Prabhat Dairy (Prabhat) is an integrated milk and dairy products company
catering to institutional as well as retail customers. The company sells its products
under retail consumer brands (which account for ~24% of the revenue) as well as
ingredient products and co-manufactured products to a number of institutional
and multinational companies (accounting for ~76% of total revenue). It procures
majority of its milk from milk farmers and registered milk vendors; as of June 30,
2015, its milk collection facilities included more than 450 milk collection centers,
over 15 milk chilling plants and over 85 bulk milk coolers with aggregate milk
processing capacity of 1.5mn litres per day. The processing and production
facilities are located at Shrirampur (Ahmednagar) and at Navi Mumbai. The company
has recently added production capacities for several new dairy products including
mozzarella cheese, cheddar cheese, processed cheese, cottage cheese (paneer) and
shrikhand and has commenced production of these products in FY2016.
Robust milk procurement system: Prabhat has built a strong relationship with local
milk farmers, which enables it to procure a large portion of its raw milk
requirement directly from milk famers and registered milk vendors. Continuous
engagement, knowledge, and infrastructure support have enabled Prabhat to
secure supply of quality raw milk and contain procurement costs. Additionally, it
has introduced automated milk testing facilities that provide transparency to the
pricing of milk purchased by the company.
Shift towards a balanced mix: Historically, institutional sales have accounted for a
major chunk of its business. However, this share has declined from 85.4% in
FY2013 to 75.8% in FY2015. The company plans to focus on growing its retail
consumer business by increasing its marketing expenditure, strengthening its
existing brands, and introducing new products and brands amongst others. The new
product launches like cheese, paneer and shrikhand have higher margins which will
improve its profitability as well as reduce its dependence on the Institutional business.
Outlook and Valuation: Though the company has posted a CAGR of 27.5% and
30.3% in revenue and net profit respectively over FY2012-15, it is still expensive
in terms of valuation. On pre-issue outstanding shares, the stock is valued at
47.5x its FY2015 EPS and at EV/EBITDA multiple of 13.7x on the lower end of the
price band. Its peer Heritage Foods trades at 29.4x its FY2015 earnings and at
EV/EBITDA multiple (FY2015) of 11.4x. Hence on account of higher valuation we
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