Prataap Snacks

NOT RATED
PRE-IPO NOTE

December 06, 2016

Consumers

Questions for management

Established in 2002, Prataap Snacks has grown to become Indias sixthlargest packaged snacks company with a 4% market share (from 1% in
2010). Despite impressive sales CAGR of 45% over FY12-16 net profit
grew by just 13% given aggressive investments in: (1) brand-building
(A&P spend up 12x); (2) distribution expansion in new geographies;
and (3) capacity expansion. As per media reports, Prataap is looking to
raise ~US$75mn from an expected equal split of primary issuance and
Offer for Sale for part exit of promoters and PE investors. We list some
key questions for management (QFM) that investors can ask regarding:
(i) sustenance of market share, (ii) need for capacity expansion despite
current under-utilisation, (iii) limited pricing power from entry level
positioning, and (iv) continued higher spending on toys than on A&P.
Market share gain impressive; sustenance is key
Prataap has grown market share in Extruded (62% of sales) from 2% to 7% over
2010-15. This over-indexation to and share gain in a relatively fast growing
category within packaged snacks drove healthy overall market share gain. As
the Indian packaged snacks industry should grow at 15% p.a., continued share
gains would be a positive. QFM: Target market share in 3-5 years? Expected
contribution to growth from new product launches and market entry? Strategy
for launch of more variants in Namkeens to take up share from just 1%?
Supply chain has significant room for improvement
Prataap currently has no linkage or contract in place for raw material purchase.
Most manufacturing is in-house; new plant is running at 16% utilisation and
older plants at 65-70%. Distribution is reasonably strong in North, West and
East; South (6% of sales) is a weak area. QFM: How does the company
manage volatility in raw material price and availability? Why use IPO proceeds
for capacity expansion given current low utilisation rates?

Prataap Snacks IPO

# in mn
Pre Issue
Shares O/S

19.1

-Promoter

8.3

-PE Investors

10.2

-Others & Employees

0.5

Post Issue
Shares O/S

29.0

-Promoter

7.5

-PE Investors

14.9

-Public (inc new issues)

Expected IPO Size (INR mn)

6.0
5,000

- Offer for Sale

2,500

- Primary

2,500

Implied Share Price (Rs)

833

Implied P/E (Mar'16)

115

Source: DRHP, Media, Ambit Capital research

Brand positioning is value for money with children as targets

Prataaps products sell at a 25% discount to peers with Rs5 SKU being a
significant contributor. Distribution is focused on SEC B,C and D stores. This
establishes an entry-level positioning but limits pricing power and ability to
premiumise. Spending on toys in packs (9% of sales) is preferred over A&P
spend (4% of sales). QFM: How does one view margin risks from weak sourcing
and limited pricing power? What is the rationale for targeting children, with
high cost of toys and licensing of characters vs spend on advertising?
Sacrificing near-term profitability for long-term growth merits premium
Prataaps growth rate has been higher than peers; sustenance of this will
require further share gains. This looks possible given Prataap is investing in
capacity, distribution, A&P and new products. Current OPM (5%) and ROIC
(15%) are weaker than peers but should improve as business expands.
Stronger growth ramp vs peers driven by right investments, strategy and
management focus despite low near-term profitability merits a premium.
Key financials
Year to March
Net Revenues (` mn)

Research Analysts
Anuj Bansal
+91 22 3043 3122
anuj.bansal@ambit.co

FY12
1727

FY13
3437

FY14
4451

FY15
5588

FY16
7572

Operating Profits (` mn)

154

207

79

185

385

Net Profits (` mn)

126

132

23

45

209

Diluted EPS (`)

6.0

5.7

1.2

1.8

8.2

RoE (%)

12%

9%

1.35

2.5%

10.4%

Dhiraj Mistry
+91 22 3043 3264

RoCE(%)

16%

13%

4%

8.6%

16.7%

dhiraj.mistry@ambit.co

Ritesh Vaidya
+91 22 3043 3246
ritesh.vaidya@ambit.co

Source: Company, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Prataap Snacks

Prataap Snacks
Prataap Snacks was incorporated in 2002 as Prakash Snacks Pvt Ltd in
Indore. Starting with manufacturing potato chips at Indore, the company has
expanded into Extruded and Namkeen (savoury) segments too. Its main
revenue contributor is the extruded segment, which contributes around 62%
of revenue from operations. It has four manufacturing plants, including two
own plants in Indore and Guwahati and two outsourced plants in Kolkata
and Bangalore. On a low base, the company has posted a revenue CAGR of
45% over FY12-16 and expanded into Eastern, Western and Northern India;
it has a strong footing in its home markets of Western and Central India. The
company recently entered the Southern market. It has a value for money
positioning for its brands as reflected in ~25% cheaper pricing and focus on
SEC B,C and D stores. It has been able to grow its Rings product rapidly
based on a strategy of providing toys within packs and using popular
cartoon characters for advertising.
Peer comparison reveals Prataap has higher growth but weaker returns
Prataap is significantly smaller than Britannia and Mondelez, which benefit from large
market shares in significantly larger packaged foods categories like biscuits and
confectionary. Packaged Snacks is a much smaller category in India (Rs500bn) and is
highly fragmented excluding the Top-2 players (Pepsi and Haldirams) which account
for ~50% of the market. The growth rate for Prataap has been impressive given its
small base. However, growth has come at the cost of profitability and return ratios.
Given the fruits (market share gain and sales growth) of investments have been
positive, we believe management has adopted the right strategy of first gaining share
and scale before chasing profitability.
Exhibit 1: Comparison of Prataap Snacks with other Packaged Foods companies in India
FY16/ Rs mn

Revenue
- 3 Year CAGR

Prataap
Snacks

DFM Balaji (2015) Britannia

Mondelez
(2015, Pro Remarks
rata)
52,062

Britannia and Mondelez are significantly larger; snacks companies

are smaller due to fragmented nature of the category

7,572

3,895

12,457

86,788

30%

20%

20%

12%

16% Prataap's growth rate is the highest among peers

4,268 EBIT growth has been varied for different players

EBIT

385

471

1,497

12,265

- 3 Year CAGR

23%

31%

5%

43%

OPM

5.1%

12.1%

12.0%

14.1%

8.2% Prataap has the lowest OPM of 40% among snacks peers

- 3 Year Avg

3.4%

8.6%

13.9%

11.2%

9.6% Prataap and DFM are showing improving OPM trends

Market Share

4%

2%

7%

33%

ROIC

15%

39%

18%

73%

5%

- 3 Year Avg

10%

28%

29%

72%

25%

ROE

13%

45%

14%

53%

6%

31%

25%

60%

21%

Extruded Potato Chips

Biscuits

Chocolates

- 3 Year Avg
Largest
Category

Extruded

Home State

Madhya
Pradesh

NCR/Delhi

Gujarat

10%

70% Mondelez and Britannia are leaders in their respective categories

Mondelez has gone through significant acquisition and capex.
Prataap has weakest ROIC
Prataap and DFM show improving trends with Britannia being flat
and Mondelez and Balaji posting weakening returns

5% ROE reflects ROIC trends for companies

National International

Source: DRHP, Ambit Capital research

Issue details
Prataap Snacks filed the Draft Red Herring Prospectus with SEBI in September 2016.
As per media reports, it might be looking at an IPO of Rs5-5.5bn. As per the DRHP, a
part of IPO will be Offer for Sale with promoters and PE investors looking to sell
~3mn shares. Primary issuance, as per DRHP, is expected to be ~Rs2.5bn. On the

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 2

Prataap Snacks
basis of this we assume the IPO is likely to be split equally between OFS and primary
issuance. The IPO will also trigger compulsory conversion of 115,504 Compulsorily
Convertible Preference Shares (CCPS) currently held by PE investors. Post conversion,
these will add ~6.9mn shares to the equity base. Post IPO, we expect the new equity
base to be ~29mn shares vs ~19mn shares currently, implying an over 50% dilution
to the existing equity base. Using the fully diluted equity base, we arrive at an EPS of
Rs7.2 for FY16. The implied share price at the time of IPO is expected to be Rs830840 (on the basis of media reports), which would imply a P/E of ~115x March16.
Exhibit 2: IPO details and dilution after IPO
# in mn Remarks
Pre Issue
Shares O/S

19.1

-Promoter

8.3

-PE Investors

10.2

-Others & Employees

0.5

Total shares outstanding pre-IPO

Promoters hold ~44% stake in the company
Private equity investors hold ~54% stake in the company
Employees and others own ~2% in the company

Post Issue
Shares O/S

29.0

-Promoter

7.5

-PE Investors

14.9

-Public (inc new issues)

Expected IPO Size (INR mn)

6.0

There will 3mn new shares issued and 6.3mn added due to conversion of CCPS
Promoters are looking to sell ~10% of their holding during the IPO
PE investors are looking to sell 2.2mn shares during the IPO. However, CCPS conversion results in stake going up
Public will have ~6mn shares post-IPO 3mn new and 3mn through OFS

5,000

As per media reports

- Offer for Sale

2,500

Difference of IPO size and primary issuance

- Primary

2,500

As per DRHP

Implied Share Price

833

Derived from assuming ~6mn shares form part of the IPO

Implied P/E (Mar'16)

115

Based on actual trailing EPS assuming full post-IPO dilution

Source: DRHP, Media, Ambit Capital research

Management details
Prataap Snacks is promoted and run by two families, the Mehtas and the Kumats.
Arvind Mehta and Amit Kumat were the founders of the company; other family
members were added to the senior management team. Professionals include Mr
Sumit Sharma (CFO), Mr Subhash Bhatt (VP Production), Mr Deepak Brahme (VP
Production), Mr Raj Kumar Kalra (Zonal Sales Manager North), Mr Mahesh Purohit
(Zonal Sales Manager West) and Mr Awadh Bihari Singh (Zonal Sales Manager
East). Private equity investor Sequoia and Faering took a stake in the company in
2011-12 and have since then helped further professionalise the company. The Board
is fairly independent (4 Independent and 4 from the Promoter/Investor group). It is
also well-diversified and of high quality with Dr Om Manchanda (CEO, Dr Lal
Pathlabs) being one of the board members.
Exhibit 3: Board of Directors
Name

Designation

Qualifications

Arvind Mehta

Chairman

Founder

Amit Kumat

CEO, MD

Founder

G V Ravishankar

Nominee Director

V T Bharadwaj

Nominee Director

Anisha Motwani

Independent Director

Representing Sequoia Capital. Engineer (Bharathidasan)

and MBA (IIM Ahmedabad)
Representing Sequoia. Engineer (BITS), MBA (IIM
Ahmedabad)
BSc (Sophia, Ajmer), MBA (Rajasthan)

Vineet Kumar Kapila Independent Director

Ex MD - Spencer's Retail, COO - RPC, United Spirits,

Diploma in IR (XLRI)

Dr OP Manchanda

Independent Director

CEO - Dr Lal Pathlabs

Haresh Chawla

Independent Director

Ex CEO - TV18, Partner - India Value Fund, Engineer (IIT

Bombay), MBA (IIM Calcutta)

Source: DRHP

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 3

Prataap Snacks

Questions for management

Brand positioning: Clearly at the lower end
A&P spends are lower than those of peers
Questions: Given the company has now scaled up and has a wider reach, why is A&P
spending not scaling up faster? Will this lower-than-peers A&P spending not impact
the health of the brand and long-term growth prospects?

The A&P spend to sales ratio has been 2-4% over FY12-16.

Forward guidance suggests this ratio is not likely to move up in the near term.
Exhibit 4: A&P as % of sales vs Packaged Foods peers
10%

Exhibit 5: A&P spend as % of sales vs FMCG sector

12%
10%

8%

8%
6%
6%
4%
4%
2%

2%
0%

0%
FY12

FY13

Britannia Inds

FY14
DFM Foods

FY15

FY12

FY16

FY14

Average of FMCG Co.

Prataap Snacks

Source: DRHP, DFM Annual Report, Ambit Capital research

FY13

FY15

FY16

Prataap Snacks

Source: DRHP, Ambit Capital research

Absence of A&P push compensated by lower pricing

Questions: Is the company able to pass on input cost inflation effectively? Given the
Rs5 SKU contributes significantly to sales, does the company face regulatory issues in
doing grammage adjustments to pass on input cost hikes?
Questions: Does management believe this lower-end positioning could be an issue if
it looks to premiumise going forward?

Entry-level pricing and higher availability at SEC B, C and D stores create a

perception of value for money positioning. This has been the key differentiator for
the company.

Rs5 SKU is the largest selling SKU and forms a significant part of revenues. This
creates an issue where price point becomes critical and limits the ability to pass
on input cost inflation. Grammage reduction in smaller priced units is restricted
by regulation.

Rs5 SKU could also potentially be a lower profit contributor given additional
packaging and logistics costs of transporting low-value SKUs. In Snacks, logistics
costs can be high as value/volume ratio of products to be distributed tends to be
low.

December 06, 2016

Ambit Capital Pvt. Ltd.

Pricing is the key reason why

people prefer Yellow Diamond
(Prataaps brand). Quality is not
same as others but packet is much
fuller which people like Kiosk
owner at Vile Parle Station,
Mumbai

Page 4

Prataap Snacks
Exhibit 6: Price point comparison of Prataap with peers
30
20
10

Nuts

Aloo Bhujia

Moong Dal

Extruded Snacks

Lays

Prataap snacks

Kurkure

Prataap snacks

Haldiram

Prataap snacks

Haldiram

Prataap snacks

Haldiram

Prataap snacks

Chips

Weight (grams)
Source: DRHP

Children appear to be the key target segment

Questions: Toys are a major source of attracting children to your brand. Why does
the company target children more than adults as a target audience for the brand?
Questions: The company has engaged certain characters for advertising and
branding. Are these licensed characters exclusive? For how long are these licenses
and at what commercial terms? Is there any long-term arrangement with any
particular Kids Entertainment Channels for continued engagement of such characters
going forward?

The company has been giving free toys in its extruded snacks packets to target
children.

Advertising also uses some popular cartoon characters like Motu Patlu and even
brand ambassador Salman Khan is featured in advertisements with children.

Exhibit 7: Cost of toys as % of sales for Prataap

10%
8%
6%

4%
2%

0%
2012

2013

2014

2015

2016

Cost of Toys as % of Revenue

Source: DRHP

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 5

Prataap Snacks

Sourcing: Need to diversify further

Sourcing of raw materials is open to disruptions
Questions: Why doesnt the company enter into long-term contracts with suppliers?
How does it mitigate the risk of non-availability or spike in costs in case of crop
failure or a food inflation scenario?
Questions: Given the lower-end positioning which makes Prataaps target customers
more price-elastic, how does the management intend to smoothen the gross margin
trajectory going forward? Or, should one expect volatility to sustain going forward
too?

The company sources all its potato requirements from Madhya Pradesh.

Other raw material purchases are made on a need basis using spot rates with no
future/forward contracts in place to lock in quantities or pricing.

Exhibit 8: Lower-end positioning combined with input cost inflation cause volatility in
gross margin

GM has moved in line with food commodity inflation trends:

- High inflation during 2011-14 led to 720bps decline
- Normalised inflation since then allowed 480bps gain

33%

31%

29%

27%

25%
2012

2013

2014

2015

2016

Gross Margin
Source: DRHP, MOCA financials

Why add capacity when utilisation of existing capacity is already low?

Questions: Will the company be making changes to the manufacturing footprint post
GST rollout? Would it make economic sense for it to have a more consolidated
manufacturing base?
Questions: Who owns the Bengaluru contract manufacturing unit? Why does the
management not let the owner of the facility invest for the upgrade? What are the
commercial terms on which the company is investing in this third-party manufacturing
facility?
Questions: The capacity utilisation is as low as 16% in the latest manufacturing
facility. Why is the company looking at expanding capacity further? Post expansion,
how much would be the capacity and for how long would this be sufficient assuming
the company grows at projected rates?

Contract manufacturing accounts for less than 10% of total manufacturing.

However, a part of the IPO proceeds will be used to augment this capacity.

A new plant was recently established in Guwahati, which is currently functioning

at 16% utilisation. Even older plants are running at 60-70% utilisation rates.
Hence, the need for funds to augment capacity at this stage is low.

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 6

Prataap Snacks

Exhibit 9: Details of existing manufacturing plants

Capacity (MTPA)

Plant
Indore

Capacity Utilization (YTD FY17)

Chips

Extruded

Namkeen

Chips

Extruded

Namkeen

14,400

27,000

10,500

69%

72%

80%

Guwahati - I

14,600

61%

Guwahati - II

12,600

16%

2,300

NA

Bengaluru
Source: DRHP

Distribution: The key battleground

Reach has a lot more room left to grow
Questions: What is the total reach for the companys products; i.e. in how many
stores across India are the products available? How many of these stores are serviced
by either own sales force or through distributors or super-stockists sales forces?
Questions: The company is largely focused on SEC B, C and D store types. These
generally tend to be in T2/T3 towns and, therefore, may provide lower throughput
per store and higher logistics cost. How does the company try to optimise the cost of
servicing these stores?
Questions: What is the target for new store expansion over next 3-5 years? What
percentage of growth can be expected from expanding reach to new geographies?
Are there any specific states that Prataap is likely to prioritise?

Being able to expand distribution is key for growth. Most local players tend to
struggle at this stage of expansion when they venture out of their home markets.

Prataap has done reasonably well with a fairly diversified geographical split.
However, it needs to sweat its reach better and enhance contribution from the
South, which accounts for only 6% of sales.

Exhibit 10: Geographical sales split for Prataap

East
Zone,
35%

Source: DRHP

December 06, 2016

Exhibit 11: Details of distribution reach for Prataap

South
Zone ,
7%

West
Zone ,
34%

Prataap like other brands (he

meant Haldirams) takes payment
in advance. Trade margin is same
but Prataap gives more volume
based promotions A North
based Distributor who also sells
Haldirams products

North
Zone ,
26%

South
Zone ,
6%
West
Zone,
49%

North
Zone,
25%

East
Zone,
18%

Source: DRHP

Ambit Capital Pvt. Ltd.

Page 7

Prataap Snacks
Quality of distribution matters a lot being sub-scale hurts
Questions: What proportion of sales is distributed through the wholesale channel?
What has been the impact on the same from demonetisation? Is the company
anticipating increasing wholesale margins to compensate for increased cost of doing
business in a non-cash environment?
Questions: How does the company manage shelf space? Do distributors have a
dedicated shelf space management team beyond sales and delivery teams?
Questions: Has the company been forced to offer higher margin to the distributor
network to encourage them to stock products? What would be the difference in trade
margin offered by the company vs established peers like Pepsi and ITC?

Being an impulse purchase category, shelf space management is crucial.

Products/brands which are more visible at the store front tend to sell much more
than the ones that are placed behind or inside.

Key competitors like Pepsi (Lays) and ITC (Bingo) have very high quality
distribution networks with dedicated teams for shelf space management.

New entrants like Prataap tend to make up for weaker quality of distribution
(smaller scale makes hiring specialised shelf space management teams unviable)
by providing higher margin to the channel to incentivise it to push their products
at point of sale.

The sales person visits once a

week and takes order for next day
delivery. He does not ask us to
place it above other brands a
Western India retailer

Competition: Fragmented but intensity is high

Market share gains have been healthy; is there room for further gains?
Questions: What is the companys target market share over next 3-5 years? Can the
company provide geography-wise market share to help understand areas of strength
better?
Questions: The company has been consistently gaining market share in Extruded and
Namkeens while maintaining share in potato chips. What is the companys target
market share for each of these categories over next 3-5 years?

Prataaps market share has gone up from 1% in 2010 to 4% in 2015. The gain in
share has been highest among peers.

The key gain in share has been in the Extruded category, which is also among the
fastest growing categories within Packaged Snacks in India.

Exhibit 12: Market share trends for Prataap and peers

Exhibit 13: Market share trends for key categories

8%

40%

Share gain has been highest for

Prataap. Leaders Pepsi and
Haldiram have lost share

30%

7%

7%

6%

20%

5%
4%

10%

3%

2010
Source: DRHP

December 06, 2016

Others

Haldiram

Prataap Snacks

Parle Foods

ITC

Balaji Wafers

PepsiCo

0%

4%
3%

2%
1%

2%
1%

0%

0%

2010

2015

3%
1%
2015

Overall

- Potato Chips

- Extruded

- Namkeen

Source: DRHP

Ambit Capital Pvt. Ltd.

Page 8

Prataap Snacks
Managing competitive intensity while entering new markets
Questions: Focus on B, C and D stores has enabled the company to avoid strong
competitive pushback from large branded players which are over indexed to A and B
stores. But does this limit the companys ability to grow into larger cities and higher
throughput geographies?
Questions: What kind of pushback has the company witnessed from large existing
players whenever it has entered a new market?
Questions: The company is present in South India through a contract manufacturing
facility since 2011. Yet it contributes only 6% of sales. Is there a heightened
competitive scenario in South which has prevented Prataap from growing faster? Can
any of these factors get replicated in any other region?

Prataap starts with smaller stores

in lower end locations. These are
not serviced well by Lays or
Haldirams. So Prataap is able to
enter new markets easily A
Western India based Distributor

Product and category mix

Business dynamics across key categories of Chips, Extruded and Namkeen
Questions: Extruded (Rings) have been a key source of growth. What is the category
mix the company is targeting over the next 3-5 years? Why is the company focused
more on this category when it has grown slower than industry over last 5 years?
Questions: Why has the companys potato chips business not grown over the last 3
years? Can these factors play out with the companys other categories as well?
Questions: What is the difference in profitability across three categories for the
company? What is the likely impact on margins with expected category mix change
going forward?

Growth rate for Extruded snacks has been the highest and for potato chips the
lowest for Prataap.

As per management guidance, this trend is likely to continue. Impact of this mix
change on profitability is, therefore, important to understand.

Exhibit 14: Size and growth rates of various categories of Prataap

8,000

6,000

4,000

2,000

2012

2013
Chips

Extruded

2014

2015

Namkeen

2016

Others

Source: DRHP

New product development process; how methodical is the company?

Questions: How does the company cater to the tastes and preferences of a new
geography? Does the company sell a standardised product across all geographies or
are changes made as per local tastes and preferences?
Questions: What is the companys new product development process? What
percentage of sales does the company target to be contributed from new product
launches over next 3-5 years? What is the companys R&D capability?

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 9

Prataap Snacks

Launching new products to keep excitement going among customers is key for
growth for a packaged foods company.

Complexity is higher in case of packaged foods as tastes and preferences tend to

be highly localised and the ability to cater to different tastes in different locations
is key.

Exhibit 15: Timelines of new product/brand launches for Prataap

2004: Potato Chips
Manufacturing at
Indore

2006: Extruded
(Chulbule) at Indore

2014: Extruded
expansion at Guwahati

2011: Rings and

Namkeen at Indore

2012: Potato
Chips Expansion
at Indore

2016: Extruded
expansion at Guwahati

2015: Extruded
expansion at
Indore

Source: DRHP, Ambit Capital research

Corporate governance and management

We find no major issues worth highlighting or questioning in this regard. We are
encouraged by:

Lack of legal cases pending against the management or company beyond a few
regular taxation disputes which are normal for any business.

Accounting ratios like CFO/EBITDA are fairly healthy and net working capital has
been consistently improving, highlighting the managements focus on cash
conversion.

Related-party transactions are few and not material in nature.

Corporate structure is fairly simple with not many complexities of subsidiaries to

be taken care of.

The board is fairly Independent (4 out of 8 members are independent) and of

reasonably high quality as discussed earlier.

Treatment of minority shareholders cannot be commented on for now as there is

no track record. But we have not found any transactions or structures which could
harm new shareholders post the IPO.

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 10

Prataap Snacks

Valuations
If we believe media reports, post IPO dilution, Prataap would be trading at a
P/E of 115x Mar16 on post IPO fully diluted EPS of 7.2. Prataap has
demonstrated the ability to grow rapidly and gain market share in a highly
fragmented industry, which itself should grow at a healthy 15% CAGR over
the next 5 years. We believe Prataap has been earning below potential as it
is still investing to drive growth and market share gains; a sound strategy, in
our view. Encouragingly, Prataap has been able to deliver on its strategy.
Comparing its profitability with that of peers, we believe Prataap can in a
steady state make significantly higher profit margins, and the improving
trajectory has already been seen in FY15-16. Given the attractiveness of the
industry, market share gains, rising profitability and improving returns,
Prataap deserves a premium to peers and FMCG companies.
Comparing with DFM Foods
DFM Foods has superior return ratios and profitability metrics but lower valuations
than those of Prataap Snacks. However, we believe Prataap has put the right
processes and strategy in place to continue growing ahead of DFM, which has not
been able to grow much beyond its home market of North India with a single
successful product (Crax extruded rings). Prataap appears to be earning below its
potential as it is investing in creating a business the hard way. Investments on own
manufacturing capacity, step-by-step distribution expansion, increasing A&P spends,
identifying and focusing on a core category (extruded), and creating a wellrecognised positioning (value for money, children-centric) should hold it in good
stead. As the business matures to a higher scale and growth enters a long-term fade
period, we believe Prataap should be able to improve its profitability and return
ratios. For now, a longer and stronger growth ramp based on sound business
fundamentals being built at the cost of near-term profitability should justify the
premium over DFM Foods, in our view.
Exhibit 16: Setting valuation benchmark for Prataap Snacks
P/E

EV/EBITDA

P/B

ROE

ROIC

Sales

EPS

CFO/EBITDA

NWC/Sales

FY16

FY16

FY16

3Yr Avg

3Yr Avg

3Yr CAGR

3Yr CAGR

3Yr Avg

3Yr Avg

115

44

12

6%

10%

30%

13%

106%

6%

Packaged Foods Peers

49

33

19

42%

35%

10%

30%

132%

-10%

DFM Foods

64

35

25

36%

25%

20%

58%

116%

-5%

Britannia Inds

44

29

20

55%

47%

12%

47%

104%

-3%

Nestle India

56

39

21

45%

34%

-1%

0%

123%

-14%

GSK Cons

31

29

31%

33%

10%

16%

187%

-17%

FMCG Peers

40

28

20

53%

49%

10%

15%

109%

-3%

HUL

44

30

49

111%

111%

7%

8%

121%

-18%

Dabur

40

32

12

36%

28%

11%

18%

117%

1%

Godrej Cons

42

31

10

24%

17%

12%

20%

87%

-1%

Marico Inds

45

30

15

34%

28%

10%

26%

107%

8%

Colgate

41

27

25

79%

80%

10%

7%

107%

-11%

ITC

28

18

33%

32%

7%

9%

116%

1%

Prataap Snacks

Source: DRHP, Media, Bloomberg, Ambit Capital research

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 11

Prataap Snacks

Risks are tangible but manageable

Margin hit from raw material price inflation: Low price positioning limits
pricing power. This, combined with no backward linkages or long-term contracts
for raw material sourcing, exposes Prataap to input-cost-related margin shocks.

Rising competitive intensity: Till date, Prataap has had it relatively easy as it
was focusing on SEC B, C and D stores where market leaders Pepsi and
Haldirams are relatively under-indexed. Also, given a lower base and strong
growth in and around home markets, growth rates have been healthy. Sustaining
such high growth rates will require new product launches, entry into farther
territories, and potential direct conflict with market leaders. Cost could be high
and results uncertain amid such increased competitive intensity.

Brand-building based on toys and not advertising: Prataap has been

investing aggressively on providing toys in packets, which has led to healthy
growth in its key SKU (Rings). However, spending on A&P has been less than half
of the spending on toys. This implies focus on near-term promotion rather than
long-term brand creation. We believe that in the long run, this strategy will
demand a re-look.

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 12

Prataap Snacks

Key financials
Consolidated Income Statement (Rs mn)
Rs mn
Revenue

2012

2013

2014

2015

2016

1,727

3,437

4,451

5,588

7,572

Gross Profit

559

1,030

1,166

1,548

2,350

Expenses:

378

754

970

1,210

1,785

Employee Cost

22

55

89

137

184

A&P

26

26

36

122

307

Freight Charges

137

309

395

395

575

Others

193

364

450

555

719

EBITDA

182

275

196

339

565

28

68

117

153

180

154

207

79

185

385

Depreciation
EBIT
Finance Cost

36

47

63

59

PBT

152

178

44

140

333

PAT

126

132

23

45

209

2012

2013

2014

2015

2016

1,020

1,452

1,731

1,800

2,011

Source: DRHP, Ambit Capital research

Consolidated Balance Sheet (Rs mn)

Rs mn
Liabilities
Equity
Other Liabilities

16

52

64

120

114

Current Liabilities

191

293

486

579

630

-Trade Payables

155

239

399

497

552

423

508

449

546

1,234

2,221

2,789

2,948

3,300

Net Fixed Assets

745

1,403

1,854

2,100

2,286

Current Assets

340

532

717

811

954

-Inventories

253

424

523

576

685

53

37

116

136

183

Debt
Total
Assets

-Trade Receivables
Cash & Bank Balance
Total

149

285

218

37

61

1,234

2,221

2,789

2,948

3,300

Source: DRHP, Ambit Capital research

Consolidated cashflow statement (Rs mn)

Rs mn
Cash Flow From Operations
-Operating Profit
-Working Capital Adjustment

2012

2013

2014

2015

2016

58

115

129

329

433

180

273

209

345

565

91

128

47

60

(31)

(31)

(33)

(13)

(72)

Capital expenditure

(199)

(671)

(503)

(410)

(463)

Free Cash Flow

(141)

(556)

(373)

(81)

(30)

Cash Flow From Investing

(500)

(919)

(384)

(289)

(466)

585

692

292

(94)

51

-Taxes Paid

Cash Flow From Financing

Source: DRHP, Ambit Capital research

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 13

Prataap Snacks
Return ratios
Performance Ratios

2012

2013

2014

2015

2016

Return on Equity (%)

12%

9%

1%

2%

10%

Net Profit Margin

7%

4%

1%

1%

3%

Asset Turnover

1.4

1.6

1.6

1.9

2.3

1.20

1.53

1.61

1.64

1.64

16%

13%

4%

9%

17%

9%

6%

2%

3%

5%

Financial Leverage
Return on Capital Employed (%)
EBIT Margin
Capital Employed Turns

1.8

2.1

2.3

2.6

3.3

EBIT

154

207

79

185

385

Fixed Assets

666

1283

1583

1821

1985

Operating WC

304

322

391

330

324

5.7

10.7

11.4

16.9

23.3

Sales/Working Capital (x)

Source: DRHP, Ambit Capital research

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 14

Prataap Snacks

Institutional Equities Team

Saurabh Mukherjea, CFA
Pramod Gubbi, CFA

CEO, Institutional Equities

Head of Equities

(022) 30433174
(022) 30433124

saurabh.mukherjea@ambit.co
pramod.gubbi@ambit.co

Research Analysts
Name

Industry Sectors

Nitin Bhasin - Head of Research

Aadesh Mehta, CFA
Abhishek Ranganathan, CFA
Anuj Bansal
Aditi Singh
Ashvin Shetty, CFA
Bhargav Buddhadev
Deepesh Agarwal, CFA
Dhiraj Mistry, CFA
Gaurav Khandelwal, CFA
Girisha Saraf
Karan Khanna, CFA
Mayank Porwal
Pankaj Agarwal, CFA
Paresh Dave, CFA
Parita Ashar, CFA
Prashant Mittal, CFA
Rahil Shah
Rakshit Ranjan, CFA
Ravi Singh
Ritesh Gupta, CFA
Ritesh Vaidya, CFA
Ritika Mankar Mukherjee, CFA
Ritu Modi
Sagar Rastogi
Sudheer Guntupalli
Sumit Shekhar
Utsav Mehta, CFA
Vivekanand Subbaraman, CFA

E&C / Infra / Cement / Industrials

Banking / Financial Services
Retail
Mid-caps
Economy / Strategy
Automobile
Power Utilities / Capital Goods
Power Utilities / Capital Goods
Consumer
Automobile
Mid-caps / Small-caps
Strategy
Retail
Banking / Financial Services
Healthcare
Metals & Mining / Aviation
Strategy / Derivatives
Banking / Financial Services
Consumer
Banking / Financial Services
Oil & Gas / Chemicals / Agri Inputs
Consumer
Economy / Strategy
Automobile
Technology
Technology
Economy / Strategy
E&C / Industrials
Media

Desk-Phone E-mail
(022) 30433241
(022) 30433239
(022) 30433085
(022) 30433122
(022) 30433284
(022) 30433285
(022) 30433252
(022) 30433275
(022) 30433264
(022) 30433132
(022) 30433211
(022) 30433251
(022) 30433214
(022) 30433206
(022) 30433212
(022) 30433223
(022) 30433218
(022) 30433217
(022) 30433201
(022) 30433181
(022) 30433242
(022) 30433246
(022) 30433175
(022) 30433292
(022) 30433291
(022) 30433203
(022) 30433229
(022) 30433209
(022) 30433261

nitin.bhasin@ambit.co
aadesh.mehta@ambit.co
abhishek.r@ambit.co
anuj.bansal@ambit.co
aditi.singh@ambit.co
ashvin.shetty@ambit.co
bhargav.buddhadev@ambit.co
deepesh.agarwal@ambit.co
dhiraj.mistry@ambit.co
gaurav.khandelwal@ambit.co
girisha.saraf@ambit.co
karan.khanna@ambit.co
mayank.porwal@ambit.co
pankaj.agarwal@ambit.co
paresh.dave@ambit.co
parita.ashar@ambit.co
prashant.mittal@ambit.co
rahil.shah@ambit.co
rakshit.ranjan@ambit.co
ravi.singh@ambit.co
ritesh.gupta@ambit.co
ritesh.vaidya@ambit.co
ritika.mankar@ambit.co
ritu.modi@ambit.co
sagar.rastogi@ambit.co
sudheer.guntupalli@ambit.co
sumit.shekhar@ambit.co
utsav.mehta@ambit.co
vivekanand.s@ambit.co

Sales
Name

Regions

Sarojini Ramachandran - Head of Sales

Dharmen Shah
Dipti Mehta
Krishnan V
Nityam Shah, CFA
Parees Purohit, CFA
Punitraj Mehra, CFA
Shaleen Silori

UK
India / Asia
India
India / Asia
Europe
UK
India / Asia
India

Desk-Phone E-mail
+44 (0) 20 7886 2740
(022) 30433289
(022) 30433053
(022) 30433295
(022) 30433259
(022) 30433169
(022) 30433198
(022) 30433256

sarojini.r@ambit.co
dharmen.shah@ambit.co
dipti.mehta@ambit.co
krishnanv@ambit.co
nityam.shah@ambit.co
parees.purohit@ambit.co
punitraj.mehra@ambit.co
shaleen.silori@ambit.co

Singapore
Praveena Pattabiraman
Shashank Abhisheik

Singapore
Singapore

+65 6536 0481

+65 6536 1935

praveena.pattabiraman@ambit.co
shashankabhisheik@ambitpte.com

USA / Canada
Ravilochan Pola CEO
Hitakshi Mehra

Americas
Americas

+1(646) 793 6001

+1(646) 793 6002

ravi.pola@ambitamerica.co
hitakshi.mehra@ambitamerica.co

Production
Sajid Merchant
Sharoz G Hussain
Jestin George
Richard Mugutmal
Nikhil Pillai

December 06, 2016

Production
Production
Editor
Editor
Database

(022) 30433247
(022) 30433183
(022) 30433272
(022) 30433273
(022) 30433265

Ambit Capital Pvt. Ltd.

sajid.merchant@ambit.co
sharoz.hussain@ambit.co
jestin.george@ambit.co
richard.mugutmal@ambit.co
nikhil.pillai@ambit.co

Page 15

Prataap Snacks
Explanation of Investment Rating
Investment Rating

Expected return (over 12-month)

BUY

>10%

SELL
NO STANCE

<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW
NOT RATED

We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock

POSITIVE

We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE

We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs

Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Disclaimer
1.
2.

3.

4.
5.

6.

7.

AMBIT Capital Private Limited (AMBIT Capital) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio
Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI.
AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes
to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the
accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this
Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.
This Research Report should be read and relied upon at the sole discretion and risk of the recipient. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of
this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital or its affiliates shall not be responsible and/ or liable for any direct/consequential loss
howsoever directly or indirectly, from any use of this Research Report.
If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions
in place between AMBIT Capital/ such affiliate and the client.
This Research Report is issued for information only and the 'Buy', 'Sell', or Other Recommendation made in this Research Report such should not be construed as an investment advice to any
recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities and should not be intended or treated as a substitute for necessary review or validation or any professional advice.
Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment or as an official endorsement of any investment.
This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in
whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including
United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract,
and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition.
Ambit Capital Private Limited is registered as a Research Entity under the SEBI (Research Analysts) Regulations, 2014. SEBI Reg.No.- INH000000313.

Conflict of Interests
8. In the normal course of AMBIT Capitals business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one clients interests conflicting
with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients interests are protected. AMBIT Capital has policies and
procedures in place to control the flow and use of non-public, price sensitive information and employees personal account trading. Where appropriate and reasonably achievable, AMBIT Capital
segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and
should make informed decisions in relation to AMBIT Capitals services.
9. AMBIT Capital and/or its affiliates may from time to time have or solicit investment banking, investment advisory and other business relationships with companies covered in this Research Report and
may receive compensation for the same.
Additional Disclaimer for Canadian Persons
10. AMBIT Capital is not registered in the Province of Ontario and /or Province of Qubec to trade in securities and/or to provide advice with respect to securities.
11. AMBIT Capital's head office or principal place of business is located in India.
12. All or substantially all of AMBIT Capital's assets may be situated outside of Canada.
13. It may be difficult for enforcing legal rights against AMBIT Capital because of the above.
14. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2
Canada.
15. Name and address of AMBIT Capital's agent for service of process in the Province of Montral is Torys Law Firm LLP, 1 Place Ville Marie, Suite 1919 Montral, Qubec H3B 2C3 Canada.
Additional Disclaimer for Singapore Persons
16. This Report is prepared and distributed by Ambit Capital Private Limited and distributed as per the approved arrangement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP
289) and Paragraph 11 of the First Schedule to the Financial Advisors Act (CAP 110) provided to Ambit Singapore Pte. Limited by Monetary Authority of Singapore.
17. This Report is only available to persons in Singapore who are institutional investors (as defined in section 4A of the Securities and Futures Act (Cap. 289) of Singapore (the SFA). Accordingly, if a
Singapore Person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and inform Ambit Singapore Pte. Limited.
Additional Disclaimer for UK Persons
18. All of the recommendations and views about the securities and companies in this report accurately reflect the personal views of the research analyst named on the cover. No part of this research
analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research report. This report may not be
reproduced, redistributed or copied in whole or in part for any purpose.
19. This report is a marketing communication and has been prepared by Ambit Capital Pvt Ltd of Mumbai, India (Ambit) and has been approved in the UK by Ambit Capital (UK) Limited (ACUK)
solely for the purposes of section 21 of the Financial Services and Markets Act 2000. Ambit is regulated by the Securities and Exchange Board of India and is registered as a Research Entity under the
SEBI (Research Analysts) Regulations, 2014. ACUK is regulated by the UK Financial Services Authority and has registered office at C/o Panmure Gordon & Co PL, One New Change, London,
EC4M9AF.
20. In the UK, this report is directed at and is for distribution only to persons who (i) fall within Article 19(1) (persons who have professional experience in matters relating to investments) or Article
49(2)(a) to (d) (high net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (as amended) or (ii) are professional
customers or eligible counterparties of ACUK (all such persons together being referred to as "relevant persons"). This report must not be acted on or relied upon by persons in the UK who are not
relevant persons.
21. Neither Ambit nor ACUK is a US registered broker-dealer. Transactions undertaken in the US in any security mentioned herein must be effected through a US-registered broker-dealer, in conformity
with SEC Rule 15a-6.
22. Neither this report nor any copy or part thereof may be distributed in any other jurisdictions where its distribution may be restricted by law and persons into whose possession this report comes
should inform themselves about, and observe, any such restrictions. Distribution of this report in any such other jurisdictions may constitute a violation of UK or US securities laws, or the law of any
such other jurisdictions.
23. This report does not constitute an offer or solicitation to buy or sell any securities referred to herein. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in
connection with, any contract or commitment whatsoever. The information in this report, or on which this report is based, has been obtained from publicly available sources that Ambit believes to be
reliable and accurate. However, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It has also not been independently
verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.
24. The information or opinions are provided as at the date of this report and are subject to change without notice. The information and opinions provided in this report take no account of the investors
individual circumstances and should not be taken as specific advice on the merits of any investment decision. Investors should consider this report as only a single factor in making any investment
decisions. Further information is available upon request. No member or employee of Ambit or ACUK accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or
indirectly, from any use of this report or its contents.

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 16

Prataap Snacks
25. The value of any investment made at your discretion based on this Report, or income therefrom, maybe affected by changes in economic, financial and/or political factors and may go down as well
as go up and you may not get back the original amount invested. Some securities and/or investments involve substantial risk and are not suitable for all investors.
26. Ambit and its affiliates and their respective officers directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add
to or dispose of any such securities (or investment). Ambit and ACUK may from time to time render advisory and other services to companies referred to in this Report and may receive compensation
for the same.
27. Ambit and its affiliates may act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies discussed in this Report (or
in related investments) or may sell them or buy them from clients on a principal to principal basis or may be involved in proprietary trading and may also perform or seek to perform investment
banking or underwriting services for or relating to those companies.
28. Ambit and ACUK may sell or buy any securities or make any investment which may be contrary to or inconsistent with this Report and are not subject to any prohibition on dealing. By accepting this
report you agree to be bound by the foregoing limitations. In the normal course of Ambit and its affiliates business, circumstances may arise that could result in the interests of Ambit conflicting with
the interests of clients or one clients interests conflicting with the interest of another client. Ambit makes best efforts to ensure that conflicts are identified, managed and clients interests are
protected. However, clients/potential clients of Ambit should be aware of these possible conflicts of interests and should make informed decisions in relation to Ambit services.
Disclosures
29.
30.
31.
32.

The analyst (s) has/have not served as an officer, director or employee of the subject company.
There is no material disciplinary action that has been taken by any regulatory authority impacting equity research analysis activities.
All market data included in this report are dated as at the previous stock market closing day from the date of this report.
Ambit and/or its associates have received compensation for investment banking/merchant banking/brokering services from Astral Poly Technik Ltd in the past 12 months.

Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views
about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this
report.
Copyright 2016 AMBIT Capital Private Limited. All rights reserved.
Ambit Capital Pvt. Ltd.
Ambit House, 3rd Floor. 449, Senapati Bapat Marg,
Lower Parel, Mumbai 400 013, India.
Phone: +91-22-3043 3000 | Fax: +91-22-3043 3100
CIN: U74140MH1997PTC107598
www.ambitcapital.com

December 06, 2016

Ambit Capital Pvt. Ltd.

Page 17