A farmer’s wife carried a pail of milk from a buffalo that was artificially inseminated under the National Dairy Development Board’s program in Bhagpat, Uttar Pradesh, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Why Investors May Have Sent Prabhat Dairy Shares On A Wild Swing

Shares of Prabhat Dairy Ltd. swung more than 30 percent in a day after the company said that it will sell its milk-processing business that generates nearly all its revenue to France’s Groupe Lactalis.

The stock opened about 20 percent higher as the deal was announced before the trading began. The initial euphoria died soon and the shares tumbled, closing 15 percent lower by the end of trade.

Why Investors May Have Sent Prabhat Dairy Shares On A Wild Swing

That came despite the company saying in its statement that it will share a “substantial portion” of the proceeds with shareholders, besides strengthening its balance sheet. One reason for investor concerns could be uncertainty on how the company would reward them.

The company is controlled by Chairman and Managing Director Sarangdhar Nirmal and his family. The promoters own 50.1 percent while the rest is held by public shareholders.

Why Investors May Have Sent Prabhat Dairy Shares On A Wild Swing

To be sure, the deal requires shareholder and regulatory approvals.

The transaction is structured in two parts. Prabhat Dairy will get:

  • Rs 1,227 crore for sale of its stake in Sunfresh Agro to the French company.
  • Rs 473 crore for transferring its dairy business to Sunfresh Agro on a slump-sale basis.

In all, Lactalis through its arm Tirumala Milk Products will pay Rs 1,700 crore for the business that generates 98 percent of the revenue for Prabhat Dairy.

What Prabhat Dairy Gets Directly

Sunfresh Agro is 29.1 percent owned by Prabhat Dairy and 71.1 percent by Cheese Land Agro, a wholly owned subsidiary of the maker of milk products.

What that means is Prabhat Dairy will directly get 29.1 percent of Rs 1,700 crore: that is Rs 508.3 crore.

The cost of stake on its books stood at Rs 294.53 crore, according to its 2017-18 annual report, leaving the company with Rs 213.7 crore in capital gains. After paying the capital gains tax at 20 percent, it would be left with Rs 171 crore to be distributed among shareholders.

If Prabhat Dairy decides to return all of that, shareholders stand to earn a dividend of Rs 17.5 per share. Another option would be for the company to buy back shares.

Through Subsidiary

Cheese Land Agro holds 71.1 percent in Sunfresh Agro. The transaction values it at Rs 1208.7 crore.

Taking into account the Rs 30 crore cost of investment disclosed in the annual report for FY18, capital gains work out to Rs 1178.7 crore. After paying the tax, Cheese Land Agro will be left with Rs 942.96 crore.

But transferring this cash to the parent will not be cost effective. The only way to do that would be by paying a dividend. That would invite a dividend distribution tax—the effective rate is 20.4 percent, which includes a 12 percent surcharge and a 3 percent education cess.

Tax rules allow for dividend paid by a company to be reduced by the amount it received from a domestic subsidiary that paid DDT. That’s to avoid taxing the same money twice.

Prabhat Dairy isn’t expected to return all the money to shareholders as it’s looking to pivot into an animal feeds and genetics company. That will require fresh investments. Moreover, it had a debt Rs 320 crore as of September, and may have pay at least a part of it for its stated objective of strengthening the balance sheet.

All said, it’s uncertain how the company will substantially reward its shareholders as a large part of the cash will be with a subsidiary. Transferring it back to the parent will be not only costlier but also cumbersome.

Prabhat Dairy didn’t respond to repeated calls and emails from BloombergQuint.