Prataap Snacks Ltd - Set for a crunchy bite!

mvphanendrak · June 21, 2020, 7:06pm

Prataap Snacks is one of the top players in the Indian snack food companies in terms of revenue and amongst the fastest growing company in the organised snack market. The company sells its product under the brand name “Yellow Diamond” with diversified product portfolio including traditional and western snacks.

Company products has 4 basket of products, Extruded Snacks, Potato Chips, Namkeen and Sweets. Its product portfolio consists of Extruded Snacks including Puffs, Rings and Pellets products, Chips including fried, sliced chips / crisps, and Namkeen including moong dal, masala or fried nuts, sev and bhujia. Sweets including cup cakes.

In a short time span of 12-13 years the company features amongst the top 5 organised players, and has witnessed its market share catapulting 4x from less than 1% in 2010 to 4% plus in 2018 (Market leader with 100+ years in market - Haldiram has a 20% market share). This is commendable as many of its peers, despite being in the business for over 20-30 years, have failed to transcend regional boundaries.

They were the first company in India that was offering different grammage (grams per packet) in different areas. They were offering a 16-gram Rs 5 pack in Delhi, but a 13-gram pack in Guwahati. When Frito-Lay was offering 22 grams in a Rs 5 pack, Prataap Snacks offered 30 grams for the same amount (offering superior value proposition for price conscious middle-class Indian consumers), which has helped the company to make a mark in this high intensely competitive space. Its pricing strategy pushed several bigger companies to also offer value packs in an effort to stay ahead in the market.

Prataap has a pan-India distribution reach via: (a) three-tier distribution structure of stockists, distributors & retailers. Prataap’s products reach 17 lakh retail touch points (almost 60% of PepsiCo’s and 35% of Britannia’s reach) served by 13 manufacturing plants with a combination of owned as well as outsourcing facilities.

Their revenue share from different regions, East with 34%, west with 30%, north with 25%, south with 11%.

In the last 3 years sales has grown at 15% CAGR.

Future Growth Drivers::

Avadh’s acquisition gives entry in large and fast growing Gujarat market.
Avadh is the fourth-largest player in Gujarat, which is highly regional and with no presence of any national player. On the opportunity dynamics front, Gujarat is home to 4% of India’s population, but consumes ~13% of packaged snacks. We believe, this acquisition is a great fit for Prataap, providing breakthrough in this market.
Avadh has a portfolio of , pellets (fryums) and namkeens which complements the overall portfolio of Prataap.Avadh posted a turnover of around INR 140 crore in FY18, with operating profit stood at roughly ₹ 11 crore.
80% stake in Avadh ws bought for ₹ 148 crore in Aug 2018, remaining 20% stake will be taken after 4 years.Before acquisition, Prataap has no presence in Gujarat,Rajasthan, Maharashtra (big markets for salty snacks), so with Avadh acquisiton, it entered those markets.
This year(FY2020) they made more than 200 crores from Avadh.
Entry in rapidly growing sweet category to accelerate growth by sweating assets.
The overall market for western sweets, especially chocolate-based confectioneries, is pegged at INR 2,800-3,000 crore and the same is expected to grow ~15-18% over the next 4-5 years. Sensing this, Prataap too has entered this segment with the launch of three products under the Rich feast brand.– (a) Yum Cake (b) Choco Vanilla Cake and ©
Cookie cakes in three different flavor- (chocolate, Vanilla and Tuti fruity).
The company has already invested INR 60 crore in land, building and production line for the sweets category. And, it is planning to incur additional INR 20 crore to expand and introduce new lines.
Sweets, as a category, is a high gross margin business—overall gross margin is >40% versus 30-35% in the snacks category
Along with higher gross margin, the volume weight ratio for sweets is favourable, leading to lower logistics cost for the company as well as distributors (logistics cost for
chips is ~7-8%, while for sweets it is ~5%). A combination of higher gross margin and lower freight cost results in higher EBITDA margin for the sweets category. Which is almost is 2x salty snacks’ margin.
Here also prataap is providing value for money, While Pillsbury offers 11gm for INR 5, Prataap offers 16 gm for INR 5
Currently, this category is clocking monthly turnover of INR 2.0-2.5 crore. Going forward, management aims to launch new versions and flavours of cookie cake, cookie biscuits and layer cake, which will propel monthly turnover to ~INR 5-8 crore over the next 4 years. Prataap aims to increase the share of sweets in its overall portfolio to ~10% over the next 3 years.
Outsourced model to drive higher asset turns and boost ROCE
In the snacks business, particularly chips and extruded snacks, it is imperative for manufacturing facilities to be closer to the market. This is largely to ensure freshness, high fill rate and also control freight cost as chips and snacks being light weight, the transportation cost is high. Hence, a successful pan-India player typically needs several small manufacturing facilities.Hence, Prataap is gearing to expand its manufacturing base via the third-party outsourcing model.Currently, the company has around 13 manufacturing facilities spread across India, of which 5 are owned and balance 8 are outsourced. Contract manufacturing constitutes ~10-12% to total revenue, which is likely to increase to 20-25% over the next 3 years.
Along with lower logistics costs, outsourcing results in lower capex, thus leading to an asset-light model. This yields better margins and asset turns, thereby driving higher ROCE.
Contribution of 3P manufacturing facility in sales increased from 11% in FY’19 to 18% in FY’20.

Key Concerns::

Raw material (key raw materials are palm oil and packaging laminate) forms around 67-68% of the total revenue for a value for money snacks player like Prataap foods. Any continuous upmove in the prices of the key raw materials would lead to impact on the Gross as well as EBITDA margin, impacting the profitability.
This year palm oil prices increased to 90RS/kg, it is why it posted very less margins this year.
Highly competitive space.

Last 5 years Financials::

Narration	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19	Trailing
Sales	445.61	558.80	757.19	893.95	1,017.35	1,170.61	1,393.79
Expenses	425.41	524.70	700.35	851.79	929.86	1,087.26	1,300.10
Operating Profit	20.20	34.10	56.84	42.16	87.49	83.35	93.69
Other Income	1.19	0.57	-5.41	2.74	7.49	10.81	9.20
Depreciation	11.68	15.34	17.99	25.47	30.42	37.64	61.74
Interest	4.73	6.33	5.88	4.57	2.90	0.86	7.47
Profit before tax	4.98	13.00	27.56	14.86	61.66	55.66	33.68
Tax	-0.40	3.10	0.19	-5.72	17.48	11.02	-13.25
Net profit	5.38	9.90	27.37	20.58	44.18	44.64	46.92
EPS	179.33	330.00	912.33	10.77	18.80	19.00	20.01

Management Commentary::
Aiming for 2000 crores in 3 years. 9 Percent margin in 4 quarters.

Promoters holds 71.5 perc, out of that Sequoia Capital holds close to 48 perc, rest 23 perc is by other promoters.
Malabar fund holds close to 6 perc.
Faering capital holds - 2 perc.

Disclosure:: Initiated tracking position.

mvphanendrak · June 21, 2020, 7:08pm

Good source to understand the business. In the above post, most of the content is taken from here.

dwarak · June 28, 2020, 8:47pm

Thanks for starting a thread on Prataap , Interesting company in an interesting space, One niggle which bothers me about this company is :

As I understand Prataaps main play is to give greater grammage than competition.
As prataap increases its market share and starts getting taken serioulsy by the incumbents (example Haldirams, Lays) , what stops Haldiram from using its greater economies of scale to compete on grammage and quell upstarts like Prataap.

sitanshu · February 16, 2021, 4:20am

has anybody attended the recent conference call ? or might be having transcript?

chaitanyakhanna · April 5, 2021, 10:05am

Would be great if someone can help provide call transcript.
Interested in seeing how margins play out in coming quarters.

Disclosure: Invested. Tracking position.

Souresh_Pal · July 19, 2022, 5:33pm

Investing Rationale: The company seems to be extremely undervalued at present price, with the key headwinds of palm oil price and packaging price going away and growth coming back due to reopening of schools. The company can easily have 9% EBITDA margin as it did in FY 18. It becomes more easier with the cost cutting initiatives taken by the company.
My Valuation: So assuming by FY23 company has a revenue of 1500 cr (which assumes a very little growth though company achived high teen growth historically) & 9% EBITDA Margin having an EBITDA of 135 cr by FY 23.
Bear Case Price: 1350 (FY23 EV/EBITDA of 10),
Base Case: 2700 (FY23 EV/EBITDA of 20),
Bull Case: 4050 (FY23 EV/EBITDA of 30)
Historical Valuations:

Antithesis: RM headwinds not going away, Decrease in sales due to increased competition, Impacted demand due to closing of schools due to lockdown
Disclosure: Invested

bhavveshh · November 21, 2022, 9:08am

Bikaji gets listed at 5x sales. Prataap today around 1.2x sales.
Bikaji has better margins and return ratios, but just needs to be seen if Prataap can improve its margins further (likely when contribution from Rs5 pack gets lower and lower).

While sales growth of 15% is not a challenge but margin is. Lets c what Prataap has to offer in 2-3 years.
Also, Haldiram looking for an IPO next year. Wonder it will trade at 10x sales with industry leading EBITDA margin ( guess 20%, others are 7-11%).

RajAnalyst · June 17, 2023, 6:21am

With palm oil prices correcting significantly, the margins should improve significantly in coming quarters

KushalKasliwal · June 17, 2023, 6:50pm

I think this compare can’t be done… Bikaji is well established brand while Diamond chips aren’t.

DVS_Capitals · November 9, 2023, 5:27am

Any reasons for a stock underperformance inspite of a good Q2 and decent Fy25 guidance. Sales growth could definitely be one but as long as margins gains are sustainable and potential to improve further, it should be fine. Any thoughts ?

bhavveshh · November 9, 2023, 6:15am

I think sales should have grown atleast 15%. On the contrary, there is a de growth. So despite margin improvement, I would categorize result as a disaster.

DVS_Capitals · November 9, 2023, 9:17am

Even Bikaji sales grew by merely 6% which has a much higher PE. Prataap Snacks stock is already very low and valuations are also reasonable. I think market is worried for a PE investor exit which becomes an overhang. That could be the reason as well

Souresh_Pal · November 10, 2023, 1:11pm

I think without growth any pe ratio is meaningless. Forward pe ratio is 35 which seems okayish.but the catch is growth is needed in topline.

Venkat_Rakesh · November 11, 2023, 9:46am

Just a brief Highlights of the call

Demand and Inflation: The company is seeing demand pressure, especially in rural and lower-income urban markets, due to rising costs and inflation. Optimism for medium to long-term improvement was expressed, with technology like Salesforce Automation being used to drive sales growth. The expectation is that the second half of the year will be better than the first, with sustained operating margins.
Competition and Market Share: There’s increased competition due to lower raw material prices, especially from smaller players, leading to heightened competitiveness and market share losses for major players including Prataap Snacks.
Namkeen Category and Portfolio Performance: Namkeen has shown strong growth due to consistent efforts, aiming to increase its revenue contribution from 16% to 20-23% in the coming years. Other product categories have not shown significant performance changes. Namkeen has a slightly lower gross margin but compensates with lower freight costs due to better weight-to-volume ratio.
Distribution and Growth Strategies: The company is expanding its reach, particularly in the Namkeen category, and aims to grow distribution by 5-7% annually. Changes in distribution are largely complete, minimizing disruptions.
Ads and Marketing Spend: Currently, marketing spend is around 1.25% of overall revenue. There are plans to increase this next year for brand building, but for this year, it will remain in the same range.
Margin Goals and Cost Optimization: Prataap Snacks is targeting double-digit EBITDA margin next year, having seen margin improvement over the last three quarters. Cost optimization measures include reduced sales channel costs and improved productivity in production.
Capacity Utilization and New Facilities: Utilization is around 60-62%, with no significant change in product category contribution compared to last year. The J&K plant is expected to be operational by January 2024, and a Rajkot expansion is also planned. The company is cautious about a rapid ramp-up to 80% utilization, considering sales growth as a factor.
Market Conditions and Future Outlook: No significant improvements in the rural market were noted around Diwali. The company reflects on its approach since the IPO, acknowledging challenges during COVID-19 and the need to adapt its product offerings. Plans are in place to cater to more urban environments with new products and categories.
Regional Markets and Expansion: The company is focusing on the South India market, developing specific products for this region, as it’s a late entrant there. Revenue from East and South India is growing, with most revenue still coming from the West and North markets

Saurabh_Khurana · November 22, 2023, 2:26pm

Why is the stock price going bonkers? Any ideas @bhavveshh @Souresh_Pal @Venkat_Rakesh

abhishekaddy · November 22, 2023, 5:41pm

Souresh_Pal · November 23, 2023, 5:57am

some big guy buying it

Pkg · November 23, 2023, 10:42am

Its non other than Modhusudan Kela sir.

YashSodha · January 18, 2024, 1:04pm

omsingla · May 22, 2024, 4:34am

First, Haldiram was in talks to acquire the majority stake, then Bikaji and then rumours about ITC being in talks for 47% stake purchase but company clarified it was never in talks with ITC. For Haldiram and Bikaji, as it turns out, the valuation didn’t come through. Can anyone tracking for longer time give any more insights?