In today’s Finshots, we dive into the business of Gopal Snacks which closes its IPO application window on 11th March ’24 (Monday).

The Story

Indians love snacking. A snack before breakfast. A snack during the middle of the day to satiate the hunger pangs. A snack with tea as an indulgence. A snack to even replace a full meal. Yup, a market survey by Mondelez, the company behind the Cadbury brand, revealed that over 80% of Indians are replacing meals with snacks and we snack at least twice a day.

So it’s no wonder we’re the third-biggest snack market in the world.

And it’s also no wonder that snack makers are trying to ride the trend. The latest being Gopal Snacks which wants to raise ₹650 crores through its IPO.

But we get it, you may not be familiar with this brand. You may not even have heard of it. And that’s because it’s quite a regional player. Nearly 80% of its revenue comes from one Indian state — Gujarat. And that’s where half of its distributor base is located too. Despite being around since 1999, the company has expanded to only 10 states and 2 union territories in the country. Its presence is quite negligible in the south and east.

But don’t let that fool you. Gopal Snacks is actually the fourth-largest branded ethnic snack maker in the country! And by ethnic snacks, we’re talking stuff like namkeen which is made using moong dal, green peas, fried nuts, etc. and gathiya which is a Gujarati deep-fried snack made from chickpea flour. In fact, it’s the largest gathiya manufacturer in India by volume and revenue.

So yeah, Gopal Snacks is a pretty big deal.

And over time, the company has also realised that ethnic snacks alone won’t cut it. Because people’s preferences seem to be tilting towards Western snacks. The market share of Western snacks has increased from around 27% to 30% in the past 3 years while the share of namkeen and gathiya has actually fallen.

So it has increasingly built its Western snack products too by introducing nachos and cheese balls. And the revenue contribution of the segment has increased from 27% to 31% in the past 3 years.

But it has also done something else quite smartly.

For a long time, the company has depended on the ₹5 strategy. You know, selling those sachet-like snack packets that people buy on impulse. It made up over 82% of the revenues.

But maybe Gopal Snacks looked around at some of its peers and realised that it’s not sustainable. Because if inflation kicks in and increases the cost of raw materials, the company has no option but to absorb the cost. It can’t pass it along because people won’t appreciate a price increase. They expect that to remain standard pricing because it’s now ingrained in their psyche. Sure, first it reduced the grammage significantly — from 8g a pack to just 5g.

But also, Gopal Snacks managed to reduce the dependence on this ₹5 category to just 70% of its sales now.

And with that, even its profit margins have jumped from 5% to 14%.

The question is — will the Gopal Snacks IPO catch investors fancy?

Well, the opportunity seems to be immense. The market research company IMARC Group estimates that the Indian snack market will grow from ₹40,000 crores to ₹95,000 crores within the decade. And seeing that the unorganised snack sector still makes up 40% of the industry, that’s an avenue for growth for Gopal Snacks.

Also, the company seems to be doing better than its peers across all parameters.

Take the Return on Capital Employed (ROCE) which measures what percentage of the money invested in the business converts to profits. For Gopal Snacks it is at 43% while the industry average is 14%. And even the profit margins (before interest and taxes) are 14% which is double that of the industry.

And how is the company able to do this, you ask?

Well, analysts believe it’s because Gopal Snacks has focused on backward integration. What this means is that manufacturing companies typically need raw materials — for instance, a snack company will need besan or gram flour, seasoning and spices. So Gopal Snacks decided to manufacture the raw materials it needs by itself too. This helped it to control costs better.

Also, it has managed to keep a lid on its transport costs to one of the lowest levels in the industry. It has ensured that the facilities making the raw material aren’t too far from the factories making the final snack. And it even has its own fleet of trucks.

Sounds good, right?

But there’s still one niggling question — If the opportunity is so large, why is it that the company doesn’t want to raise fresh funds?

Yup, that’s right. The company won’t raise any fresh money in this IPO. It’s just an avenue for the promoters to cash out. And of course, there’s nothing wrong with that. The people who build these sorts of companies deserve a large payday.

However, investors might argue that currently, the manufacturing for some of Gopal Snacks’ products such as chikki, nachos, and rusk is outsourced. And for a company that has worked hard to even manufacture its raw materials, won’t it be better to expand capacity with some fresh money?

While that is true, we also have to look at how much of the current manufacturing capacity the company is utilising. And that’s only 30%. So the factories are already in place to expand. It doesn’t need more money.

So what are the problems then?

Well, the company actually hasn’t grown the top line in line with some of its rivals over the past few years. From FY19 to FY23, Bikaji Foods grew by 21% annually and Balaji Foods soared by nearly 26%. But Gopal Snacks’ revenues rose only by 14%.

And while that’s not a bad figure, investors might want to keep an eye on what’s happening at the company. Especially given that there was a family rift at the company as well. One of the brothers left the company in 2022 and started a direct competitor called Gokul Snacks. That could have an impact on the company’s current market share in places like Gujarat.

Also, the concentration risk remains in all aspects — Gujarat contributing to 80% of revenue, just 10 stock-keeping units (SKUs) making up 43% of revenues, and nearly the entirety of revenues coming from retail outlets with hardly any e-commerce or even exports.

Will these risks be a deterrent to investors? Or will the massive growth opportunity and reasonable valuation draw them in?

Tell us what you think.

Until then…

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