Prabhat Diary sells 98% of the business, uncertain times ahead

Prabhat Dairy Ltd (PDL) announced on January 21, 2019 that the company has entered into definitive agreements with Tirumala Milk Products Private Limited (“Purchaser”), a wholly owned subsidiary of French dairy multinational Groupe Lactalis, for the slump sale of its dairy business for a consideration of Rs 1,700 cr. PDL's milk business is around 98% of its revenues while cattle feed business is the balance miniscule. The company's plan of exiting core business and concentrating on the insignificant portion of its business, which also commands lower margins and is highly capital intensive, appears to be a move fraught with risks, and thus a negative for the shareholders. 
The current transaction would be routed through its subsidiary. The transactions would be in two parts wherein PDL's share in its subsidiary, Sunfresh Agro industries, would be sold to Lactalis for Rs 1,227 cr, while additional Rs 473 cr would come from the slump sale of the dairy business to Sunfresh Agro industries. PDL owns 29% in Sunfresh Agro industries, while remaining 71% is owned by Cheese Land Agro (a wholly owned subsidiary). 
Further, the company in its press release has stated that it would like to share a substantial portion of the proceeds from the sale with shareholders as dividends after using the requisite cash for expanding its cattle feed and allied business (animal nutrition & genetics), paying taxes & other costs. Besides, with the shareholders and CCI approvals, the deal is expected to close in Q1FY20. 
Post the announcement of the news, the stock price of PDL has fallen significantly, as it has raised concerns about the future growth visibility for the company, since it is selling its core business and focusing on the low margin & high capital intensive business. Further, the market seems to have got discouraged on account of the lack of clarity w.r.t. the cash proceeds that will come into the company. Many brokerages and funds have dropped coverage and have exited positions in them.

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