In today’s Finshots, we talk about the journey of Prataap Snacks and the rumours of an acquisition by Haldiram’s.
Before we begin, here's a quick sidenote. If you're a person who is great at communicating and are enthusiastic to join our team, Ditto is looking to recruit new Insurance advisors. You don't even have to know about Insurance, we'll train you from scratch and you can enjoy working remotely with a great team. If you're interested in this or know someone who is please click this link.
In 2017, when Prataap Snacks launched its IPO, it was a huge hit. It was oversubscribed 47 times and it popped 35% on listing.
But….it hasn’t seen glory since then. The stock has gone nowhere in the past 6 years and it’s back to where it started. Investors have lost faith and the rumours began that the company’s biggest investor Peak XV Partners (earlier Sequoia India) and even the promoters are looking for an exit.
Who could buy them out?
Well, the current favourite seems to be the nearly 90-year-old snack king of India — Haldiram’s.
But to understand if India’s snack market could soon see a big acquisition, let’s start from the top.
If you want to categorise India’s snack market, you can broadly split it into three primary segments: You have Extruded snacks. These are typically processed and fried cereal-based snacks. Then you have Chips which include fried, sliced chips usually made from potatoes. And then you get Namkeen which is a traditional savoury Indian snack that’s made out of moong dal, masala or fried nuts, sev, and bhujia.
Now you might think that the traditional Namkeen category is probably India’s favourite out of the three. But you’d be wrong. 3 in 5 snacks sold are products from the West. We’re talking primarily about the potato chips category.
And Prataap Snacks had realized this. Maybe that’s why they decided that potato chips would be their star product. They launched the Yellow Diamond brand from Indore in 2005 to take on the might of PepsiCo’s Lay’s.
That set the wheels in motion for the company.
Prataap Snacks had a simple idea — they wanted to be the snackmaker of choice for small-town India. They didn’t want to first go after the urban centres. So they concentrated on these towns in Northern and Western India. And primarily sold low-value packs of ₹5. Think of this as the shampoo sachets of the snacking world. It’s easier for most people to shell out ₹5 and pick up a packet. It’s an easy impulse purchase too when you’re in a supermarket. And the humble ₹5 packet contributed to 80% of the company’s revenues.
Then, the company decided to become a toy maker.
Yup, Prataap Snacks expanded its product range into making Ring snacks. And then struck a deal with Nickelodeon to include the toys from one of its hit cartoon shows in the pack. The experiment was a big success.
And all of this meant that the company was quickly gaining market share in the snacking industry and in the 5 years leading up to the IPO, they were growing revenues by nearly 25% annually. This was miles ahead of peers such as Haldiram’s and Balaji Wafers.
But soon, the growth began to slow. And their profit margins took a beating.
Now we don’t know the exact reasons as to why that happened. Most reports blame the Covid-induced lockdown that disrupted operations. So we tried to piece together interviews with their management team from the past.
And it looks like some of the strategies that made them successful began to hurt them too.
For instance, the dependence on the ₹5 strategy.
See, inflation was rearing its ugly head around the time of the pandemic. Raw material costs began to rise. And here’s something that Subhashish Basu, chief operating officer of Prataap Snacks had said, “For companies that sell snacks at ₹5, ₹10 and ₹20 price points, absorbing the costs is the only route available.”
Basically, you can’t raise costs for these low-priced items because it’s standard. People expect to get a packet of chips for that price and it’s ingrained in their psyche. Any deviation from that could spell doom for the company trying it out.
So naturally, that hurt margins.
Also, the company realized it couldn’t rely on impulse purchases forever. It needed to branch out into higher-value packs too.
Meanwhile, as the company attempted to move away from the tried and tested strategy of dealing with small stores in small towns, costs rose. They were competing against the biggies for space on the supermarket shelves and that hurt margins even further.
So the question is why on earth would Haldirams — a nearly 90-year-old company with $1 billion in revenues — choose to buy a company that has hit a bit of a rut? Also, it’s not like the stock price has crashed and made the company available for a steal either. It’s still an expensive stock compared to its earnings.
Well, we don’t quite have an answer to that.
Because most arguments in the media say that it’s all about diversification — it will give Haldirams entry into the big fat world of potato chips.
But the company is already in the potato chips business. It’s not a big revenue earner yet but it’s making a presence here.
And you could make another argument that an acquisition will still give Haldiram’s an immediate and fairly large foothold in this business. But the thing is that Haldiram’s also seems quite confident in breaking the mould on its own. It has launched premium chocolates now. And it isn’t even concerned about keeping its brand. They’re calling their chocolate Cocobay. By the looks of it, the package doesn’t have prominent Haldiram’s branding either.
So the company does seem quite comfortable with striking out and building a brand from scratch. Why wouldn’t they want to do that with potato chips too?
We don’t know.
And it’s not like Halidram’s will get access to completely new geographies where it doesn’t have a presence either.
So yeah, if you have answers as to how Prataap Snacks will slot right into the Haldiram’s portfolio, you know where to find us.
📢Finshots is now on WhatsApp Channels. Click here to follow us and get your daily financial fix in just 3 minutes.