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.

Sygene IPO: Subscribe with a 18 months time horizon

COMPANY

The Bangalore based firm, incorporated in the year 1993, now became one of the well known and leading CRO (Contract research organization) in India. They are a subsidiary of Biocon Limited (“Biocon”), a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. The company offers service in discovery and development of small molecules, large molecules, antibody-drug conjugates (“ADC”) and oligonucleotides. The company offers a suite of integrated, end-to-end discovery and development services for novel molecular entities (“NMEs”) across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies.

Source: Company                                                                     

As of March 31, 2015, their tangible fixed assets (gross block) were Rs 9,311 million. Their laboratory and manufacturing facilities are spread over more than 900,000 sq. ft. and located in Bengaluru, India. As of May 31, 2015, the firm had 2,122 scientists, including 258 Ph.Ds. and 1,665 scientists with a Master’s degree.

During fiscal 2015, the firm has serviced 221 clients, ranging from multinational corporations to start-ups, including eight of the top 10 global pharmaceutical companies by sales for 2014. Syngene also have longstanding, extensive relationships with multinational clients such as BMS, Baxter, and Merck & Co.

INDUSTRY

Frost & Sullivan estimates that global R&D expenditure for the pharmaceutical industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced.  Outsourcing penetration for the CRO market for development services as of 2014 was estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%. 

• The global CRO market for discovery services was estimated to be US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5% (2014-2018). 
• The global CRO market for development services was estimated to be US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014–2018) of 11.6.

FINANCIAL PERFORMANCE

Historical Performance of Syngene

For the fiscal year ended March 31, 2015, the firm generated total revenue of Rs 8,716 million, restated profit of Rs 1,750 million and EBITDA of Rs 2,928 million. For the fiscal year ended March 31, 2014, we generated total revenue of Rs 7,077 million, restated profit of Rs 1,348 million and EBITDA of Rs 2,226 million. For the three fiscal years ended March 31, 2015, their total revenue, restated profit and EBITDA grew at a CAGR of 27.7%, 35.1% and 28.3%, respectively.

VALUATION

The price band is between Rs 240 to Rs 250. The valuations are slightly expensive. The company is available at a P/E of 27.4x to 28.6x based on the EPS for FY15 i.e. Rs 8.80. The valuations are justified by the strong growth prospects of the company. Hence, we suggest SUBSCRIBE with a time horizon of atleast 18 months.