Prataap Snacks IPO, priced in the range of INR930-938 per share, opens for subscription today. The Indore-based fast-growing company counts Sequoia as its biggest shareholder and the private quality (PE) firm will be leading the Offer For Sale (OFS) component of the IPO. The high business growth in recent years has put tremendous pressure on profitability and we have highlighting the same in our analysis of the IPO. Nevertheless, we are not the only one finding the IPO’s pricing too aggressive as some brokerage houses and analysts have also pointed out the same. Here is a quick recap of Prataap Snacks IPO recommendations by major brokerage houses.
Aditya Birla Money is positive on the prospects of the company. “On the higher price band, Pratap Snacks’ market capitalisation stands at ~`2200 cr. It is valued at ~2.4x Price to sales which is at a steep discount to its peers (Avg ~4.75x P/S for two listed peers). We believe it deserves better valuation from the issue price, leaving headroom for listing gains. Looking at the prospects of the organised food snacks industry (expected to grow at 14.6% CAGR – FS Report) and the performance of the company in specific, we recommend “Subscribe” on the issue,” said analysts in their IPO note.
Hem Securities has put a Long term subscribe rating on the offer while also mentioning that the IPO is overpriced in comparison to fundamentals. “Co is bringing the issue at price band of Rs 930-938/share on post issue FY17 eps of Rs 4.22 at p/e multiple more than 200. Although co has diverse product portfolio with pan India distribution net- work but looking after valuation, issue looks overpriced. Hence, we recommend “Long term Subscribe” on issue,” advised the company in its research report to clients.
Angel Broking has a Neutral view and noted that the Prataap Snacks’ peers have better return ratios. “At 202x of its FY17 earnings, the issue is richly valued at upper end of its price band i.e. `938. 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 Britannia (which is not an exact peer due to size and product portfolio). Its peer in exactly same industry i.e. DFM Foods, also has good margins (10% in FY17) and handsome return profile (~20%). For Prataap to justify this high valuation, remarkable improvement in profitability is required which may come at the cost of lower growth. Considering this, we rate Prataap Snacks as Neutral,” said the note adding to mixed Prataap Snacks IPO recommendations.
Sharekhan did not offer a recommendation for the IPO but added that the company has a long way before its margins improve. “The company is planning to expand its product portfolio by entering sub-categories of snacking in the coming years. Further, GST implementation bodes well for branded snacking players as a large shift will happen from non-branded players in the coming years. However, at the upper and lower end of the price brand, the stock is trading at significant premium to its peers. In addition, OPM of 4.5% and return on equity (RoE) of 4.3% 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,” added the brokerage house’s IPO note.
Mixed analyst opinions in Prataap Snacks IPO recommendations may be confusing for investors but it is actually a good sign that brokerage houses are calling steep pricing what it is. “When in doubt, stay away” is the rule that should be followed in investing, like most other things in life. Nevertheless, feel free to check out the IPO discussion page and the grey market page to get latest updates about the public offer.