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PRE-IPO NOTE
19.1
-Promoter
8.3
-PE Investors
10.2
0.5
Post Issue
Shares O/S
29.0
-Promoter
7.5
-PE Investors
14.9
6.0
5,000
2,500
- Primary
2,500
833
115
Research Analysts
Anuj Bansal
+91 22 3043 3122
anuj.bansal@ambit.co
FY12
1727
FY13
3437
FY14
4451
FY15
5588
FY16
7572
154
207
79
185
385
126
132
23
45
209
6.0
5.7
1.2
1.8
8.2
RoE (%)
12%
9%
1.35
2.5%
10.4%
Dhiraj Mistry
+91 22 3043 3264
RoCE(%)
16%
13%
4%
8.6%
16.7%
dhiraj.mistry@ambit.co
Ritesh Vaidya
+91 22 3043 3246
ritesh.vaidya@ambit.co
Prataap Snacks
Prataap Snacks
Prataap Snacks was incorporated in 2002 as Prakash Snacks Pvt Ltd in
Indore. Starting with manufacturing potato chips at Indore, the company has
expanded into Extruded and Namkeen (savoury) segments too. Its main
revenue contributor is the extruded segment, which contributes around 62%
of revenue from operations. It has four manufacturing plants, including two
own plants in Indore and Guwahati and two outsourced plants in Kolkata
and Bangalore. On a low base, the company has posted a revenue CAGR of
45% over FY12-16 and expanded into Eastern, Western and Northern India;
it has a strong footing in its home markets of Western and Central India. The
company recently entered the Southern market. It has a value for money
positioning for its brands as reflected in ~25% cheaper pricing and focus on
SEC B,C and D stores. It has been able to grow its Rings product rapidly
based on a strategy of providing toys within packs and using popular
cartoon characters for advertising.
Peer comparison reveals Prataap has higher growth but weaker returns
Prataap is significantly smaller than Britannia and Mondelez, which benefit from large
market shares in significantly larger packaged foods categories like biscuits and
confectionary. Packaged Snacks is a much smaller category in India (Rs500bn) and is
highly fragmented excluding the Top-2 players (Pepsi and Haldirams) which account
for ~50% of the market. The growth rate for Prataap has been impressive given its
small base. However, growth has come at the cost of profitability and return ratios.
Given the fruits (market share gain and sales growth) of investments have been
positive, we believe management has adopted the right strategy of first gaining share
and scale before chasing profitability.
Exhibit 1: Comparison of Prataap Snacks with other Packaged Foods companies in India
FY16/ Rs mn
Revenue
- 3 Year CAGR
Prataap
Snacks
Mondelez
(2015, Pro Remarks
rata)
52,062
7,572
3,895
12,457
86,788
30%
20%
20%
12%
EBIT
385
471
1,497
12,265
- 3 Year CAGR
23%
31%
5%
43%
OPM
5.1%
12.1%
12.0%
14.1%
8.2% Prataap has the lowest OPM of 40% among snacks peers
- 3 Year Avg
3.4%
8.6%
13.9%
11.2%
Market Share
4%
2%
7%
33%
ROIC
15%
39%
18%
73%
5%
- 3 Year Avg
10%
28%
29%
72%
25%
ROE
13%
45%
14%
53%
6%
31%
25%
60%
21%
Biscuits
Chocolates
- 3 Year Avg
Largest
Category
Extruded
Home State
Madhya
Pradesh
NCR/Delhi
Gujarat
10%
National International
Issue details
Prataap Snacks filed the Draft Red Herring Prospectus with SEBI in September 2016.
As per media reports, it might be looking at an IPO of Rs5-5.5bn. As per the DRHP, a
part of IPO will be Offer for Sale with promoters and PE investors looking to sell
~3mn shares. Primary issuance, as per DRHP, is expected to be ~Rs2.5bn. On the
Page 2
Prataap Snacks
basis of this we assume the IPO is likely to be split equally between OFS and primary
issuance. The IPO will also trigger compulsory conversion of 115,504 Compulsorily
Convertible Preference Shares (CCPS) currently held by PE investors. Post conversion,
these will add ~6.9mn shares to the equity base. Post IPO, we expect the new equity
base to be ~29mn shares vs ~19mn shares currently, implying an over 50% dilution
to the existing equity base. Using the fully diluted equity base, we arrive at an EPS of
Rs7.2 for FY16. The implied share price at the time of IPO is expected to be Rs830840 (on the basis of media reports), which would imply a P/E of ~115x March16.
Exhibit 2: IPO details and dilution after IPO
# in mn Remarks
Pre Issue
Shares O/S
19.1
-Promoter
8.3
-PE Investors
10.2
0.5
Post Issue
Shares O/S
29.0
-Promoter
7.5
-PE Investors
14.9
6.0
There will 3mn new shares issued and 6.3mn added due to conversion of CCPS
Promoters are looking to sell ~10% of their holding during the IPO
PE investors are looking to sell 2.2mn shares during the IPO. However, CCPS conversion results in stake going up
Public will have ~6mn shares post-IPO 3mn new and 3mn through OFS
5,000
2,500
- Primary
2,500
As per DRHP
833
115
Management details
Prataap Snacks is promoted and run by two families, the Mehtas and the Kumats.
Arvind Mehta and Amit Kumat were the founders of the company; other family
members were added to the senior management team. Professionals include Mr
Sumit Sharma (CFO), Mr Subhash Bhatt (VP Production), Mr Deepak Brahme (VP
Production), Mr Raj Kumar Kalra (Zonal Sales Manager North), Mr Mahesh Purohit
(Zonal Sales Manager West) and Mr Awadh Bihari Singh (Zonal Sales Manager
East). Private equity investor Sequoia and Faering took a stake in the company in
2011-12 and have since then helped further professionalise the company. The Board
is fairly independent (4 Independent and 4 from the Promoter/Investor group). It is
also well-diversified and of high quality with Dr Om Manchanda (CEO, Dr Lal
Pathlabs) being one of the board members.
Exhibit 3: Board of Directors
Name
Designation
Qualifications
Arvind Mehta
Chairman
Founder
Amit Kumat
CEO, MD
Founder
G V Ravishankar
Nominee Director
V T Bharadwaj
Nominee Director
Anisha Motwani
Independent Director
Dr OP Manchanda
Independent Director
Haresh Chawla
Independent Director
Source: DRHP
Page 3
Prataap Snacks
The A&P spend to sales ratio has been 2-4% over FY12-16.
Forward guidance suggests this ratio is not likely to move up in the near term.
Exhibit 4: A&P as % of sales vs Packaged Foods peers
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
FY12
FY13
Britannia Inds
FY14
DFM Foods
FY15
FY12
FY16
FY14
Prataap Snacks
FY13
FY15
FY16
Prataap Snacks
Rs5 SKU is the largest selling SKU and forms a significant part of revenues. This
creates an issue where price point becomes critical and limits the ability to pass
on input cost inflation. Grammage reduction in smaller priced units is restricted
by regulation.
Rs5 SKU could also potentially be a lower profit contributor given additional
packaging and logistics costs of transporting low-value SKUs. In Snacks, logistics
costs can be high as value/volume ratio of products to be distributed tends to be
low.
Page 4
Prataap Snacks
Exhibit 6: Price point comparison of Prataap with peers
30
20
10
Nuts
Aloo Bhujia
Moong Dal
Extruded Snacks
Lays
Prataap snacks
Kurkure
Prataap snacks
Haldiram
Prataap snacks
Haldiram
Prataap snacks
Haldiram
Prataap snacks
Chips
Weight (grams)
Source: DRHP
The company has been giving free toys in its extruded snacks packets to target
children.
Advertising also uses some popular cartoon characters like Motu Patlu and even
brand ambassador Salman Khan is featured in advertisements with children.
4%
2%
0%
2012
2013
2014
2015
2016
Page 5
Prataap Snacks
The company sources all its potato requirements from Madhya Pradesh.
Other raw material purchases are made on a need basis using spot rates with no
future/forward contracts in place to lock in quantities or pricing.
Exhibit 8: Lower-end positioning combined with input cost inflation cause volatility in
gross margin
33%
31%
29%
27%
25%
2012
2013
2014
2015
2016
Gross Margin
Source: DRHP, MOCA financials
Page 6
Prataap Snacks
Plant
Indore
Chips
Extruded
Namkeen
Chips
Extruded
Namkeen
14,400
27,000
10,500
69%
72%
80%
Guwahati - I
14,600
61%
Guwahati - II
12,600
16%
2,300
NA
Bengaluru
Source: DRHP
Being able to expand distribution is key for growth. Most local players tend to
struggle at this stage of expansion when they venture out of their home markets.
Prataap has done reasonably well with a fairly diversified geographical split.
However, it needs to sweat its reach better and enhance contribution from the
South, which accounts for only 6% of sales.
East
Zone,
35%
Source: DRHP
West
Zone ,
34%
North
Zone ,
26%
South
Zone ,
6%
West
Zone,
49%
North
Zone,
25%
East
Zone,
18%
Source: DRHP
Page 7
Prataap Snacks
Quality of distribution matters a lot being sub-scale hurts
Questions: What proportion of sales is distributed through the wholesale channel?
What has been the impact on the same from demonetisation? Is the company
anticipating increasing wholesale margins to compensate for increased cost of doing
business in a non-cash environment?
Questions: How does the company manage shelf space? Do distributors have a
dedicated shelf space management team beyond sales and delivery teams?
Questions: Has the company been forced to offer higher margin to the distributor
network to encourage them to stock products? What would be the difference in trade
margin offered by the company vs established peers like Pepsi and ITC?
Key competitors like Pepsi (Lays) and ITC (Bingo) have very high quality
distribution networks with dedicated teams for shelf space management.
New entrants like Prataap tend to make up for weaker quality of distribution
(smaller scale makes hiring specialised shelf space management teams unviable)
by providing higher margin to the channel to incentivise it to push their products
at point of sale.
Prataaps market share has gone up from 1% in 2010 to 4% in 2015. The gain in
share has been highest among peers.
The key gain in share has been in the Extruded category, which is also among the
fastest growing categories within Packaged Snacks in India.
40%
30%
7%
7%
6%
20%
5%
4%
10%
3%
2010
Source: DRHP
Others
Haldiram
Prataap Snacks
Parle Foods
ITC
Balaji Wafers
PepsiCo
0%
4%
3%
2%
1%
2%
1%
0%
0%
2010
2015
3%
1%
2015
Overall
- Potato Chips
- Extruded
- Namkeen
Source: DRHP
Page 8
Prataap Snacks
Managing competitive intensity while entering new markets
Questions: Focus on B, C and D stores has enabled the company to avoid strong
competitive pushback from large branded players which are over indexed to A and B
stores. But does this limit the companys ability to grow into larger cities and higher
throughput geographies?
Questions: What kind of pushback has the company witnessed from large existing
players whenever it has entered a new market?
Questions: The company is present in South India through a contract manufacturing
facility since 2011. Yet it contributes only 6% of sales. Is there a heightened
competitive scenario in South which has prevented Prataap from growing faster? Can
any of these factors get replicated in any other region?
Growth rate for Extruded snacks has been the highest and for potato chips the
lowest for Prataap.
As per management guidance, this trend is likely to continue. Impact of this mix
change on profitability is, therefore, important to understand.
6,000
4,000
2,000
2012
2013
Chips
Extruded
2014
2015
Namkeen
2016
Others
Source: DRHP
Page 9
Prataap Snacks
Launching new products to keep excitement going among customers is key for
growth for a packaged foods company.
2006: Extruded
(Chulbule) at Indore
2014: Extruded
expansion at Guwahati
2012: Potato
Chips Expansion
at Indore
2016: Extruded
expansion at Guwahati
2015: Extruded
expansion at
Indore
Lack of legal cases pending against the management or company beyond a few
regular taxation disputes which are normal for any business.
Accounting ratios like CFO/EBITDA are fairly healthy and net working capital has
been consistently improving, highlighting the managements focus on cash
conversion.
Page 10
Prataap Snacks
Valuations
If we believe media reports, post IPO dilution, Prataap would be trading at a
P/E of 115x Mar16 on post IPO fully diluted EPS of 7.2. Prataap has
demonstrated the ability to grow rapidly and gain market share in a highly
fragmented industry, which itself should grow at a healthy 15% CAGR over
the next 5 years. We believe Prataap has been earning below potential as it
is still investing to drive growth and market share gains; a sound strategy, in
our view. Encouragingly, Prataap has been able to deliver on its strategy.
Comparing its profitability with that of peers, we believe Prataap can in a
steady state make significantly higher profit margins, and the improving
trajectory has already been seen in FY15-16. Given the attractiveness of the
industry, market share gains, rising profitability and improving returns,
Prataap deserves a premium to peers and FMCG companies.
Comparing with DFM Foods
DFM Foods has superior return ratios and profitability metrics but lower valuations
than those of Prataap Snacks. However, we believe Prataap has put the right
processes and strategy in place to continue growing ahead of DFM, which has not
been able to grow much beyond its home market of North India with a single
successful product (Crax extruded rings). Prataap appears to be earning below its
potential as it is investing in creating a business the hard way. Investments on own
manufacturing capacity, step-by-step distribution expansion, increasing A&P spends,
identifying and focusing on a core category (extruded), and creating a wellrecognised positioning (value for money, children-centric) should hold it in good
stead. As the business matures to a higher scale and growth enters a long-term fade
period, we believe Prataap should be able to improve its profitability and return
ratios. For now, a longer and stronger growth ramp based on sound business
fundamentals being built at the cost of near-term profitability should justify the
premium over DFM Foods, in our view.
Exhibit 16: Setting valuation benchmark for Prataap Snacks
P/E
EV/EBITDA
P/B
ROE
ROIC
Sales
EPS
CFO/EBITDA
NWC/Sales
FY16
FY16
FY16
3Yr Avg
3Yr Avg
3Yr CAGR
3Yr CAGR
3Yr Avg
3Yr Avg
115
44
12
6%
10%
30%
13%
106%
6%
49
33
19
42%
35%
10%
30%
132%
-10%
DFM Foods
64
35
25
36%
25%
20%
58%
116%
-5%
Britannia Inds
44
29
20
55%
47%
12%
47%
104%
-3%
Nestle India
56
39
21
45%
34%
-1%
0%
123%
-14%
GSK Cons
31
29
31%
33%
10%
16%
187%
-17%
FMCG Peers
40
28
20
53%
49%
10%
15%
109%
-3%
HUL
44
30
49
111%
111%
7%
8%
121%
-18%
Dabur
40
32
12
36%
28%
11%
18%
117%
1%
Godrej Cons
42
31
10
24%
17%
12%
20%
87%
-1%
Marico Inds
45
30
15
34%
28%
10%
26%
107%
8%
Colgate
41
27
25
79%
80%
10%
7%
107%
-11%
ITC
28
18
33%
32%
7%
9%
116%
1%
Prataap Snacks
Page 11
Prataap Snacks
Margin hit from raw material price inflation: Low price positioning limits
pricing power. This, combined with no backward linkages or long-term contracts
for raw material sourcing, exposes Prataap to input-cost-related margin shocks.
Rising competitive intensity: Till date, Prataap has had it relatively easy as it
was focusing on SEC B, C and D stores where market leaders Pepsi and
Haldirams are relatively under-indexed. Also, given a lower base and strong
growth in and around home markets, growth rates have been healthy. Sustaining
such high growth rates will require new product launches, entry into farther
territories, and potential direct conflict with market leaders. Cost could be high
and results uncertain amid such increased competitive intensity.
Page 12
Prataap Snacks
Key financials
Consolidated Income Statement (Rs mn)
Rs mn
Revenue
2012
2013
2014
2015
2016
1,727
3,437
4,451
5,588
7,572
Gross Profit
559
1,030
1,166
1,548
2,350
Expenses:
378
754
970
1,210
1,785
Employee Cost
22
55
89
137
184
A&P
26
26
36
122
307
Freight Charges
137
309
395
395
575
Others
193
364
450
555
719
EBITDA
182
275
196
339
565
28
68
117
153
180
154
207
79
185
385
Depreciation
EBIT
Finance Cost
36
47
63
59
PBT
152
178
44
140
333
PAT
126
132
23
45
209
2012
2013
2014
2015
2016
1,020
1,452
1,731
1,800
2,011
16
52
64
120
114
Current Liabilities
191
293
486
579
630
-Trade Payables
155
239
399
497
552
423
508
449
546
1,234
2,221
2,789
2,948
3,300
745
1,403
1,854
2,100
2,286
Current Assets
340
532
717
811
954
-Inventories
253
424
523
576
685
53
37
116
136
183
Debt
Total
Assets
-Trade Receivables
Cash & Bank Balance
Total
149
285
218
37
61
1,234
2,221
2,789
2,948
3,300
2012
2013
2014
2015
2016
58
115
129
329
433
180
273
209
345
565
91
128
47
60
(31)
(31)
(33)
(13)
(72)
Capital expenditure
(199)
(671)
(503)
(410)
(463)
(141)
(556)
(373)
(81)
(30)
(500)
(919)
(384)
(289)
(466)
585
692
292
(94)
51
-Taxes Paid
Page 13
Prataap Snacks
Return ratios
Performance Ratios
2012
2013
2014
2015
2016
12%
9%
1%
2%
10%
7%
4%
1%
1%
3%
Asset Turnover
1.4
1.6
1.6
1.9
2.3
1.20
1.53
1.61
1.64
1.64
16%
13%
4%
9%
17%
9%
6%
2%
3%
5%
Financial Leverage
Return on Capital Employed (%)
EBIT Margin
Capital Employed Turns
1.8
2.1
2.3
2.6
3.3
EBIT
154
207
79
185
385
Fixed Assets
666
1283
1583
1821
1985
Operating WC
304
322
391
330
324
5.7
10.7
11.4
16.9
23.3
Page 14
Prataap Snacks
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Research Analysts
Name
Industry Sectors
Desk-Phone E-mail
(022) 30433241
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vivekanand.s@ambit.co
Sales
Name
Regions
UK
India / Asia
India
India / Asia
Europe
UK
India / Asia
India
Desk-Phone E-mail
+44 (0) 20 7886 2740
(022) 30433289
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Americas
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Production
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Production
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Editor
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Database
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Page 15
Prataap Snacks
Explanation of Investment Rating
Investment Rating
BUY
>10%
SELL
NO STANCE
<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW
NOT RATED
We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE
We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE
We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
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Prataap Snacks
25. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well
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Disclosures
29.
30.
31.
32.
The analyst (s) has/have not served as an officer, director or employee of the subject company.
There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
All market data included in this report are dated as at the previous stock market closing day from the date of this report.
Ambit and/or its associates have received compensation for investment banking/merchant banking/brokering services from Astral Poly Technik Ltd in the past 12 months.
Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.
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