Friday, 6 May 2016

Parag Milk Foods IPO: Milk is for Babies not Cheese-2nd Part

This is the 2nd part in the series of Parag Milk Foods IPO(Click here for 1st part). Although I wanted to write something about the peculiar features of dairy business in india but recent negative views given by some of the top analysts have forced me to write this post. I have explained in the IPO note of Thyrocare that listing gains are an outcome of so many variables like market view, short term hype, analysts’ views, any pumping news etc. So if top analysts are negative about the stock then the chances of listing gains are remote although these so called analysts were wrong in their assessments so many times like the IPO of Indigo airlines.

In the case of Parag, they are comparing the same with the likes of Kwality and Hatsun and giving their final verdict on the basis of low pe ratio of these as compared to Parag. Like kwality is at pe ratio of 18. But first of all lets churn their business model. The players like kwality, Hatsun are basically into the sale of milk which they do not even produce. They collect the same from producer farmers and then sell the same after minimum processing. It is not production at all…in my view it is just retailing or we can better say LOGISTICS. They are speeding up the supply chain; acting as intermediaries between sellers and buyers who are scattered. I am terming it Logistics as they are not earning from the “Production of Milk” but from the distribution of the same in much better packaging. 

Just like the case of textiles; Raymond collects the cotton from farmers and sell the same to us in the form of a shirt which is the result of some definitive value addition just like what Parag is doing when it is processing the milk into cheese…it is value addition which requires sophisticated machines and know how to get the end product. Sale of Milk is just Logistics…Curd is also not far away as most of the Indian households make their own curd daily and that too very easily with minimum of processing at their end as most of the processing is done by humble bacteria. Yoghurt requires some specialization although it is also a curd but more standardized. Can we say that Hatsun and Kwality are in the same business with the likes of Vadilal which produces specialty Ice Creams? Cheese requires longer maturation just like a wine and continuous testing and checking. This Milk and curd business has very low entry barriers and we can see so many small local dairies doing the same business producing almost identical products.

Now let’s see beneath the cream of low pe ratio of these players. Kwality is having a turnover of 5200 cr in 2015 and earned a NP of 140 cr (I have taken standalone numbers, not much difference though). 140 cr (6 EPS) is good amount of profit. But they are paying just 10 paisa as dividends for so many years!! Again Mystery with Milk. But here mystery is not related to Milk but to the usage of money. Kwality has earned around 500s cr NP in last 5 years and if add depreciation of 60 cr (Assets base is 180 cr) then cash profit 560 cr for last 5 years. It has taken fresh loans of 680 cr during this period. So total inflow is 560+680=1240 cr. And you know where all this money has gone?? No...not in creation of assets and capacities as their assets base has grown from just 60 cr to just 180 cr. This low assets base is an indication that they are into distribution not into production.

The money has actually gone into working capital!! Debtors has increased from 414 cr to 1150 cr, Inventory from 63 to 264 cr…so 736 cr for debtors + 200 cr for inventory + 120 cr for new assets= 1056 cr where 936 cr is stuck into working capital. Balance has gone into other advances etc. So nothing has been created for shareholders nor returned to them in the form of dividends. Low inventory levels of just 5% of turnover appear strange especially when they are just into retailing. Can we take these figures of high turnover and profits as real…whether this low pe ratio has some credibility or this is good enough for this doubtful business model.

Things are same for Hatsun also which is also strange figures although it is very expensive at 60 PE. It has big assets base of 1000 cr (Kwality 180 Cr) but very low turnover ratio with turnover of 3000 cr…NP is also low at 40-50 cr. It has also stuck most of the growth in working capital and unused assets. It has created funds of around 900 cr from debt and profits in last 5 years out of which around 250 cr stuck in working capital but used 500 cr for new assets/capacity which is largely unused. Strangely its turnover has been increased from 1300 cr to 3000 cr in last year but debtors have been changed from just 10 cr to 13 cr…this is just unbelievable. But with such a great business their dividend is way too low just like Kwality. Kwality has used the funds for Debtors whereas Hatsun has created unnecessary assets….so I do not think this high dose of Lactose is digestible…to digest it and enjoy the low pe ratio of these we need mutation of intellect.

Heritage foods is surely worth investing but it has big investments into retail business which is loss making at present, so can’t be compared with these two…although at some point in near time I will post a detail study on it.

I can’t say what market is really thinking about Parag and there are high chances that market may follow these analysts. However I am very clear in my view that if it falls on listing day, I will be a happy buyer. I have no doubt about the business model. But you can take your chance as per your risk taking capability…Although the battle still is between Milk and Cheese.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and applied for the shares discussed in this Post)


  1. Dear sir,
    Thx for sharing ur in depth analysis.
    Please provide ur views on mold tek packaging

  2. hello gurpreet,

    As usual great analysis and against the crowd regarding this ipo.
    Request all the readers to subscribe to for regular beneficial updates.
    sir by any chance are you tracking Caplin point..debt free and great ROE.. your inputs would be productive in analysis.

    1. Thanks Dear. I have never tracked Caplin Point...will have a look in free time. Although i always need a lot of courage to analyze pharma stocks just like IT as they require a deep dive into technical aspects of business. That's why i could study only Biocon to the roots. Anyways will make a first hand look into it.

  3. Hello sirji

    You described you could not sometimes send mail from yahoo to the questions raised via mail due to technical just forwarding some old queries

    Studied your old mail regarding agarwal eye hospital .... do you still track it...yesterday they declared 80p dividend..your thoughts on results and future outlook?

    Also do u think SAIL is a deep value buy for long term at current market price?


    1. Dear Sanjeev, Reply posted in a separate post. Kindly check the today's post.