It’s funny how we take some major life decisions based on almost nothing and sometimes want every possible proof for smaller decisions. Ours is a country with very confusing faith systems. Finding a balanced faith which people use at all times is getting increasingly difficult. We choose life partners based on astrology, break and modify houses based on vaasthu and change our names based on some theory of numerology and wait for specific dates and times to start something new. In short, we have no shortage of faith when we want to have it.
When Prabhat Dairy was running its business people had enough faith in the promoter to value the company at 236 rupees a share or a M.Cap of 2,300 cr. Prabhat had no monopoly or MOATS in the geographical area or the products that it was selling. The only reason the market valued the company at 2,300 cr was because they believed that the management could carry out what he was currently doing as well as grow the business. In short, the business was a commoditish business, that we perceived was being run by excellent management.
You look around the dairy industry and you will notice that the businesses barely ever cross a PAT margin of 3.5-5%. The industry is also going to get even more hyper competitive with the likes of ITC getting into this business. Not only could one suffer margin pressure, the dairy industry raw material prices are also getting more expensive as the no of dairy farmers are only decreasing. The new, capital and machinery intensive organised dairy is still a very small percentage of the raw material requirements today.
The management has been a killer contract manufacture but has never made much of dent with his own brands. Much of his turnover was Value Added Products, but net profits from own brands were to my knowledge minuscule or negative.
Think of yourself as the trustee of this company that makes a net profits of about 55 cr a year and someone comes and gives you an offer of 1700 cr. Assuming no growth thats 30 years of business profits ! 30 years !
In an environment where almost all parts of the business are moving parts as there is no great brand, the offer cannot not be taken seriously. I think the managements decision of converting a M.Cap to Cash was a smart decision.
Some math for investors who own or want to own the stock.
Of the 1700 cr cash, expect about 350-400 cr to be paid off as taxes. 1300 cr is all cash as the LIABILITIES too are being taken over by Thirumala Dairy. 1300 cr is about 133 rs of cash per share. Assume 33 rs is given off as dividend, at the CMP of 60 your net investment price is about 30. For a 30 rupee investment you are getting 100 rs cash in a company, that was created by the same management that people willings bought at 230 rupees a share not too long ago.
But the business is over, what will he do next ? OMG OMG !
Women have married men, with a lot less evidence of what the future would bring them, based on their faith in their partner. Most of the men, have kept up the faith.
Have some faith, i think Prabhat will soon have a Su-Prabhat.
(Remember with a 50% holding at a point, the promoter was worth 1200cr. Will he really damage his networth and credibility and bring it down to a mere 300 cr ? Current market cap 600 cr and falling)
(Management has indicated that they will go into the feeds and animal nutrition business.)