The IPO of Parag Milk Foods has been extended till 11 May following poor demand from qualified institutional buyers (QIBs) while the lower end of the price band has also been revised to INR215 per share, from the earlier INR220 per share. At 5 PM, the IPO received just 55% subscription in the category, combined data from BSE and NSE showed. Interestingly, retail portion of the IPO was subscribed 1.71 times while HNI category also saw subscription of 2.65 times. “The Issue closure date has been extended by three working days to accommodate pending demand from certain international and domestic investors against the backdrop of volatile stock markets in the week of May 2-6, 2016,” said Parag Milk Foods in a statement.
Overall, the IPO saw subscription of 1.32 times at the end of the day. However, poor show in the QIB category forced the company to extend the IPO. According to SEBI rules, an IPO candidate needs to get at least 50% subscription in the QIB category under regular circumstances but the requirement increases to 75% if the IPO is backed by institutional buyers. This was the case for Parag Milk Foods which allocated 75% of the IPO to institutional buyers, leaving 15% and 10% for high net worth individuals (HNIs) and retail investors respectively. The IPO was earlier supposed to close today (6 May).
The development is in sharp contrast to several brokerage houses’ positive recommendations on the IPO citing a multitude of reasons including integrated business and strong brand. IDFC private equity and Motilal Oswal Financial Services’ India Business Excellence Fund (IBEF) planned to sell about 82.6 lakh (8.26 million) and 60.2 lakh shares respectively through the IPO.
Parag Milk = Prabhat Dairy
Parag Milk follows industry peer Prabhat Dairy in slashing IPO price band and extending the offer period. Despite offering a discount of INR5 per share, Prabhat Dairy had to lower price band from INR140-147 per share to INR115-126 per share and reduce share sale to sail through the IPO last year as investors showed little interest in the public offer.
While Prabhat Dairy was shunned by retail investors, institutional buyers demonstrated better judgment this time. In our analysis of the IPO, we maintained the company’s growth is impressive but did not justify the super premium valuations.
Our objection to Prabhat Dairy was with valuations and things are not any better with Parag Milk. In FY2015 – the year when its margins improved – the company had a consolidated EPS of INR3.81. The PE ratio works out to a very steep 59.6 times on the basis of FY2015 consolidated earnings.