Prataap Snacks IPO: Too pricey to savour

Snacks have traditionally been a stronghold of the unorganised segment in India. With products and tastes varying vastly across regions, unorganised players have been running successful businesses confined to a few popular items and within a limited region. However, urbanisation, lifestyle changes, higher affordability and widening tastes and preferences are driving the demand for branded and packaged snacks in the country.

About 40 per cent of the ₹55,000-crore market for snacks in India is catered to by the organised segment dominated by big FMCG companies such as Pepsi (Lay’s, Kurkure), ITC (Bingo!) and players such as Haldiram’s. The demand for organised snack foods has grown at a compounded annual growth rate (CAGR) of 14 per cent from 2012-2016 and is expected to grow at a similar CAGR in the next five years. Besides, the share of the organised segment is expected to move up to 50 per cent in this period.

Prataap Snacks is looking to capitalise on this trend. The company manufactures chips, savouries ( namkeen ) such as bhujia , sev and extruded snacks such as rings, puffs and pellets. Prataap’s products are made at its own facilities in Indore and Guwahati and two other contract manufacturing facilities in Bengaluru and Kolkata. The company has been selling its products under the ‘Yellow Diamond’ brand since fiscal 2012.

With the offer pegged at a ₹930-938 band, Prataap plans to raise up to ₹200 crore through this initial public offer (IPO). The funds will be used for setting up new production lines, expansion of packaging lines across its facilities, repayment of certain borrowings and marketing and brand-building activities. An offer for sale from the promoters for ₹279.5-282 crore is also on. At the upper end of the price band, the company’s market capitalisation will be about ₹2,200 crore.

In pricing the offer, Prataap is banking on the overheated valuations, both in the mid- and small-cap space as well as in the FMCG segment. At the given price band, the company will trade at a stiff 220-222 times its 2016-17 earnings, on the post-issue equity. Pepsi, the market leader in chips and extruded snacks and Haldiram’s, the market leader in the namkeen segment, are not listed.

While ITC is listed, its valuations are not comparable, considering its multiple business verticals. The closest listed peer is the ₹1,332-crore market-cap DFM Foods which sells the ‘Crax’ brand of namkeen and extruded snacks. But this stock trades at a lower trailing 12-month valuation of 84 times. Investors need not subscribe to the Prataap Snacks issue, considering that room for upside in the stock is limited at such a high valuation. Besides, its profitability track record so far is also lacklustre.

In the last five fiscal years, the company’s revenue has grown steadily from ₹343.75 crore in 2012-13 to ₹904 crore in 2016-17, a CAGR of 27.34 per cent. But while it notched up ₹14.9-crore profits in 2012-13, the profit has dipped to ₹9.9 crore in 2016-17. In comparison, fiscal 2016 (2015-16) was a good year with a profit of ₹27.4 crore.

With raw material costs (including traded goods) accounting for about 70 per cent of revenues, the company is highly raw material-intensive. Rise in input prices thus tends to have a strong impact on profitability. In 2016-17 for instance, the company was faced with a steep increase in prices of potato and oil. This, along with higher advertising and promotion and contract labour charges, pulled down the operating margins to 4.5 per cent. In the past years, operating margins have fluctuated anywhere between 4.5 per cent and 8 per cent.

Since the company predominantly sells ₹5 SKUs (stock-keeping units) and faces stiff competition from well-entrenched players, it has limited room to pass on any cost increases or reduce grammage. Besides, profits in 2016-17 were impacted by a sharp rise in depreciation. This was due to amortisation of the rights of the newly roped in brand ambassador (Salman Khan).

Fluctuations in input prices, along with higher depreciation as the company embarks on expansion, could continue to hit profitability.

From the current levels of about 3 per cent of revenues, the company also plans to spend 5-7 per cent of revenues on advertising over the next three years. Return on net worth, at 4-13 per cent in the last five years, is not very impressive. DFM Foods has clocked a higher 19-45 per cent in the same period.

While high valuation and weak financials are dampeners now, Prataap Snacks does hold promise. For one, 60-65 per cent of its revenues come from extruded snacks and another 12 per cent from namkeen , both of which are relatively more profitable than potato chips. Both these segments are expected to grow at a faster clip in the years to come. Second, the company is expanding its product line to add chocolate-based confectionery, another higher-margin segment. It is also tapping into the market for healthy snacks through hummus and lentil chips.

Prataap now holds a 4 per cent market share in the organised snacks segment, up from 1 per cent in 2010.

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