06 May 2016

Parag Milk Food IPO. – Avoid ::IIFL

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Parag Milk Food Ltd. – Avoid
Issue Opens: 04-May-16, Issue Closes: 11‐May‐16, Price Band: Rs215-227

Expensively Priced: AVOID
Parag Milk Foods Ltd (PMFL) is a value-added player and is leading the transition that the Indian dairy industry is currently embarking on. PMFL has two of the strongest B2C dairy brands (Gowardhan and Go) among private players in India. With ~80% of milk sourced directly from farmers and chilling centers, PMFL has the best milk procurement mix. We are of the opinion that the company has the potential to do 15%-17% sales CAGR over the next five years as the company enjoys a strong brand equity of Govardhan and Go, will launch various value added products to remain competitive in the market and has the ability to increase the procurement of milk from existing areas and can also add new farmers for the same. However, a) weak pricing power in the value added products, b) higher ad spend to remain competitive, and c) increased focus on cheese, the working capital requirements will be higher thereby putting pressure on RoCE.

We are also concerned about: a) weak ROCEs (10%-12% historically) as working capital requirements rise with focus on cheese segment; and b) lower gross/EBITDA margins compared to its peers despite higher share of value-added products. The share is offered at ~20x EV/EBITDA and 44.7x PE in FY16E (9MFY16 annualized) compared to Prabhat Dairy/Kwality/Heritage Food/Hatsun as 31x/8.7x/9.3x/17.5x EV/EBITDA, respectively and 10.8x/12.6x/21.7x/48.7x P/E for Prabhat Dairy/Kwality/Heritage Food/Hatsun, respectively. On the back of envelope calculation, we expect PMFL to do EPS of Rs8.6 per share for FY18E. As a result, at 26x FY18E EPS at the upper IPO price band of Rs227, we feel that the company is richly priced related to the growth prospects and also the emerging competition. For the retailers, the IPO is offered at Rs12 discount, which is available at 42.4x PE FY16E, is still expensive in our view, compared to its peers. AVOID.

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