Prataap Snacks IPO kicks off: Can it liven up market?

The 482 crore initial public offer (IPO) by Prataap Snacks kicked off on Friday. The company is offering shares in Rs 930-Rs 938 range. It is offering a discount of Rs 90 per share to its eligible employees.

The snacks company on Thursday sold Rs 143 crore worth of shares to 15 anchor investors including Goldman Sachs India Ltd, HDFC Trustee Company, Smallcap World Fund Inc and Fidelity Funds at the upper limit of the price band. Analysts noted that the company's profitability has remained inconsistent due to its focus on gaining the market share. They are neutral to positive (on the long-term basis) on the issue.

Angel Broking said that the issue looks richly valued at 202 times of its FY17 earnings.

"Ignoring its lower profitability in FY17 and valuating the issue on FY16 EPS still yields a high P/E of 73.0x. FMCG companies commanding such high P/Es have a very strong profitability and returns profile such as BritanniaBSE -1.66 %. Its peer in exactly the same industry i.e. DFM FoodsBSE -4.21 %, also has good margins (10 per cent in FY17) and handsome return profile (20 per cent cent)," the brokerage said.

For Prataap Snacks to justify this high valuation, remarkable improvement in profitability is required which may come at the cost of lower growth, the brokerage said.

The company is into three product lines. Extruded Snacks, Chips and Namkeen. It own brands Chulbule and Yellow Diamond. Prataap Snacks has three manufacturing facilities, 218 distributors and 3,500 super stockists. Sharekhan said that while GST implementation bodes well for branded snacking players, the offer by the the company is at significant premium to its peers.

"In addition, operating profit margin (OPM) of 4.5 per cent and return on equity (RoE) of 4.3 per cent are much lower than industry peers. Though the company is expanding its capacity and enhancing its distribution reach, we believe it will take some time for margin profile and return ratios to improve," it said.

Hem Securities said that even as the company has diverse product portfolio with pan India distribution network, the issue's valuation looks overpriced, which led the brokerage give a Long term susbcribe rating to the issue.

"The company’s EBITDA margins have been consistently weak and have come down from 8 per cent in FY13 to 4.5 per cent in FY17. PAT margins have also shrunk to just 1 per cent in FY17 from 4.3 per cent in FY13 due to the potato crop related issues. Analysts say if an investor is looking to participate in the issue, he should not expect listing gains and rather look for long-term growth.