The Maharashtra-based integrated dairy company Prabhat Dairy will use ₹185 crore out of its ₹300 crore public issue to pare down debt. This will reduce interest outgo and improve net profit in 2015-16. The company is also pursuing aggressive plans to expand its retail business over the next three to five years. It has recently started making value-added products such as cheese, shrikhand and paneer. While this will add to revenues, Prabhat will have to shell out more money to advertise and promote its products; margins may be under pressure over the next two to three years. Prabhat being a late entrant into the retail business, fighting competition from other local and large dairy firms may not be easy. Also, higher depreciation on the newly commissioned facility will eat into its profit. The offer’s valuation does not seem to justify the company’s near-term prospects. At the upper end of the pricing band of ₹147, the stock discounts its estimated 2015-16 earnings by over 40 times (on a post-issue basis). Stocks of dairy companies such as Heritage Foods and Umang Dairies trade at a modest 20 times and 12 times their 2015-16 estimated earnings. Investors may be better off avoiding the issue.

Incorporated in 1998 as a liquid milk marketing company, Prabhat has gradually expanded into value-added products such as ghee, milk powder and sweetened condensed milk. The company has two production facilities in Maharashtra at Shrirampur and Navi Mumbai with a total milk processing capacity of 1.5 million litres and caters to customers in Maharashtra, Gujarat and Madhya Pradesh. Prabhat has both institutional and retail clients.

Under the institutional business, the company sells specialty ingredient products such as sweetened condensed milk and milk powders — full cream, partially skimmed, fully skimmed — to multinational companies such as Mondelez India and Abbott Healthcare. It also does co-manufacturing of dairy whiteners, curd, ghee and yoghurt for companies such as Britannia Industries, Mother Dairy and Heritage Foods. The institutional business accounts for three-fourth of the overall revenue.

Retail reach Prabhat’s retail business includes pasteurised milk sold under the ‘Prabhat’ brand, flavoured milk ‘Flava’, sweetened condensed milk and dairy whitener sold under its ‘Milk Magic’ brand. The company has over 350 distributors through which it supplies its products to over 40,000 retail outlets.

It aims to scale up its retail business from the current 25 per cent of its overall revenues to 50 per cent over the next few years by trebling its retail reach. While this will help the company’s gross margins, it may not translate into higher operating profit margin due to higher promotion and advertising spend.

Also, the scale up in the retail segment may be a gradual one given Prabhat’s relatively late entry into the business and the competition from local brands such as Gowardhan besides dairy majors such as Amul and Mothers Dairy.

New launches Prabhat has recently forayed into other value-added products such as paneer, shrikhand and cheese. The company is in the process of signing up with institutional players for supply of cheese and plans to sell products such as paneer and shrikhand through its retail distribution network. Though this will help the company’s profitability in the long term, revenue flow from these products may happen only in 2016-17 and the scale up may also be gradual.

The company’s current utilisation levels are low at about 55 per cent, which is also eating into its profit, by way of higher fixed costs.

In 2014-15, Prabhat’s operating profit margin slipped by 0.5 percentage points to 10.1 per cent on account of higher employee, promotion and fixed costs. The pace of growth in revenue has also slowed from about 33 per cent levels in 2012-13 and 2013-14 to about 17 per cent in 2014-15.

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