IPO Size: Rs. 881 Cr – entirely offer for sale (OFS) mainly by

• PE Lighthouse (to halve 10% holding) – 40% of OFS
• IIFL funds (7.4% stake to drop to 3%) – 37% of OFS
• Promoters (78% to drop to 76%) – 17% of OFS

Price band: Rs. 285-300 per share

Mcap: Rs. 7,485 cr, implying 12% dilution

IPO Date: Thu 3^rd Nov to Mon 7^th Nov 2022, Listing 16^th Nov 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

‘Bikaji’ Bhujiya and Namkeen Maker

India’s largest Bikaneri bhujia maker, with annual production of 29,380 tonnes, accounting for 35% of Rs. 1,600 cr revenue in FY22. While company has pan-India distribution network of 416 direct and 1,956 indirect distributors, ~85% revenue is derived from North and East India.  

Regional Player

Rajasthan, Assam and Bihar together account for 70% revenue, as its 7 manufacturing plants are located in these 3 states. While it enjoys 45% and 30% market share of organised Indian ethnic snack market in Rajasthan and Bihar respectively, company is largely a regional play, with exports, South and West India barley 5%, 2% and 7% of revenue respectively.

Capacity Expansion

Company is undertaking Rs. 200 cr capex to increase manufacturing capacity by 7% in 12 months, to be funded via debt and internal resources. This investment is being done in existing markets of Rajasthan and Bihar where current capacity are under-utilised (19-56% utilisation), hence rationale for the capex unclear. Besides, company has net debt of Rs. 58 cr as of 30.6.22, so further borrowings will squeeze margins, as interest rates are hardening.

Inflation Squeezes Margins

Unprecedented inflation in key raw materials like edible oil, milk, pulses contracted gross margin from 30.6% in FY20 to 27.4% in FY22, and further by 295 bps in Q1FY23 to 24.4%, shrinking net margin to 3.7% in Q1FY23 from 4.7% in FY22 and from 5.2% in FY20. This is a steep decline in margin and given highly competitive unorganised market, company lacks pricing power and is unable to fully pass on rising costs.

Low Margins, even Historically

Even in FY19 and FY20, company’s net margins of 5-6% were quite slim in relation to some of the listed food companies like Nestle and Britannia, operating at 12-15%. As material costs account for 72-75% of revenue, company’s margins and return ratios (10-11% RoE) are lower than most FMCG companies. This calls for lower valuation multiples too.

Exorbitant IPO Pricing

EPS for FY22 stood at Rs. 3.15 and 65 paise for Q1FY23, leading to estimated FY23E EPS of Rs. 3.9. This translates into a PE multiple of 78x for current year, which is extremely demanding. FMCG giant Hindustan Unilever with 18% net margin is ruling at PE multiple of 58x, while food majors Britannia and Tata Consumer, all in mid-teen net margins, are trading at 60x and 63x respectively. This is despite all parameters being better for the biggies – scale of operations, revenue, margin, distribution reach, cash rich, diversified portfolio.

Unjustified Valuation even based on Past Transaction

In Aug 21, company raised Rs. 150 cr at Rs. 220 per share from Lighthouse Fund (despite another Lighthouse Fund being the largest seller in OFS). 55% premium in 15 months is unjustified, as company’s EBITDA, PBT and PAT have all fallen 3%, 13% and 16% respectively in FY22 vs FY21.  

Bewildering Buy-Back

In Feb 22, company bought back shares from Intensive Softshare Private Limited at Rs. 280 each, for Rs. 12 cr, which is surprising, given ongoing capex, fund-raise 6 months ago and company no longer being cash surplus.