STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

Case: Prataap Snacks Ltd: Unlocking the Shareholder Value

Company Background:

Incorporated in 2009, Prataap Snacks Ltd. (PSL), (BSE- 540724), (NSE- DIAMONDYD) is Indore,
MP based leading Indian snack foods company. It offers multiple variants of products across
categories of Potato Chips, Extruded Snacks, Namkeen (traditional Indian snacks) under the popular
and vibrant “Yellow Diamond” brand. It has recently launched a range of sweet snacks under the
distinctive Rich Feast brand. PSL is focused on offering deep value to consumers through a variety
of pack sizes at attractive price points. Its products are present across 27 states in India and it is one
of the fastest growing companies in the organized snacks industry. The company was converted into
a public limited company and the name was changed to 'Prataap Snacks Limited' on September 19,
2016. In Fiscal 2012, the Company acquired the snack foods business of its Group Company,
Prakash Snacks Private Limited. Pursuant to such arrangement, it acquired the Yellow Diamond
brand and the snack foods business under such brand. It’s among the fastest growing companies in
the Indian organized snack market between 2010 and 2016 (from 1% in 2010 to 4% in 2016).

Prataap Snacks has a diversified product portfolio including traditional and western snacks.
Company manufacture and sell its snacks under three major savory snack food categories: (i).
Extruded Snacks: Processed, reconstituted and shaped potato or cereal based snacks. This includes
Puffs, Rings, Pellets and Chulbule products. (ii). Chips: Fried, sliced chips or crisps made from
potatoes, hummus, lentils. (iii). Namkeen: Traditional savoury Indian snack which includes
products such as moong dal, masala or fried nuts, sev and bhujia. In FY17, these aforesaid
categories contributed 63.0%, 23.9% and 12.2% to revenues, respectively. In FY16, these aforesaid
categories contributed 65.9%, 22.3%, and 10.3 % respectively. In FY15, these aforesaid categories
contributed 57.2%, 30.4%, and 10.8%, respectively. In 2012 and 2013, Sequoia Capital made
additional investment of Rs 12 crore and Rs 30 crore in the company, respectively. VC-firm
Sequoia had invested around Rs 265 crore in multiple tranches with its first investment dating back
six years.

PSL has a strong presence in Northern and Western markets and is increasing penetration in the
Southern markets as well. Prataap Snacks is the market leader in the rings segment (part of extruded
snacks), and its share in the overall organized snacks market has grown from 1% to 4% from 2010
to 2016. Being a pan-India player, Prataap Snacks has seen high growth over the last few years and
has successfully garnered market share from larger companies such as PepsiCo and ITC. With
capacity expansion plans aimed at reaching newer geographies, the dominant position of leading
snack companies will be challenged over the course of the next four to five years. As per 2017
analyst reports, it is among the top six players in the Rs. 22000 crore Indian organized snacks
market with a 4% market share. It owns three manufacturing facilities, one in Indore, Madhya
Pradesh and the other two in Guwahati, Assam. In addition, it has two facilities on a contract
manufacturing basis: one in Bengaluru, Karnataka and the other in Kolkata, West Bengal. Prataap
reported revenue CAGR of 27.3%, in FY13-17. As per company read hearing prospectus filed to
SEBI during the IPO process, PSL informed that “the following business strengths allow us to
successfully compete in the industry: innovation driven diversified product portfolio, value
proposition for consumers, strategic supply chain for a pan-India distribution network, strategically
located manufacturing facilities, successful track record and professional management. Its
1
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

distribution network includes 235 super stockists and more than 3500 distributors allowing it
extensive reach across the country. PSL has a wide presence across the country that is equally
spread in metro cities and urban clusters as well as in rural areas and Tier 2 and 3 cities and towns.
Its diversified portfolio has enabled the company to cater to a wide range of taste preferences and
consumer segments, including adults and children.
Financial Performance: An Overview

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. 905 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. The company has reduced its working capital cycle to nine
days from 32 in five years to March and improved its asset turnover ratio to 4.5 times from 2.7
times.
The IPO News of Prataap Snacks Ltd.
The company came out with an initial public offer (IPO) during the period from 22 September 2017
to 26 September 2017 (Rs. 477.83 crs - 481.94 crs). It received Securities and Exchange Board of
India (SEBI)’s nod for the IPO on 11 August. The IPO, which will see a fresh issue of Rs200 crore,
aims to raise Rs482 crore through the share sale. The company's Rs 482-crore issue size includes Rs
200 crore through fresh equity issue and the rest from sale of 30,05,770 shares. The IPO was a
combination of fresh issue of Rs 200 crore and Offer for Sale of up to 30.05 lakh shares by the
selling shareholders at a price band of 930-938 per share. The stock made its debut on the secondary
equity market on 5 October 2017. The initial public offer (IPO) of Prataap Snacks received bids for
17.03 crore shares on the last day of bidding for the IPO i.e., 26 September 2017, and the IPO was
subscribed 46.96 times. Share offer saw huge demand despite concerns over weakness in secondary
market, pricing of shares1. After the IPO, promoters will own 71.4 percent of the company and the
rest will be held by public shareholders. Sequoia Capital’s stake would reduce to 49% post IPO
from 63% at present, while the other three promoters Arvind Mehta, Amit Kumat and Apoorva
Kumat’s shareholding will come down to approximately 24% from around 33-34% at present. PSL
1
https://www.business-standard.com/article/markets/prataap-snacks-rs-482-cr-ipo-oversubscribed-47-times-on-last-day-of-offer-
117092600959_1.html
2
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

will also offer a discount of Rs 90 per share to eligible employees of the company. Ahead of the
IPO, PSL raised Rs 143.40 crore by selling 15.28 lakh shares to a total of 15 anchor investors at Rs
938 per share, the top end of IPO price band.
Prataap Snacks Ltd. IPO Offer Details
Issue Open Date 22-09-2017
Issue Close Date 26-09-2017
Listing Date 05-10-2017
Face Value (Rs) 5.00
Book Value (Rs) 114.6 (March 31, 2017)
Offer Price/Range (Rs) 930.00-938.00
Issue Size (aggregating up to ₹481.56 Cr) 5,137,966 Eq Shares of ₹5
Issued at (Value) Premium (933.00)
Issue Type Public Cum Offer for Sale (Book Building)
Prataap Snacks Ltd Listing Day Closing Price 1181.00
Listing At BSE, NSE
The minimum order quantity 15 Shares per application
Capital Structure: Pre Issue Equity Rs. 10.66 cr
Capital Structure: Post issue Equity Rs. 11.73 cr

The above table captures the Prataap Snacks Ltd. IPO details in terms of its issue open date, issue
close date, listing date, face value, price band, issue size, issue type, and listing date's closing price.
Company proposes to utilize the Net Proceeds from the Fresh Issue towards funding the following
objects:
1. Repayment/pre-payment, in full or part, of certain borrowings availed by the Company. Our
Company proposes to utilize an estimated amount of ` 431.92 million from the net proceeds
towards full or partial repayment or pre-payment of certain borrowings availed by our
Company.
2. Funding capital expenditure requirements in relation to expansion and modernization at certain
of our existing manufacturing facilities;
3. Investment in its Subsidiary, Pure N Sure, towards enabling the repayment/pre-payment of
certain borrowings availed of by our Subsidiary. The company incorporated its wholly owned
subsidiary 'Pure N Sure Food Bites Private Limited' in 2011.
4. Marketing and brand-building activities; and General corporate purposes.
Global Coordinators and Book Running Lead Manager: Edelweiss Financial Services Limited, JM
Financial Institutional Securities Limited. Book Running Lead Manager: Spark Capital Advisors
(India) Private Limited Registrar to issue: Karvy Computershare Pvt Ltd.
As per news published in the popular financial press “Prataap Snacks IPO comprises of a fresh issue
of Rs 200 crore. The objects of the fresh issue is to spend around Rs 40 crore on advertising and
brand promotional activities, Rs 70 crore on capital expenditure in relation to expansion and
modernization, Rs 13 crore in relation to repayment of certain borrowings, Rs 29.37 crore worth of

3
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

investments in subsidiary for repayment of certain loans availed by the subsidiary and rest for
general corporate purposes.”2

Source: https://www.bloombergquint.com/ipos/prataap-snacks-ipo-heres-what-you-need-to-know

Prataap Snacks’ net worth was close to Rs 238 crore as of March 31, 2017, translating into a book
value of Rs 102 apiece after issuing the new shares. At the upper end of the price band of Rs 938
apiece, earnings per share and price-earnings ratio for the year ended March (after issuing new
shares) stands at Rs 4.2 and 222 times, respectively, according to Bloomberg Quint’s calculations.
Revenue rose at a CAGR of 27.3 percent and EBITDA increased at 10.4 percent over five years to
March 2017. Its total debt stood at Rs 101 crore, while the debt-to-equity was 0.4 times. This will
further reduce by Rs 40 crore as the company repays part of the debt from IPO proceeds.
The IPO Performance and Concern:
The IPO has received mixed ratings from the analysts, PSL IPO not crunchy enough for value investors. In
summary, there was a huge demand in the IPO was despite weakness in the secondary market and
concerns surrounding the pricing of the issue. The institutional investor portion of the IPO was
subscribed 78 times; high net worth individual (HNI) portion was subscribed 101.5 times and the
retail portion was subscribed close to eight times. Prataap Snacks listed at Rs 1,270, a 35% premium
against its IPO price of Rs 938 per share on the NSE. On BSE, the stock listed at Rs 1,250, a 33%
above its issue price. Post its listing, the stock hit its high of Rs 1,319 on the NSE and Rs 1,317 on
BSE. However, some analysts mentioned that “steep valuation worries analysts” 3. Analysts said
though Prataap Snacks is one of the top snack food companies in India and one of the fastest
growing companies in its sector, its valuations are very high. 4 Given the current margin profile and
earnings, the company is being offered at expensive valuations, leaving little scope for appreciation
in the near term.
However, some analysts raised concern over the valuation of PSL shares. For instance, Angel
Broking said in IPO note that, “at 202 times of its FY17 earnings, the issue is richly valued at upper
end of its price band i.e. Rs 938. For PSL to justify this high valuation, remarkable improvement in
profitability is required which may come at the cost of lower growth” 5. Furthermore, “ignoring its
lower profitability in FY17 and valuing the issue on FY16 earnings per share (EPS) still yields a high price

2
https://www.business-standard.com/article/news-cm/prataap-snacks-ipo-subscribed-46-96-times-117092600827_1.html
3
https://www.livemint.com/Money/B3Jw6gmWnSfed2nqC4PAjI/Prataap-Snacks-IPO-opens-today-steep-valuation-worries-anal.html
4
https://www.livemint.com/Money/B3Jw6gmWnSfed2nqC4PAjI/Prataap-Snacks-IPO-opens-today-steep-valuation-worries-anal.html
5
https://www.business-standard.com/article/markets/prataap-snacks-makes-strong-debut-lists-at-35-premium-to-ipo-price-
117100500219_1.html
4
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

to earnings of 73 times of FMCG companies commanding such high PEs have a very strong profitability and
returns profile such as Britannia"6. For PSL to justify the high valuation, remarkable improvement in
profitability is required, which may come at the cost of lower growth, Angel Broking added. 7 Its peer in
exactly same industry i.e. DFM Foods, also has good margins (10% in FY17) and handsome return profile
(~20%). Other analysts from, Choice Equity Broking said in a note “on valuation front on a P/E
metric, PSL is trading at a premium to its peer. Given the lower profitability and return ratios,
higher valuation demanded by PSL is not justified. The management has indicated that it has taken
some corrective measures like reducing the grammage per packet, entering into forward contracts
with oil suppliers and efficient & adequate procurement of potato for full year consumption. With
these initiatives, margin improvements are anticipated.
Angel Broking report further added that, Prataap Snacks’ revenue grew at a compounded annual
growth rate (CAGR) of 27% from FY13-FY17. Its gross margins during FY13-17 have been 26-
31%, which is weak compared to its peer DFM Foods’s, which made gross margins of 40% in
FY17. “With weak GM and higher depreciation, company’s EBITDA (earnings before interest, tax,
depreciation and amortization) margins have been consistently weak and have come down from 8%
in FY13 to 4.5% in FY17. Its net profit margins have also shrunk to just 1% in FY17 from 4.3% in
FY13 due to the potato crop related issues,"8
Prabhudas Lilladher said in a report that “it has shown 27.5% sales compounded annual growth rate
(CAGR) in the past five years in a large and growing category, which instills confidence in its
ability to drive growth. However, volatility in margins and limited pricing power at Rs5 price point
(80% of sales) are the key risks for investment. A margin crawl-back to the earlier range of 7.5-
8.5% can result in sharp increase in profitability and improvement in its return on equity (ROE)
which is at 4.2% in FY17”. Angel Broking gave "Neutral" rating. At the demanded price, the IPO is
valued at 220 times FY17 earnings; traders may try for listing gains. Taking advantage of the frenzy
in the IPO market for the past year, the snacks company has priced the IPO at an expensive
valuation, not leaving much on the table leaving much on the table for value investors. Traders may
allocate part of their portfolio to the IPO in expectation of listing gains.9
Analysts believe that, “at the demanded market capitalization of Rs 2,200 crore at the upper price
band, the IPO is valued at 220 times its FY17 earnings. DFM trades at a trailing PE ratio of 92. If
Prataap delivers a 20% growth in FY18 and sees peak net margin of the past five years, its net profit
for FY18 will be Rs 38.8 crore 300% year-on-year jump. Even at such optimistic assumptions, the
PE multiple on the estimated FY18 earnings is 57 times. This is too expensive for a company
operating in a highly competitive sector with wafer thin and inconsistent margins, declining sales
growth and return ratios of less than 10%.
However, Aditya Birla Money Ltd believes that Prataap Snacks deserves better valuation from the
issue price, leaving headroom for listing gains. Ahead of its IPO, it has already raised Rs143.4 crore
by allotting shares to institutional investors as part of its anchor book allocation. Shares were
allocated to 15 institutional investors at Rs938 per share, the upper end of the IPO price band of
6
https://www.livemint.com/Money/B3Jw6gmWnSfed2nqC4PAjI/Prataap-Snacks-IPO-opens-today-steep-valuation-worries-anal.html
7
https://www.livemint.com/Money/B3Jw6gmWnSfed2nqC4PAjI/Prataap-Snacks-IPO-opens-today-steep-valuation-worries-anal.html
8
https://www.livemint.com/Money/B3Jw6gmWnSfed2nqC4PAjI/Prataap-Snacks-IPO-opens-today-steep-valuation-worries-anal.html
9
https://economictimes.indiatimes.com/markets/ipos/fpos/prataap-snacks-ipo-not-crunchy-enough-for-value-
investors/articleshow/60774095.cms
5
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

Rs930-938. Prataap Snacks is attractively placed compared to its peers at 2.4 times its market-
capitalization to sales ratio. ICICI Direct with a subscribe rating suggests that “Prataap Snacks is
attractively placed compared to its peers at 2.4 times its market-capitalisation to sales ratio. With
expansion plans in place, initiative to penetrate weaker markets and strengthening brand image and
recall through Rs 40 crore investment over coming three years, the company would be able to post a
sustainable operating margin and record better earnings”.10 Analysts say if an investor is looking to
participate in the issue, he should not expect listing gains and rather look for long-term growth. 11 It
has shown 27.5% sales compounded annual growth rate (CAGR) in the past five years in a large
and growing category, which instills confidence in its ability to drive growth. Brokerage Geojit
Financial Services has given ‘Subscribe’ rating to the issue. Despite steep valuation the issue got
good response due to its strong growth prospects and earnings track record, say analysts.12
However, volatility in margins and limited pricing power at Rs5 price point (80% of sales) are the
key risks for investment.13 In addition, operating profit margin (OPM) of 4.5 per cent and return on
equity (RoE) of 4.3 per cent are much lower than industry peers. 14 The company’s EBITDA margins
have been consistently weak and have come down from 8 per cent in FY13 to 4.5 per cent in FY17.
PAT margins have also shrunk to just 1 per cent in FY17 from 4.3 per cent in FY13. 15 In FY17, the
return on equity was 4.2%; the highest in the past five years was 12.6%. Centrum Broking has given
‘Avoid’ rating to the issue. The brokerage house in a research note said, “At the higher end of the
price band of Rs 938, the issue is valued at 222.4x P/E on FY17 basis (post dilution). This appears
very expensive given the current financials (EBITDA margins around 4.5 per cent and RoE around
4.3 per cent). Food snack industry in India has a strong historical dominance of both MNCs
(Pepsico) and Indian brands (Haldiram’s, DFM Foods, Balaji Wafers) having deep pockets for
aggressive advertisement and promotion budget making the space highly competitive. Given PSL’s
declining profitability, competitive intensity and high valuation we recommend investors to Avoid
the IPO.”16
Kotak’s analysts added in the note that “Overall market valuations look palatable but hide super-
rich valuations of ‘growth’ stocks and expensive valuations of companies with mediocre business
models"17 Supporters of the snack foods firm’s issue point out that earnings were unusually
depressed in the previous fiscal year and that valuations are more reasonable when juxtaposed
against fiscal year 2016 (FY16) earnings. While its true valuations are much lower using FY16
earnings, they are nowhere near reasonable at more than 60 times. Another argument put forth is
that Prataap Snacks is reasonably valued compared to peers on the market cap-sales multiple.
Relying on a price-sales multiple for a manufacturing firm is a sure sign we’re well in bubble

10
https://www.bloombergquint.com/ipos/prataap-snacks-ipo-heres-what-you-need-to-know
11
https://economictimes.indiatimes.com/markets/stocks/news/prataap-snacks-ipo-kicks-off-can-it-offer-you-crispy-listing-
gains/articleshow/60789951.cms
12
https://www.ndtv.com/business/prataap-snacks-makes-blockbuster-debut-shares-soar-40-on-listing-1758835
13
https://www.livemint.com/Money/L9eF4xhWoIyxZAaUEUr9QJ/Prataap-Snacks-shares-rise-35-on-stock-market-debut.html
14
https://economictimes.indiatimes.com/markets/stocks/news/prataap-snacks-ipo-kicks-off-can-it-offer-you-crispy-listing-
gains/articleshow/60789951.cms
15
https://economictimes.indiatimes.com/markets/stocks/news/prataap-snacks-ipo-kicks-off-can-it-offer-you-crispy-listing-
gains/articleshow/60789951.cms
16
https://economictimes.indiatimes.com/markets/stocks/news/prataap-snacks-ipo-subscribed-43-on-day-1-should-you-
subscribe/articleshow/60796883.cms
17
https://www.livemint.com/Money/8BWGuGFrTM0KgHSnkNsaaM/What-does-an-IPO-priced-at-202-times-earnings-say-about-our.html
6
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

territory—especially so when the company has been growing sales at the cost of profit margins.
While revenues have grown at an annual average rate of 27% in the past four years, operating
profits have expanded at a rate of only around 10%. Sequoia, which invested about Rs265 crore in
acquiring a large stake in Prataap Snacks, is selling only 13.6% of its shares in the IPO but will end
up recovering as much as 63% of its investment. Put differently, these investment firms bought the
company’s shares at a little more than Rs200 per share between 2011 and 2014 but are now selling
at as much as Rs938 per share in the IPO.18 The PSL issue, then, just underlines the bubble in
various pockets of the Indian market.
Industry Outlook

The Indian food market is the world’s 6th largest and accounts for approximately 31% of India’s
consumption basket. In terms of revenues of Indian organized snack market, it is among the top six
companies of 2016.It is estimated that the India Snacks Market will be more than INR 1 Billion by
the end of 2024. Branded snacks hold 40% of market share in presence of both organized and
unorganized players. Unregistered business accounts for 60 percent of India’s Rs 55,000-crore
packaged snack market (including includes chips, extruded snacks and namkeen). The organized
market, estimated at Rs 22,000 crore, grew at 16.4 percent in six years to March last year. It’s
estimated to grow at a compounded annual growth rate of 14.6 percent in five years to March
2021.19 The Indian snacks industry expanded nearly six times to ₹ 47,000 crore in 2013 from ₹
8,000 crore in 2004, according to market researcher Nielsen India. 20 The processed food category
has become the face of modern trade contributing 9% to the total food & grocery market with a
CAGR of 20%.
The snacks market in India is estimated at approximately Rs 550 billion, out of which organized
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.21
PSL estimates the market for organized snacks will grow at a CAGR of about 14.6% between 2016
and 2021. A Credit Suisse report says the total branded packaged foods market will grow from $40
billion to $200 billion over the next decade. “Affordability of products is important for growth in
most categories in India due to the low per capita income levels,” says the report. 22 PSL pricing
strategy pushed several bigger companies to also offer value packs in an effort to stay ahead in the
market, and helped the company grow at around 20% to 25% in the past five-six years.23

18
https://www.livemint.com/Money/8BWGuGFrTM0KgHSnkNsaaM/What-does-an-IPO-priced-at-202-times-earnings-say-about-our.html
19
https://www.bloombergquint.com/ipos/prataap-snacks-ipo-heres-what-you-need-to-know
20
https://www.livemint.com/Companies/N8CXP6N6ViwTHbOgVUnfEI/Sequoiabacked-Prataap-Snacks-looks-to-go-public.html
21
https://www.dsij.in/article-details/ArticleID/22795/Prataap-Snacks-IPO-An-avoidable-chip
22
https://www.fortuneindia.com/enterprise/prataap-snacks-a-bigger-bite/102398
23
https://www.fortuneindia.com/enterprise/prataap-snacks-a-bigger-bite/102398
7
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

A recent report published by Deloitte in January 2018 entitled as Industry 4.0 in Food Industry,
India Food Report documents that “food is an inherent factor and a strong backbone of economic
growth for any country. In India, the food industry is estimated to be $ 448 Bn in FY 16. This
industry is growing at ~10% and contributes to 9-10% of manufacturing GDP in FY17. Several
changes are shaping the Indian food landscape with disruptions in business models of companies, in
terms of their interaction with consumers and responsiveness to their needs. Among all food
categories the Ready to Cook/Ready to Eat and packaged food has grown at the fastest rate (CAGR
of 18-20%). A report from PWC in 2017 entitled as Retail and Consumer Quarterly Newsletter-
2017 mentions that this is a high growth industry and the market is expected to grow at a CAGR of
15% over the next five years representing high growth opportunities and the ability to generate high
returns.
Valuation and peer comparison: A Final Thought
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 PSL 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 PSL is very high.24 Despite high competition from PepsiCo,
Haldiram's, ITC, Balaji Wafers, Bikajis, Parle and DFM Foods, PSL has been one of the fastest
growing companies with a 27% sales growth between FY13 and FY17.
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 PSL 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 crores, these multiples are 2x, 32x and 70x respectively, which is 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, PSL 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 organized and unorganized players.25 To justify such high valuations, remarkable
improvement in profitability is required, which may come at the cost of lower growth. However, the

24
https://www.dsij.in/article-details/ArticleID/22795/Prataap-Snacks-IPO-An-avoidable-chip
25
https://www.sptulsian.com/f/ipo-analysis/prataap-snacks
8
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

popularity of its snacks helped the company’s annualized consolidated revenue increase to Rs
1,036.7 crore in 2017-18 from Rs 909.4 crore the previous year.26
Supporters of the snack foods firm’s issue point out that earnings were unusually depressed in the
previous fiscal year and that valuations are more reasonable when juxtaposed against fiscal year
2016 (FY16) earnings. While its true valuations are much lower using FY16 earnings, they are
nowhere near reasonable at more than 60 times. 27 Another argument put forth is that PSL is
reasonably valued compared to peers on the market cap-sales multiple. However, relying on a price-
sales multiple for a manufacturing firm is a sure sign we’re well in bubble territory; especially so
when the company has been growing sales at the cost of profit margins. While revenues have grown
at an annual average rate of 27% in the past four years, operating profits have expanded only around
10%.28
Company Official Interviews: How are things in 2019
Amit Kumat, MD & CEO, Prataap Snacks. Excerpts from interview with ETNOW.
Date: Jul 10, 2019 & Jan 23, 2019
With new launches and distribution expansion, we have enough drivers to get back our growth
momentum in FY20. Last year probably saw our slowest growth rate. We grew only at 7% last year.
But this year, we should be back on track with 15% plus growth. We hope to grow 20- 22% in next
three-four years. We always say that we are looking for 18% to 20% growth in volume and value.
We will try to go more but target is 18% to 20%. We would be present in 60% of the country right
now but there are places where we are not strong. There are strong markets, big markets where we
are very weak. These are Punjab, UP, southern India, Himachal Pradesh and J&K. It will take
another two years for us to have a pan-India presence. We must be a value player going forward that
is basically our philosophy, to give more value to the consumer and probably to be the best player in
the country by giving good value and quality. We do not want to change that philosophy. We would
be needing another Rs 100-150 crore in next two to three years’ time for that expansion including
marketing and distribution.
In Jan 17, 2019 Ambit Capital has initiated coverage on Prataap Snacks with a target price of Rs
1,349. The brokerage said Prataap Snacks' stellar growth and market share rise to 6.5% from 4.9%
in savoury snacks was led by sound strategy, innovative product launches, keen understanding of
consumer tastes and distribution growth fueled by strategic partnership with Sequoia Capital. The
brokerage expects Prataap Snacks to deliver around 27% compounded growth in EPS over FY19-
FY23. Prataap's short term focus on sales growth led by distribution expansion is a sound strategy to
build scale that can be leveraged later through introduction of more premium products and higher
same store sales, said Ambit29. The brokerage expects logistics costs to remain high, advertising
spends to taper and stable EBITDA margin of 8-9% over FY19-FY23.
26
https://www.fortuneindia.com/enterprise/prataap-snacks-a-bigger-bite/102398
27
https://www.livemint.com/Money/8BWGuGFrTM0KgHSnkNsaaM/What-does-an-IPO-priced-at-202-times-earnings-say-about-
our.html
28
https://www.livemint.com/Money/8BWGuGFrTM0KgHSnkNsaaM/What-does-an-IPO-priced-at-202-times-earnings-
say-about-our.html
29
https://economictimes.indiatimes.com/markets/stocks/news/ambit-initiates-coverage-on-prataap-snacks-with-buy-
rating/articleshow/67570621.cms
9
 STUDENTS MUST BRING THE PRE-READ TO THE EXAMINATION HALL

Brokers call: Prataap Snacks (Buy)30. In our view, management’s target of 20 per cent return on
invested capital (ROIC) over the next five years is quite achievable given its focus on scaling-up
revenues through asset light model (3P manufacturing) and clocking a 9.5-10 per cent OPM through
supply-chain cost savings. Maintain positive bias with new DCF based target price of ₹1,280.
Prataap Snacks’ analyst meet gives us greater comfort on our assumption of steady expansion in its
operating profit margin - OPM (key factor driving our preference) as it is now transitioning to
distributed manufacturing which could help drive substantial savings in freight and supply-chain
costs (expects to have 33 per cent of business on direct distribution which could drive 1 ppt OPM
expansion). However, revenue growth opportunity in its core extruded snacks business, though
attractive (double-digit CAGR over medium term), appears lower than what we had earlier
envisaged (mid-teens CAGR). As on 20-12-2019 the PSL stock is trading at a price of 859.05 with a
market beta of 0.56.

https://tre
ndlyne.com/research-reports/stock/60394/DIAMONDYD/prataap-snacks-ltd/

30
https://www.thehindubusinessline.com/markets/prataap-snacks-buy/article29509139.ece
10