Buy Prataap Snacks Ltd For Target Rs.1,515 - Ventura Securities
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Crispy delight for your portfolio
Selling nearly 11 million packets every day, Prataap Snacks Ltd (PSL) is one of India’s leading snacks food manufacturers and distributors. It operates out of 7 owned and 8 contract manufacturing facilities serving over 1.7 million retail touch points in 31 states and UTs across India. Its wide range of products are offered in 100+ SKUs across categories of Potato Chips, Extruded Snacks, Namkeen (traditional Indian snacks) under the Yellow Diamond and Avadh brands. Revenues are expected to grow at 18.9% CAGR to INR 1,966 cr over FY21-24 with an improvement in operating margins by 370 bps to 9.1% by FY24.
Their growth strategy is based on two main pillars – a) geographical expansion in markets that have huge potential but in which PSL has a relatively low market share; and b) deeper penetration in existing markets. The company is transitioning to the asset light 3P model with decentralized operations. This enables it to directly distribute to the distributors and save on the ~6% margin that would have otherwise gone to the super stockists.
The company has taken a number of sustainable cost-saving initiatives to offset the impact of the upward trending palm oil prices. These include reducing the size of packaging, changes in the placement of products in corrugated boxes, changes in recipes to use a lesser percentage of oil, manufacturing of certain flavours in-house, change in the distribution structure to eliminate the cost of super stockists and grammage rationalization. We expect margins to improve going forward based on the forecast that palm oil prices are going to fall by ~20% in the near future and PSL is looking to gain directly as and when this happens.
We value PSL at INR 1,515 (38.9X FY24 earnings) and initiate coverage with a BUY. At the CMP of Rs 839 the price objective represents a potential upside of 80.1% over the next 24 months.
Valuation
We have used the DCF model to value PSL since it has a healthy and consistent cash generation over our forecast period i.e., till FY30. We have discounted back the future cash flows to FY24 and value the company at INR 1,515 per share, presenting an upside of 79.8% from the CMP of INR 839.
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