Prataap Snacks

By Geetanjali Kedia

IPO Snapshot:

Prataap Snacks is entering the primary market on Friday 22^nd September 2017 to raise Rs. 200 crore via fresh issue of equity shares and an offer for sale (OFS) of upto 30 lakh equity shares of Rs. 5 each by PE investor Sequoia (59% of OFS) and promoters (41% of OFS), both in the price band of Rs.930 to Rs. 938 per share. Representing 21.91% of the post issue paid-up share capital at the upper end, total issue size is Rs. 482 crore, of which, Rs. 282 crore is the OFS portion. Issue will close on Tuesday 26^th September and listing is expected on 5^th October.

Company Overview:

Prataap Snacks is an Indore based snack food company selling extruded snacks, potato chips and namkeen under the ‘Yellow Diamond’ brand, through a pan-India distribution network of 218 super stockists and 3,500 distributors. It has own manufacturing capacity of 80,500 MTPA spread across one facility in Indore and two in Guwahati. Additionally, it has leased units in Bangalore and Kolkata, contribution of which is however less than 10% to total production. Almost 80% of company’s Rs 900 crore topline is generated through the Rs. 5 price point packet, as it has higher presence in tier III and IV towns. Sales mix: extruded snacks make up for 63%, potato chips 24% and balance 12% is namkeen. Company has roped in Bolloywood super star Salman Khan as brand ambassador and will soon foray into chocolate confectionery segment.  

Financials:

While topline growth has been healthy at 27% CAGR between FY13-17%, EBITDA growth was much lower at 11% CAGR, as margins have been dwindling between 4.7% to 8.2% on account of cost pressures. On FY17 topline of Rs. 904 crore, EBITDA of Rs. 42 crore was reported, down 26% YoY, leading to EBITDA margin of 4.7%, company’s lowest in the past 5 years. Higher contract labour charges and advertising/promotion spends de-grew FY17 PAT by 64% YoY to Rs. 10 crore, despite 19% revenue growth. On then equity of Rs. 3.06 crore, EPS for FY17 stood at Rs. 4.77, a steep fall from FY16’s EPS of Rs. 13.32.

Besides low margins, company’s return on equity (RoE) is also low - not only for FY17 (Rs. 4.2%) but also in FY16 (12.6%), which was one of the strongest years in terms of performance. Reason being deployment of over Rs. 250 crore in fixed assets, as most of manufacturing is undertaken in-house, vis-à-vis industry trend of third-party outsourcing since manufacturing is considered a ‘non-core’ operation for food and FMCG companies. 

Shareholding and Objects of Issue:

As of 31-3-17, company’s net worth stood at Rs. 238 crore. In Aug 2017, it raised Rs. 50 crore as pre-IPO funding, from Faring Capital (Aditya Deepak Parekh) at Rs. 938 per share, same as the upper end of the price band. Current equity stands at Rs. 10.66 crore, of face value Rs. 5 each, of which, Sequoia Capital, through 3 of its funds, holds 61.58% stake, while founders hold 31.09%, both groups classified as promoters. Faering Capital has 2.27% and balance is with employees.  

Objects of the fresh issue comprise: (i) capex worth of Rs. 67 crore for capacity expansion at Guwahati and Indore, (ii) debt repayment of Rs. 42 crore in company and subsidiary, on total debt of Rs. 80 crore, as of 31-3-17 (iii) marketing spends of Rs. 40 crore. 

Valuation:

At upper end of the price band of Rs. 938 per share, company’s market cap will be Rs. 2,200 crore, on expanded equity of Rs. 11.73 crore, while enterprise value (EV) will be Rs.2,230 crore. Based on FY17 historic earnings, the valuation multiples are – P/sales 2.4x, EV/EBITDA 53x, PE of 197x, While the sales multiple is acceptable, both the earnings multiples are very aggressive.

Listed peer DFM Foods, making snacks under Crax and Natkhat brands, has FY17 topline of Rs. 350 crore and much stronger and consistent margins, with EBITDA in double digit and PAT in mid-single digit, despite lower topline. Its RoE is much higher at 23% in FY17. Share of DFM Foods is currently ruling at FY17 Price/sales, EV/EBITDA and PE multiples of 4x, 38x and 76x respectively. While Prataap has a handsome topline, inconsistency and wafer-thin margins spoil the party completely, even in comparison to peer.

While the management may be very optimistic about FY18 earnings, one must wait for the actual numbers to unfold. Taking a base case estimate of FY18 PAT of Rs. 30 crore, these multiples are 2x, 32x and 70x respectively, which is definitely stretched. Since 80% of company’s sales is via the Rs 5 pack (and will continue to be its mainstay), pressure on margins will always remain. Moreover, since company caters to the price conscious segment, increasing price packs may not be easy (especially from the psychological level of Rs. 5) on the back of growing competition, both from the organised and unorganised players.

Conclusion:

While company’s topline growth is credible, not much can be said for its margins. For investors, it will be prudent to wait for actual quarterly numbers to unfold before justifying such premium multiples. In addition to this, somber mood of the primary markets in the recent past does not aid either.

On inconsistent and wafer-thin margins coupled with aggressive issue pricing, the IPO can be given a miss.

Disclosure: No interest.