Parag Milk Foods IPO – Is it worth investing?

Parag Milk Products IPO ReviewParag Milk Foods IPO – Is it worth investing?

Pune based, Parag Milk Foods IPO would open for subscription on 4th May, 2016. Parag Milk Foods Ltd one of the leading manufacturers and marketers of dairy-based branded foods in India. The company revenues grew at 22% CAGR in last 4 years. It has doubled its income in last 4 years. What are the positive factors in a Parag Milk Foods IPO? What are the hidden factors about this IPO? Should you invest in this Param Milk IPO or not? In this article, I would provide Parag Milk Foods IPO Review.

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About Parag Milk Foods Limited

The company commenced its business in 1992 with the collection and distribution of milk and have now developed into a dairy-based branded consumer products company with an integrated business model, manufacturing a diverse range of products including cheese, ghee (clarified butter), fresh milk, whey proteins, paneer, curd, yoghurt, milk powders and dairy based beverages targeting a wide range of consumer groups through several brands. A significant portion of its product range includes long shelf-life is food and beverage products that enable us to sell its products to retail and institutional customers across India. We derive all of its products only from cows’ milk. Its aggregate milk processing capacity is 2 million liters per day and its cheese plant has the largest production capacity in India, with a raw cheese production capacity of 40 MT per day. (Source: IMARC Report). ‘Gowardhan’ and ‘Go’, its flagship brands, are among the leading ghee, cheese and other value added product brands in India.

Issue details of Parag Milk Foods IPO

  • IPO opens: 4-May-2016
  • IPO closes: 6-May-2016
  • Face Value: Rs 10 per share
  • Issue price band: Rs 220 to Rs 227 per share
  • Issue size:
  • Market lot: 65 shares and in multiples of 65 shares therein
  • Minimum investment: Rs 14,300 on lower price band
  • Lead Managers: Kotak Mahindra Capital, JM Financial institution, IDFC Securities and Motilal Oswal Securities.
  • Listing: BSE / NSE
  • Download Parag Milk Foods IPO  Prospectus at this link.

Objects of the Parag Milk Foods IPO issue

a) The Offer for Sale

The Selling Shareholders will be entitled to the proceeds of the Offer for Sale after deducting their proportion of Issue related expenses. The company will not receive any proceeds of the Offer for Sale.

b) The Fresh Issue

The company proposes to utilize the Net Proceeds towards funding of the following objects:

1. To meet the capital expenditure requirements in relation to the expansion and modernization of existing manufacturing facilities of the Company at Manchar.

2. Investment in Subsidiary for financing the capital expenditure requirements in relation to the expansion and modernization of the Bhagyalaxmi Dairy Farm.

3. Partial repayment of the Working Capital Consortium Loan.

4. General corporate purposes.

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Company Financials (reinstated)

  • The company generated revenue of Rs 659.67 Crores  for the year ended Mar-11 and Rs 1,442.04 Crores for the year ended Mar-15.
  • The company posted a profit of Rs 0.6 Crores for the year ended Mar-11 and profit of Rs 29.47 Crores for the year ended Mar-2015.
  • Its restated EPS for FY 2015 is Rs 4.9 and last 3 years average EPS Rs 3.88.

Parag Milk Products IPO - Financials

Reasons to invest Parag Milk Foods IPO

  • Revenues have grown from Rs 659.67 Crores FY11 to Rs 1,442.04 Crores in FY15 indicating a strong revenue growth of over 22% CAGR.

Reasons not to invest in a Parag Milk Foods IPO

  • Generated thin margins of 2% to 2.4% in last 3 years.
  • There are outstanding criminal proceedings against the Company, its Promoters and one of its Directors.
  • Its operations are dependent on the 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.
  • A slowdown or shutdown in its manufacturing operations or the under-utilization of its manufacturing facilities could have an adverse effect on its  business, results of operations and financial condition.
  • They do not have long term agreements with suppliers for other raw materials and an increase in the cost of or a shortfall in the availability of such raw materials could have an adverse effect on its business, results of operations and financial condition.
  • The improper handling, processing or storage of its raw materials or products, or spoilage of and damage to such raw materials and products, or any real or perceived contamination in its products, could subject us to regulatory action, damage reputation and have an adverse effect on its business, results of operations and financial condition.
  • The examination report of company Statutory Auditors on its restated financial statements contains certain qualifications.
  • Its manufacturing facilities and procurement operations are concentrated in a few regions and any adverse developments affecting these regions could have an adverse effect on its business, results of operations and financial condition.
  • Its Subsidiary, Bhagyalaxmi Dairy Farms Private Limited has incurred losses and had negative net worth in the past.
  • They have had negative net cash flows in the past and may continue to have negative cash flows in the future.
  • Other risk factors (Internal and external) can be viewed in the draft prospectus from Page no. 17s onwards.

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Recommendation / Investment strategy – Parag Milk Foods IPO

  • On the upper price band of Rs 227 and on FY15 EPS of Rs 4.9, P/E ratio works out to 45x. Similarly, on last 3 years EPS of Rs 3.88, P/E Ratio works out to be 46x. Means company is asking issue price for
  • P/E ratio between 45x to 46x.
  • Its competitors, Prabhat Dairy shares are trading at a P/E ratio of 127x (Highest) and Nestle India is trading at 48.8x (Lowest), hence the issue price of Parag Milk Foods is reasonably priced.
  • Company revenues grown at 22% CAGR in last 4 years. Its share price is reasonably priced. However, it generated thin margins of around 2% in last 3 years. However, for such business, we can’t expect higher margins of 20% or 25%. High risk investors can invest in this IPO considering the risk factors indicated above.

Disclaimer: I do not have an 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 this IPO. Please consult your investment advisor before you invest in such high risk investment options.

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Parag Milk Foods IPO Review

Suresh KP


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