Prataap Snacks Limited - IPO Note - Angel Broking

Prataap Snacks is one of the top snack food companies in India and with 27% revenue CAGR between FY13-FY17, it is also one of the fastest growing companies in its sector. It has three product lines i.e. Extruded Snacks, Chips and Namkeen and has brands such as Chulbule and Yellow Diamond. It has 3 manufacturing facilities, 218 distributors and 3,500 super stockists.

Fastest growing organized snacks player: Prataap Snacks has seen a strong revenue growth since inception and from FY13-FY17 its revenue grew at a CAGR of 27% vs. organized snack food industry growth of 14% (2010-16). This has been due to its strong distribution network and acquisition of Yellow Diamond brand which is doing well. With the focus on growth, company has gained 8% and 3% market share in organized extruded snacks and chips market respectively. Company is foraying in chocolate-based confectionary products which will benefit Prataap to report above industry growth rate going ahead.

Inconsistent profitability: With the focus on gaining the market share, its profitability has remained inconsistent. The gross margins (GM) during FY13-17 have been between 26-31% which is weak compared to its peer DFM Foods' which made GM of ~40% in FY17. With weak GM and higher depreciation, company's EBITDA margins have been consistently weak and have come down from 8% in FY13 to 4.5% in FY17. PAT margins have also shrunk to just 1% in FY17 from 4.3% in FY13 due to the potato crop related issues.

Weak return ratios: With the poor profitability, company has also seen poor set of return ratios. The highest of RoE in the last five years has been 12.6% in FY16 which declined to just 4.2% in FY17. This is weaker than its peer DFM Foods (20% in FY17). Its ROCE has also been lower than cost of capital during this period.

Valuations and outlook: At 202x of its FY17 earnings, the issue is richly valued at upper end of its price band i.e. `938. Ignoring its lower profitability in FY17 and valuating the issue on FY16 EPS still yields a high P/E of 73.0x. FMCG companies commanding such high P/Es have a very strong profitability and returns profile such as Britannia (which is not an exact peer due to size and product portfolio). Its peer in exactly same industry i.e. DFM Foods, also has good margins (10% in FY17) and handsome return profile (~20%). For Prataap to justify this high valuation, remarkable improvement in profitability is required which may come at the cost of lower growth. Considering this, we rate Prataap Snacks as Neutral.

Source : Equity Bulls

Keywords