Should you invest in Prataap Snacks IPO? Here's what HDFC Securities has to say

Source : SIFY
By : HDFC Securities
Last Updated: Fri, Sep 22, 2017 12:16 hrs

Background & Operations:

Prataap Snacks Ltd (PSL) is one of the top six Indian snack food companies in terms of revenues in 2016, and among the fastest growing companies in the Indian organised snack market between 2010 and 2016. It is present in three major savoury snack food categories in India and all its products are sold under the Yellow Diamond brand. 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 has over the years leveraged its understanding of target markets and consumer segments, product innovation capabilities, extensive distribution network, strategically located manufacturing facilities, and has focused its marketing and promotional activities to strengthen its product brands and establish the Yellow Diamond brand across India. Its diversified product portfolio includes three categories

Extruded Snacks: Extruded snacks are processed, reconstituted and shaped potato or cereal based snacks. Extruded snacks may be flavoured or unflavoured. It includes puffed snacks. Its Extruded Snacks products are divided into two sub-categories: (i) Shaped Extruded Snacks, which includes Puffs, Rings and Pellets products; and (ii) Random Extruded Snacks, which includes Chulbule product.

Chips: Chips include fried, sliced chips or crisps made from potatoes, hummus, lentils etc. It includes flavoured and unflavoured chips, and may be standard chips, thick-cut and / or crinkle- cut. Currently, it sells Potato Chips under the Yellow Diamond brand.

Namkeen: Namkeen are a type of traditional savoury Indian snack which includes products such as moong dal, masala or fried nuts, sev and bhujia. Namkeen under the Yellow Diamond brand was launched by the Company in Fiscal 2012

PSL has set up a pan-India distribution network supported by strategically located manufacturing facilities. Its wide network of super stockists and distributors is supported by large team of sales representatives and arrangements with various modern retail outlets. As of June 30, 2017, its distribution network included 218 super stockists across 26 States and one Union Territory in India and over 3,500 distributors. It owns and operates three manufacturing facilities, one located at Indore, Madhya Pradesh and the other two located at Guwahati, Assam.

In addition, it has engaged two facilities on contract manufacturing basis, located at Bengaluru, Karnataka and at Kolkata, West Bengal. The Bengaluru facility was engaged on an informal, non-exclusive basis between October 1, 2011 and July 31, 2016. This facility has been engaged exclusively pursuant to the Bengaluru Contract Manufacturing Agreement with effect from August 1, 2016. These facilities has access to cost efficient transportation to major markets and enable the company to benefit from transportation cost efficiencies from reverse logistics arrangements.

Objects of Issue:

The Offer consists of a Fresh Issue by PSL and an Offer for Sale. The Company will not receive any proceeds from the Offer for Sale. The Company proposes to utilize the Net Proceeds from the Fresh Issue towards funding the following objects:

  • Repayment/pre-payment, in full or part, of certain borrowings availed by the Company

  • Funding capital expenditure requirements in relation to expansion (including through setting up of a new production line and construction of a building) and modernisation at certain of its existing manufacturing facilities;

  • Investment in Subsidiary, Pure N Sure, towards enabling the repayment/pre-payment of certain borrowings availed of by its Subsidiary;

  • Marketing and brand-building activities; and

  • General corporate purposes.

Competitive Strengths

  • 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.

Business Strategy:

  • Deeper penetration in existing markets and explore select new territories.

  • Expand and modernize production capabilities

  • Increased advertising and marketing activities.

  • Expand product portfolio into healthier snacks segment and confectionaries.

Key Concerns

  • Any alleged contamination or deterioration of products or any negative publicity or media reports related to its products or raw materials;

  • Inadequate or interrupted supply and price fluctuation of PSL's raw materials and packaging materials;

  • Inability to compete effectively;

  • Failure to develop, launch and market new products due to unpredictable consumer preferences;

  • Failure to effectively manage future growth and expansion;

  • Any adverse development in general economic conditions in India and globally; and

  • Changing laws, rules and regulations and legal uncertainties, including adverse application of corporate and tax laws.