Khambatta Securities’ research report on Prataap Snacks
Prataap Snacks Limited (PSL) is contending with significant pressures on two fronts – the failure of the topline to recover to pre-covid levels with the company reporting y-o-y declines over each of the last five quarters (compared to pre-covid numbers), and margin stress exacerbated by unprecedented inflation in palm oil prices, leading to inconsistent profitability performance. With a large part of PSL’s sales originating in catchment areas around schools and colleges, and the travel segment, as educational institutions stay shut and travel activities remain sluggish, strong growth revival looks still some distance away. Notwithstanding the fresh lockdown measures and restrictions imposed across states during 1Q FY22 in the wake of covid 2.0, the company’s performance reflects strong headwinds with limited visibility of their abatement. PSL has undertaken a number of initiatives, which are ongoing, including the compression of the distribution structure to increase direct reach to distributors, setting up a distributed manufacturing model comprising regional hubs across the country, telecalling support to distributors to deepen their distribution reach, and discontinuation of some low-margin products that were hurting overall profitability. That said, visibility regarding sales revival, return to average profitability levels and consistency in operating performance is obscured at the moment. Based on the continued modest performance in a tough operating environment and uncertainty surrounding the horizon for revival, we revise our profitability expectations downwards in the absence of visible drivers for recovery in the near term.
The PSL stock has appreciated by 16% since we initiated coverage on 22 October 2020. Based on an unchanged P/E multiple of 32.0x, we revise our price target down to Rs 725 with an upside of 5%, leading to a HOLD rating. We shall continue to monitor key data-points to update our outlook and rating as and when the operating environment for the company changes.