Prabhat Dairy IPO – Should you invest or not?

Prabhat Dairy Ltd IPOPrabhat Dairy IPO – Should you invest or not?

There is flood of regular IPO's now. Maharastra based, Prabhat Dairy IPO will open for subscription on 28th August, 2015. Prabhat Dairy Ltd is an integrated milk and dairy products company. Its revenues doubled in last 4 years. It earned 2% consistent profits in last few years. What are the positive factors of Prabhat Dairy IPO? What are hidden factors of Prabhat Dairy Ltd IPO? Should you invest in Prabhat Dairy Limited IPO or not?

About Prabhat Dairy Limited

Prabhat Dairy ltd is an integrated milk and dairy products company in India catering to institutional as well as retail customers. The company produces fresh, dry, frozen, cultured and fermented dairy products, including pasteurized milk, flavoured milk, 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.

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Issue details of Prabhat Dairy IPO

  • IPO opens: 28-Aug-2015
  • IPO closes: 1-Sep-2015
  • Face Value: Rs 10 per share
  • Issue price band: Rs 140 to Rs 147 per share
  • Minimum Shares: 102 shares
  • Minimum amount: Rs 14,200 at lower price band
  • Issue size: Rs 300 Crores
  • Lead Managers: Edelweiss Financial Services Ltd
  • Listing: BSE and NSE
  • Download Prabhat Dairy Limited IPO Prospectus at this link

Purpose of the IPO

a) Part pre-payment of loans availed by our Company and its wholly owned subsidiary, SAIPL;

b) To meet capital expenditure; and

c) General corporate purposes

Company Financials (restated consolidated)

  • Company generated revenue of Rs 483.82 Crores for the year ended Mar-12 and Rs 1,001.73 Crores for the year ended Mar-15.  
  • Company posted a Profit of Rs 9.51 Crores for the year ended Mar-12 and a Profit of Rs 21.04 Crores for the year ended Mar-15.  
  • Its diluted EPS for FY 2015 is Rs 2.95 and last 3 years average EPS of Rs 2.95.

Prabhat Dairy Ltd IPO-Financials

Reasons to invest Prabhat Dairy IPO

  • Good revenue growth in last 4 years where its revenue increased by almost 2.07 times.
  • Retail Investors would get discount of 5% on issue price band.

Reasons not to invest in Prabhat Dairy IPO

  • Company earns thin margins of 2% in last few years. Such thin margins can erode with increase in costs.
  • There are outstanding legal proceedings against the Company, certain of its Directors and Promoters and its Subsidiaries which may adversely affect its business, financial condition and results of operations.
  • Company historical revenues have been significantly dependent on certain institutional customers and an inability to maintain such business may have an adverse effect on its results of operations.
  • Real or perceived product contamination could result in reduced sales, product liability and damage to company reputation, and subject them to regulatory action.
  • Company business operations are dependent on supply of large amounts of raw milk, and an inability to procure adequate amounts of quality raw milk at competitive prices could adversely affect its results of operations.
  • If Company is unable to effectively implement its business and growth strategies, its business prospects, results of operations and financial condition may be adversely affected.
  • The dairy products business in India is evolving rapidly and is highly competitive and an inability to compete effectively with established and new competitors may adversely affect its growth prospects, results of operations and financial condition.
  • The loss, shutdown or slowdown of operations at any of our facilities or the under-utilization of any such facilities may have a material adverse effect on company results of operations and financial condition.
  • There are outstanding criminal proceedings against the Company.
  • Other risk factors (Internal and external) can be read in prospectus Page no. 19 onwards.

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Recommendation / Investment strategy

  • At the issue price band of Rs 140 to Rs 147 and diluted EPS of FY2015 and last 3 years average, P/E Ratio is being asked is in between 22 to 49.
  • There is only one listed peer whose P/E ratio is 113 (Hutson Agro Products), hence we cannot say whether issue price of Prabhat Dairy IPO is reasonably priced or not.
  • Prabhat Dairy revenues have been growing consistently in last 4 years.  However, it earns thin margins. Margins could be low considering the nature of business. I would have been excited if margins are on higher side. Currently, I am neutral on this IPO considering some of the negative factors indicated above.

Disclaimer: I do not have interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Prabhat Dairy IPO – Should you invest or not

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