Aditya Birla Money Limited

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1 Pratap Snacks Ltd. (PSL) is one of the India s fastest growing Indian snack food companies. PSL has a PAN India presence offering diversified snack portfolio which includes Extruded snack, Chips and Namkeen. Company owns and operates under the brand Yellow Diamond. Long Term Investors Short Term Investors Subscribe Subscribe PSL s revenue has grown at a CAGR of ~27% over FY PSL is coming with an IPO of about `482cr. out of which `200cr. is the fresh issue and remaining OFS. The post Issue market capitalisation is expected to be `~2200cr. We recommend SUBSCRIBE on the issue for long term as well as from listing gains perspective. Key Investment Rationale Fastest Growing Company in Indian Organised Snacks Market- PSL is the among the fastest growing orgainsed snacks food company in India with highest increase in market share over 2010 to Its market share increased by 3% when compared to the likes of Balaji wafers (2%), which is yet another fast growing company in the market, ITC (2%), Parle foods (0%), Haldirams (-1%), Pepsico (-4%). More so this growth has been across the product basket. This demonstrates the company s success in launching variety of products and aggressive distribution which has helped it to scale the business so fast. Diversified Product Portfolio with strong Brand Yellow Diamond - PSL offers diversified range of snacks food across Extruded snacks, Chips and Namkeen. Company sells Chulbule, Rings, Puffs, wheels & Scoops under extruded snacks, flavoured & unflavoured potato chips and moong dal, masala or fried nuts, sev & bhujiya as namkeen. PSL sell all these products under Yellow Diamond brand. Company also intends to consolidate its position in healthy snacks - launched a variety of healthier savoury snacks under Better For You segment. Going forward it also intends to foray into chocolate based confectionary snacks which are expected to grow at 15-18% over next five years (FS Report). This mix in the product portfolio makes PSL a strong player in the competitive FMCG segment. Riding growth on back of value to consumers; DILDAAR HAIN HUM - PSL has emphasized on delivering maximum value to the consumers- be it taste, be it quality or be it volume. It offers relatively higher grammage which has helped it to penetrate deep in the price conscious middleclass consumers. For instance its `5 SKU offers 25% more grammage per pack when compared to the industry leader (FS Report). This `5 SKU contributes to the majority of the company s revenue. This strategy has led to Brand Recall in the minds of value conscious middle class consumers. At the same time company has forayed into premium products too namely Seven Wonders (with ` 30 SKU). Thus it is endorsing its brand into premium segment as well. Issue Details Issue Opens Issue Closes Equity Offerings (In MN shares) 22-Sep Sep Face Value 5 Price Band Bid Lot 15 Issue Size (` Cr) 482 Maximum Application for Retail Investor (`) Issue Type Listing BRLMs Registrar Shareholding Pattern (%) 2,00, % Book Building NSE,BSE Edelweiss, JM Financials, SPARK Capital Pre Issue Karvy Post Issue Promoter Non Promoter Issue Structure (In mn no. of shares) Issue size 5.14 Fresh Issue 2.13 OFS 3.01 Break-up of net issue to public: QIB's portion 2.57 Non-institutional portion 0.77 Retail Portion 1.80 Source: ABML Research, RHP Analyst Details Mahavir Jain mahavir.jain@adityabirla.com Page No. 1

2 Aspiration to serve consumers across all regions- PSL has established itself as a PAN India player present across all the four regions. PSL is currently a leading player in the East Zone which contributes 33.32% to its revenue. It intends to leverage its presence in the region by increasing penetration of entire product portfolio in the region. Its revenue contribution from west, north and south is 32.94%, 24% and 9.37% respectively. It is in the process of consolidating & deepening its presence in the northern and western region. Company has started to foray into southern market and is present in Indore and Bangalore. Its manufacturing facilities are also strategically located at Indore (1), Guwahati (2) which are company owned and at Kolkata (1) and Bangalore (1) on contract basis (which are currently utilized completely for PSL). Its aggregate mfg capacity is 80,500 MTPA at its owned facilities. Strong Distribution Network- PSL has a strong distribution network comprising of 218 super stockists in 26 states and one union territory and 3500 distributors. The distribution network covers urban, semi-urban and rural markets targeting a wide range of customers across markets. The geographical spread of stockists is East-42, West-104, North-46 and south-13 which has ensured uninterrupted supply of its products. The Way Forward- Grow the Core with More of the Same - PSL plans to deepen its distribution network in existing markets, expand production capacity geographically to deepen pan-india presence, use Rings product to increase market share in relatively new southern market and focus on sale of larger size SKUs. Add more through further innovation -Increase advertising and marketing activities to increase brand awareness, launch new and healthier products under Better For You segment, Explore exports options like south Asia, foray into chocolate based confectionary snacks. Page No. 2

3 Industry and Company Comparison Industry Distribution - Product Industry Distribution - Geography Others 2% Namkeen 36% Chips 30% West 30% North 32% Extruded snacks 32% East 19% South 19% PSL Distribution - Product PSL Distribution - Geography Namkeen 12% Others 1% Chips 24% West 33% North 24% South 9% Extruded snacks 63% East 33% Page No. 3

4 About Company Incorporated in 2002, Pratap Snacks Ltd. is one of the top six Indian snack food companies. It offers wide range of snacks food - Extruded snacks, Chips andnamkeen across India under Yellow Diamond brand. It is a leading player in Eastern markets. It had 40 flavours of Extruded snacks & Chips and 23 varieties of Namkeen in its markets. Its product basket includes traditional Indian as well as western snacks.it includes Chulbule, Rings, Puffs, Wheels, Scoops, Seven Wonders, Potato Chips, Bhujiya among its product offering. Philosophically company emphasises on delivering maximum value to its customers and runs campaign- Dildaar Hain Hum. It has astrong distribution network comprising of 218 stockists spread across 26 states & one union territory and 3500 distributors. Company has three owned manufacturing facilities- one at Indore & two at Guwahati and two contract manufacturing facilities- one at Bangalore & one at Kolkata. Its owned mfg capacity stands at 80,500 MTPA. It appointed Salman Khan as its brand ambassador in effort to develop strong brand. Company reported revenue of `~904 cr. in FY17 and it has grown at a CAGR of 27.3% over FY Outlook and Valuation Pratap Snacks has emerged as a strong snacks food player in the competitive FMCG industry. Its strategy to diversify both products wise and geography wise has led to revenue growth of 27.3% over FY The continuous focus on brand strengthening and increasing product portfolio across existing and new geographies should augur well for the revenue growth in the coming years. Pratap Snacks fixed asset turnover is 4.5x in FY17 from 2.74x in FY13, while its working capital days has improved from 32 days in FY13 to 9 days in FY17. The debt/equity stood at ~0.3x as on 31 st March However on bottom line front company reported of `9.9 cr. of net profit in FY17 against `27.4 in FY16 but the drop was mainly on account of increase in brand promotion expenses and aggressive marketing strategy. To shift the focus to profitability, it intends to reduce margins to distributors which should improve profitability in the hands of company. Also as the size of business increases going forward it should be able to make up for the high brand promotion expenses. On the higher price band, Pratap Snacks market capitalisation stands at ~`2200 cr. It is valued at ~2.4x Price to sales which is at a steep discount to its peers (Avg ~4.75x P/S for two listed peers). We believe it deserves better valuation from the issue price, leaving headroom for listing gains. Looking at the prospects of the organised food snacks industry (expected to grow at 14.6% CAGR FS Report) and the performance of the company in specific, we recommend Subscribe on the issue. Peer Valuation FMCG Players P/S Competitors of Yellow Diamond P/S HUL 8.58 Tasty Bites 5.72 Dabur 7.21 DFM Foods 3.78 Marico 7.30 Jubilant Foodworks 3.59 Manpasand beverages 7.14 Average 6.76 Average 4.75 Source: ABML Research Page No. 4

5 Key Risks Interruption in supply of products. Inability to maintain the competitive intensity in very competitive FMCG Food industry. Inability to launch new products with innovation IPO details and Objects Fresh issue up to `200 cr. and offer for sales up to `282cr Proceeds from fresh issue will be utilized towards- Debt repayment, Funding Capex, Investment in subsidiary, marketing & branding and for general corporate purpose. Proceedings from OFS will go directly to the selling shareholders. Source: RHP Page No. 5

6 Income Statement (Consolidated) In ` mn FY13 FY14 FY15 FY16 FY17 Income from Operations YoY (%) Total expenses EBIDTA YoY (%) NA EBIDTA (%) Depreciation & Ammor EBIT Other income Interest Exceptional Items PBT (-) Tax Expense PAT Source: ABML Research, RHP Balance Sheet (Consolidated) In ` mn FY13 FY14 FY15 FY16 FY17 Equity capital Reserves & Surplus Networth Minority Interest Total Debt Other Non Current Liabilities Total liabilities Asset Block (Net) Intangible assets Capital WIP Long term loans and advances Other Non Current Assets Current assets Current liabilities Net current assets Total assets Source: ABML Research, RHP Page No. 6

7 Cash Flow In ` mn FY13 FY14 FY15 FY16 FY17 Cash Flow from Operations Cash Flow from Investing Cash Flow from Financing Per Share FY13 FY14 FY15 FY16 FY17 EPS - Basic (`) Book value (`) Debt-equity (x) ROCE (%) 23.46% 4.32% 8.47% 15.85% 5.59% RoE (%) 10.12% 3.03% 5.22% 12.60% 4.15% Source: ABML Research, RHP Page No. 7

8 Research Team Vivek Mahajan Hemant Thukral Head of Research Head Derivatives Desk Fundamental Team Avinash Nahata Head Equity Analyst Jaymin Trivedi Banking & Finance Naveen Baid IT Suresh Gardas Pharma & Chemicals Mahavir Jain Mid - Cap mahavir.jain@adityabirla.com Mohan Jaiswal Technical Analyst mohan.jaiswal@adityabirla.com Quantitative Team Sudeep Shah Sr.Technical Analyst sudeep.shah@adityabirla.com Rahil Vora Technical Analyst rahil.vora@adityabirla.com Smita Dhale Sr.Executive Derivative Desk smita.dhale@adityabirla.com Advisory Team Salim Hajiani Equity Advisor salim.hajiani@adityabirla.com Pradeep Parkar Equity Advisor pradeep.parkar@adityabirla.com ABML research is also accessible in Bloomberg at ABMR Page No. 8

9 Disclaimer: This document is not for public distribution and is meant solely for the personal information of the authorised recipient. No part of the information must be altered, transmitted, copied, distributed or reproduced in any form to any other person. Persons into whose possession this document may come are required to observe these restrictions. This document is for general information purposes only and does not constitute an investment advice or an offer to sell or solicitation of an offer to buy / sell any security and is not intended for distribution in countries where distribution of such material is subject to any licensing, registration or other legal requirements. The information, opinion, views contained in this document are as per prevailing conditions and are of the date appearing on this material only and are subject to change. No reliance may be placed for any purpose whatsoever on the information contained in this document or on its completeness. Neither (ABML), its group companies, its directors, associates, employees nor any person connected with it accepts any liability or loss arising from the use of this document. The views and opinions expressed herein by the author in the document are his own and do not reflect the views of or any of its associate or group companies. The information set out herein may be subject to updation, completion, revision, verification and amendment and such information may change materially. Past performance is no guarantee and does not indicate or guide to future performance. Nothing in this document is intended to constitute legal, tax or investment advice, or an opinion regarding the appropriateness of any investment, or a solicitation of any type. The contents in this document are intended for general information purposes only. This document or information mentioned therefore should not form the basis of and should not be relied upon in connection with making any investment. The investment may not be suited to all the categories of investors. The recipients should therefore obtain their own professional, legal, tax and financial advice and assessment of their risk profile and financial condition before considering any decision., its associate and group companies, its directors, associates, employees from time to time may have various interests/ positions in any of the securities of the Company(ies) mentioned therein or be engaged in any other transactions involving such securities or otherwise in other securities of the companies / organization mentioned in the document or may have other interest with respect to any recommendation and / related information and opinions. The company follows Employee Trading Policy which regulates the trading activities of the research analysts. The compensation of the research analysts is governed as per the Board approved Research Analyst Policy. is acting as a Research Analyst and is registered under SEBI (Research Analyst) Regulations, SEBI Registration No. INH Page No. 9