Prabhat Dairy IPO: Looks expensive

About the company
Prabhat Dairy, incorporated in 1998, is a firm which sells dairy products to both institutional and retail customers of India. The firm is in three verticals namely: integrated business, consumer business and co-manufacturing. Some of the products in their portfolio include 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. As of June 30, 2015, the firm had an aggregate milk processing  capacity of 1.5 million litres per day.

Issue proceeds will be used for

• Increasing their manufacturing capacity

• Developing their logistics chain

Risks

• Margins are very low around 2% level.

• Sales to institutional clients are more (around 75%) and top five clients contribute around 36%.

Industry
Currently, about 42% of the total milk produced in India is purchased by consumers directly from milk farmers  in a raw form. The remaining 58% goes for processing and is sold as processed milk and milk products like  curd, yogurt, buttermilk, lassi, butter, ghee, ice cream, frozen desserts, cheese, paneer, khoa and milk powder  (including skimmed and whole). The processed dairy industry in India was estimated to be around ₹3,650-3,700 billion. The processed milk and milk products segment is expected to record about 12-13% CAGR between Fiscal 2014  and Fiscal 2017. Growth will be driven by several factors such as changing lifestyle of consumers, growth in the  food services industry, increasing urbanisation.

Financial
The firm's total revenue increased at a CAGR of 36.71% from Rs 2,868.21 million in Fiscal 2011 to Rs 10,017.38  million in Fiscal 2015, while their profit after tax increased at a CAGR of 22.06% from Rs 94.81 million in Fiscal  2011 to Rs 210.45 million in Fiscal 2015. In the same period, the firm's EBITDA increased at a CAGR of 48.00% from  Rs 213.75 million in Fiscal 2011 to Rs 1,025.50 million in Fiscal 2015.

Valuation
At the price band of Rs 140 – Rs 147, the firm is valued at an 43.8x to 46.4x which looks expensive. Therefore, the firm may not be a good bet for listing gains. The dairy industry is a very competitive one, so the firm may face difficulty in gaining market share.

Buy Kaveri Seeds for long term

About the company

Kaveri seeds, incorporated in 1986, is one of the high growth company in India dealing in the field crops and vegetables space. The company has also received the "Best under a Billion" award from Forbes this year. The company has a strong network of around 15,000 dealer across the country. Their seeds portfolio includes corn, paddy, cotton, sunflower, mustard, sorghum, pulses, bajra, wheat and their vegetable portfolio includes tomato, brinjal, okra, gourd, watermelon, chillies. The company is backed with strong management who are specialized in this agri domain of the business.

Industry

Over half the population of the world lives in rural part and their main occupation is agriculture. Majority of the Indian population relies on agriculture for employment and livelihood. In India, agriculture accounts for 14% of the GDP. In value India is estimated at 12154 Cr. and 6th in rank after USA, China, France, Brazil and Canada. Indian seed industry is undergoing metamorphosis with increased role of private seed companies, entry of MNCs, joint ventures of Indian companies with multinational companies and a wave of consolidations. Cotton, Maize and paddy are expected to be the main growth drivers.

Financial Performance                                   Source: Company

Strengths

·      Significant investment in R&D in the last five years.

·      Developed proprietary germplasm and hybrids.

·      Multi-location breeding and trial stations.

Financials

The company has faced a slowdown due to weak markets in Karnataka and some other southern parts of India. This slow down occurred due to weak rainfall. The company has improved both its operating and net profit margin even in this slowing market.

Valuation

The firm is currently trading at 11x compared to industry average of 10x. Considering weak monsoons in FY16, we expect the firm to generate less volumes of sales but improving margins maybe able to offset this decline a bit. The stock can move to reach Rs 600 by the end of FY16.

Kaveri Seeds vs NIFTY                                                          Source: Reuters

Nitesh Estate: A multibagger in process

Company

Nitesh Estates  is an integrated property development company  headquartered  in Bangalore, India. Founded in 2004, has  grown into a company renowned for its above average developments in Office Buildings, Residential, Hotels and Shopping Malls. Within few years of its inception, the firm has brought more than 20 million sq ft of space under development as premium living, working, lifestyle and leisure space. The company has expanded its services to Goa, Chennai, and Kochi.

Recent Development

• Goldman Sachs and Nistesh Estates announced an agreement to jointly invest in income producing commercial real estate assets in India for upto $250 million. This partnership will bring produce fruitful results in the next 3-5 years.
• Nitesh Estates has a very strong portfolio of 20 ongoing projects with a total revenue potential of Rs 46 billion of which Rs 35 billion is still to be booked and recognized. In line with our strategy of diversifying revenue streams, they recently acquired a shopping mall in one of the prime locations in Pune. This will provide the firm with a recurring income stream of Rs 450 million.

Financial Performance

The firm ended FY15 with a revenue of Rs 2,906mn. The company reported EBITDDA of Rs 687 million, up by 13% (y-o-y). The margins recorded 13.0% which is an increase of 344bps (y-o-y). The net profit recorded Rs 309 million which is a substantial 31% increase over previous year. The PAT margins stood a

t 10.6%.

Industry

The Indian real estate market size is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's gross domestic product (GDP). Also, in the period FY08-20, the market size of this sector is expected to increase at a compound annual growth rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.

Valuation

Nitesh estate vs Nifty50

Nitesh estates is currently trading at a PE of 12x (industry PE: 24x). Hence, we suggest a BUY for a target of Rs 25 for the next six months period. The stock has multibagger attributes, hence we also suggest to keep holding the stock for the next three years.

Source for information in the post: Company, IBEF.