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    Wednesday , May 04, 2016


   Publication: Business Standard , Journalist:Sheetal Agarwal
   Edition: Bangalore , Page No: 2 , Location: Top Left , Size(sq.cms): 225

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Pa rag Milk Foods IPO positives priced in
P arag Milk Foods is an integrated dairy player with key brands such as Go, Govardhan, Topp Up and Pride of Cows. Focus on the healthier cow milk and value-added dairy products along with under-penetration of organised players are key pos­itives and will aid the compa­ny's growth over the next few years. However, valuations of 27-28 times FY17 estimated earnings based on the equity capital after the initial public offering (IPO) - after discount of Rs12 per share to retail/employees - appear to be on the higher side. Notably, this is after assum­ing a higher earnings growth rate of 50 per cent for FY17 considering its recent earn­ings growth track-record as well as potential savings on interest costs after the IPO.
Although not strictly com­parable, peers such as Prabhat Dairy and Hatsun Agro are trading at 20 times and 28 times their FY17 estimated earnings, respectively. While Hatsun's revenue was double
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added products in total rev­enues is far higher than its peers. The lower margins can be attributed to Parag's high investments in branding and having its own marketing and distribution reach. Also, given the high competition in branded space, pricing power is limited.
While the company's strat­egy of expanding its value-added portfolio is exciting, it operates in a highly competi­tive industry with biggies such as Amul also growing its cheese and other value-added products. Parag will also need to continuously invest in advertising and brand-build­ing activities going forward, which will keep a check on its profitability and return ratios in the near term.
Of the issue proceeds, Rs 300 crore will flow into the compa­ny's books with the rest being offer for sale. Of this, one-third will be deployed towards part repayment of Parag's debt, Rs148 crore for expansion and mod­ernisation of existing manu­facturing facilities, Rs2.3 crore for investment in Bhagyalaxmi Dairy farm and the rest for general corporate purposes.
After the issue, the company's debt-equity ratio will come down from 1.6 times to 0.5 times and add to overall earn­ings.
Expansion of its value-added portfolio (57 per cent of revenues), which comprises ghee, cheese/paneer, whey products and flavoured milk, among others, is a key growth strategy for Parag. While its ghee products (under Govardhan brand) continue to witness healthy traction, the company believes cheese will be another fast-growing prod­uct going forward. In addition to cheese sold in retail outlets, Parag is also focusing on grow­ing the hotels, restaurants and canteen (HORECA) segment to boost cheese sales. It currently supplies cheese to prominent quick service restaurants such as Dominos, Pizza Hut and KFC. Notably, its peers such as Prabhat Dairy, too, are aggressively looking at grow­ing their revenues from the HORECA segment. Parag pro­vides whey powder (1.6 per cent of revenues) to larger players such as Nestle and believes that this product holds a lot of promise.
that of Parag, Prabhat's was about 30 per cent lower than Parag's revenues in FY15. Prabhat Dairy also enjoys higher earnings before inter­est, taxes, depreciation and amortisation (Ebitda) margin than Parag given that it is largely a business-to-business (B2B) player with about 75 per cent of its revenues coming from non-retail segment. Parag, on the other hand, derives just 12 per cent of its revenues from this space. Parag's Ebitda margin of 8.8 per cent, though, is compara­ble with other retail-focused players such as Hatsun Agro. However, this is despite the fact that Parag's share of value-
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Date: Wednesday , May 04, 2016
Publication: Business Standard, Journalist: Sheetal Agarwal
Edition: Bangalore, Page No: 2, Location: Top Left, Size(sq.cms): 225