Prabhat Dairy Limited (PDL) is a public Company domiciled and headquartered in India. The Company was incorporated on 25 November 1998 as a Private Limited Company and converted to a Public Limited Company on 19 March 2015. Consequent to completion of its Initial Public Offering (‘IPO’), the equity shares of the Company were listed on the National Stock Exchange of India Limited and BSE Ltd. on 21st September 2015. The Company is engaged in the business of procurement and processing of milk and sale of milk and milk products like Ghee, Flavoured Milk, Skimmed Milk Powder, Whole Milk Powder and Condensed Milk etc. It caters to the needs of retail as well as the industrial trade sector. Total market capital is ~₹490 cr. PDL has presence in western, north and northeast region of India.

Sunfresh Agro Industries Private Ltd. (SAIPL) is wholly owned step-down subsidiary of PDL incorporated in 2007. Engaged in the business of processing of milk, manufacturing and sale of various milk products including skimmed milk powder.

Cheese Land Agro (India) Private Limited (CLAPL) is engaged in the business of trading of milk products. CLAPL is a Wholly Owned Subsidiary (WoS) of PDL. Further, CLAPL also holds 70.71% stake in SAIPL.

Lactalis Strategy

Lactalis, a French conglomerate, is one of the world’s largest in dairy industry catering to Asia, Africa, Middle East and in the French Overseas Territories. It entered Indian in 2013 by acquiring 100% stake in Tirumala for around Rs 1895 crores with plants located in southern states cities of Hyderabad, Vijayawada, Ganagavaram (AP), Bengaluru and Chennai.

This transaction helps Lactalis to strengthen its position in India whilst also expanding in other states.

In 2016, the company acquired dairy business of the Anik Industries Limited being run at its plants situated at Dewas, Bhopal in the state of Madhya Pradesh and at Etah in the state of Uttar Pradesh as a going concern on Slump Sale basis lump sum consideration in cash of approximately Rs. 470 Crore

Proposed Transaction

The Board of Directors of PDL has decided to sell its dairy business to Lactalis. The said transaction will be done through two tranches: –

  • PDL along with CLAPL will sell its entire stake in SAIPL for the consideration of around INR 1227 crores.
  • Post-transfer of stake, PDL will sell its Dairy Product Business by way of Slump Sale to SAIPL for the consideration of INR 473 crores.

Lactalis group will purchase the said through its wholly owned subsidiary Tirumala Milk Products Private Ltd. (TMPPL). The proposed transaction to be completed till Q1 of FY 2019-20.

PDL also announced Merger with its Wholly Owned Subsidiary CLAPL in board meeting held on 13-02-19 but has not filed any scheme with SEBI till date.

Proposed Structuring

It seems Lactalis wants to acquire the business through its existing operating company. May be post acquisition, it will merge (SAIPL) into Tirumala sooner than later to capture synergies and operating efficiencies of both the businesses.

As far as Prabhat is concerned, considering the valuation it got, it must have accepted the structure as suggested by the Acquirer. Post transaction, Prabhat should merge its WoS with itself so that all consideration received by WoS also become part of the surplus cash of listed company. Post-merger Prabhat can utilise the surplus cash to compensate the shareholders or give exit to public shareholders.

Financials

Table 1: Consolidated Financials of Prabhat Dairy for Last 3 Years (All Figs in INR Crores)

Prabhat Dairy Parag Milk Foods
Particulars 2015-16 2016-17 2017-18 2017-18
Revenue 1,162 1,410 1,554 1,955
EBIT% 6.95% 6.02% 5.60% 7.93%
Profit After Tax 24.52 46.94 47.28 87
Capital Employed 813 1,046 929 976
RoCE 9.9% 8.1% 9.4% 15.88%
RoE 3.7% 6.8% 6.5% 12.22%
Interest Coverage Ratio 2 3 3 4

Over the last three years, the revenue of the company grew at compounded ~16%, however, its operational profit growth remained subdued. Despite introduction of value-added products like ice cream brand ‘Volup’ and ‘Volup Sinsane’, cheese, paneer, shrikhand, curd, flavoured and ultra-heat treated milk, the operational profits have not grown much.

After IPO, the market capitalisation of the company has not shown any significant movement.

Table 2: MCap of Prabhat (IPO vs Current in INR Crores)

Particulars Sep-15 21stJan-19
Market Capitalisation 1,035 909

Exit for Private Equity

To raise money from secondary market, PDL came up with IPO in 2015. In the year 2012 and 2013, three Private Equity investors IABF, Real and Proparco invested around INR 140 crores in the company. These investors realised most of their capital invested at the time of IPO with minimum dilution of their stake. Any exit henceforth is pure profit for the institutional investors.

Table 3: Investors Stake (IPO vs Current)

Particulars Sep-15 Dec-18
Promoters 43.8% 50.1%
Institutional Investors 47.7% 42.5%

Valuation

As Lactalis done his earlier deals which is based on multiple of revenue

Table 4: Valuation Comparison of Prabhat & Parag (All Figs in INR Crores)

Particulars Prabhat Parag
Purchase Consideration 1,700 NA
Enterprise Value# 2,022 2,256
TTM Revenue as on 30.09.2018 1,613 2,160
Revenue Multiple# 1.25 1.04
EBIT 102 189
EBIT Multiple# 20 12

#Enterprise Value, Revenue & EBIT Multiple are calculated by HU Consultancy.

Revenue multiple for the given transaction as compare to Parag Milk Foods Ltd. is higher it seems that acquirer paid premium to strengthen its presence in Indian market.

Who shall be the Beneficiary?

The acquisition seems to be a win-win, cause promoters of Prabhat are in the most beneficial position as exiting at this valuation has created immense wealth for the company. The minority shareholders should get a proper exit and hopefully we do not see loss of value as seen in a recent case involving a slump sale by LEEL Electricals Ltd to Havells India Ltd. Investors lost a lot of wealth despite the fact that the sale was done at a decent valuation.

Prabhat Dairy has various options to give exit to their minority shareholders post transaction.

Exit Strategy

There are various options for Prabhat to give exit to their minority shareholders given that they will have close to ₹1459 crores post transaction.

Table 5: Total Net proceeds calculations

Transaction I Transaction II
Particulars Amount Particulars Amount
Sales Proceeds 1227 Sales Proceeds 473
Indexed COA* 295 Net-Worth 248
Long Term Capital Gain 932 Long Term Capital Gain 225
Tax Rate 21% Tax Rate 21%
LTCG Tax 194 LTCG Tax 47
Net Proceeds 1033 Net Proceeds 426
Total Tax – 241 Crores
Total Net Proceeds – 1,459 Crores

*We assume that investment in SAIPL by CLAPL is made in 2010-11 at the time of incorporation.

Option I: Pay dividend to shareholders

If they choose the dividend route, then it is liable for DDT at rate of 20.36%.  Net proceeds available after payment of DDT is around ₹1213 crores. Dividend receivable by shareholders ₹124 per share.

Option II: Delisting of Company

In the case of delisting, Prabhat’s total net proceeds will be ₹1459 crores. Shareholder should get ~₹149 per share.

Option III: Buyback – Partial utilisation

Buyback of shares according to legal compliance.

Conclusion

This transaction helps Lactalis to strengthen its position in India whilst also expanding in other states. Lactalis seems to understand the industry as well as the market and are expanding to maintain their global leadership in the dairy industry.

Prabhat dairy has got a good valuation for its business, and it would ideal to give a buyback option to its minority shareholders (which is less than 3%). Institutional investors and promotors should not participate in case of buyback so that their loss net of tax is minimised. Promoters of Prabhat Dairy, post sale of its core business, intends to further develop its cattle feed business in various parts of the country, as well as expand into allied businesses such as animal nutrition and animal genetics. Cattle feed is a low-margin and high working capital business which demands huge cash to run the business. Citing that promoters of the company has no experience of running this business, institutional investors may not have an incentive to come along with Prabhat on their journey in their new avatar.

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