Prataap Snacks IPO - An avoidable chip!

IPO Rating - 41 (Risky)*

About the Issue
The forthcoming IPO of Prataap Snacks Ltd consists of fresh issue of equity shares with face value of Rs 5 each worth Rs 200 crore and offer for sale (OFS) of 30,05,770 equity shares worth Rs 220 crore, with the issue size aggregating to Rs 420 crore. The minimum lot size is of 15 shares with a price band of Rs 930-938 per equity share. The issue will remain open between September 22-26, 2017. The company would be listed on both BSE and NSE, post allotment.

Purpose of the IPO
Each of the selling shareholders will be entitled to their respective portion of the proceeds from the OFS and hence the company will not receive any proceeds from the OFS.
The net proceeds from the fresh issue will be utilized towards –
-  Repayment/pre-payment, in full or part, of certain borrowings availed by the company
-  Funding capital expenditure requirements in relation to expansion (including, through setting up of a new production line and construction of a building) and modernisation of existing manufacturing facilities    
-  Investment in the company's subsidiary, Pure N Sure, towards enabling the repayment/pre-payment of certain borrowings availed of by the subsidiary
-  Marketing and brand-building activities
-  General corporate purposes

Company Background
Prataap Snacks Ltd. is one of the top six Indian snack food companies in terms of revenues and is the fastest growing company in the Indian organised snack market. It is present in three major snack food categories in India, namely extruded snacks, chips and namkeens and sells these products under the Yellow Diamond brand.
Extruded snacks are processed, reconstituted and shaped potato or cereal-based snacks which may be flavoured or unflavoured. This segment is further sub-divided into two categories, including shaped extruded snacks, which includes puffs, rings and pellets products; and random extruded snacks, which includes the Chulbule product. Chips include fried, sliced chips or crisps made from potatoes, hummus, lentils etc. It includes flavoured and unflavoured chips, and may be standard chips, thick-cut and crinkle-cut. Namkeens are a type of traditional savoury Indian snacks, which includes products such as moong dal, masala or fried nuts, sev and bhujia. In FY2017, share of revenue from extruded snacks, potato chips and Namkeen was 62.99%, 23.85% and 12.23%, respectively.

Its diversified portfolio has enabled the company to cater to a wide range of taste preferences and consumer segments, including adults and children. The products in the extruded snacks category are primarily targeted at the youth and children, while the potato chips and Namkeen category of snacks are for all consumer segments. As of Jun 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 two facilities engaged on contract manufacturing basis, located at Bengaluru, Karnataka and at Kolkata, West Bengal.

Industry Outlook
The snacks market in India is estimated at approximately Rs 550 billion, out of which organised snack market is estimated at Rs 220 billion. The market grew at a CAGR of 14% between 2012 and 2016. It is estimated to grow at 14.6% CAGR between 2016 and 2021. While some of the segments such as chips and snacks (nuts and popcorns) are expected to witness only moderate growth of about 9-10% as they have already reached maturity, the market for Namkeens is expected to witness highest growth, at about 17.8% between 2016 and 2021. With increasing competition and cost pressures, there has been a gradual shift from unorganized to organized sector across various product segments.

Other players in each segment
In the organised snacks segment the market has been historically dominated by major FMCG companies such as PepsiCo, ITC, Parle Products, etc. PepsiCo, with its Lays’ and Kurkure brand has dominated the chips and extruded snacks market with close to 50% market share in each of the segments.
Extruded snacks - PepsiCo is the market leader with a 44% value share in 2016 with their 15-year-old brand Kurkure. However, the dominance of PepsiCo has been challenged by companies such as Prataap Snacks, Balaji Wafers and DFM Foods. Prataap Snacks became the market leader in rings (extruded snacks) with its product Rings in 2015 and continues to remain so in 2016, followed by DFM Foods with its product Crax.
Chips - The share of market leader PepisoCo’s Lays’ has eroded over the last few years with mid-sized companies such as Balaji Wafers and Prataap Snacks chipping away market share from PepsiCo. Prataap Snacks is currently a major player in North, West and East India.
Namkeen - Haldiram is the undisputed market leader in Namkeen. Bikaji Food and Bikanervala Foods are other companies that have always been associated with the Namkeen market. Prataap Snacks is also another upcoming player, witnessing 40% growth with a strong presence in eastern and western markets.

Financial Performance



For FY13-17, the company's revenue has grown at a CAGR of 27.34%. Its EBITDA grew at CAGR of 10.38% during the same period. As we can see, although revenue is showing growth, the growth rate is decreasing on a YoY basis. Its PAT has not been showing steady and consistent growth.

Valuation and peer comparison
On the upper price band of Rs 938 with EPS of Rs 4.77 for FY17, the company’s P/E works out to be 196.65x. We can compare with some listed players like DFM Foods and Britannia Industries, whose P/E stands at 110.07x and 48.11x, respectively for FY17. Also, we see that Prataap Snacks needs to invest into marketing, distribution network and innovative products to stay competitive. The Indian snacks market has changed and the margins are thinner with customers' expectations of higher quality along with freebies. Considering the above, we see moderate growth with margin pressure to continue. Also, the valuation of Prataap Snacks is very high.
 
Our View
There is stiff competition in this industry with many FMCG players grabbing major market share. Also, entry of new players affects the market share of small and medium-sized companies like Prataap Snacks. Profitability has been on a downward trend in the last five years due to increasing operating expenses. The company is planning for capacity expansion which would increase the production levels. If demand remains constant, then it might aid company's revenue, but looking at its valuation, we find the investment risky and hence advice investors to avoid this IPO.

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment