IPO

Tuesday, September 19, 2017 Click here for Rating Reckoner
Prataap Snacks
Pricing itself like a diamond
CM RATING45/100
Incorporated in 2009 and promoted by Arvind Mehta, Amit Kumat and Apoorva Kumat, Prataap Snacks (PS) an Indore based company, is one of the top six Indian snack food companies in terms of revenues in 2016, and among the fastest growing companies in the Indian organized snack market between 2010 and 2016.

PS is present in three major savoury snack food categories in India namely Extruded snacks, Chips and Namkeen and all its products are sold under the Yellow Diamond brand. As of July 31, 2017, PSL had 40 flavours of chips and extruded snacks and 23 varieties of namkeen in the market.

Extruded snacks include puffs, rings, pellets, chulbule product etc, Chips include fried, sliced chips or crisps made from potatoes, hummus, lentils etc and namkeen includes moong dal, fried nuts, sev, bhujia, etc. The company has appointed Salman Khan as its brand ambassador.

In Fiscal 2017, revenue from extruded snacks, potato chips and namkeen constitute around 62.99%, 23.85%, and 12.23%, respectively. The company seeks to differentiate itself from competitors through introduction of new products, including launching innovative flavours targeted at addressing consumer taste, market trends and providing superior value to consumers.

Rings and Puff, which were launched in FY 2012 have grown at 50.48% CAGR since 2013 and now accounts for 47.27% of the revenues in FY 17. The company will further penetrate its rings product in relatively new zone of southern market.

The company has further plans to foray into chocolate based confectionary snack business. It has also plans to launch a new variety of health savoury snacks under the Better for you segment.

The company has set up a pan-India distribution network supported by strategically located manufacturing facilities. Its wide network of super stockists and distributors is supported by company's large team of sales representatives and arrangements with various modern retail outlets. As of June 30, 2017, its distribution network included 218 super stockists across 26 States and one Union Territory in India and over 3,500 distributors. The company owns and operates three manufacturing facilities, one located at Indore, Madhya Pradesh and the other two located at Guwahati, Assam. In addition it has engaged two facilities on contract manufacturing basis, located at Bengaluru, Karnataka and at Kolkata, West Bengal. This has helped company in reducing logistics cost.

Around 75% of its sales come from independent small grocers or the mom and pop stores, 10% comes from supermarkets, 7% from hypermarkets or the organised modern trade, 3% from convenient stores and rest from other retailers.

Based on FY 2017 revenues, Eastern and Western region constitute around 33% each of its total sales, North market around 24% and rest Southern market constitute around 10% of its total sales.

The Offer and the Objects

The offer comprises fresh issue of Rs 200 crore, which at lower price band of Rs 930 per share, works out to 21.51 lakh shares and at higher price band of Rs 938, the offer works out to 21.32 lakh shares. The offer also comprises offer for sale of 30.06 lakh shares, which at lower price band of Rs 930 per share, works out to Rs 279.54 crore and at higher price band of Rs 938, the issue size works out to Rs 281.94 crore. The minimum bid lot is 15 equity shares and in multiples of 15 equity shares. The issue is made through the book-building process and will open on 22nd Sep and will close on 26th Sep, with anchor investor bidding date of 21st Sep 2017.

A discount of Rs 90 is offered to eligible employees of the company.

The issue also comprises of offer for sale of up to 30.06 lakh shares including up to 3.69 lakh equity shares by Sequoia Capital GFIV Mauritius Investment, up to 0.94 lakh equity shares by Sequoia Capital India Growth Investment Holdings I, up to 13.17 lakh equity shares by SCI Growth Investments II, and by the Promoters and Promoters group which includes Mr. Arvind Mehta (upto 1.84 lakh share), Mr Naveen Mehta (upto 1.39 lakh shares), Mr. Arun Mehta (upto 1.39 lakh shares), Rajesh Mehta (up to 3.62 lakh shares), Kanta Mehta ( up to 0.69 lakh Shares, Mrs Premlata Kumat (up to 0.78 lakh shares), Mrs Swati Bapna (up to 0.22 lakh shares, up to 1.17 lakh equity shares by Apoorva Kumat and up to 1.17 equity shares by Amit Kumat.

The objects of the fresh issue is to spend around Rs 40 crore on advertisement and brand promotional activities, Rs 70 crore on capital expenditure in relation to expansion and modernisation, Rs 13 crore on relation to repayment of certain borrowings, Rs 29.37 crore worth of investments in subsidiary for repayment of certain loans availed by the subsidiary and rest for general corporate purposes, apart from the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

Strengths

As per the Frost & Sullivan Report (quoted in the IPO prospectus), the snacks market in India is estimated at approximately Rs. 55000 crore out of which organized snack market is estimated at Rs. 22000 crore and grew at a CAGR of 14% between 2012 and 2016. With increasing competition and cost pressure and consumers awareness about brands, there has been a gradual shift from an unorganized to organized sector across the various product segments. Further, availability of a variety of snacks, easy accessibility and a variety of SKUs (stock keeping units) are some of the major factors that have influenced this growth in the market.

The company has diversified product portfolio which enables it to cater to a wide range of taste preferences and consumer segments, including adults and children. The company's products in the Extruded Snacks category are primarily targeted at the youth and children, while potato chips and namkeen category of snacks are for all consumer segments.

PSL grew consolidated sales at a CAGR of 27.3% in the last four years, higher than industry growth of 10%. The company has been able to consistently gaining its market share from unorganised players and from strong international players like Pepsico in the last few years. It has gained 3% market share from 2010 to 2016 largely due to diversified product mix, value proposition, pan India reach, strategic manufacturing locations, strong dealer distribution model, more value per grammage, schemes of promotional toys with every pack for the children, wide range of consumer driven flavours, etc.

The brand philosophy of the company is reflected in its campaign Dildaar Hai Hum. The relatively high grammage and consequent value proposition that the company offers to the price conscious middle-class Indian consumers who form a large proportion of the consumer market in India for the snacks products, has been an important factor in the growth and acceptance of company's brand and the market share, particularly in the urban, semi-urban and rural markets in India.

Extruded snacks market size as on 2016 is around Rs 174.6 billion, of which organised market is expected to be around 40% and is expected to grow at 15% CAGR between 2016-2021. PS is the 3rd largest player with market share of 8% in the organised extruded snack market in 2016. The company is market leader in rings category in 2015 and 2016.

Potato chips market size as on 2016 is around Rs 137.60 billion of which organised market is expected to be around 48% and is expected to grow at 10.4% CAGR between 2016-2021. The company has market share of 3% among the organised segment and is continuously gaining market share from Balaji Wafers and Lay's.

Namkeen market size as on 2016 is around Rs 224.2 billion, of which organised market is expected to be around 35% and is expected to grow at 17.8% CAGR between 2016-2021. PS has entered namkeen segment in FY 12, and has 1% market share in organised segment with massive growth potential untapped.

There is consistent improvement in asset turnover and overall working capital. The asset turnover ratio improved from 2.4 times in FY 2013 to 4.5 times in FY 2017 and working capital days has improved from 32 days in FY 2013 to 9 days in FY 2017.

The company will continue to remain under MAT till 2022.

Shift from unorganised sector to the organised sector, and increasing penetration in southern and eastern markets will lead to higher growth for the company in future.

With GST implementation, the scope for organized sector is expected to increase manifold.

Weaknesses

Operates in highly competitive and unorganised dominated industry which may restrict the company's pricing power

Certain aspects of the business like procurement of raw materials, consumer segments etc are seasonal in nature.

Fluctuating raw material costs is a worry. Potatoes, edible oil, corn, rice, toys are some of the major raw materials for the company on which company has no control and does not have any long term contracts. Any sharp price increases of raw materials will take time before it gets passed on to the consumers. Like in FY 2014 and in FY 2017 there were steep increase in prices of potatoes and oil which affected the operating margins and thus overall profitability of the company. Potatoes, which account for around 7-10% of its total raw material costs depending upon the pricing of potatoes, have to be procured and stored well in advance. Major raw materials like corn, potatoes, rice are agriculture products and prices and availability of which are dependent on monsoon.

The Rs 5 pack Stock Keeping Unit (SKU) constitutes around 80% of total revenues for the company. Thus the price point is also such that any increase in raw materials will require some offset in other costs rather than making a Rs 5 pack to Rs 6 due to various currency related issues.

Company's business is dependent on consumer preferences and tastes, consumer income, consumer perceptions and confidence on product safety and quality, and consumer awareness of health issues, all of which affect consumer spending patterns and thus sales of the company.

Growing concern among the consumers about health problems associated with obesity and dietary guidelines are encouraging consumers to reduce or eliminate consumption of such products manufactured by the company.

Any government regulations, public health professionals and government agencies actions concerning the health issues can result in negative publicity for the company and affect the business.

Valuation

For FY 2017, net sales were up 19% to Rs 903.82 crore. The OPM stood at 4.5% as compared to 7.5% of FY 2016, which resulted in a 28% decrease in OP to Rs 40.87 crore. Other income stood at Rs 1.54 crore. Interest cost was down by 24% to Rs 4.48 crore while depreciation was up by 39% to Rs 24.99 crore. Thus PBT stood at Rs 12.94 crore down by 61% YoY. There was an EO loss of Rs 5.80 crore as compared nil for FY 2017 which resulted in PBT after EO of Rs 12.94 crore down by 53%. After paying total tax of Rs 3.05 crore consolidated PAT for FY 17 stood at Rs 9.89 crore down by 64%.

For FY 2017, the company suffered a setback on account of steep rise in the cost of raw materials and higher depreciation provisions for capex made in the earlier years. However the company claims to have taken adequate steps of passing on price increases and a further lower raw material costs have helped the company in reaching normal operating margin of around 7-8% for FY 2018.

At higher price band of Rs 938, the diluted equity share capital of the company works out to Rs 11.73 crore of face value of Rs 5. EPS for FY 2017 works out at Rs 4.2. The P/E on FY 2017 diluted EPS works out to 222.4 while on FY 2016 diluted EPS of Rs 11.7, P/E works out to 80.4.

The company is present in fast growing and high potential Indian snacks market which has strong potential of growth. Increase sale of larger SKU's, deeper penetration in existing market and further introduction of products in newer geographies will drive future earnings.

Prataap Snacks : Issue highlights
Offer for sale (in Rs crore)
- On lower price band279.54
- On upper price band281.94
Total Issue size for offer for sale ( in no of shares in lakh)30.06
Fresh Issue ( in no of shares in lakh)
- On lower price band21.51
- On upper price band21.32
Total Issue size for fresh issue ( in Rs crore)200.00
Price band (Rs)930-938
Minimum Bid Lot ( in number of shares)15
Post issue share capital (Rs crore) 11.73
Post-issue Promoter & Group shareholding (%)79.0%
Issue open date22-09-2017
Issue closed date26-09-2017
ListingBSE, NSE
Rating 45/100

Prataap Snacks: Consolidated Financials
1303(12)1403(12)1503(12)1603(12)1703(12)
Revenue from operations343.75445.62558.81757.19903.92
OPM (%)8.0%4.5%6.1%7.5%4.5%
OP27.5420.1633.9356.5240.87
Other in. 0.731.231.760.711.54
PBDIT28.2721.3935.6957.2342.41
Interest3.614.736.335.884.48
PBDT24.6616.6629.3651.3537.93
Dep.6.8211.6815.3917.9924.99
PBT 17.844.9813.9733.3612.94
EO 0.000.000.965.800.00
PBT after EO17.844.9813.0127.5612.94
Tax (including Deferred Tax)2.97-0.403.100.193.05
PAT14.875.389.9127.379.89
MI0.000.000.000.000.00
PAT after MI14.875.389.9127.379.89
EPS*6.32.34.211.74.2
*EPS is on post issue equity capital of Rs 11.73 crore of face value of Rs 5 each
EO: Extraordiary items, EPS is calculated after excluding EO and relevant tax
Figures in crore
Source: Capitaline Database

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