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Prataap Snacks IPO opens today, steep valuation worries analysts

LiveMint logoLiveMint 22-09-2017 Nasrin Sultana

Mumbai: Initial public offering (IPO) of Prataap Snacks Ltd will open for subscription on Friday with a price band of Rs930-938. The IPO, which will see a fresh issue of Rs200 crore, aims to raise Rs482 crore through the share sale.

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. According to Angel Broking Pvt. Ltd, at 202 times its FY17 earnings, the issue is richly valued at the upper end of its price band.

“Ignoring its lower profitability in FY17 and valuing the issue on FY16 earnings per share (EPS) still yields a high price to earnings of 73 times of FMCG companies commanding such high PEs have a very strong profitability and returns profile such as Britannia,” it said in a report on 19 September.

Its peer DFM Foods also has good margins and a handsome return profile. For Prataap to justify the high valuation, remarkable improvement in profitability is required, which may come at the cost of lower growth, Angel Broking added.

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 amortisation) 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,” Angel Broking said.

Prabhudas Lilladher Pvt. Ltd also said that at the current margin profile and earnings, the company is being offered at expensive valuations, leaving little scope for appreciation in the near term. “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,” Prabhudas Lilladher said in a report on 20 September.

It said that volatility in profit margins has been a major concern for the company but Prataap Snacks has undertaken measures like grammage reduction, bulk buying and forward contact in palm oil which will reduce volatility in future. According to Prabhudas Lilladher, 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.

However, Aditya Birla Money Ltd believes that Prataap Snacks deserves better valuation from the issue price, leaving headroom for listing gains.

The company has three product lines such as extruded snacks, chips and traditional savoury Indian snack which operates brands such as Chulbule and Yellow Diamond. It also has a subsidiary named Pure N Sure which intends to foray in chocolate-based confectionary snacks.

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 Rs930-938. Investors that participated in the anchor book allocation include Small Cap World Fund Inc, Fidelity Funds, Goldman Sachs India Ltd, HDFC Trustee Co. Ltd and SBI Life Insurance Co. Ltd.

Proceeds from fresh issue will be utilized towards debt repayment, funding capex, investment in subsidiary, marketing and branding and for general corporate purposes.

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