods IPO

Moneycontrol Bureau Most analysts are bullish on Parag Milk Foods IPO, open from May 4-6 and recommend subscribing the issue. With a price band of Rs 220-227 per share, the IPO aims to raise Rs 760 crore. The Maharashtra-based dairy company owns brands like Go, Gowardhan, Pride of Cows and Topp UP. The company is offering 2.06 crore shares of which 0.31 crore shares are being sold by promoters, 1.43 crore shares are being sold by investor shareholders, and the balance by other shareholders. This would be the third initial public offer in less than one week to hit the market after Thyrocare Technologies and Ujjivan Financial Services. Subscribe?Angel Broking recommends investors to subscribe the issue for a longer term perspective. It believes that the company will continue to perform well on both the top-line and the bottom-line front considering the company has a diversified product basket, strong brands and wide distribution network. "At the upper end of the issue price band, the company is seeking a P/E multiple of 37.6x its 9MFY2016 annualised earnings, lower than its close peer Prabhat Dairy’s valuation, which is trading at a higher multiple of 49.8x its 9MFY2016 annualised earnings. Further, retail investors will be given a discount of Rs 12 per share," it says in a report. The brokerage firm is optimistic that Parag Milk will benefit from an increase in the overall consumption of cheese in India as household penetration of cheese in the country is very low compared to other developed countries.KR Choksey also suggests subscribing the issue as it feels each of its brands is positioned to get premium pricing.With a subscribe recommendation, Philips Capital believes that its valuation is justified given the growth visibility, brand equity, innovations history, strong supply chain and capable management team. Though it feels that stock is slightly expensive to some peers but the higher valuation is justified by lower share of institutional sales, stronger brands, distribution reach, and strong execution history. "Lower RoE/RoCE for dairy players versus FMCG companies is compensated by 35 percent discount to FMCG sector multiple and higher growth and premiumisation prospects compared to penetrated FMCG categories," it says in a report. Religare expects the company to grow at 15-20 percent in the next 2-3 years.SMC also suggest subscribing the issue for long term. However, it feels that manufacturing facilities and procurement operations of the company are concentrated in a few regions and any adverse developments affecting these regions could have an adverse effect on its business. It also notes that  operations of the company are dependent on supply of large amounts of cow's raw milk, and its inability to procure adequate amounts of good quality raw milk, at competitive prices, may have an adverse effect on its business, results of operations and financial condition.

SPA Research advises to subscribe the issue for long term investors, due to reasonable valuation coupled with industry leading growth rate and scope for margin improvement. The company expects milk and milk products sales to grow at a CAGR of 12-13 percent in FY16-18.Hem Securities is neutral on the stock as it feels upside potential in price seems limited.So, is Parag Milk Foods a cash cow? Value‐added products fetch around 57 percent revenues to for the integrated dairy player. It has a pan-India network comprising of 15 depots, 104 super stockists and over 3,000 distributors. 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.Parag derives 57 percent of sales from value‐added products like Cheese, UHT Milk, Ghee, Whey products, Flavored milk, Buttermilk and other value‐added products. Prabhudas Lilladher says that value‐added products offer higher margins and profitability although it requires higher inventory levels than fresh products.Parag Milk Foods has largest cheese plant with 32 percent market share in India next only to Amul with a market share of 42 percent. About 12 percent of sales flow from B2B segment including hotels, restaurants and caterers. It supplies cheese to Dominos, KFC and Pizza Hut. It has a robust milk procurement network with 3400 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. Of the total issue proceeds Rs 148 crore will be utilised towards expansion and modernisation of existing manufacturing facilities at Manchar and Palamaner and towards improving the marketing and distribution infrastructure. Rest Rs 2 crore will be invested in its subsidiary Bhagyalaxmi Dairy Farm for its expansion and modernisation. Out of the total money raised, Rs 100 crore will be used for partial repayment of working capital consortium loan. The balance will be used for general corporate purposes.The total revenues grew at a CAGR of 21.6 percent Rs 144.1 crore in FY15 from Rs. 658.5 cr in FY11. Net profit grew to Rs 26 crore in FY15 from Rs 18.9 crore in FY12. The volume of milk procured by them increased at a CAGR of 11.47 percent to 1.05 million litres per day in  FY15 from 0.68 million litres per day in  FY11. Its EBIDTA for 9MFY16 is around 8.8 percent which was 7.8 percent in FY11 and the margin was around 2.6 percent compared to 0.1 percent in FY11.

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