Prataap Snacks IPO Note

Issue Opens: September 20, 2017

Issue Closes: September 26, 2017

Face Value: Rs 5

Price Band: Rs 930-938

Issue Size: Rs 514 cr

Public Issue: 0.51 cr shares (at upper price band)

Bid Lot: 21 Equity shares

Issue Type: 100% Book Building

Source: RHP

Company Background

Prataap Snacks Ltd (PSL), which sells its products under the Yellow Diamond brand, is one of the fastest growing companies in the Indian organized snacks market. Its product category includes- Extruded Snacks (Chulbule, Rings, Puffs, Wheels, Scoops and Seven Wonders), Potato Chips and Namkeen (Dal, Sev, Mixture, etc). As per industry reports, PSL was one of the top six Indian snack food companies in terms of revenues in 2016 and had ~8% market share in the organized extruded snack market.

Objective of the Offer

The offer consists of Fresh Issue of `200 crore shares and an Offer for Sale (OFS) of up to 0.30 crore shares. The net proceeds from the Fresh Issue will be utilized as follows - Rs 67 crore for capex requirements, Rs 13 crore for repayment of loans, Rs 29 crore for repayment of borrowings availed by its subsidiary Pure N Sure, Rs 40 crore for marketing and brand building activities and balance will be utilized for general corporate purposes.

Key Investment Rationale

• PSL is a relatively newer entrant as compared to its peers having completed ~13 years of operations. Its larger peers have been in business for most part of the century and have already been through their growth phase. As per the company, its region-wise split is East – 33.4%, West - 33.1%, North - 24.1% and South – 9.4%. We believe that the company is yet to drive deeper into metros and other geographies, which should enable it to maintain its high growth rate. Moreover, the company is also planning to explore foreign markets like South Asia that can provide support to top-line.

• The company also plans to foray into newer categories like chocolate-based confectionaries to add to its recent launches in “Better For You” segment (healthier snacking). Chocolate-based confectionaries are generally a high margin business. Increasing contribution from this category will expand EBITDA margins as the company will be using its existing infrastructure for the product.

Key Risks

Brands such as Lays and Kurkure owned by PepsiCo have much higher advertisement budget compared to PSL. So far PSL has grown by targeting regions where major peers have lower focus. Failure to make inroads in territory where stronger competition has firm hold will have a negative impact on PSL’s revenues.

Conclusion

At upper end of the price band, P/E multiple on post-IPO shares works out to 222x (FY17 EPS). Considering, strong growth outlook and margin expansion, we believe that the IPO provides a good entry point and hence we recommend SUBSCRIBE on the issue.