Sector Thoughts

CONSUMER
March 2018
NOO
DLES
CHIPS
N BISC
KEE UIT
NAM S
AL
RE
CE
T
AS
KF
EA
BR
Food for thought and more

Research Analysts:
Anuj Bansal Archit Varshney

anuj.bansal@ambit.co archit.varshney@ambit.co
Tel: +91 22 3043 3122 Tel: +91 22 3043 3275
Ariha Doshi
ariha.doshi@ambit.co
allresearch@ambit.co;ambitresearch@ambitcapital.com
Tel: +91 22 3043 3228
Consumer
CONTENTS
Food for thought and more ………………………………………………………..3
For F&B, the time has come ………………………………………………………..4
Consumption tide will NOT raise all boats ……………………………………..19
And the winners are ……………………………………………………………….25
Value for growth and not profitability ……………………………………………33
COMPANIES
Prataap Snacks (BUY) ………………………………………………………………43
March 01, 2018 Ambit Capital Pvt. Ltd. Page 2
Consumer
POSITIVE
THEMATIC March 01, 2018
Food for thought and more Key Recommendations

HUL BUY
We prefer F&B* plays within FMCG as we believe they will outpace
overall sector growth (15% revenue CAGR vs 10-12% over the next Target Price: 1500 Upside 13%
decade). This will be led by: 1) lower penetration (20-60% for F&B vs
ITC BUY
80%+ for HPC*), 2) larger share of unorganized in F&B (30-50% vs sub-
10% for HPC) shifting to organized as consumers’ health and brand Target Price: 370 Upside: 41%
awareness rises, 3) M&A activity, and 4) category/distribution expansion.
Higher sales growth and improving margins (from scale efficiencies and Britannia BUY
premiumisation) suggest F&B plays are better placed than HPC to deliver
Target Price: 5280 Upside: 11%
18-20% 20Yr FCF CAGR that current valuations imply. We prefer
Britannia, Prataap, Hatsun and USL over Nestle, GSK and UB in this Hatsun BUY
space due to presence in more scalable categories, superior innovation
track records and higher quality and deeper reach of distribution. Key Target Price: 925 Upside: 19%
risks: Lack of consistent quality and quantity of agri produce, tightening
Prataap Snacks BUY
of regulations and weak cold chain infrastructure.
Target Price: 1825 Upside: 50%
F&B segment is at the cusp of acceleration in growth
India is witnessing rapid addition of new age consumers (40% of population born Nestle SELL
in liberalized India). These consumers are more literate, which makes them
Target Price: 6650 Downside: 11%
health conscious; digitally connected, which makes them brand aware and open
to influence from Western lifestyles; and more affluent due to higher income and USL BUY
wealth effect of previous generation. Convenience, Health, Impulse and
Premiumisation focused categories should therefore benefit. F&B fits these Target Price: 3860 Upside: 19%
criteria better than HPC. Additionally, rising modern trade salience (higher for
F&B at 15% vs 10% for HPC) will boost F&B growth as MT drives experimentation Scalable category mix, innovation
and premiumisation, incentivizing companies to innovate. ability and wide distribution essential
Formalization of F&B industry is a growth opportunity to leverage F&B opportunity
Category Innovation Distribution
Unlike HPC where consumer tastes, preferences, affinities and perceptions are
more universal, F&B provides opportunity for smaller, regional players to work in Britannia
niches through heterogeneity and scalability. This has led to a fragmented Prataap
industry with Top 3 players having smaller market share (32% avg. vs 68% avg. ITC
for HPC) and large share for unorganized players. But we believe the sector is
GSK
ripe for formalization (leading to consolidation) given: 1) share shift from
HUL
unbranded to branded players, 2) PE investors seeding new entrants or aiding
existing players to scale up (~20 deals with US$400-500mn invested in the last 5 Nestle
years), and 3) acquisitions of regional players (10 deals worth `210bn) for their DFM
products and brands by larger/national companies. Marico
Source: Ambit Capital research
Supply chain constraints are the key issues that can spoil the party
Note: - Strong; - Relatively Strong; -
We are encouraged by F&B companies taking initiatives like: 1) contract farming
Average; - Relatively weak
by Pepsi, UB and Dabur for potatoes, barley and fruit pulp respectively; 2) e- *F&B = Food & Beverages, HPC = Home & Personal
Choupal by ITC to procure directly from farmers; 3) investment in better cold Care
storage by Prataap for year-round availability of raw materials; and 4) cattle feed
programme by Hatsun to improve cows’ milk productivity. Companies which take Research Analysts
such initiatives have significant competitive advantage as they are able to Anuj Bansal
overcome structural bottlenecks (inconsistent quantity and quality of agri +91 22 3043 3122
produce, price volatility, lack of cold chains/storages) and grow ahead of peers.
anuj.bansal@ambit.co
Winners back scalable categories, innovate and expand distribution Ariha Doshi
We prefer Britannia, Prataap, Hatsun and USL over Nestle, GSK and UB within +91 22 3043 3228
F&B as companies can transform into multi-category players and acquire a larger ariha.doshi@ambit.co
geographical reach with scale leverage and mix improvement driving margins
higher. Higher FCF CAGR of 18-20% vs 12-15% for HPC should sustain premium Archit Varshney
of F&B sector to HPC as is seen in the current valuations of 42x FY20P/E, which +91 22 3043 3275
are at a 5% premium to that of the FMCG sector. archit.varshney@ambit.co
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Consumer
For F&B, the time has come

We believe a confluence of factors is leading to an inflection point in the
growth trajectory of the Food and Beverages sector in India. Primarily it is
the consumer who is getting more aspirational because of rising affluence
levels and brand awareness due to deeper media penetration. Aspiration in
turn is driving higher penetration, shift to branded and premiumisation.
Modern trade is also becoming a key catalyst as it is a key market place for
companies to seed innovation and premiumisation and for consumers to
experiment and indulge. Overarching above the consumer and supplier is
the ecosystem of Government regulations, raw material availability and
supply chain – all of which have formed a headwind for a long period of time
but are now witnessing change for the better.
Why now – because the consumer is ready for it!

Consumerism in any country evolves with rising economic prosperity. As income
levels rise, Home and Personal Care categories develop, starting with staples like
soaps and detergents and then moving up to skin care, hair care and eventually to
more discretionary items like surface care, beauty and wellness. F&B by nature is a
more discretionary segment as the basic need of nourishment is met at home. Hence,
adoption of packaged F&B categories is always at a lag to HPC categories as only
when the consumer is affluent enough to have discretionary spending and becomes
aspirational does he move to consuming packaged F&B. In terms of consumption
pattern (with penetration rates for most HPC categories now 80-90%), India is now at
a point where consumer will step up from HPC to F&B. Slow but steady rise of
modern trade will accelerate this growth for F&B by providing the channel for
consumers to experiment and for companies to innovate and drive impulse purchase
decisions.
Exhibit 1: Growth differential between F&B and HPC is set to widen going forward
HPC categories revenue growth F&B categories revenue growth
20%
16%
12%
8%
4%
0%
FY04-FY16 FY17-FY22
Source: Euromonitor International Limited 2018 © All rights reserved, Ambit Capital research
Growth for HPC categories will mainly come from premiumisation as volume growth
is set to moderate due to higher penetration rates and lower inflation is likely to
restrict pricing power. Contrarily, growth in F&B will derive from both strong volume
growth as well as premiumisation, driven by:
 Increasing penetration and share shift from unorganized to organized to
drive volume growth in F&B: Given HPC categories are now fairly penetrated
(e.g. soaps, detergents and toothpaste have a ~90% penetration rate) and are a
part of daily consumption habits, volume growth will come from increasing
occasions of consumption or increasing quantum of consumption per occasion.
Both these factors require a change of habits, lifestyle and perception, which will
result in a moderating volume growth. Thus, as explicated by us in our CHIP
thematic dated 16 October 2017, we expect HPC categories growth to mainly
come from premiumisation. In contrast, F&B categories are less penetrated.

Consumer
Exhibit 2: Processed food categories are less penetrated than HPC categories
100% Penetration level (%) 90% 90%

60-65% 75-80%
75% 50-60% 60-65%
40-45% 50-55% 50-55% 50-60%
50% 30-35%
20-30%
20-25% 20-30%
25%
0%
Instant Coffee
Hair Oil
Fruit Juices
Insecticides
Biscuits
Colorant
Infant nutrition
Bread
Bath and
Ice Cream
Cheese
Oral Care
Potato Chips
Noodles
Shower
Home
Exhibit 3: Except for edible oils, the per capita consumption of most categories is substantially lower than the global per
capita consumption
World PCC India PCC World PCC India PCC
India as a % of world Category India as a % of world
(USD) (USD) (USD) (USD)
F&B
Coffee 10.8 0.4 4% Noodles 6.0 0.5 9%
Tea 5.6 1.4 25% Sauces, Dressings 16.2 1.5 9%
HFD 2.3 0.8 36% Chips 4.5 0.8 18%
Baby Food 8.7 0.5 5% Puffed Snacks 2.6 0.8 32%
B'fast Cereals 3.7 0.2 6% Soup 1.9 0.1 3%
Chocolate 13.3 1.2 9% Spreads 3.1 0.2 5%
Other confec. 10.9 1.4 12% Biscuits 12.0 2.9 25%
Edible Oils 10.6 12.0 113% Namkeen 0.2 0.2 69%
Ice Cream 10.2 1.1 11% Bottled water 16.8 1.0 6%
Processed foods 37.1 0.3 1% CSD 21.8 2.4 11%
Ready Meals 11.6 0.2 2% Juice 8.2 1.3 16%
HPC
Deodorant 2.8 0.4 13% Colour cosmetics 8.7 0.7 9%
Shampoos 3.7 0.6 16% Toothpaste 3.1 1 32%
Facial care 12.5 1.1 9% Dishwashing 1.5 0.3 23%
Detergents 8.2 2.4 30%
Increasing affordability to drive premiumisation: The willingness to premiumise In our CHIP thematic, we conveyed
is likely to be driven by digital penetration creating brand awareness and exposure two types of premiumisation 1)
and aspiration towards the Western lifestyle. The ability to premiumise is likely to be brand premiumisation and 2)
driven by increasing income and affordability. In our CHIP thematic, we conveyed two category premiumisation
types of premiumisation: 1) brand premiumisation and 2) category premiumisation.
We believe F&B will witness both these trends of lower priced brands moving to
higher priced brands as well as adoption of processed food categories such as ready
meals, processed foods, baby food, etc. from staples such as flour, loose tea, etc.
Additionally, as affordability rises, consumers will also shift from unorganized to
branded products, providing an additional growth driver to listed players in this
space.

Consumer
Exhibit 4: HPC has seen the accelerated transition from Exhibit 5: We believe that the time is ripe for F&B categories
“Must have” product to the premium “Good to have” to witness a similar transition
100% 100%
Good to have
80% 80% Good to have
60% 60%
40% 40%
Must have Must have
20% 20%
0% 0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Euromonitor International Limited 2018 © All rights reserved, Ambit Source: Euromonitor International Limited 2018 © All rights reserved, Ambit
Capital research Capital research
 With a change in demographics, Indian lifestyles will evolve to mirror

Western lifestyles: As India’s key consumer class gets younger, more affluent,
more digitally connected, we believe that the evolving Indian consumer will
increasingly adopt Western lifestyle and, as a result, increasingly adopt Western
consumption habits, causing the Indian consumption basket to increasingly mirror
the Western consumption basket. This is further accelerated by Indians
increasingly travelling abroad and the proliferation of Western lifestyles through
pop culture. Consumption habits will evolve as more women join the workforce,
the Indian family nuclearizes and cost of domestic help increases.
Exhibit 6: Though India’s consumer basket is currently skewed to the “Must Have”
category, it is currently migrating towards the global consumer basket
39%
72%
61%
28%
Global India
Must haves Good to haves
Ability of modern trade to change consumer behavior is effective now

Modern trade has been in India since the early 2000s, offering products at a discount
to general trade for most products. We believe it was these cost savings that initially
attracted the Indian consumer to switch to modern trade from the traditional
neighborhood kiranas.

Consumer
Exhibit 7: Modern trade offers products at significant discount to general trade

Weight/
Product Variant MRP DMart Big Bazaar
volume
Aashirvaad Superior MP Atta (free biscuits) 5kg+Free Sunfeast Marie biscuits 5kg 225 195 225
Premia Poha Jada Own brand 1 Kg 54 45 54
Fortune Rice Bran Health Oil Free: 1 L Pack 5L 695 575 695
Surf Excel Easy wash detergent 1.5 kg 180 160 180
Premia Tur Dal premium Guj Own brand 500 gm 55 45 47
Premia Moong Dal Own brand 500 gm 50 42 66
Pantene Pro-V Hairfall Control Shampoo 180 ml 120 NA 109
Colgate Total Advanced Health Toothpaste Single tube 120 gm 85 79 85
Lifebuoy Total 10 Soap Pack of 4 4x125 gm 90 80 90
Whisper Ultra Clean XL Wings Pads 30 u 310 250 275
Parle-G Original Gluco Biscuits 800 gm 60 53 60
Britannia Vita Marie Gold 300 gm 40 32 40
Tata Tea premium 1kg 387 296 340
Bill Value 2,351 1,852 2,316
Having experienced the other benefits of modern trade such as variety, convenience,
and ability to interact with the product on shelf, the ability of modern trade to impact
consumer behavior (e.g. promoting impulse purchase and driving experimentation)
has now gained ground. Growth of modern trade is beneficial for F&B sector in
several ways.
 From the consumer perspective: It encourages experimentation as it provides
more varieties of both product categories and brands. It induces impulse
purchases as consumers are forced to make their way through multiple aisles.
 From the company perspective: MT is easier to service as demonstrated by the
relatively easier implementation of change in product prices post GST cut in the
modern trade channel versus the traditional general trade channel. MT also tends
to partner with companies to generate deeper consumer insights into consumer
wants, preferences and behaviors. Most importantly, MT is now the preferred
route for new launches due to higher ability to influence consumers to experiment
through sampling and shelf space management.
Our thesis that modern trade will be key to influencing consumer purchasing
decisions will strengthen as the generation changes, women’s workforce participation
increases and convenience/premiumisation trends pick up.
Exhibit 8: Share of modern trade in groceries is increasing
Share of modern trade FY12 Share of modern trade FY17

40%
30%
20%
10%
0%
Ice Cream
Edible Oils
Processed
Noodles
Sauces
Packaged
Tea
HFD
B'fast Cereals
Ready Meals
Soup
Biscuits
Soft Drinks
Baby Food
Confectionery
Coffee
Spreads
snacks
Foods

Consumer
Also, we believe that modern trade is being used as a platform to sell convenience
based products or introduce Western products given urban Indian consumer is
increasingly getting more aligned with the global consumer.
Exhibit 9: Categories that have a higher salience on modern trade are convenience-based products or western products;
40% % sales from modern trade in CY17
30%
20%
10%
0%
Pasta
Tea
Ice Cream
CSD
Processed F&V
Rice
RTE meals
Edible Oils
Cereals
Water
Noodles
Butter
Snacks
Confectionary
Baby Food
Milk
Cheese
Juice
F&B is no longer a need; it is a Want

The combined impact of the social, economic, demographic trends (rising median
age, increasing affluence, higher literacy rates, changing lifestyles, increasing internet
penetration, increasing working women, etc.) has led to increasing substitution effect
in the F&B categories. Staples are giving way to value-added, discretionary packaged
food items and home cooked food is giving way to more processed, ready to eat
food. This is further driven by company push through enticing and heavily advertised
new launches, increasing variety of goods, and enhancing access.
 Convenience: Whilst convenience themed F&B products (e.g. breakfast cereals,
instant noodles, RTE foods, etc.) are widely available, we believe the commercial
value of this consumer need is yet to be fully realized. A key argument against
this thesis is an Indian’s inherent preference for fresh products and some form of
value addition in the cooking process, which dissuades purchase of packaged
foods. We believe that as the generation changes and the Indian’s consumer’s
lifestyle increasingly migrates towards the Western lifestyle, the need for
convenience will increase.
Exhibit 10: Convenience-based F&B categories are growing faster than the market
Category growth over FY12-17

27%
22% 24%
19% 18%
16%
F&B (overall)
Tea Bags
Processed
Ready Meals
Cheese
Yoghurt
Meat
 Health: Rising awareness and increasing affluence have forced the Indian
consumer to be more health conscious. Our channel checks with shop owners
also suggest that consumers are increasingly enquiring of the health benefits and
evaluating ingredients of products before purchasing them. Additionally,
increasing formalization of the economy will dissuade and downsize unorganized
roadside vendors, the demand for which can easily be replaced by more hygienic
packaged goods. This increasing awareness towards health products has
effectively been monetized by F&B companies by 1) advertising health benefits of
their products, 2) creating differentiated product offerings through fortification,
and 3) charging premium for such ‘health focused’ products.

Consumer
Exhibit 11: Producers are increasingly emphasizing the health benefits of their
products…
Exhibit 12: …and are able to monetize it by charging a premium for health variants
Price of standard Standardised Health
Product Price of healthy variety
variety grammage premium
Noodles Maggi Veg atta noodles Maggi Noodles
` 18 ` 11 70 gm 59%
Oils Saffola Total Saffola tasty
` 195 ` 105 1 kg 86%
Nutri Choice - Hi Fibre Digestive
Biscuits Tiger
Biscuits
` 44 ` 20 250 gm 120%
Tea Red Label- Natural care Red label
` 240 ` 174 500 gm 38%
 Indulgence: We believe that with changes in lifestyle and rising affordability,

focus on value-based planned purchase will come down, leading to more impulse
buying. The F&B categories are more prone to impulse purchases than the HPC
categories. This will be aided by rising salience of modern trade and increased
push by consumer companies.
Exhibit 13: Products with scope for indulgence are growing faster than the industry
Growth rates over FY12-17

25%
20%
15%
10%
5%
0%
Chocolate Other Packaged Ice cream Cookies F&B (overall)
Confec. Snacks
 Premiumisation: Compared to HPC, we concede that F&B will witness a

moderated degree of premiumisation. This is because growth at the bottom of the
pyramid will still be strong for F&B (as compared to HPC, F&B have lower
penetrations and through share gains from unorganized to organized segment)
which will mask the impact of premiumisation from consumers upgrading their
consumption. However, given the large population and unequal income
distribution, there still exists a market at the top of the pyramid for premium F&B
launches.

Consumer
Exhibit 14: Premium products in F&B are at a price-premium of 1.1 – 20x with median
at ~1.5x
Average price of Average price of premium Premiumisation
Categories
standard product in ` product in ` scope
Breakfast
95 145 1.5
Cereals
Chocolate 20 400 20.0
Edible Oils 105 195 1.9
Ice Cream 20 55 2.8
Processed Meat 460 750 1.6
Ready Meals 115 187.5 1.6
Sauces 25 59 2.4
Namkeen 35 37 1.1
Soup 10 12 1.2
Chips 20 32 1.6
Biscuits 20 44 2.2
CSD 75 84 1.1
Tea 174 240 1.4
Coffee 30 422 14.1
HFD 176 520 3.0
Noodles 11 17.5 1.6
Exhibit 15: Premium products have a higher price differential in case of HPC at a
median of 2-2.5x
Average price of Average price of premium Premiumisation
Categories
standard product in ` product in ` scope
Soaps 26 65 2.5
Detergent 78 172 2.2
Colour Cosmetics 300 1800 6.0
Fragrance 900 5500 6.1
Shampoo 265 450 1.7
Facial Care 100 399 3.9
Dishwashing 96 120 1.2
Colourants 140 190 1.4
Headwinds abound; but companies are working to

overcome them
The ability of companies to service the rising demand might be hobbled by the
ecosystem. Lack of consistent quality and quantity of agri commodities, volatility in
prices that is not always related to market forces, stringent Government regulations
(or their lack of) to ensure food safety, and weak supply chain especially cold chain
and storages are some of the key challenges being faced by the F&B industry. Added
to this is the heterogeneity in India due to cultural differences leading to different
tastes and preferences across regions. This adds to complexity of doing business.
Encouragingly, companies on their own are putting in efforts to bypass these issues to
create sustainable supply chains (contract farming, direct sourcing, investments in
food parks) and product innovation (identify homogenous categories or create
variants for local tastes). This will help them in overcoming these issues and scaling
up their business to fulfill rising demand from consumers.
Heterogeneity – many markets within a market
While India’s heterogeneity from an F&B perspective is a well-known theme, here we
discuss its implications on the F&B businesses.

Consumer
Exhibit 16: Parameters across which directly and indirectly causes the Indian F&B
space to be heterogeneous
Factors that affect supply Factors that affect demand
• Raw material availability • Climatic impact on food habits

• State wise food • Varied food customs due to varied cultutal heritage
regulations • Religious preferences
• Jain
• Halal
• ..
• Vegetarian versus non vegetarianism
• Varying degrees of
• Affluence
• Family size and preferred SKU size
• Exposure to Western food habits and tastes
Heterogeneity requires that companies cater to multiple tastes and price points as the Heterogeneity requires that
consumer market is highly fragmented and ‘niched’. A highly fragmented market companies cater to multiple tastes
increases the number of SKUs, deepens supply chain complexity and potentially limits and price points as the consumer
scale economies (due to shorter and more frequent production runs, frequent setups, market is highly fragmented and
increased RM SKU count and declining buying leverage, brand dilution and shelf ‘niched’.
space clutter). On the positive, a heterogeneous customer implies a higher scope for
differentiation within categories. We believe the intensity of heterogeneity of the
Indian consumer and a company’s inability to cater to all niches, partially explains
why several F&B categories (e.g. soups, processed foods, juices, etc.) are highly
fragmented, lack credible market leaders and are littered with regional players.
However, by focusing on categories that are Western and therefore have a wider
national acceptance, some companies are able to overcome this hurdle.
Exhibit 17: Growth of ‘Western’ categories with national acceptance is higher than
traditional Indian F&B categories that are more impacted by heterogeneity
30%
25%
20%
15%
10%
5%
0%
Cereals Chocolates Ice Cream Potato Juice Tea Sauces
and Frozen Chips
Desserts
Consistent supply of good quality and quantity of agri-inputs is a challenge

Marginal land holdings and consequent fragmentation at source, dependency on
monsoon and lack of adequate irrigation facilities, high number of intermediaries,
wastage, leakage and hoarding, extraneous pricing mechanism - i.e. pricing not
determined by supply and demand factors, and inadequate cold chain facilities are
some of the issues that have resulted in an inadequate and insufficient supply of
required quality and quantity of agricultural produce for the F&B sector. We are
encouraged to see there are companies that do not rely on external regulatory
interventions but have proactively taken steps within the existing framework in the
form of contract farming, import of balance requirements, bulk purchase and
investment in storage, cold chain technologies to successfully mitigate these
challenges.

Consumer
 Case study 1: Collaborative/contract farming by Pepsi for potato

procurement: To overcome lack of adequate storage facilities and volatility in
potato supply and prices, PepsiCo initiated contract farming of potatoes across
Punjab, West Bengal, Maharashtra, Gujarat and Uttar Pradesh. The company
provides technical support (drip irrigation, seeds, and seeding equipment), a fixed
purchase price (higher than market realizations by 10-100%) and financial
support (crop insurance, loan). In return the company controls quality (potatoes
have lower water concentration, reducing dehydration costs, and lower sugars
that prevent browning of chips) and is assured of supply.
 Case study 2: ITC’s e-Choupal: Over 2006 to 2018, ITC implemented e-
Choupal in 40,000 villages, reaching 4 million farmers. The company instituted
computers in villages that gave live information on weather forecasts and trained
the villagers to use the same. It is intended to work as an online aggregator for
agri-services. It cuts out the middle man, thus reducing costs, generates company
loyalty in the farmers, thus ensuring supply, and provides real time information
on soil, weather and prices, thus improving quality of supply.
Lack of adequate cold chain

Cold chain industry consists of the front-end warehousing and transportation and the
back-end cooling technology and the requisite IT to monitor and control flow of
goods. Key issues facing this industry are: 1) fragmentation as most companies have
less than five refrigerated vehicles and only 8-10% of cold chain capacity is held by
organized players, 2) outdated equipment, 3) sporadic development of infrastructure,
and 4) single purpose warehouses – all of which combined have resulted in reduced
shelf life and increased wastage, increased cost of operations and compromised
quality of food supplies. However, the sector is increasingly seeing concerted efforts
and traction led by Government funding, which has encouraged startups and
incentivized existing players to address these issues.
Exhibit 18: Whilst supply lags demand across the cold chain…
Packhouses, Storage, 2015, Reefer vehicles, Ripening Retail/front end, 2015,

2015, in MMT 2015, in no.s chambers, 2015, in in Mn outlets
in no.s 35 62 no.s
9.1 10
K
70 K
K
32
2
9K 812
250
Requirement Supply Requirement Supply Requirement Supply Requirement Supply Requirement Supply
Source: Ambit Capital research, National Center for Cold Chain Development

Consumer
Exhibit 19: …the sector is seeing increasing funding that should enable plugging of gaps
Start-ups Funding Founding year
Tessol Series A 2013
Rivigo Series D 2014
Tagbox Angel 2016
AbleCold - 2017
Schedulers Series B 2012
Existing players Investments Founding year
Crystal logistics $ 10 Mn 1962
Cold Ex $ 10 Mn 2005
CMA CGM Undisclosed
Aarvee Undisclosed 2011
Bhorukas $ 15 Mn 1996
Pawar Electrosystems $ 4 Mn 1997
Snowman Logistics $ 31 Mn 1993
Brattle Foods $ 2 Mn 2009
Star AgriWareHousing $ 38 Mn 2006
Cold Star $ 7 Mn 2010
Higher competition is better as it will help categories

scale up
Higher growth potential, wider consumer acceptance, easier production and larger While in a relatively mature
scope for differentiation attract competition. Given most of these factors are more segment like HPC, higher
relevant for F&B as compared to HPC, we are witnessing higher competitive intensity competition can result in lower
mainly through new entrants, accelerated new launches and formalization of profitability, in an evolving
unorganized segment as PE investors and M&A activity are revving up in the sector. segment like F&B, competition
While in a relatively mature segment like HPC, higher competition can result in lower helps build the category faster.
profitability, in an evolving segment like F&B, competition helps build the category
faster. Hence, for now, higher competition is better for most F&B categories.
F&B industry has local champions; MNCs are struggling to scale up
In HPC, consumer tastes, preferences, affinities, perceptions are more universal in
nature. As a result, MNC companies have a distinct advantage as they can leverage
their global portfolio and consumer knowledge to launch new products and garner
brand equity. However, given the extent of heterogeneity in India, there is a
significant degree of localization and regional players are more adept at catering to
local tastes and identifying niches. We believe that this is a key reason why MNCs do
not have dominance in F&B as they do in HPC. Another reason is that the
heterogeneous Indian consumer creates several small niches that are potentially not
large enough for an MNC to enter, allowing regional companies to enter the market.

Consumer
Exhibit 20: High degree of heterogeneity in F&B leads to creation of niches which are serviced better by regional players
90%
60%
30%
0%
Oral Care
Skin Care
Juice
Namkeen
Soaps
Fragrances
Dishwashing
Detergents
Edible Oils
Biscuits
Tea
Bottled Water
Confectionery
Sauces, Dressings
HPC F&B
Market share of MNCs Market share of Indian Companies
Large number of new entrants and startups…

New entrants and startups are encouraged by low entry barriers (ease of RM access,
ease of processing, scope for niches due to varied tastes and preferences, limited
need for financial investment) and the growth potential. Whilst new entrants can
potentially lead to market share dilution of existing players, they help to grow the
category by spreading awareness of the product, introducing a new consuming class,
creating niches, bringing in competitive pricing and forcing existing players to
innovate.
Exhibit 21: Illustrative list of new competitors and start-ups in the F&B space
Company Category Year Company Category Year
ID Foods RTE meals 2005 Snackexperts Dry Snacks 2015
Best Foods Ready meals 2005 Green Snack Company Other savoury snacks 2015
Green Dot (Cornitto) Chips 2009 Juice Maker Juice 2015
Harley Foods Savoury Snacks 2010 Rejoov Cold Pressery Juice 2015
Eatelish Various 2012 Slurrp Farm Cereals, Cookies 2015
Ice berg Ice parlour Ice cream 2012 Epigamia Dairy 2015
The Indian Bean Coffee 2012 Cosmic Nutracos Tea 2015
Udyan tea Tea 2012 Vahdam Tea Tea 2015
Excelus Star Food Beverage Namkeen, Puffs & Patato
2012 Dropkaffe Coffee 2015
(Kettle Studio) chips
Teabox Tea 2012 Global Consumer Products Chocolates 2015
Indian Bean Coffee 2012 Bonhomia Tea, coffee 2015
Veeba Sauces, spices 2013 Smoodies Juices 2015
Rawpessery Juices 2013 Mojo Bar Confectionery 2016
Blue Tokai Coffee 2013 AG Taste Confectionery 2016
Happy ratio Food 2013 Kiru Cookies Biscuits 2016
Yoga Bar Confectionery 2014 Soria Foods and Beverages Juice 2016
The Flying Squirrel Coffee 2014 Flyberry Gourmet Fruits 2016
Chai Thela Tea 2014 Jarlie Ice cream 2016
Shri Shandar Snacks Private
Chips 2014 Quinoa Guru Seeds and grains 2016
Limited (Tastilo)
Macrobiotic herbal Hearbal Product 2014 Ganya Agro Edible oil 2017

Consumer
This presents a potential upside for existing players. As companies scale up,
demonstrate business model feasibility, a differentiated value proposition and an
established brand, they present themselves as viable acquisition targets.
Exhibit 22: Share of top-3 players in most categories has declined over FY13-17
Change in market share of top-3 players over FY13-17

10%
0%
-10%
-20%
-30%
-40%
Puffed Snacks
Ready Meals
Coffee
Baby Food
Soup
Sauces
Noodles
CSD
Tea
Biscuits
Icecream
B'fast Cereals
Spreads
HFD
Proc. foods
Edible Oils
Juice
Chocolate
Water
Namkeens
Potato Chips
Other confec.
… has resulted in a fragmented industry

New entrants/startups, regionalisation of the industry due to differing consumer
tastes and preferences, fragmentation at source of raw material availability and its
domino effect across the value chain, and recent entry of large/MNC players are
some reasons why the F&B industry is highly fragmented. Such a high degree of
fragmentation holds important implications for the industry.
 Limited pricing power: Increased availability of brands implies high
substitutability, which could keep the prices in check.
 Subscale operations: Given the degree of fragmentation, companies are
currently functioning sub-scale. There is potentially scope to increase margins in
the longer run.
 Scope for consolidation: Lowe profitability and inability to scale up beyond a
region/category could force smaller players to sellout to larger national players
that have the resources to realize the growth potential of a product.
Exhibit 23: Consolidated share of players having share less than 0.1%
Consolidated market share of players having less than 0.1% maarket share
72%
64%
49% 48% 47%
44% 44%
34%
28% 28%
24% 24% 22% 22% 22%
18% 18% 15% 15%
13% 11% 10%
Ice Cream
Chocolate
Edible Oils
Puffed Snacks
Namkeens
Biscuits
Ready Meals
HFD
Tea
CSD
B'fast Cereals
Baby Food
Bottled Water
Coffee
Juice
Sauces, Dressings
Potato Chips
Proc. foods
Noodles
Spreads
Soup
Other confec.
9 22 28 8 7 9 29 30 10 5 11 21 7 13 3 10 10 25 8 16 10 11
Source: Ambit Capital research; Note: number represents number of players having market share greater than 0.1%

Consumer
Exhibit 24: Share of top 3 players is much smaller in F&B… Exhibit 25: …compared to HPC
82% 84%
52% 76%
64%
34% 34% 34%
21% 34%
19% 16% 21%
15% 14% 15%
8% 10% 12% 8% 11%
3%
Toothpaste
moisturisers
Cosmetics
Shampoos
Bar soap
Edible oils
frozen deserts
Sugar confec.
Butter & ghee
Salty snacks
Baked goods
Icecream &
Facial
Share of top 3 in 2016 Share of next 3 in 2016
Share of top 3 in 2016 Share of next 3 in 2016
Source: Euromonitor International Limited 2018 © All rights reserved, Ambit Source: Euromonitor International Limited 2018 © All rights reserved, Ambit
Capital research Capital research
Increasing formalization through shift to organized and M&A

Given the fragmented nature of the industry, we believe that consolidation will take
place through:
 Increasing formalization as unorganized players lose share to organized
players: We believe the following factors could lead to the share shift from
unorganized to organized.
o Category premiumisation: As the consumer and category itself
premiumize, for e.g. moves from the glucose to cookies segments in biscuits,
unorganized players could potentially lose market share to organized players.
This is because unorganized players have lesser capabilities (specialty RM
sourcing, production technology, R&D and product innovation, scale, access
to finance, etc.) to differentiate and cater to premium segments within
categories.
o Hygiene expectations: Consumers are increasingly aware of the need for
hygiene and small unbranded players are perceived to use lower quality
ingredients and have less effective safety control, procedures and standards.
o Regulations: Stricter implementation of food regulations (especially
pertaining to safety standards), increasing formalization of the economy
through transition towards a cashless economy and stricter tax and
compliance requirements (e.g. GST, e-way bill) will further encourage share
shift from unorganized to organized.
However, the share shift will reflect over a period of time and not with immediate
effect, as was initially anticipated, as smaller players determine whether to continue
business and as the channel adapts to a cashless working environment.

Consumer
Exhibit 26: Share of unorganised sector in various F&B categories
90% Share of unorganised segment
60%
30%
0%
Frozen desserts
Confectionary
Dairy
Breakfast Market
Salty snacks
Biscuits
Bread
Hot drinks(Tea)
Soft drink (Juices)

Icecream
 Increasing formalization as unorganized and smaller players are scaling

up backed by PE investments: Smaller players that have a strong regional
presence and have national ambitions are now able to scale up significantly
faster through the PE route. This enables not only a means of finance, but also
gives access to the PE investor’s experience, network and industry knowledge.
Exhibit 27: There has been an increase in PE investments in the F&B space
Year PE investor Company Amount (US $ Mn) Category
2017 Morgan Stanley Private Equity Asia Southern Health Foods 23 Instant Food
2017 Accel Partners Maverix Platforms Pvt. Ltd 7 Ready to cook
2017 Premji Invest iD fresh Food 22 Ready to cook
2017 Verlinvest Veeba Foods 6 Sauces
2016 Binny Bansal Yumlane 1 Ready meals
Various- Beverages, Spices, Frozen
2016 Peepul Capital. Maiyas Beverages and Foods Pvt 30
food, Ready to eat
2015 Everstone Modern Food Undisclosed Breads
2015 Adinath Agro Processed Foods Pvt Ltd Carpe Diem Capital Management LLC Undisclosed Sauces & Ketchup
Goldman Sachs, Mitsui Global
2014 Global Beverages and Foods Pvt. Ltd 51 Juices, Confectionaries and Snacks
Investment
2014 International Finance Corporation Lucid Colloids Ltd 30 Additives
2013 India Value Fund Advisors VKL Seasoning & Flavors Pvt Ltd 40 Condiments
2013 The Invus Group LLC, Artal Capital Foods Pvt. Ltd. 29 Ready to Cook, Sauces, Oats
2013 Quadria Capital Capricorn 10 Frozen foods
2013 Sequoia Capital Raykyan Beverages(Raw pressery) 7 Juices
2012 IDFC Private Equity Parag Milk Foods Pvt Ltd 29 Dairy
2011 Sequoia Capital Prataap Snacks 30 Extruded Snacks
2011 Standard Chartered PE Bush Foods Overseas 25 Ready to Eat
 Increasing consolidation through mergers and acquisitions: In the natural

order of competition, larger players with deeper pockets are acquiring smaller
brands for scaling up or for plugging its regional gaps.

Consumer
Exhibit 28: Recent M&A activities (select) in the sector

Total Value
Target Name Acquirer Name Category
(` Mn)
Havmor Ice Cream Ltd Lotte Confectionery Co Ltd 10,200 Ice Cream
Creamline Dairy Products Ltd Godrej Industries Ltd 1,500 Dairy
Avanti Frozen Foods Pvt Ltd Thai Union Group PCL 1,250 Frozen Foods
Rasoi Emami 130 Edible Oil
United Spirits Ltd Diageo 171,450 Alcohol
Delightful Gourmet Pvt Ltd Neoplux Co Ltd,Sistema PJSC FC 650 Frozen food
Chhajed Foods Pvt Ltd GVFL Ltd 300 Ready to eat
Thirumala Milk Products Private
Groupe Lactalis SA 17,500 Dairy
Limited
Amrit Banaspati Company Ltd Bunge Ltd 3,250 Edible Oil
Zea Maize Pvt Ltd PVR Ltd 50 Ready to eat
Harvest Gold Grupo Bimbo 3,400 Breads

Consumer
Consumption tide will NOT raise all boats

We believe that unlike HPC categories that have similar underlying dynamics
of consumer perception, production processes and competitive actions,
underlying dynamics defining F&B categories are very diverse. This is to
some extent a function of F&B being a more evolving segment as compared
to HPC and also because of the more unorganized and regional nature of
F&B categories. We believe certain categories within F&B are therefore more
scalable and profitable than others; e.g. Baby Foods, Packaged Snacks,
Chocolates, Biscuits, Processed Foods and Ready Meals. On the other hand
categories like Tea, Coffee, Edible oils and Noodles face issues that make
them less growth-oriented.
Consumer demand is the key to determine scalability

In the previous section, we established the various parameters across which the Case study: Green dot – Lessons
Indian F&B consumer is heterogeneous. Not acknowledging or not catering to the
from Mars: Mars launched global
nuanced Indian consumer can potentially result in product failure. However, certain
chocolate brand Snickers in India
categories and products have displayed the ability to cut across regional differences
in 2004. However, the brand met
and succeed nationally. We believe that a combination of factors enables products to
with limited traction in the market
go national - price point, distribution reach, ease of production, appealing to Western
as Snickers contained egg,
rather than regional tastes (e.g. Parle G’s glucose biscuits, Prataap’s Rings extruded
resulting in having to put a ‘red
snacks, Nestle’s Maggi noodles). In the table below, we analyze the scalability
dot’ on the pack which kept
potential of various F&B categories. We conclude that Chocolates, Processed, Foods,
vegetarian consumers away. When
Ready Meals and Packaged Snacks have the highest scalability potential in India at
company re-launched the Snickers
this stage.
in a vegetarian version in 2013,
 Homogeneity: In our view, higher homogeneity implies easier acceptance by with a green dot, Snickers to
consumers at the national level, which increases potential category size. become the largest revenue
contributor to Mars’ India sales.
 Penetration levels: We use per capita consumption as a metric to measure
penetration levels. Lower penetration levels imply higher growth potential.
 Share of unorganized segment: Higher the share of unorganized segment,
higher is the potential for organized players to grow the category for themselves.
 Affordability: Higher affordability implies the category is less discretionary in
nature and its adoption will be higher as a larger consumer base can afford to
indulge in this category.
 Fit with ‘CHIP’: We have seen that categories and companies that are more
aligned to ‘CHIP’ (Convenience, Health, Impulse, Premiumisation) have grown
faster than their peers which are less aligned to ‘CHIP’.

Consumer
Exhibit 29: Homogeneity and scalability of a category are closely related

Scope for Share gain India PCC
Degree of Fit with
Category Overall further from Affordability as % of Remarks
homogeneity ‘CHIP’
penetration unorganised world
Lower penetration and lower per capita
Coffee 4% consumption than tea; homogeneity of
category across regions allows scalability
Share gain from unorganised is the only
Tea 25% driver of scalability as category is already
widely available and accepted
Despite high per capita consumption and low
degree of unorganised players, scalability
HFD 36%
potential exists as the product is largely not
penetrated in Northern and Western markets
Scope for scalability due to low per capita
consumption and increasing consumer
Baby food 5%
acceptance; heavily regulated nature prevents
frequent new launches which is a deterrent
Lower degree of homogeneity as category
B'fast cereals 6% growth is mainly driven by hot cereals, i.e.
oats, which is prepared as per regional tastes
Homogeneity of product allows scalability.
While unorganised segment is small, shift
Chocolates 9%
from traditional sweets to chocolates can drive
growth
Other Share gain potential from unbranded players
13%
confec. drives scalability
Despite high PCC, share gains from
Edible oils 113% unorganised sector drives scalability potential;
regional variants restrict pan-India scalability
Low penetration as not all point of sale outlets
Ice cream 11%
are cold chain enabled
Low per capita consumption drives scope for
Processed scalability; higher scalability than ready meals
1%
foods due to multipurpose nature of processed
foods
Share shift from home-cooked/street-side
food combined with low salience currently will
Ready meals 2%
be offset to some extent by lack of
homogeneity
Category is already widely available and
Noodles 9% could see competition from healthier snacking
options
Sauces, Regional nature of product and fairly high
9%
condiments degree of penetration restricts scalability
Fairly penetrated category but share shift from
Chips 18% unorganised and homogenous nature of
category provide growth opportunity
Given suitability to palette, further penetration
Puffed potential is high; also category is fairly
32%
snacks homogenous with reasonably large
unorganised segment
Share of unorganised remains high due to
Namkeens** N/A ease of production and lack of specialty raw
materials required in production
Low per capita consumption drives scope for
Soups 5%
scalability
PCC is low which should support penetration
Spreads,
6% growth. However, lower share shift from
jams
unorganized to limit growth potential
Homogeneity of product allows scalability;
Biscuits** 24% high share gain potential from regional
unbranded players
ease of production and lack of specialty raw
Water 6%
materials required in production;
homogeneity of products allows scalability
CSD 11% Fairly penetrated category
Juice** 16% ease of production and lack of specialty raw
materials required in production
Source: Ambit Capital research; **penetration gains for these fairly penetrated categories refers to potential gains from home made to processed goods
Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

Consumer
Supply chain complexity differs across categories

FMCG companies are pure play marketing companies that rely on A&P and brand
perception to drive sales. Thus, arguably, back-end processes such as procurement,
cold chain, do not merit much scrutiny or analysis. While this largely holds true in
case of HPC, for F&B, availability of consistent quality and quantity raw material and
shorter shelf lives leading to higher focus on efficient distribution add to the
challenges. This can not only impact topline growth but also impacts margins and
product quality. Different sub-categories face varying dynamics of lack of cold chain
and volatility in supply and pricing of raw materials. Hence categories which are less
prone to these issues are better for companies to establish a lower risk, higher profit
and higher growth potential business.
 Ease of procurement: Availability of raw materials in India or dependency on
imports, import/export restrictions, scarcity or abundance of supply versus
demand, fragmentation at source of supply, ease or difficulty in meeting climatic
conditions, mode of selling (auction model versus purchase by mandis), perennial
or annual source of supply, strictness of regulations governing supply are some of
the thoughts used by us to judge the ease of procurement of commodities.
 Pricing Stability: Alignment with global agri-commodity prices or local
determinants of prices, monsoon sufficiency, taxation policy on imports can cause
volatility in raw material prices.
 Ability to pass on volatility to consumers: However, pricing volatility is
partially offset by the ability of the company to pass it over to the consumer.
Typically, companies are able to pass on the input cost volatility in
premium/discretionary categories (e.g. processed foods), indulgence based
product categories (e.g. chocolate cookies) or where consumer willingness to
spend is high (e.g. baby food).
 Ease of production: Easier production process makes category more scalable as
it allows for easier entry by new players. While this may cause disruption for
existing players, it helps category expand faster.
 Cold chain requirement: Given the state of cold chain in India, we believe that
a category that is highly dependent on cold chain may not be able achieve its
true potential due to the insufficient and inefficient state of the infrastructure.

Consumer
Exhibit 30: Different categories face different supply chain dynamics

Ability to
Non-
Key raw Procurement Pricing pass Ease of
dependency Remarks
material (s) ease stability volatility to production
on cold chain
consumer
Premium, less competitive, addictive, daily
Coffee Coffee beans consumption nature of industry allows passing
on of RM prices; India is a net exporter of coffee
Auction model allows easy availability of loose
tea and inability to pass on prices; higher
Tea Tea leaves
volatility on account of global prices having a
pass-through impact on India prices
Urban, premium nature and consolidated
competition allow passing of RM prices; prices
Barley, milk
Other hot drinks of milk powder align with global pricing cycles,
powder, sugar
unlike milk which is fairly insulated and
determined by local forces
Premium, urban, discretionary, convenience
Milk powder,
Baby food nature, consumer willingness to spend allows
wheat, malt
price transfer
High availability of substitutes and high
Breakfast cereals Corn, sugar competitive intensity restricts ability to pass on
changes in RM prices
Cocoa, Net importer of cocoa; as it is mainly grown as
Chocolate condensed an intercrop in India; aligned with exogenous
milk, sugar international pricing cycle
Other `0.50 price point restricts ability to pass on RM
Sugar
confectionary pricing volatility
Ease of procurement due to change in
regulations allowing import of edible oils;
Seeds, oils
Edible oils volatility in prices due to changing import
(palm oil)
regulations; higher substitutability, lack of
branding, restricts ability to pass on volatility
With key raw materials being available freely in
markets, price volatility is the only issue. Given
Ice cream Milk, sugar
premium/discretionary nature of the category,
price inflation can be passed on to consumers
Premium/urban/discretionary/convenience
Fruits and
nature of product allows price transfer; high
Processed foods vegetables,
volatility and difficulty in procurement due to
meat
fragmentation, varying quality, and seasonality
Premium/urban/discretionary/convenience
Fruits and
nature of product allows price transfer; high
Ready meals vegetables,
volatility and difficulty in procurement due to
meat
fragmentation, varying quality, and seasonality
Wheat flour, Ease of procurement due to change in
Noodles
edible oils regulations allowing import of edible oils
High volatility and difficulty in procurement due
Fruits,
Sauces dressings to fragmentation, varying quality, and
vegetables,
condiments seasonality; change in formulations enables
edible oils
passing on volatility
One-time harvest of potatoes; restricted ability
Potato chips Potato, palm oil to pass on pricing volatility due to all-time low
grammages
Flour is a relatively stable commodity; palm oil
Flour corn, rice,
Puffed snacks is mainly imported and has fluctuating duty
palm oil
structure
Flour gram, Higher ability to pass on changes in pricing
Namkeens corn, rice, palm through changes in grammage and
oil differentiation
Fruits and Premium/urban/discretionary/convenience
Soups
vegetables nature of product allows price transfer
Spreads, jams, Fruits and Premium/urban/discretionary/convenience
preserves vegetables nature of product allows price transfer
As category premiumises, ability to pass on
Wheat, sugar,
Biscuits volatility in pricing of sugar and palm oil will
milk, palm oil
increase
Licence to withdraw water from ground/rivers,
Water Water diminishing supply has increased regulatory
scrutiny on the sector
Licence to withdraw water from ground/rivers,
CSD Sugar, water diminishing supply has increased regulatory
scrutiny on the sector
Changes in composition enable nectars (>24%
Juice Fruits, sugar
to <100% fruit content) to pass on RM volatility

Consumer
Ability to innovate determines competitive intensity

Given that consumer and competitor dynamics differ across categories, some
categories lend themselves better to innovation than others. We believe that the key
source of innovation is the ability to differentiate the product. We maintain that
whilst the scope for differentiation and thus scope for innovation is high in F&B, the
success or failure depends on the ability of the company to create a product offering
with a unique value proposition. The scope for differentiation results in either new
product launches by incumbents or entry of new players/startups that enter to fill a
white space. Also, MT as a channel supports innovation and increases competitive
intensity as it promotes experimentation and provides easy access to urban/affluent
consumer for launch of new products/brands. Cereals, Processed Foods, Ready
Meals, Biscuits, Packaged snacks and Juices are the categories that are better geared
towards driving growth through innovation better than other F&B categories.

Consumer
Exhibit 31: Scope to differentiate a product is the key driver of innovation within F&B categories
Scope for Scope for Intensity of
Dependency
Overall differentiation disruption by New product launches Remarks
on MT
in products entrants/Start-ups by incumbents
Differentiation through introduction of global products,
quality/origin of seeds; sourcing of coffee beans is
Coffee
tougher than tea procurement due to quality
specifications
Scope for differentiation through tea flavours (e.g. green
tea, fruit tea, etc.); limited new launches; higher scope
Tea
for disruption through start-ups due to ease of
procurement of tea leaves compared to coffee beans
Scope for differentiation through health proposition,
fortifications, category expansion through customer
HFD
segment development; consolidated nature of
competition restricts new comers
Only few products globally available have been launched
in India; new entrants deterred by prohibition on
Baby food advertising and intensity of regulatory scrutiny;
differentiation through introduction of sub-categories
currently not available in India but available globally
Differing breakfast habits provide scope for
B'fast
differentiation which has resulted in both new entrants as
cereals
well incumbents launching variants
Scope for differentiation through introduction of global
products; sourcing of chocolates can be difficult and
Chocolates
establishing cold chain is an issue which restricts new
entrants
Other
Products are largely standardized and hence level of
confectiona
innovation has been low in this category
ry
Differentiation driven only by blended oil compositions;
recent launches include olive oil; scale of category and
Edible oils
ease of procurement allows new entrants to disrupt in
local regions
Differentiation through formats, health proposition,
Ice cream premiumisation; cold chain dependency hinders new
entrants
Limited scope for differentiation as product is
Processed
homogenous; however growth potential has attracted
foods
new entrants such as ITC
High scope for differentiation due to heterogeneity of the
Ready
product; new entrants encouraged by ease of availability
meals
of raw materials
Limited scope for differentiation as health and flavour
Noodles
based differentiation exploited by incumbents
Sauces, Additive nature allows for differentiation through tastes,
condiments ingredients, packaging, branding
Limited further scope for differentiation through flavours
Chips as several flavours are already available; differentiation
through health value proposition
Scope for differentiation through shapes; lesser intensity
Puffed
of start-ups compared to chips due to tougher production
snacks
methodology
High scope for differentiation due to heterogeneity of the
product; fragmented nature of competition and high
Namkeens
growth potential increases scope for disruption from new
entrants
Scope for differentiation due to heterogeneity of the
Soups
category; consolidated nature hinders new entrants
Spreads, Limited new launches by incumbents despite entry of
jams smaller players
Scope for differentiation through premiumisation;
Biscuits regional players are ceding ground; incumbents have
been active with new variant launches
Premium launches by global companies like Coke, no
Water differentiation in local brands; ease of production
encourages regional players
Some recent innovations (such as Pepsi Black) are
CSD
incremental in nature
Differentiation through tastes, packaging, ingredients,
health proposition; ease of processing has attracted
Juice 3
several new players, such as Raw Pressory, Hector, B
Natural (ITC)
Source: Ambit Capital research. Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Consumer
And the winners are…

To benefit from improving consumer demand and evolving industry
construct, a company must have the right category mix (scalable and
profitable), innovation track record (ability to enter new categories) and
distribution reach (ability to go national vs remaining regional).
Encouragingly, when a company gets these aspects in place, scale efficiencies
and product mix improvement kick in as well, which help improve
profitability. Companies that have achieved this mix are Britannia, Prataap,
GSK and ITC while their peers like Nestle, HUL, Marico and DFM are not.
…those with topline growth potential

To achieve market leading sales growth (and gain market shares), a company must
have the combination of:
 Right categories: Scalability of a category is determined by how homogenous,
affordable and easy to produce it is from a supply chain perspective. Also, more
impulse-driven a category, higher is scope for premiumisation and pricing power
which drive sales growth.
 Innovation: A company must be in categories where scope for innovation and
differentiation is high. Also, the company itself should have the intent as well as
the ability (differentiated products, branding, positioning) to maintain a robust
new product launch pipeline.
 Distribution expansion: The company should not only have the right
distribution mix (general trade vs modern trade, rural vs urban) and reach (total
outlets covered) but also should be servicing the channel well through direct
servicing. Shelf space management is key to generate impulse-based purchases
in this segment.
If not all categories are great, not all companies are great either
We assess the topline potential of companies on the basis of their category mix. At
the onset, we establish that we prefer companies that are present in multiple
categories. This allows them to sweat distribution better, to leverage potential brand
synergies and to gain from back-end procurement synergies.
We believe the topline potential of a company is primarily driven by the scalability,
scope for innovation and degree of alignment with CHIP themes of the categories the
company is present in. Additionally, the potential for transformational growth is
defined by the company’s intent and ability to enter new categories.

Consumer
Exhibit 32: Companies’ topline potential is dependent on existing and new categories
Assessment of potential
Assessment of current categories
categories expansion
Intent of
Ability of the
How Does the How aligned the
Company company to Remarks
scalable is category is it to the companies
successfully
the lend itself to CHIP to enter
enter new
category? innovation? themes? new
categories
categories
Present in categories that are premium and aspirational and
urban in nature (such as baby food, noodles, chocolates), hence
aligned with CHIP; intent to enter new categories remains
Nestle questionable given weak new launch rate and given that several
categories from global portfolio are not introduced; weak ability to
enter new categories given supply chain and reach issues (e.g.
Grekyo)
Scope for scalability of categories by increasing impulse and
indulgence-based purchases, and share gains from unorganised
players; premiumisation drives scope for innovation; health
Britannia proposition and convenience of consumption aligns it with CHIP
themes; ambitions to become a total foods company and enter
new categories every year; however, track is poor (e.g. breakfast
cereals, Danone JV)
Scalability potential by making category relevant for different sub-
segments; scope for innovation through varying health
GSK propositions; aligned with CHIP theme of convenience (east to
consume) and health through fortification); weak entry into
cereals, noodles, biscuits
Limited presence in namkeen which is the scalable sub-category;
limited scope for innovation in puffs (packaging, shapes); aligned
DFM
with CHIP themes of convenience and impulse; no stated intent to
enter new categories
Edible oils is scalable due to share gains from unorganised; scope
for innovation limited to composition changes; whilst breakfast
Marico
cereals may gain from CHIP themes, edible oils can benefit from
increasing health consciousness
HUL’s F&B categories are well penetrated steady-state categories
HUL (tea, ice-cream, ketchup); new launches in F&B are limited to
variant launches
ITC is present in scalable categories (e.g. biscuits, ready meals,
spices) that are CHIP aligned due to scope for premiumisation;
ITC strong track record of market entry in new F&B categories (biscuits,
atta, noodles, snacks); capital intensity and new launches to
continue as company invests in back end sourcing synergies;
Scalability through share shift from unorganised to organised;
high scope for innovation through variant launches; aligned to
Prataap CHIP themes of convenience-based consumption and impulse
consumption; strong track record of successful market entry with
rings, namkeens, chips
Source: Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak
We prefer national players who are able to sweat resources better

As established in the previous section, it is easier to scale regional boundaries in HPC
products than in F&B products, due to a higher degree of universality of tastes,
preferences and perceptions of HPC products. In F&B, not all companies are able to
transition from being a regional player to a pan-India player as it requires a
successful combination of: 1) ability to cater to varied consumer tastes and
preferences, 2) ability to set up distribution beyond home turf, and 3) ability to
withstand initial investments in establishing brand awareness, recognition and recall.
National players enjoy the obvious benefits of scale in manufacturing and
procurement. They may also be able to cross-pollinate products from one region to
another. Additionally, they are able to sweat their brand investments (such as TV,
radio advertisements etc.) better.
Arguably, regional players may be able to sweat their general trade distribution
better in their home turf due to better brand recognition and established relations
with local distributors and retailers. However, in the case of modern trade (15-20% of
total F&B sales) and CSD (<5% of total F&B) sales, i.e. channels with centralized
(non-regional) decision making, a pan-India player may be able negotiate better
terms on a consolidated basis than a regional player.

Consumer
Exhibit 33: Distribution split

Distribution by channel Distribution by reach Sales/Store/Month(`)
Direct Indirect Total Directly Indirectly Geographic
Traditional CSD Modern dispersion
(Mn) (Mn) (Mn) Serviced Serviced
HUL 83% 5% 12% 3.0 5.5 8.5 7,241 1,693
Marico 83% 5% 12% 1.0 3.7 4.7 3,304 440
Nestle 81% 4% 15% 1.3 2.7 4.0 4,171 1,254
GSK CH 83% 5% 12% 1.0 3.3 4.3 2,325 302
Britannia 83% 5% 12% 1.8 3.0 4.8 3,353 503
ITC 96% 2% 2% 2.0 5.5 7.5 8,743 3,843
Prataap 99% 0% 1% 0.7 0.5 1.2 700 527
DFM 99% 0% 1% - - 0.3 - -
Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak
Not all companies actually innovate

In F&B, we distinguish between brand and product innovation and further, within
product innovation, we distinguish between incremental innovation (innovation based
on flavor, size and packaging, re-launch of old products) and transformational
innovation (new product category, new value proposition).
Compared to HPC, there is a greater need for product innovation in F&B categories.
We believe this is mainly due to:
 Consumer buying process – HPC purchase decisions tend to more planned
whereas for several F&B categories they tend to be more impulse-driven.
 Consumer’s willingness to try – F&B consumer is likely to experiment more with
F&B purchases than HPC purchases. Whilst this is partly on account of the degree
of choices available in F&B versus HPC, it is also due to a higher degree of
familiarity with the product and ingredients. In HPC, ingredients are largely
chemical and unknown.
 Consumer experience and judgment – In F&B (e.g. sauces, packaged snacks,
etc.), the consumption cycle is shorter sometimes and instantaneous and the
judgment of whether the product is liked or disliked is known within a shorter
span of time and more tangibly, whereas in HPC products (e.g. skincare products,
sunscreen, surface care, etc.), the efficacy of the product takes longer to
ascertain.
The above reasons necessitate greater innovation and a shorter new launch cycle to
maintain consumer engagement or interest. Potentially, F&B products are easier to
innovate, especially incrementally, due to easy availability of raw materials, lesser
regulatory hurdles and faster product approval processes.
Exhibit 34: New product launches and nature of innovation involved
Company
Product and Nature of
Description Year track Remarks
brand innovation
record*
ITC
RTD Ready to drink milk-based beverages Incremental 2018
Frozen food
Fresh fruit & Vegetable Transformational 2017
Farmland
Spice Master Chef Variants of Indian spices Transformational 2017
Biscuits enriched with native Indian
Biscuits Sunfeast Transformational 2017
cow milk
Confectionery
Candyman clear candy mango Incremental 2017
Candyman Successfully launched both incremental and
Biscuits Sunfeast Sunfeast farmlite protein powder Incremental 2017 transformational products at a pan-India level
Savoury Snacks Bingo No Rulz- multiple shapes of with a relatively short turnaround time
Incremental 2017
Bingo snacks in every pack
Dairy whitener
Dairy Whitener Transformational 2016
Sunfresh
Coffee Sunbeam Premium Coffee Incremental 2016
Chocolates Fabelle Luxury Chocolates Incremental 2016
Natural fruit
Juices Transformational 2015
beverages B Natural

Consumer
Company
Product and Nature of
Description Year track Remarks
brand innovation
record*
HUL
Ice Cream Cornette
Oreo biscuit mixed in the cream Incremental 2018
Oreo
Noodles Knorr Taste based variety Incremental 2017
Incremental launches; no new transformational
Ice Cream Magnum Mini Multipack - size based innovation Incremental 2017
launches in recent years
Ice Cream Magnum Taste based variety Incremental 2017
Spices Knorr Chef Launched eight new taste-based
Incremental 2016
Masala variants
Prataap
Other Savoury On short turnaround time, leveraging contract
Launches in multiple flavours Transformational 2018
Snacks Nachos manufacturing methodology, has successfully
Sweet Snacks Rich carried out multiple category launches with a
Chocolate, jam treat Transformational 2017
Feast relatively faster RTM
DFM
Savoury Snacks Crax Cheese balls Incremental 2018
Not able to launch nationally; innovations are
Savoury Snacks Crax Curls shaped snacks Incremental 2017
only incremental
Savoury Snacks Crax Wheat-based puff Incremental 2016
Marico
Aura- 80% olive oil blended with 20%
Edible Oil Saffola Incremental 2017
flax seed
Breakfast Cereals Flavour based variation Tandoori Magic, Innovations in oil are only composition-based
Incremental 2017
Saffola Tangy Chaat variations; impressive performance and success
Soup Saffola Soup in 5 Flavour Transformational 2017 in oats
Shake Saffola Saffola Active Slimming Nutri-Shake Transformational 2017

Britannia
Chocolates Pure
Wafers bridge products Transformational 2018
Magic Deuce
Biscuits Good Day Wonderfulls variants Incremental 2017 Impressive new launch record in biscuits;
company loses out due to longer RTM; entry into
Biscuits Cake Biscotti Combination of cake & biscuit Transformational 2017 breakfast foods was withdrawn due to failure of
Biscuits Nutri Choice Digestives Incremental 2016 product to gain traction
Bread Britannia Atta and Maida variant Incremental 2016

Nestle
Chocolates Kit Kat KITKAT Strawberry-based variant Incremental 2018
Chocolates Kit Kat Nestlé KITKAT Dessert delight Incremental 2017
Noodles Maggi Maggi health noodles based variant Incremental 2017
Blueberry Greek Yoghurt and Greek
Dairy Nestle Incremental 2017 Company has several incremental innovations
Style Curd
only despite having access to the global portfolio
Cocoa-malt milk beverage crafted
RTD Milo Incremental 2017
specially for growing children
3 flavours (e.g. Chilled Latté)
RTD Nescafe Incremental 2017
customised for Indian taste
Dairy Nestle Milk variant 20% higher protein Incremental 2017
GSK
HFD Horlicks Horlicks Protein+ Incremental 2018
Breakfast Cereals
Horlicks Oats Incremental 2017
Horlicks
Two Flavour-Chocolate Delight and
Shakes Horlicks Incremental 2017
Kesar Badam
Recent pick-up in incremental launches is
Maltova- the yummy choco caramel
HFD Boost Incremental 2015 encouraging
drink
Noodles Horlicks Foodles Transformational 2010
Biscuit Horlicks Horlicks Biscuit Transformational 2009
HFD Horlicks Women Horlicks Incremental 2008
Source: Ambit Capital research, * for company track record of recent success and failure, please see appendix
Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Consumer
… and with scope for profitability improvement

We believe if companies are able to scale up their sales growth, margin
improvements are achievable. The key factors for a company to earn at its optimal
level are scaled up business, pricing power to mitigate input cost inflation and ability
to navigate competitive disruptions through differentiation and not through price cuts.
Pricing power can offset hit to margin from cost inflation
Given the regulatory scenario governing the agri-sector and its dependency on the
monsoon, RM prices are volatile. However, whether a company is able to maintain
margins despite these and other unpleasant margin surprises, i.e. whether a
company can pass on these changes to the consumer, is determined by the following
factors:
 Ability to differentiate: As it is not possible to provide the same product to the
consumer as the competitor and then charge a higher price, the category must
lend itself to differentiation so that the company is able to create a monetisable
value proposition and differentiate its product from competitors
 Degree of dominance: As market leader, the more the company is able to
dictate category growth and category premiumisation, more is the ability of the
company to act as price setter.
 Alignment of the company to monetisable consumer themes: Given the
evolving lifestyles of the Indian consumer, as established in our CHIP thematic,
we believe the key themes defining the Indian consumer are Convenience,
Health, Impulse and Premiumisation. The more aligned a company’s category
mix, products and brands are to these key themes, the more the company can
charge a premium over competitors.
Exhibit 35: Dominance and CHIP alignment are the key factors that allow a company to develop pricing power
Ability to Degree of Aspirational/
Remarks
differentiate dominance CHIP alignment of categories
Market leader in most of the categories (e.g. baby foods, noodles,
coffee); baby foods, noodles, instant coffee, represent discretionary
categories and ride the CHIP themes of health and convenience;
Nestle
scope to differentiate exists in baby food as several products
available globally are not yet available in India; however, it is
limited in confectionary, dairy
Overall market leader in biscuits, supplemented by dominant share
Britannia in discretionary/indulgent sub-segments, such as cookies, cream-
filled biscuits
Room to innovate and differentiate in the HFD category through
GSK segmentation and targeting, as has been done in the past; GSK
has ~60% market share in HFD and a "health franchise"
Ability to differentiate through incremental product and packaging
innovation; company has dominance only in Northern India;
DFM
category is aligned to CHIP themes of convenience and impulse
purchases
Ability to differentiate in edible oils is limited to formulation
changes; ability to leverage dominance is limited due to
Marico
fragmentation in the category; Oats/hot cereals franchise can ride
convenience, health, premiumisation themes
Categories like ice-cream, sauces, soup are aligned to CHIP
HUL
themes
Categories like packaged snacks, premium chocolate are highly
ITC geared to CHIP themes, given recent entry, the company does not
have dominance in most categories
Categories like packaged snacks are highly geared to CHIP
Prataap themes, given recent entry, the company does not have dominance
in most categories
Source: Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

Consumer
Category/industry premiumisation helps improve profit margins

We concede that given that India is in its growth phase for F&B, many categories (e.g.
processed foods, soups.) which are relatively newer and less penetrated may not
premiumise as newer consumers are enticed to purchase the product through lower
pricing. However, categories that have a significant degree of acceptance in India,
especially that were introduced decades ago (e.g. biscuits, tea) are witnessing
premiumisation. This enables incumbents to compete effectively with new entrants
whilst maintaining margins. We believe that companies that have a premium offering
(e.g. Nestle, Britannia, ITC) stand to benefit as premiumisation will enable premium
brands to outgrow mass brands. Also, at the category level, there could be mix
improvement as premium categories are growing faster than staple categories.
Exhibit 36: Premium brands are outgrowing mass brands
Revenue CAGR over FY13-17

20%
15%
10%
5%
0%
Brooke Lipton Lactogen Nan Munch Kitkat Tiger Good day
bond
Unilever - tea Nestle - Baby food Nestle - Chocolates Britannia - Biscuits
Degree of competitive intensity is a key factor in determining profitability

Both the historical growth record and the future potential for growth have attracted a
fair share of new entrants in the market, as illustrated in exhibit 21 in the previous
section. This has resulted in market share losses for incumbents.
We reiterate that whilst in HPC global companies have an edge given access to their
global portfolios, in F&B, there is a level playing field between MNCs and domestic
companies. This is reflected in market share trends as MNC veterans such as Nestle
are losing share to domestic players.
Whilst new entrants who specialize either in products or in regions do dilute market
share, given the regional nature of the industry, they also present an opportunity for
inorganic growth, especially when they are able to scale their distribution and/or
brand and demonstrate the viability of their business models.
We expect the competitive intensity, which varies across categories, to continue. This
may cause stress to margins as it forces incumbents to increase A&P intensity to retain
market share or reduce prices to meet new entrants’ prices.

Consumer
Exhibit 37: Relatively new entrants (such as Prataap, ITC, others) are able to gain share from industry veterans (such as
Nestle, HUL)
Market share Market share
Company/ Company/
category Change in category Change in
2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016
market share market share
Britannia ITC
Biscuits 30.2 30.4 31.4 31.8 30.2 30.6 0.4 Biscuits 13.0 13.7 14.4 12.4 15.2 15.4 2.4
Cheese 11.6 10.1 7.9 7.6 6.5 5.7 -5.9 Puffed snacks 9.2 10.1 10.7 10.9 12 12.1 2.9
Bread 8.1 9.0 9.5 10 10.4 10.8 2.7 Ready meals 7.0 6.8 6.8 7.5 8.8 8.8 1.8
Nestle Unilever
Noodles 59.9 61.3 55.7 51.0 34.9 42.2 -17.7 Coffee 31.3 31.0 30.7 31.2 30.6 32.0 0.7
Baby food 72.5 73.4 64.8 64.9 64.6 62.8 -9.7 Tea 28.4 26.8 27.1 26.9 27.2 26.8 -1.6
Coffee 34.5 35.9 36.8 36.8 37.4 37.3 2.8 Ice-cream 11.2 11.5 11.4 9.9 9.8 10.0 -1.2
GSK Prataap
MFD 66.8 66.7 66.8 66.7 62.4 58.7 -8.1 Namkeen - 0.7 1.3 3.7 2.8 2.7 2.0
Breakfast
0.3 1.6 3.1 4.5 4.7 4.4 4.1 Pufffed 0.3 4.9 6.8 6.6 8.7 10.6 10.3
cereals
Biscuits 0.6 0.5 0.4 0.4 0.3 0.3 -0.3 Potato chips 7.1 6.8 6.6 5.5 4.8 3.8 -3.3
Marico DFM
Edible oils 6.2 5.5 4.5 4.5 4.0 3.6 -2.6 Puffed 7.1 7.2 6.5 5.6 5.8 6.4 -0.7
Breakfast
1.2 2.9 4.8 5.7 6.5 6.9 5.7 Namkeen 0.6 2.1 2.4 2.3 2.3 2.5 1.9
cereals
Britannia, Prataap, GSK and ITC stand out vs Nestle,

Marico, DFM and HUL
In our view, Britannia, Prataap, GSK (off late) and ITC have the right category mix,
innovation track record and distribution strength to benefit from underlying tailwinds
of F&B segment. On the other hand, Nestle, Marico, HUL and DFM Foods have a
positive category mix but their innovation track record is the key reason why we
believe they are unable to benefit from the F&B trends in India.
The good…
 Britannia: Transforming into a Total Foods company with innovation and
distribution expansion
Biscuits is still a highly scalable and premiumisation-oriented category.
Additionally, through its plans to enter new categories, Britannia is likely to scale
up into a total foods company. The quality (less than 30% sales come from
wholesale) and depth of distribution (with special focus on hinterlands), Britannia
also has distribution in place. In terms of profitability, we believe that the
company is under-earning its potential as the scope to premiumise categories
does exists. Additionally, it is likely that the new categories that the company
enters are higher-margin plays.
 Prataap: Multi-category, multi-geography play in the most scalable
category of packaged snacks
Prataap’s focus on highly scalable category of packaged snacks is a positive.
Additionally, through successful expansion of its product portfolio (from chips to
extruded to namkeens) and distribution reach (2.5x in 4 years), Prataap has
managed to gain market share (1% in 4 years). In our opinion, the company is
earning below its true potential. The company’s announced new product
launches (such as the Yumpie) are higher-margin products due to their favorable
transportation value to volume ratio. The company is likely to see margin
improvements through scale benefits as it sweats its distribution better.

Consumer
 ITC: End-to-end supply chain and innovation abilities in place for multi-
category expansion
ITC’s focus in its FMCG division has firmly shifted towards F&B segment – a
development we support given ITC’s supply chain strength in this segment. ITC
has plans to scale up in Dairy, Chocolates, Spices, Frozen Foods – all of which are
highly scalable categories though they may be margin-dilutive. However, the
company is already earning below its potential on account of over-investment in
new launches and steep innovation curve. As investments moderate and
categories scale up, the company’s earnings trajectory is likely to rise.
The bad…
 GSK: Dominance in a category with scalability issues
We believe GSK by not investing enough in category development and
distribution expansion. By taking steep price hikes it was earning more at the cost
of sales growth. It has the highest EBIT margin among peers. However, as it
launches new products (such as Growth+, Protein+), invests in A&P to support
the new launches, and faces higher competition (as peers like Danone and Nestle
launch/re-launch products), sales growth is on a recovering path albeit at the cost
of margins.
 HUL: Innovation engine misfiring; existing categories scaled up well
While one cannot fault HUL’s distribution strength and attempts at innovation, its
track record in scaling up new launches has been limited. Also, some of its
existing categories like Tea and Ketchups have lower scalability. In terms of
profitability, we believe HUL is at a fine balance currently where premiumisation
in existing categories is funding its new launch initiatives. In case any new
launches succeed and scale up, there is a case for margins to improve. But as of
now visibility on that front is low.
The ugly…
 Nestle: Wasted opportunity as weak innovation and distribution limit
ability to scale up high-quality categories
Despite being present in some of the most attractive categories, Nestle failed in
riding the F&B trends in India due to lack of successful innovation. Premium
category mix and brand positioning is being fully utilized for margin benefits and
is not being invested back into innovation and distribution revamp. In case it
expands into new categories, we believe its earning trajectory will moderate as
the company spends on A&P and innovation. This is further corroborated by the
fact that the new categories that it enters are likely to have lower margin
potential given its existing category mix.
 DFM: Large fish in a small pond with limited ability to venture out
Inability to expand beyond extruded snacks and Delhi NCR region has limited
DFM’s growth potential. In terms of profitability, we believe DFM Foods is earning
at optimal level currently but could see margin erosion if it invests in growth (new
categories, distribution expansion or branding).
 Marico: Milking the existing franchise; lack of innovation the key
challenge
Marico’s F&B portfolio mainly consists of Saffola edible oil and oats. We believe
both the categories are scalable but Marico due to lack of credible innovation has
not been to drive market share gains in a meaningful manner. Also, Marico’s
forays into other F&B categories have failed due to excessively high pricing. A
fully scaled up business at high price points and premium positioning imply that
Marico’s current earnings may not be sustainable in its F&B segment.

Consumer
Value for growth and not profitability

Both F&B and HPC have similar value drivers – 1) steady and sustained
growth led by rising consumer demand and active push by companies
through innovation and A&P spends; 2) strong business moats derived from
branding and distribution strength; and 3) resultant high return ratios from
high margins (derived from pricing power), short cash conversion cycles and
lower capex requirements. However, F&B’s valuation drivers are skewed
towards growth than profitability. In a low-growth and low cost-of-capital
environment, F&B has been getting a premium over HPC whose higher cash
generation at lower growth rendered it a yield play. In India, where overall
growth of the FMCG sector has been reducing, expectations of F&B delivering
similar growth path which HPC did about a decade ago is likely to support
F&B valuations better than HPC valuations. It is not a coincidence that our
long-term BUY basket has 3 F&B names (USL, Hatsun, Britannia) and only
one HPC name (HUL).
F&B is preferred over HPC

Globally as well as in India, F&B plays have been closing the valuation gap vs HPC
and are now trading at a premium in some instances. F&B plays, being lower-margin
and lower-return businesses, used to trade at a discount to cash-generative HPC
businesses. However, as growth for HPC has moderated (globally and in India) and
F&B is maintaining growth, the valuation discount has narrowed.
Globally, HPC has been preferred over F&B
Globally, over last decade, HPC companies have grown faster than F&B companies
for most part as HPC companies have higher exposure to faster growing emerging
markets (30-50% of sales). Given F&B does not travel well due to local tastes and
preferences, most global F&B companies do not have large contribution from EM
sales (less than 30% of sales). Even in India MNCs do not dominate as many F&B
categories as HPC categories. Also, given the commodity cycle has been more
favorable to HPC companies than F&B companies (correction in crude prices has been
higher than correction in agri commodities), even margin improvement has been
higher for HPC companies globally. Hence, global investors prefer HPC over F&B as
can be seen in trading multiples (HPC trades at 25x 1Yr forward P/E vs F&B at 21x
1Yr forward P/E).
Exhibit 38: HPC has higher exposure to faster growing EMs Exhibit 39: Higher correction in crude prices than agri
=> HPC (4.4% CAGR) has grown ahead of F&B (3.9%) prices implied higher margin gains for HPC vs F&B
globally
14% 3-year rolling sales CAGR 20% HPC EBIT margins are up 3% vs F&B EBIT
10% 18%
6% 16%
2% 14%
-2% 12%
-6% 10%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
HPC F&B HPC F&B
Source: Ambit Capital research, Global HPC include Unilever, P&G, Colgate, Source: Ambit Capital research
RB, L’Oreal, Unilever Indonesia, Mayora, Kao, Amore Pacific and Global F&B
include Nestle, Mondelez , Kellogs, Suntroy, Lotte, Tingyi.

Consumer
Exhibit 40: This has reflected in one-year forward P/E multiples with F&B trading at
discount vs HPC
30
25
20
15
10
Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Global HPC 1 year forward PE Global F&B 1 year forward PE
Source: Ambit Capital research, Global HPC include Unilever, P&G, Colgate, RB, L’Oreal, Unilever Indonesia,
Mayora, Kao, Amore Pacific and Global F&B include Nestle, Mondelez , Kellogs, Suntroy, Lotte, Tingyi.
However, in India, expectations of faster growth and margin improvement in

F&B => higher multiple for F&B over HPC
In India, F&B has been closing the valuation gap with HPC and is now trading at a
marginal premium to the HPC sector. We believe this is on account of expectations of
higher sales growth as well as higher margin improvement from F&B segment given
the plethora of factors mentioned earlier.
Exhibit 41: Expectations of higher growth and margin Exhibit 42: Sales growth and EBITDA growth comparison
improvement in F&B is reflected in one-year forward P/E between HPC and F&B
multiples with F&B at a premium to HPC
70 F&B HPC
60 40%
50
40 30%
30
20 20%
10
0 10%
Mar-08
Feb-09
Feb-10
Feb-11
Feb-12
Feb-13
Feb-14
Feb-15
Feb-16
Feb-17
Feb-18
0%
Indian HPC 1 year forward PE Revenue growth expected EBIT margin expansion
over FY17-20 over FY17-20
Indian F&B 1 year forward PE
Source: Ambit Capital research Note: Indian HPC includes HUL, Marico, Source: Ambit Capital research
Dabur, Godrej Consumer, Emami, Colgate and F&B includes Nestle,
Britannia, Prataap, GSK Consumer, UNSP, UB, Hatsun, Prabhat, Parag,
Manpasand.

Consumer
Exhibit 43: Expectations of higher growth and margin improvement in F&B is reflected
in one-year forward P/E multiples with F&B at a premium to HPC
70
60
50
40
30
20
10
0
Mar-08
Nov-09
Apr-10
Sep-10
Feb-11
Dec-11
May-12
Mar-13
Nov-14
Apr-15
Sep-15
Feb-16
Dec-16
May-17
Aug-08
Jan-09
Jun-09
Jul-11
Oct-12
Aug-13
Jan-14
Jun-14
Jul-16
Oct-17
Indian HPC 1 year forward PE Indian F&B 1 year forward PE
Source: Ambit Capital research Note: Indian HPC includes HUL, Marico, Dabur, Godrej Consumer, Emami,
Colgate and F&B includes Nestle, Britannia, Prataap, GSK Consumer, UNSP, UB, Hatsun, Prabhat, Parag,
Manpasand.
And we agree as we prefer F&B over other FMCG segments

As discussed earlier in the note, it is no coincidence that most PE deals, M&A deals
and IPOs that are happening in the Indian FMCG space relate to F&B and not to
HPC. Improved valuation and expectations of higher growth vs HPC sector have
attracted higher interest by investors in this space. Given sales growth is the key
driver of value creation for most of our coverage companies, the ability to benefit
from changing consumption patterns would be key for companies to deliver on
growth expectations and justify their current valuations. We believe certain categories
(and hence companies over-indexed to these categories) like F&B are better placed
than others to deliver on this growth potential.
Exhibit 44: F&B is placed high in our pecking order in the FMCG space
6 Tobacco Tobacco Fut

High
5 HPC Fut HPC
4 Paints F&B Fut

Medium
ROCE
3 AlcoBev Fut Paints Fut F&B
1 AlcoBev
Low
-
-Low 1 2 Medium
3 4 5 High 6
Growth
Source: Ambit Capital research, Size of the bubble denotes valuations
 Food & Beverages: We believe F&B is the best-placed segment in FMCG. Low
penetration, rising affordability, strong innovation and changing lifestyles
(preference for impulse, convenience and health & wellness products) should
support higher growth. Growth led by shift of share from unorganised to
organised is also likely to be the highest for the F&B segment. Investments to
drive growth have already been made to a large extent and, hence, return ratios
should improve. We expect valuations to further expand from the current above-
sector-average levels.
 Home and Personal Care: While HPC is currently growing in line with the
sector, with rising penetration we expect growth to slow to below sector average.
However, return ratios would remain high; so any de-rating would be marginal.

Consumer
 Paints: Paints have historically grown ahead of the FMCG sector average. But we
believe that as re-painting cycles stabilise and slower housing addition from
FY12-17 comes into the painting cycle, growth should moderate and come in line
with the sector. Rising investments by key players combined with the slowdown
should bring down return ratios from above average to average levels. This
should lead to a significant de-rating.
 Tobacco: We believe tobacco’s below-average growth would largely sustain.
However, return ratios remain high and, with earnings expected to maintain
steady growth, multiples should re-rate from below average to in-line levels.
 Alcohol: We believe alcobev stacks unfavorably to most segments in terms of
growth and returns. However, its future trajectory is positive as we expect it to
maintain growth while improving return ratios. This should drive only a marginal
de-rating from the current lofty valuations.
As Indian FMCG is to world, F&B is to FMCG in India

As we had highlighted in our detailed note on HUL (18th Dec 2017), India is uniquely
placed in the global FMCG space as it is the only country which provides a
combination of scale, growth and profitability. Realization of this unique and powerful
combination has led to Indian FMCG space re-rating strongly vs the global FMCG
space. We believe, even within the Indian FMCG space, F&B is set to have higher
scale, higher growth and higher improvement in profitability vs HPC. Hence, the
closing of valuation gap as seen above.
Rare combination of scale, growth and profitability
Indian companies account for a meaningful 5-9% of sales for their global parents and
are growing significantly ahead (5-10% higher). Also, the profitability of Indian
companies (especially if royalty is added back) is higher than that of their parents.
This clearly highlights the unique combination of scale, growth and profitability. We
believe F&B categories are scalable to a size higher than those of HPC. Also, they are
currently witnessing higher growth and while they may not reach the same
profitability levels (GMs tend to be lower due to lower premiumisation and higher
substitution effect), the improvement in profitability is currently higher for F&B vs HPC.
Hence, within the Indian FMCG space, F&B has an edge in terms of scale, growth and
profitability improvement.
Exhibit 45: Indian FMCG plays are Exhibit 46: …and are currently Exhibit 47: …with higher EBIT margins
meaningful contributors to parents… witnessing high growth… especially if royalty is added back
Indian FMCG sales as a FY12-17 Sales CAGR Global CY16 India FY17
percentage of global sales of the 15%
10% parent
Indian Global 35%
8%
10%
28%
6%
4% 21%
5%
2% 14%
0% 0% 7%
P&G
GSK Consumer
HUL
RB
Nestle
Colgate
J&J
0%
P&G
Unilever
RB
GSK
Nestle
Colgate
-5%
RB
Colgate
P&G
Unilever
GSK
Nestle
Source: Ambit Capital research Source: Ambit Capital research Source: Ambit Capital research

Consumer
Exhibit 48: F&B categories are more scalable and are growing faster than HPC
per US $ (in mn, USD) (in mn, USD)
India PCC as % of Expected CAGR for
Category Size of the Size of the category
India PCC World PCC Global PCC next 20Yr
category,FY17 as 50% of World PCC
Deodorant 0.3 2.8 13% 503 1,890 7%
Colour Cosmetics 0.7 8.6 9% 984 5,750 9%
Shampoos 0.6 3.7 16% 809 2,476 6%
Toothpaste 0.9 3.1 32% 1295 2,052 2%
Facial Care 1.1 12.5 9% 1513 8,297 9%
Hand Dishwashing 0.3 1.5 23% 459 1,011 4%
Laundry Detergents 2.4 8.2 30% 3234 5,469 3%
Coffee 0.4 11.1 4% 633 7,383 13%
Tea 1.4 5.7 25% 1913 3,777 3%
Bread 1.0 27.2 4% 1434 18,032 13%
Chocolate 1.3 13.7 10% 1769 9,102 9%
Ready Meals 0.2 11.8 2% 298 7,837 18%
Potato Chips 0.9 4.6 20% 1221 3,086 5%
Biscuits 3.1 12.3 26% 4215 8,185 3%
Source: Euromonitor International Limited 2018 © All rights reserved
High valuations appear sustainable

Given the uniqueness and power of the combination mentioned above, we believe
the F&B segment’s current valuations are sustainable. With sales growth expected to
accelerate and profitability improvement starting to come through, earnings growth
will support high valuations. Combined with technical aspect of PE investments and
M&A deals, multiples are likely to sustain as the sector enjoys scarcity premium with
more investors chasing fewer deals.
Exhibit 49: F&B sector is currently trading 1 standard deviation above mean
50
40
30
20
10
11-Oct
11-Oct
11-Oct
11-Oct
11-Oct
11-Oct
11-Oct
11-Oct
11-Oct
F&B sector 8 year mean
Even with de-rating to sector levels, compounding earnings growth will result
in strong share price returns
Even if we believe that at some stage the sector is likely to witness mean reversion in
terms of valuations, we believe earnings growth will be strong enough to offset any
de-rating impact and still deliver a positive stock return CAGR over next 5 years.
Having said that, given there have been few listed pure play F&B players and some of
the recent ones do not have enough trading history, establishing the current ‘mean’
valuation is fraught with risk.

Consumer
Exhibit 50: Even with valuations reverting to mean*, strong earnings growth should
lead to positive stock returns
Current 1 year 5 year 3 year stock return CAGR in case of
Mean P/E
forward P/E EPS CAGR reversion to mean
Britannia 48.0 29.0 19% 1%
Nestle 47.8 43.0 17% 9%
GSK 31.6 31.0 12% 8%
Hatsun 47.2 37.7 30% 17%
Manpasand 34.9 34.6 15% 5%
Heritage 30.8 17.7 25% 5%
Parag 25.9 28.7 22% 35%
Prabhat 27.6 21.6 22% 17%
Source: ,* mean is last 10 year average of 1Year forward P/E multiple or since listing if stock has been listed for
less than 10 years
Our long-term BUY basket is dominated by F&B plays

Reverse DCF (explicit forecast period until FY40, WACC of 13.5% and terminal
growth rate of 5% beyond FY40) suggests most businesses in our coverage need to
deliver mid to high-teen FCF CAGR over FY17-40E. This is a challenging task as most
businesses have struggled to deliver this high level of FCF CAGR over the last 20
years. With the base now being higher and margins for most companies being close
to lifetime highs, expecting an acceleration of earnings growth from here is difficult.
Exhibit 51: Reverse DCF shows most companies are expected to deliver higher future
FCF CAGR over FY18-40E than their past growth over FY04-17
FCF CAGR over FY 04-17 FCF CAGR over FY 17-40
25%
20%
15%
10%
5%
0%
ITC HUL Marico GSK Colgate Nestle Dabur Prataap*
Source: Ambit Capital research; Note: As Prataap is a new player, it had a negative FCF till FY17, hence we have
not given historical figures of the same
Hence, it is imperative that we are able to differentiate between businesses that are
good at carrying out their business as usual (which can help them deliver low-teen
CAGR) vs businesses that can transform into a superior business with ability to gain
margins and, hence, generate additional 3-5% FCF CAGR that would justify the
current multiple. We believe F&B plays are better placed on these parameters given
they will find it easier to transform through: 1) entering/introducing new categories,
2) recruiting new consumers as penetration levels rise, 3) growing inorganically, 4)
gaining share from unorganized players, and 5) improving margins as scale leverage
improves and premiumisation comes through.

Consumer
Business transformation + improving margins needed for our long-term

BUYs to justify rich multiples
The two criteria that we use to judge a business’s ability to create long-term value
better than peers and justify its current premium valuations are:
 Transform into a larger business vs what can be foreseen today: We
believe a business’ ability to innovate and expand into new
categories/brands/price-points/geographies is crucial for it to grow faster than
peers that have the ability to execute current business well but lack the ability to
expand beyond their current category/geography of expertise.
 Improve margins even from current lifetime high levels: For any business to
deliver mid to high-teen FCF CAGR over a long period of time (FY17-40E),
margin expansion is the key because delivering such high growth over such a
long period of time just through sales growth is difficult.
It is our belief that our long-term picks, HUL, Britannia, USL and Hatsun, possess
these two factors, which drive our BUYs on these names despite implied FY20E P/E
multiples of 32-38x. These businesses have the right blend of category mix,
product/brand ladder, supply chain strengths and new launch capabilities to continue
expanding into new categories, drive premiumisation and enter new geographies.
This should aid their transformation into much larger businesses than we can forecast
today while also leading to margin expansion mainly on account of improved product
mix and scale leverage.
Britannia, USL and Hatsun make the cut with HUL being the only HPC play
All our long-term BUYs have DCF-based TPs that imply >50x FY19 P/E. Hence, to
determine our top pick from a long-term perspective, valuation is not a criterion. So
we rely on finding which of these four has least ‘risk’ of missing our expectations of
15%+ FCF CAGR over FY17-40E that is embedded in their valuations. Our order of
preference (least likely to miss FCF CAGR and, hence, a preferred BUY) are:
 Britannia: We believe presence in Food & Beverage (lower penetration, share
shift potential from unorganized) and ability/intent to diversify beyond biscuits
(into packaged snacks, chocolates, RTDs etc.) will aid high-single-digit volume
growth and sales CAGR over FY17-40E. With such strong support from sales
growth, beating 16% FCF CAGR over FY17-40E should be relatively risk-free for
Britannia.
 USL: Product mix improvement is the key driver for both sales growth and
margins. Diageo has worked on all possible levers of product quality, marketing,
branding, distribution and supply chain to equip USL to deliver volume growth,
price hikes and product mix improvement. Given the low base from which USL is
expected to deliver 16% FCF CAGR over FY17-40E, we believe this is an
achievable task. However, regulatory risk, high competitive intensity and one-
dimensional nature of growth driver make us believe USL is a ‘riskier’ investment
than Britannia and Hatsun.
 Hatsun: Hatsun has multiple growth drivers for sales growth as well as margins.
Dairy in India as a primary source of protein is set to benefit from rising spending
levels. Also, share of unorganized is high (50%+), which provides a company like
Hatsun the opportunity to grow by taking away market share. Product mix shift
from liquid milk to value-added products will also be a key driver. On the margin
front, drivers are largely internal, such as backward integration, operating scale
leverage and improving product mix. However, given our estimates assume
Hatsun will successfully ramp up in new geographies, the element of risk for it to
deliver 12% FCF CAGR over FY17-40E is higher than for Britannia.
 HUL: The scale of opportunity that HUL has is largest given its presence and
dominance in most large FMCG categories in India. Also, its margin drivers are
largely internal (product mix improvement and cost cuts). While HUL is ahead of
its peers in terms of seeding new-age categories, creating a premium brand
ladder, and supporting new-age channels, ability to deliver is dependent on
India’s macro trends playing out as expected. Given this external dependence for
growth and higher competitive intensity, we believe HUL’s control over its delivery
of 16% FCF CAGR over FY17-40E is least among our four long-term BUYs.

Consumer
Exhibit 52: FCF CAGR embedded in HUL, USL, Britannia and Hatsun’s DCF
FCF CAGR over FY17-40

20%
17%
16% 16%
16%
12%
12%
8%
4%
0%
HUL Hatsun USL Britannia
We see scope for ‘emerging giants’ in this space – initiate with BUY on
Prataap
We believe F&B will witness emergence of more players currently not being noticed
by investors. Some of the PE investee companies as they scale up are likely to get
listed over time. Also, formalization of the unorganized sector could lead to some
regional players scaling up to be large enough to get listed. One such name which
got recently listed is Prataap Snacks on which we are initiating with a BUY with a
DCF-based TP of `1825 (50% upside).
We like Prataap’s focus on packaged snacks as the category will grow by 12-15% p.a.
led by consumers looking for convenience and indulgent products. Experienced and
knowledgeable management invested in growth via focus on value (20-30%
cheaper), innovation (entry into extruded), distribution (2.5x in 4 years) and capacity,
driving market share from 4.3% to 5.3% in 4 years. Prataap should deliver EPS CAGR
of 34% over FY18-21E led by: 1) 20% sales CAGR led by new premium launches
(nachos, Yum Pie) and wider distribution and 2) EBIT margin gain of ~290bps on
operating leverage and better product mix. Our DCF-based TP of `1,825 (50%
upside) implies 51x FY20E P/E, with 47% premium to FMCG sector justified by longer
and stronger growth ramp (FY18-40 FCF CAGR of 18% vs 14% for peers). Risks:
Limited ability to manage input cost rise; increased competition from larger players.

Consumer
Exhibit 53: Prataap through innovation… Exhibit 54: …value leadership and…
40 Weight (grams),` 5 SKU's

30 30 28
30 25 25 24 23
20 15 16
12
10
Lays
Kurkure
Prataap Snacks
Haldirams
Prataap Snacks
Haldirams
Prataap Snacks
Haldirams
Prataap Snacks
Prataap Snacks
Nuts Aloo Moong Extruded Chips
Bhujia Daal Snacks
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Exhibit 55: …early investment in direct distribution (low Exhibit 56: …is outgrowing its peers and gaining market
sales per directly covered store are a testament to it)… share…
Outlet reach Sales/Store/Month(`) Chips Extruded Snacks
Direct Indirect Total Directly Indirectly Namkeen Choclates
(Mn) (Mn) (Mn) Serviced Serviced Market Share(RHS)
HUL 3.0 5.5 8.5 7,241 1,693 20,000 8.0%
` mn
Marico 1.0 3.7 4.7 3,304 440
15,000 6.0%
Nestle 1.3 2.7 4.0 4,171 1,254
10,000 4.0%
GSK CH 1.0 3.3 4.3 2,325 302
Britannia 1.8 3.0 4.8 3,353 503 5,000 2.0%
ITC 2.0 5.5 7.5 8,743 3,843 0 FY18E 0.0%
FY19E
FY20E
FY21E
FY15
FY16
FY17
Prataap 0.7 0.5 1.2 700 527

Source: Company, Ambit Capital research
Exhibit 57: …which will provide operating scale leverage Exhibit 58: …that will drive 33% EPS CAGR over FY18E-21E
and product mix improvement leading to strong margin and could generate 20% stock price return even if Prataap
gains… de-rates to sector average multiple of 40x one-year
forward P/E
3Yr CAGR Returns
1Yr Forward P/E –
GM EBITDA Margin EBIT Margin
5Yr EPS CAGR 25% 35% 45% 55% 65% 75%
40%
30 -30% -20% -10% 1% 12% 23%
30%
40 -23% -12% -1% 11% 23% 36%
20%
50 -17% -5% 7% 19% 33% 46%
10%
60 -11% 1% 14% 27% 41% 55%
0%
FY15 FY16 FY17 FY18E FY19E FY20E FY21E 70 -7% 6% 20% 34% 48% 64%
Source: Ambit Capital research Source: Ambit Capital research

Consumer
Risks and catalysts

We believe there are certain risks inherent to the F&B sector which all the players
share. These are:
 Volatility in raw material supply and prices: Given the bulk of raw materials
for F&B segment are agri commodities, consistency in quality and quantity of
supplies is unpredictable. Also, pricing can be volatile as it is based not only on
demand-supply scenario but also by political considerations and import/export
restrictions.
 Fragmentation leading to heightened competitive intensity: As highlighted
above, F&B industry is fragmenting in India due to entry of new players backed by
PE investors. Also, some regional players are formalizing, leading to more
competition in the branded space. This combined with rising salience of Modern
Trade/e-Commerce (both of which tend to demand higher margin from brands),
could cause margin pressure on the sector.
 Stricter Government regulations: Disruption in sales due to Government
action regarding food safety have cropped up sporadically in India (pesticide
issue with carbonated soft drinks and lead issue with Maggi). While these
disruptions are difficult to predict, the larger risk is from Government regulation
around taxation, sale and advertisement of certain F&B products that the
Government may deem harmful to the health of consumers from time to time.
Exhibit 59: Risks and catalysts for recommended stocks

BUYS Key Risks Key catalysts
The risks of unfavourable
Strong margin gains (EBIT margin Deleveraging (interest cost to
regulations that hamper
Slowdown in mix improvement to move up from 9% to 15% over come down by 30% over FY17-
alcobev sector in India such as
USL can delay or stunt margin gains FY17-20E) led by improved 20E) led by reduction in net
introduction of GST or state
vs our expectations product mix and cost efficiency working capital and sale of non-
bans or production regulations
programs core assets
etc.
Rise in competition especially We expect HUL sales growth to
EBITDA margin is expected to
from foreign FMCG players recover from 8% CAGR over
Macro slowdown can impede improve by 440bps over FY17-
HUL which share HUL’s strength of FY12-17 to 13% CAGR over
longer-term growth for HUL 21E led by product mix
global premium product FY17-20E led by product mix
improvement and cost cuts
portfolio improvement and new launches
Inability to take price hikes due Share gain from unorganised
Continuation of cost efficiency
Failed launches may hamper to anti-profiteering clause could segment, pick-up in demand and
programs and product mix
Britannia Britannia's ambitions to become hurt margins if agri prices move new launches should aid
improvement should help
a total foods company up due to higher support by the Britannia’s 15% FY17-20E sales
Britannia resume margin gains
Government CAGR
Entry into new geographies of Geographic expansion, share As backward integration comes
Prolonged drought in Tamil
Maharashtra and Odisha could gain from unorganised and on stream and product mix
Nadu could lead to lower
Hatsun be less successful than product mix shift from milk to continues to improve, expect
procurement and impact sales
anticipated resulting in higher curd/ice-cream to lead sales 270bps EBITDA margin gain over
growth
gestation costs CAGR of 19% over FY17-20E FY17-20E
Lack of backward integration Given PE investors and not On a low base of FY18 impacted Margin gain of 50bps in GM and
for key raw materials and 80% Promoters hold majority stake, by GST implementation, shortage 40bps in EBIT margin in FY19 led
Prataap Snacks of sales coming in from `5 price there could be management of raw materials and capacity by operating leverage from sales
point, limit ability to mitigate change in case of non- constraints, we expect sales growth acceleration and product
input cost inflation alignment of interests growth to revive to 22% in FY19 mix due to new launches
SELLS
Higher-than-expected Continued decline in agri We believe Nestle is not geared
As Government support to agri
contribution from new launches commodity prices as being well to ramp up new launches
Nestle commodity prices increases,
could provide support to sales witnessed currently could aid which should stunt its sales CAGR
margin gains could get limited
growth margin gains to 16% over FY17-20E
Sales growth to be hit by rising Low premiumisation and scale
United Premiumisation due to Regulatory easing to promote
completion from international leverage to limit EBIT margin gain
Breweries increasing acceptance of beer beer over other harsher liquors
brewers and craft beer to 10% over FY17-20

Prataap Snacks
BUY
INITIATING COVERAGE DIAMOND IN EQUITY March 01, 2018
Can’t savor it enough Consumer Staples
We like Prataap’s focus on packaged snacks as the category will grow by Recommendation
12-15% p.a. led by consumers’ increasing need for convenience and Mcap (bn): `28/US$0.4
indulgent products. Experienced and knowledgeable management 6M ADV (mn): `34.8/US$0.5
invested in growth via focus on value (20-30% cheaper), innovation
CMP: `1,220
(entry into extruded), distribution (2.5x in 4 years) and capacity, driving
TP (12 mths): `1,825
market share from 4.3% to 5.3% in 4 years. Prataap should deliver EPS
Upside (%): 50%
CAGR of 34% over FY18-21E led by: 1) 20% sales CAGR driven by new
premium launches (nachos, Yum Pie) and wider distribution and 2) EBIT
margin gain of ~290bps on operating leverage and better product mix. Flags
Our DCF-based TP of `1,825 (50% upside) implies 51x FY20E P/E, with Accounting: AMBER
47% premium to FMCG sector justified by longer and stronger growth Predictability: AMBER
ramp (FY18-40 FCF CAGR of 18% vs 14% for peers). Risks: Limited ability Earnings Momentum: AMBER
to manage input cost inflation; higher competition from larger players.
Competitive position: STRONG Changes to this position: NO CHANGE Catalysts
Fits into our preferred F&B segment; ticks C,H & I of our CHIP framework  Sales growth to recover to 20%+ levels
in FY19E as disruptions from GST and
We prefer F&B plays as they provide a stronger growth path (20-year CAGR of
supply chain subside
15-18% vs 10-12% for FMCG) given: 1) lower penetration, 2) shift in share from
unorganised, and 3) they fit better into our Convenience, Health, Impulse and  Improved margin gain trajectory due to
Premiumization framework [link]. Prataap is outpacing peers in terms of growth operating leverage, leading to 40bps
and gaining share (up 120bps over FY14-17) as its combination of low price and EBIT margin gain in FY19E
high quality enables it to recruit non-consumers, attract consumers from
unorganised, and gain share from higher-end players. Performance (%)
120
Investing in the right foundation for a long, strong growth ramp
Prataap is realizing its scalability potential by investing ahead of time in: 1) 110
capacity (last 5-year capex/sales of 10%), 2) national distribution with high direct 100
reach (lowest sales/direct store/month of `600), 3) branding (A&P spend of
~14% of sales, including cost of toys, vs sector average of ~10%), 4) product 90
Oct 17
Nov 17
Jan 18
Feb 18
Dec 17
innovation (expand from chips to extruded to namkeen and has now added
nachos and pies) and packaging innovation (counter top dispenser vs sachets).
Experienced management with strong execution backed by PE advisors Prataap Sensex
We attribute successful expansion into new categories to management’s in-

depth understanding of products (table top dispenser for Yum Pie to avoid shape Source: Bloomberg, Ambit Capital Research
distortion) and consumer tastes (Yum Pie, sour cream variant in extruded). Long-
term business building acumen is highlighted by management’s ability and
willingness to back growth with ahead-of-time investments.
Scalability in place, profitability will follow; DCF captures value creation
Given smaller scale, Prataap is earning below potential (FY18 EBIT margin of 5%
vs low teens in steady state). Prataap’s 18%/28% sales/EPS growth over the next
decade will be driven by transformation into a multi-category packaged snacks
company with margins nearing optimal levels (~13%) due to scale and mix Research Analysts
improvement. Near-term earnings multiples do not capture this value accretion. Anuj Bansal
Key financials +91 22 3043 3122
Year to March FY16 FY17 FY18E FY19E FY20E anuj.bansal@ambit.co
Operating income (` mn) 7,572 9,039 10,395 12,682 15,218 Ariha Doshi
EBITDA (` mn) 565 409 894 1,175 1,514
+91 22 3043 3228
EBITDA margin (%) 7.5% 4.5% 8.6% 9.3% 10.0%
ariha.doshi@ambit.co
EPS (`) 13.2 4.8 20.7 28.4 37.0
RoE (%) 16.3% 4.3% 12.5% 11.6% 13.4% Archit Varshney
RoCE (%) 16.1% 4.4% 15.6% 21.5% 27.6% archit.varshney@ambit.co
P/E (x) 92.7 256.4 58.8 43.0 32.9 +91 22 3043 3275
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Prataap Snacks
Snapshot of Company Financials

Profit and Loss Company Background
Year to Mar (` mn) FY17 FY18E FY19E
Based in Indore, Prataap Snacks was established in 2004 to
Net revenues 9,039 10,395 12,682 manufacture potato chips by Mr. Arvind Mehta, Mr. Amit
EBITDA 409 894 1,175 Kumat and Mr. Apoorva Kumat. Promoters own 23% stake
Depreciation & Amortisation 250 308 348 in the company whilst private equity players, Sequoia and
Interest expense 45 18 18 Faering Capital, own ~51%.
PBT 129 637 895 The company is engaged in manufacturing and marketing
Tax 30 150 228 potato chips, namkeen and extruded snacks. It operates
under brand names such as Yellow Diamond, Chulbule, 7
Net profit 99 487 666
Wonders, Fungroo and Scoops.
Profit and Loss Ratios
EBITDA Margin (%) 4.5% 8.6% 9.3%
It has over 3,500 distributors, a direct coverage of
approximately 0.7 million retail outlets and indirect reach of
Net profit margin (%) 1.1% 4.7% 5.3%
0.5 retail outlets. Its products reach 27 states.
EV/ EBITDA (x) 63.4 29.2 21.7
It has 8 manufacturing facilities (both in-house and contract
P/E (x) 256.4 58.8 43.0
manufacturing) with blended average capacity utilisation of
Price/Sales (x) 2.8 2.8 2.3
~70%.
Balance Sheet Cash flow

Year to Mar (` mn) FY17 FY18E FY19E Year to March (` mn) FY17 FY18E FY19E
Total Assets 4,271 7,140 8,144 PBT 129 637 895
Fixed Assets 2,526 2,518 2,620 Depreciation 250 308 348
Current Assets 1,745 4,622 5,524 Tax 30 150 228
Investments - - - Net Working Capital 50 93 17

CFO 426 907 1,050
Total Liabilities 4,271 7,140 8,144
Capital Expenditure (586) (300) (450)
Total networth 2,383 5,412 6,079
Investment - - -
Total debt 656 268 268
CFI (698) (300) (450)
Others 85 85 85
Issuance of Equity 112 2,542 -
Current Liabilities 1,146 1,375 1,713
Inc/Dec in Borrowings 261 -389 -
Balance Sheet ratios
Net Dividends - - -
RoCE 4.40% 15.57% 21.49% Interest paid (50) (18) (18)
RoE 4% 13% 12% CFF 323 2,163 -18
Net debt (cash)/ Eq (x) 0.2 (0.5) (0.5) Net change in cash 51 2,770 582
P/B (x) 10.6 5.3 4.7 Closing cash balance 83 2,853 3,434
Prataap has presence in all regions of India Extruded Snacks contribute 63% to the revenue
Region-wise sales Category-wise sales
Namkeen,
South, 9%
12%
West, 33%
North,
24% Potato
Chips,
24%
Extruded
Snacks,
63%
East, 33%

Prataap Snacks
Tasty formula: Innovation, leadership, leverage

Exhibit 1: Prataap through innovation… Exhibit 2: …value leadership and…
40 Weight (grams),` 5 SKU's

30 30 28
30 25 25 24 23
20 15 16
12
10
Prataap Snacks
Haldirams
Prataap Snacks
Haldirams
Prataap Snacks
Haldirams
Prataap Snacks
Prataap Snacks
Lays
Kurkure
Bhujia Daal Snacks
Exhibit 3: …early investment in direct distribution (low Exhibit 4: …is outgrowing its peers and gaining market
sales per directly covered store are a testament to it)… share…
Outlet reach Sales/Store/Month(`)
Chips Extruded Snacks
Direct Indirect Total Directly Indirectly Namkeen Chocolates
Market Share(RHS)
HUL 3.0 5.5 8.5 7,241 1,693 20 8.0%
Marico 1.0 3.7 4.7 3,304 440

15 6.0%
Nestle 1.3 2.7 4.0 4,171 1,254
` bn
10 4.0%
GSK CH 1.0 3.3 4.3 2,325 302
5 2.0%
Britannia 1.8 3.0 4.8 3,353 503
0 0.0%
ITC 2.0 5.5 7.5 8,743 3,843
FY18E
FY19E
FY20E
FY21E
FY15
FY16
FY17
Prataap 0.7 0.5 1.2 700 527
Source: Ambit Capital research Source: Company, Ambit Capital research
Exhibit 5: …which will provide operating scale leverage Exhibit 6: …that will drive 33% EPS CAGR over FY18E-21E
and product mix improvement leading to strong margin and could generate 20% stock price return even if Prataap
gains… de-rates to sector average multiple of 40x one-year forward
P/E
3Yr CAGR Returns
GM EBITDA Margin EBIT Margin 1Yr Forward P/E –
25% 35% 45% 55% 65% 75%
5Yr EPS CAGR
40%
30 -30% -20% -10% 1% 12% 23%
30%
40 -23% -12% -1% 11% 23% 36%
20%
50 -17% -5% 7% 19% 33% 46%
10%
60 -11% 1% 14% 27% 41% 55%
0%
FY15 FY16 FY17 FY18E FY19E FY20E FY21E 70 -7% 6% 20% 34% 48% 64%
Source: Company, Ambit Capital research Source: Ambit Capital research

Prataap Snacks
Doing it the right way

Prataap Snacks has all the right ingredients in place for a small and evolving
business that set it on a path of strong and sustained growth. We like the
packaged snacks category in which Prataap operates due to: 1) high growth
potential (17% over FY18-22E versus 15% for F&B); 2) support from
favourable macro trends; and 3) fragmented industry structure (top 3 players
have only 27% market share). We also appreciate Prataap’s ahead-of-time
investments in capacity, innovation, branding and distribution which have
created the right product, brand and channel structure for Prataap to grow
ahead of peers. The key to Prataap’s success is the high quality of
management, which has both the ability (strong understanding of consumer
tastes to drive innovation) and intent (calibrated risks and investments) to
grow this business multifold.
Right people – quality management guiding the ship

The key to Prataap’s strengths, that we will discuss, is the high quality of
management with the right experience, knowledge and growth. Prataap is backed by
high quality PE investors who bring their knowledge and network to play and is
supported by an able board. We believe Prataap’s promoter management will
continue to build on the evolutionary path that they have charted for the company
since 2004 when it was a single location (Indore) and single category (potato chips)
company to a national company now with products in a wide range of categories.
Promoter and management team is a strategic asset
Prataap’s founders include Mr. Arvind Mehta and brothers Mr. Apoorva Kumat and
Mr. Amit Kumat. Mr. Amit Kumat serves as a Managing Director and brings more
than two decades of snacks industry and entrepreneurial experience. Having
demonstrated a keen understanding of the consumer tastes and preferences, he is
instrumental in deciding flavours and tastes for the various product categories and
determining the nature of toys and characters to feature in their packets (toy-based
sales form ~80% of their sales). We believe, Mr. Amit Kumat has been instrumental
in driving the transformation of the company through its various phases.
Exhibit 7: Prataap has evolved from a single-product, single-location company to a national, multi-category company
2004 2005 2006 2010 2011 2012 2013 2014 2015 2017
chips plant Potato Random Wheels Sequoia Second chips Kolkatta Rings, Pellets Second
in Indore snacks extruded Rs 620 plant in contract chulbule, plant in
snacks Mn Indore manufacturing pellets Guwahati
invest. Plant in for rings
Rings, Guwahati
Namkeen Indore
plant Yumpie,
capacity Nachos,
Sequoia Sequoia increased Sequoia Healthy
Rs 120 Rs 300 Rs 250 snacks
Mn Mn Mn
invest. invest. invest.
North and West Pan India
KEY: Geographic reach Plant capacity PE investment Product launch
Source: Ambit Capital research, Company
High quality of board of directors is encouraging

We are impressed by Prataap’s high quality board of directors. The board consists of
8 directors; i.e. 2 promoters, 2 nominee directors who represent the majority PE
investors, Sequoia, and 4 independent directors. The independent directors bring in
both cross functional (operations, finance) and cross industrial (media, retail, finance)
expertise, thus presenting a strong ability to generate fresh ideas and act as a
sounding board to the promoter group.

Prataap Snacks
Additionally, with a high quality PE investor such as Sequoia on board, we believe

Prataap should have access to Sequoia’s network, functional capabilities, industry
experience and knowledge through its board representation.
Given the shareholding (23% with promoter group, equally split between the Mehta
and Kumat families, 48% with majority PE investor Sequoia, 2% with minority PE
investor Faering Capital), we believe a high quality, professional board, such as the
one Prataap has, is necessary to mitigate the risk of misaligned stakeholder interests.
Exhibit 8: Prataap has a highly qualified Board of Directors

Total
remuneration % of
Year of Qualifications and in ` and Sitting fees Shareholding Past position &
Name, age Designation Independent
appointment Experience nature of received of key Affiliation
remuneration directors
in FY17
Over 29 years of
experience in real estate
Arvind Mehta, business along with over 5,000,000 ,
Chairman Incorporation No - 2.39%
49 years 13 years in the snacks Gross Salary -
foods industry and in the
financing business
Holds Master’s
degree in science from the
Amit Kumat, University of South 5,000,000 ,
CEO, MD Incorporation No - 2.46%
48 years Western Louisiana and Basic Salary -
over 21 years in the
snacks foods industry
Representing Sequoia
GV Previously worked
Nominee Capital. Engineer
Ravishankar, 2011 No - - with McKinsey &
Director (Bharathidasan) and MBA -
39 years Company
(IIM Ahmedabad)
VT Representing Sequoia. Previously worked
Nominee
Bharadwaj, 2011 Engineer (BITS), MBA (IIM No - - with McKinsey &
Director -
38 years Ahmedabad) Company
Previously worked
at General Motors
Anisha
Independent BSc (Sophia, Ajmer), MBA India Private
Motwani, 53 2016 Yes 500,000 -
Director (Rajasthan) - Limited and Max
years
Life Insurance
Company Limited.
Ex MD - Spencer's Retail,
Vineet Kumar
Independent COO - RPC, United
Kapila, 56 2016 Yes 480,000 -
Director Spirits, Diploma in IR - -
years
(XLRI)
Previously worked
at Hindustan Lever
Dr OP Limited, Monsanto
Independent CEO & Executive Director-
Manchanda, 2016 Yes 270,000 - India Limited and
Director Dr Lal Path labs -
51 years Ranbaxy
Laboratories
Limited
Ex CEO - TV18, Partner -
Haresh
Independent India Value Fund,
Chawla, 49 2016 Yes 310,000 -
Director Engineer (IIT Bombay), - -
years
MBA (IIM Calcutta)
Our forensic analysis shows no RED flags on accounting

We assessed the company on various parameters including related-party
transactions, provisions for debtors, political affiliations of promoters, tax rate
volatility, dependency on other income, and degree and nature on contingent
liabilities. We benchmarked its performance against comparable industry peers such
as DFM Foods and Manpasand Beverages. Our analysis along with our channel
checks and interactions with the management suggest that there are no red flags on
corporate governance.

Prataap Snacks
Exhibit 9: Forensic analysis shows Prataap is a well-managed company

Parameter Flag Remark
Lower working capital requirement due to low credit period given to
Cash Conversion Cycle GREEN
debtors.
Prataap is showing increase in efficiency of using assets which in turn is
Du point GREEN
increasing their RoE.
Loans & Advances AMBER L&A to related parties includes loans given to employees for ESOPs
Provisioning for Provisioning for doubtful debtors is high as Prataap is in process of
AMBER
Doubtful Debtor building the distribution network.
Investment Income AMBER Other income forms 12% of PBT for FY17.
Contingent Liability GREEN Prataap has only 0.1% contingent liability as compared to its net worth.
Audit of Prataap is done by one of the Big 4s and no excess
Auditor's GREEN
remuneration is paid.
Capital Allocation
GREEN Prataap’s funding to capex is done through CFO and Equity.
record
Depreciation GREEN Prataap follows conservative depreciation policy.
Right place and time – fits well into our ‘CHIP’ theme
Our analysis of the underlying socio-economic and demographic trends that boost
FMCG growth suggests that whilst all tailwinds are heading in the right direction,
their intensity is slower and thus longer and stronger than expected. We highlight
Convenience, Health, Impulse and Premiumisation as the key themes.
Socio-economic, demographic tailwinds provide a long trajectory of growth…
The key underlying socio-economic-demographic trends that result in increasing
FMCG consumption are urbanization, literacy rates, internet and media penetration,
income distribution, women’s workforce participation. Our analysis suggests that
these tailwinds are improving and heading in the right direction. However, they are
progressing slower than initially perceived and hence are expected to last longer. We
expect India to reach the demographic sweet spot in 2040.
Exhibit 10: Urbanisation is progressing at a slow rate… Exhibit 11: …and literacy rates are improving
100% Adult (15 years and above) literacy rates, %
80% 82% 84% 80%

77%
60% 64% 61%
60%
55%
40%
20%
0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Rural Urban Male Female

Brazil China India
2007 2014

Prataap Snacks
Exhibit 12: India’s transformation from “bottom of the pyramid” to “bulge of the diamond” is taking time as its average
household income is improving gradually
The key emerging themes in the Indian consumption space are CHIP:
Convenience, Health, Impulse, Premiumisation
Based on the trends explained above, we believe the key themes that will drive
consumption are Convenience, Health, Impulse, Premiumisation.
 Convenience: As more women choose to study and join the workforce and
families nuclearize, consumers will opt for goods that provide the utility of
convenience to consumers.
 Health: Increase in literacy and internet penetration may induce health
consciousness in consumers who opt for healthier products.
 Impulse: A younger consumer is likely to indulge in more impulse purchases
than an older consumer. Additionally, proliferation of modern trade could further
provide a fillip to impulse purchases.
 Premiumisation: With increasing purchasing power and exposure to western
lifestyles, we expect consumers to upgrade purchases to premium brands and
categories.
Exhibit 13: Convenience-based categories are outpacing industry growth
Growth rate over FY12-17

30%
25%
20%
15%
10%
5%
0%
F&B (overall)
Tea Bags
Ready Meals
Processed Meat
Yoghurt
Cheese

Prataap Snacks
Exhibit 14: Producers are highlighting health benefits of their products more as health
consciousness rises
We prefer F&B over HPC

We believe that F&B categories are better placed than HPC categories to exploit each
of the CHIP themes especially due to its faster innovation and route-to-market cycle.
Additionally, organised players stand to benefit from share gains from the
unorganised players with increasing regulatory enforcement in the form of the e-way
bill, GST compliance, etc. Lower existing penetration rates will enable topline and
margin growth in F&B to outpace topline and margin growth in HPC. Prataap’s
presence in high-traction segments such as packaged snacks and positioning as a
value leader enable it to benefit disproportionately compared to peers.
Exhibit 15: Share gains from the unorganised sector should enable growth in F&B
Unorganised sector share
80%
75%
67%
56%
42% 40%
Salty snacks Dairy Food Biscuits Bread Confectionery

processing
Right way – cheaper, wider, deeper

The key strength of Prataap Snacks has been clarity of strategy and its execution.
Prataap has focused on the most important factor of scalability which it has driven by
being the value leader, innovation to expand product portfolio, investments in brand,
and setting up high-quality distribution network. This has allowed Prataap to pull
ahead of peers like DFM Foods or Balaji, which have struggled to expand beyond
their geographies and categories of origination.
Focus on being ‘Value Leader’ will provide volume growth
Prataap has created a position of being the value/price leader in categories that it is
present in while maintaining high quality of products in terms of ingredients,
preparation, taste and packaging. Also, what is encouraging to note is that this price
point strategy is backed by distribution network which focuses on SEC B, C and D
stores; i.e. smaller stores in economically weaker sections of urban India. This has

Prataap Snacks
allowed it to provide access to its products to the most relevant target audience while
avoiding direct competition from premium well-established brands like Lay’s, Bingo
and Haldiram’s. However, the company is now expanding into SEC A and Modern
Trade outlets based on: 1) improved brand visibility after national ad campaigns and
prominence achieved through IPO and 2) launches of new ‘premium’ products like
Yum Pie chocolate products and Nachos. This is helping the brand overcome
consumer’s perception of being low quality due to the products’ lower price points.
Exhibit 16: Prataap offers more value than market leaders Exhibit 17: New launches despite being at higher price
points are price leaders in their categories
40 Weight (grams), `5 SKUs

30 30
30 28
25 25 24 23
20 15 16
12
10
0
Lays
Kurkure
Prataap Snacks
Haldirams
Prataap Snacks
Haldirams
Prataap Snacks
Haldirams
Prataap Snacks
Prataap Snacks

Bhujia Daal Snacks
Source: Prataap DRHP, Ambit Capital research Source: Ambit Capital research
We believe this two-pronged strategy of being the price leader and expanding
distribution to higher-end stores will help Prataap deliver low to mid-teen volume
growth for a long period of time as: 1) it recruits non-consumers into the
consumption fold, 2) it takes away share from the unorganised segment, and 3) it
competes effectively in new channels/geographies with larger well-established
national players like Pepsi, ITC and Haldiram’s.
Exhibit 18: Prataap snacks should be able to outpace Exhibit 19: …as it launches new categories once growth in
industry growth… existing category starts moderating
Chips Extruded Snacks

Chips Extruded Snacks Namkeen
Namkeen Chocolates
Market Share(RHS) Category: 5 yr CAGR:
16
20 8.0% Chips 5%
Extruded 50%
Namkeen 65%
` Billion
15 6.0% 12
` bn
10 4.0% 8
5 2.0%
4
0 0.0%
FY18E
FY19E
FY20E
FY21E
FY15
FY16
FY17
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Company, Ambit Capital research Source: Euromonitor International Limited 2018 © All rights reserved, Ambit
capital research

Prataap Snacks
Case study: Hippo snacks

Not all companies are able to achieve success with every new launch. The launch of
Hippos baked wheat-based snacks marked Parle products’ entry into savoury snacks.
It was launched nationally with an eye-catching advertisement and accompanying
social media campaign that generated significant market traction. Though the
product was slated to be a success, it was withdrawn by Parle in 2013. There was a
disconnect between the positioning and branding. Whilst it was positioned as a
healthy alternative (wheat-based, non-fried), the TV ad branded it an item that can
be snacked on at all times. Thus, it potentially confused the consumer on whether it
was an indulgent or a healthy snacking option. Also, we believe the healthy snacking
positioning was ahead of its time.
In comparison, Prataap’s value proposition as “value leader” is consistent across their
branding (“Dildaar Hain Hum” tagline), grammage/price points (~20-25% more
grammage at same price point), distribution reach (Sec B, C, D focused),
advertisement (Salman Khan as brand ambassador has mass appeal). Additionally,
Prataap ensures it caters to varied segments with its ~67 SKUs.
Multi-category + multi-geography capability is proven now

We believe Packaged Snacks as a category has a strong and long growth ramp in
India due to under-penetration, which will get resolved as affordability and access
improves and the large share of unorganised players are likely to continue ceding
share to branded players. However, to realise this growth potential, it is imperative
that a company is able to expand its product range and distribution. Most Packaged
Snacks companies tend to be strong in their category and geography of origin; e.g.
Balaji in wafers in Western India and DFM Foods in extruded snacks in Delhi NCR.
This is driven by: 1) inability to innovate to cater to varying tastes and preferences, 2)
identify categories with limited variance in tastes and preferences, and/or 3) lack of
resources/willingness to invest in national brand and distribution building.
Exhibit 20: Whilst majority of players are losing market share, Prataap is able to gain
Market Share (%)
Company Comments
FY12 FY13 FY14 FY15 FY16 FY17 Change in 5Yr
Loss in market share despite presence in fast growing
Haldiram’s 15.9 15.0 13.9 12.8 11.8 11.7 -4.2
namkeen segment due to moderation in A&P intensity
Loss in market share potentially due to substantial reduction
in grammage in comparison to competitors, moderation in
Pepsi Co 14.8 14.1 12.6 11.2 9.5 8.1 -6.7
new variety launches, limited presence in fast growing
namkeen segment
Balaji Wafers 8.4 8.1 7.8 7.3 6.8 6.8 -1.6
Aggressive launches (e.g. Namkeen varieties, taste variations
ITC 6.2 6.5 6.7 6.9 7.0 6.6 0.4 in random extruded snacks) and heavy A&P spends at a pan-
India level has allowed ITC to gain market share
Parle Products 7.2 6.5 6.0 6.0 5.6 5.5 -1.7
Aggressive product launch pipeline, increasing A&P
Prataap Snacks 3.2 3.9 4.0 4.3 4.6 5.2 2.0 intensity, aggressive increase in distribution reach
caused gain in market share
Britannia 6.2 6.1 5.6 5.2 5.0 5.1 -1.1
DFM Foods 2.2 2.2 2.0 2.1 2.3 2.7 0.5
Bikaji Foods 2.7 2.7 2.6 2.5 2.4 2.4 -0.3
Source: Euro monitor International Limited 2018 © All rights reserved

 Prataap Snacks: Prataap started with potato chips and followed it up with
extruded snacks, both of which have least regional variance. Also, while it has
been able to develop over 60 variants in terms of flavour to cater to any regional
nuances, it has focused on key 10 variants which have national acceptance to
provide scale to its operations. Use of Salman Khan as brand ambassador and
providing toys (which have universal appeal to children and help transcend
regional barriers) in products have also helped build a national-level acceptance.

Prataap Snacks
 ITC (Bingo): ITC relied on extruded and chips/nachos products which have
national appeal and followed it up with national-level media campaigns to
establish a national brand. Its existing distribution strength, riding on other FMCG
businesses, also helped it expand reach nationally. However, innovation and
hence expansion beyond nachos have been weak.
 Pepsi: Pepsi has been the most successful Packaged Snacks company in India (as
seen in its market share). This success has been driven by multi-pronged strategy
of using Chips as an entry point and following it up with Extruded (Kurkure) –
both of which have national acceptance. Acquisition of regional brands (like
Uncle Chipps) also helped expand faster. Its innovation track record based on
localisation of global R&D, distribution synergies with soft drinks and massive
national-level media campaigns has also helped. However, namkeens have still
eluded Pepsi as it has struggled to develop products which do not have national-
level appeal.
 Haldiram’s: Better-than-peers understanding of regional tastes and preferences
has allowed Haldiram’s to become the largest Packaged Snacks company in
India. Long-term presence through local operations in various parts of India
(except in South) has allowed Haldiram’s to understand local tastes, develop
products to cater to these tastes and establish strong brand equity. However,
even Haldiram’s has struggled to expand into categories like chips and extruded
as it is strongly associated with traditional packaged snacks like namkeens.
 DFM Foods: This is a classic case of a one-trick pony where the company has
remained dominant in one category (extruded rings) though one brand (Crax) in
one region (Delhi NCR) due to lack of innovation and ability/intent to invest in
national brand-building or distribution.
 Balaji: Though better than DFM Foods, especially in terms of expansion into
other categories (started with Chips but has now entered namkeens as well),
Balaji has been hobbled by inability to expand distribution beyond Western India.
This is due to the strategy of running own logistics within a radius of 100-200kms
of each of its factories. While this is a sound strategy in terms of quality of
operations, it will restrict Balaji’s ability to grow faster. Also, lack of distribution
beyond Western India has implied brand recognition is also limited to this region
as no national-level media campaigns have been run (and rightly so).
Exhibit 21: Only a few players have been able to succeed in multi-category, multi-geography strategy
Category Brand Geography
Company Homogeneity Clarity of Remarks
Variety Innovation Umbrella Reach Expansion
of tastes Positioning
Impressive new launch record with 67 SKUs; well defined
'value leader' positioning complemented by A&P and
Prataap distribution; pan-India reach; umbrella Yellow Diamond
Snacks brand diluted by sub-brands such as Chulbule, 7 Wonders;
new launches include flavour-based launches and new
category entry (e.g. Yumpie, Nachos, etc.)
Presence in potato, corn chips; limited presence in
ITC namkeens; limited new launches - only flavour-based
launches; pan-India reach
Clearly positioned as a premium player with Lays basis the
Pepsi grammage and value players with Uncle Chips; new
launches include only flavour-based incremental innovation
Present only in Namkeens which is a very heterogeneous
product category; all products under umbrella Haldirams
Haldirams
brand, positioning unclear as it caters to both premium and
value strata; has not been able to scale outside of North
Significant presence in only puffed snacks, minor presence
in namkeens; positioning unclear as it caters to both
DFM Foods
premium and value strata; has not been able to scale
operations outside of North
Western flavours have not gained traction due to lack of
Balaji A&P behind them; struggles to expand capacity beyond
West
Source: Ambit Capital research. Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Prataap Snacks
Exhibit 22: Pace of distribution expansion and quality has Exhibit 23: Prataap has a well spread out national reach
been impressive for Prataap Snacks with South India being work in progress
Outlets (Mn) % of Distribution Reach

0.9
North,
22%
0.6
0.3 West, 50%
East, 20%
0.0
FY14 FY17
Indirect Direct South , 7%
Innovation track record to add categories and premiumise is impressive

Launch of new products is one aspect of innovation which Prataap has been
successful at. Prataap entered the namkeens segment in FY13. By FY17, namkeens
contributed ~12% of revenues. In fact, we believe Prataap’s entry into new categories
is timed such that as sales in previous categories moderates, the company is ready
with its new launches. In addition to sub-category launches, Prataap has also relied
on taking innovation beyond just products.
 Toys: Providing toys in packaged snacks has been an often deployed strategy by
companies to attract young consumers. However, Prataap’s innovation lies in the
choice of toys and frequency with which they keep changing the toys. This has
helped them build a better connect with young consumers and giving it an excuse
to run constant media campaigns. Tie-ups with popular cartoon characters have
also been unique for Prataap in the Indian context.
 Packaging: While the quality of packaging has always been at par with the
higher-end brands, innovations like table top dispensers for chocolate-based
products like Yum Pie helped Prataap launch a single-serve SKU without running
the risk of it getting spoiled (becoming out of shape) when hung as a string of
sachets.
Exhibit 24: Whilst figurines are a common toy, ‘Clay’ toys Exhibit 25: Table top dispenser for Yum Pie to preserve
have been unique to Prataap shape is an innovation in an industry dominated by sachets

Prataap Snacks
 Production methodology: Contract manufacturing tie-ups with various local

players which have strengths in certain products have helped Prataap expand
rapidly without significant capital outlay. This has also helped cut distribution
costs due to reduction in distance and time travelled by a product. Cost of failure
is reduced and ability of rapid innovation is enhanced through this strategy. As
the product is established and scale is achieved, Prataap has shown willingness
and ability to expand its own manufacturing to bring production in-house. Only in
the case of Yum Pie, Prataap has made investments upfront because it is
important to keep the recipe in-house and also given the inability to find third-
party manufacturers that have this product capability.
 Variants/flavours based on local understanding products: Prataap has also
been innovative in terms of adapting western snacks like choco-pie and extruded
snacks by launching unique offerings. Some examples include adding a layer of
‘jam’ in their variant of choco-pie and flavours like sour cream & onion for their
extruded snacks products. Prataap has also been able to tweak its offerings based
on local tastes as seen in its mustard-based variants in the East, pepper-based
variants (Ratlami) in the North and sweet variants in the West, which have
improved the acceptance of its namkeens nationally.
Exhibit 26: Prataap has demonstrated a strong product launch pipeline with a fast turnaround time and has reiterated and
revised its products where necessary

Prataap Snacks
Ahead-of-time investments to pay rich

returns
The low margin profile that Prataap has (5% EBIT margin in FY18) is on
account of: 1) ahead-of-time investments in capacity, branding, innovation
and distribution, and 2) value leadership position. While value leadership
restricts the ability to grow margins, we endorse the view that whilst the
industry/market-leader/consumer themselves premiumised, Prataap will
maintain its value leadership. Both factors are key to Prataap growing
ahead of peers in a category which is scalable and provides a long growth
ramp. As Prataap scales up and improves product mix, profit margin should
significantly improve (we expect Prataap to achieve 13% EBIT margin at an
optimal scale of `82mn, 9x FY17 revenues); this combination of faster sales
growth (20% CAGR vs 13% for the sector) and strong margin gain (290bps
over FY18-20E) should lead to 34% EPS CAGR.
Sales growth likely to beat all our coverage stocks

We are building in 20% sales CAGR for Prataap over FY18-21E. This is higher than
our sector average sales CAGR of 13% over FY18-21E. New category launches,
distribution expansion and share gain from unorganised to organised are likely to be
the key drivers of this sales growth.
Exhibit 27: Prataap’s sales growth is volume driven as realisation per pack remains
constant irrespective of grammage offered
Sales (Rs Mn) Volume Growth(%)
20,000 40%
15,000 30%
10,000 20%
5,000 10%
- 0%
FY15 FY16 FY17 FY18E FY19E FY20E FY21E
Recruitment of new customers to drive volume growth

Prataap should be able to deliver 16% volume CAGR over FY18-21E (we assume 4%
of growth comes from price/mix improvement). This will be driven by:
 Rising penetration levels: Given affordable price points (`5 and `10) that
Prataap has maintained for its products, including new launches, we believe it will
be able to benefit from non-consumers getting added to the consumption fold as
their spending power crosses subsistence level.
 Share gain from unorganised: Share of unorganised players remains high in
packaged snacks category. Even in our recent rural visits we noticed that while
acceptance of packaged snacks category was strong and rising, most of the
products sold were either local brands or counterfeits of national brands. As
brand consciousness and awareness towards hygiene increases, share shift from
such local/counterfeit brands to branded players like Prataap (especially at
affordable price points) should increase.
 Distribution expansion: Prataap should also be able to recruit more consumers
by expanding its distribution network. This expansion will be both in 1) existing
locations where direct reach is likely to increase and the company will enhance
penetration of SEC A stores and 2) new geographies that are adjacent to existing
locations.

Prataap Snacks
Exhibit 28: Recent rural visit highlighted F&B products were mainly local brands or
counterfeits of national brands
Driving occasions of consumption to sweat existing customers better

Volume growth will also be driven by getting existing consumers to consume more.
This can be achieved through selling different types of snacks which cater to different
day parts/occasions of consumptions. For example, chips/extruded are for in-between
meals snacking, namkeens can be for tea-time snacking and Yum Pie for children’s
snacking around school time. Also, by promoting counter top dispensers and string of
sachets to hang at shop fronts, Prataap is able to create impulse-based demand.
Finally, constant innovation around flavours entices existing consumer to try
something new for the sake of variety and drives growth.
Premiumisation + price hikes will aid value growth
80-90% of Prataap’s sales are at `5/`10 price points, which make hikes difficult.
While Prataap does reduce grammage as and when required, which in effect results
in ‘price hikes’, we believe there is a limit to which Prataap can cut grammage
because beyond a certain level the consumer experience gets compromised
significantly. Hence, the key driver for value (total volume) growth for Prataap would
be portfolio premiumisation. This can be driven in two forms: 1) consumer moving up
to larger pack sizes as affordability improves, and 2) improving product mix in favour
of new premium launches like Nachos and Yum Pie.
Exhibit 29: Prataap has cut grammage in the past
30
For `5 SKUs (Grams)
20
10
FY13 FY14 FY15 FY16 FY17
Moong Dal Potato Chips Rings

Prataap Snacks
Margin improvement to provide multiplier effect

We believe Prataap’s margins are currently low given: 1) the product mix is skewed
towards price/value leadership products, 2) significant investments in production,
branding and distribution have been made ahead of time; and 3) the business is still
sub-scale. For these reasons, we do not believe Prataap’s lower-than-industry
margins to be an indicator of a weak business model or value proposition. However,
we believe as sales growth of high teens materializes, driven to some extent by
premiumisation of product mix, Prataap should be able to improve its margins by 2-
3x; but it may not achieve profitability levels similar to that of peers (15-18% peak
profitability) due to its price/value leadership positioning.
Exhibit 30: We expect EBIT margins to improve by ~290bps Exhibit 31: …led by increase in GM and operating
over FY18-21E… leverage
GM EBITDA Margin EBIT Margin Employee Power

Carriage A&P
40% Other expenses Depreciation
10%
30% 8%
6%
20%
4%
10%
2%
0% 0%
FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY15 FY16 FY17 FY18E FY19E FY20E FY21E
Inherent profitability level of the business is 2-3x current levels

Packaged snacks as a category offers mid to high-teen operating (EBIT) margin as can
been seen in the margin profiles of some of Prataap’s peers. However, this requires a
fully scaled up business, pricing power to offset input cost inflation and a product
portfolio that allows higher GM than what Prataap currently has. We believe Prataap,
given its weaker product mix, may not achieve mid to high-teen operating margin.
However, with increasing scale and some premiumisation of the product mix, it can
get up to low-teen margins. The key to note here is that the main difference between
DFM Foods and Prataap EBIT margin is the former’s higher GM as it is present only in
higher-margin extruded snacks. Also, Balaji has higher EBIT margins than Prataap
despite similar GM. This is on account of Balaji restricting its sales to only Western
India, where it services stores within a 200km radius of its manufacturing facilities.
This has allowed Balaji to save on logistics cost, a line item which forms as high as
9% of sales for Prataap.

Prataap Snacks
Exhibit 32: Prataap’s lower GM vs. peers… Exhibit 33: …is the key reason for lower EBIT margin vs.
peers
Gross Margin, FY17 EBIT Margin, FY17

60% 25%
45% 20%
15%
30%
10%
15%
5%
0% 0%
Prataap Balaji DFM Mondelez Pepsico Prataap DFM Mondelez Pepsico Balaji
India India
Investments ahead of time; as business expands margins will improve

Besides the weaker product mix which impacts gross margin, significant investments
for driving growth have resulted in weak operating leverage for Prataap.
 Spread out production facilities: Prataap has set up new capacities in Indore
and Guwahati. These are running at low capacity utilisation of ~2-56%. As
volume growth continues to pick up we expect utilisation and resultant scale
efficiencies to flow through. Increasing reliance on third-party contract
manufacturing could limit gains on this front.
Exhibit 34: Prataap’s new facilities are still running at sub-optimal capacity utilization
Plant Nature Products Capacity utilisation (FY17)
Chips 73%
Rings and puff 73%
Indore Owned
Namkeen 85%
Chulbule 74%
Rings and puff 64%
Guwahati 1 Owned
Chulbule 33%
Rings and puff 56%
Guwahati 2 Owned
Chulbule 2%
Bangalore 1 Contract Rings and puff N/A
Bangalore 2 Contract Chips N/A
Kolkata 1 Contract Chips N/A
Kolkata 2 Contract Chips N/A
Ahmedabad Contract Chips N/A
 National branding: Prataap has been investing in national-level TV advertising

with marquee brand ambassador Salman Khan. By building brand even ahead of
the products being made available nationally, Prataap’s A&P spends have
surpassed that of peers. As more products are launched sharing the brand
architecture and distribution is expanded, A&P spend will get spread over larger
sales base.

Prataap Snacks
Exhibit 35: Prataap’s A&P spends are moving up as it continues to drive sales growth
20000 Sales (Rs Mn) A&P as % of sales 6%
15000
4%
10000
2%
5000
0 0%
FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E
 Distribution: With a total reach of 1.2mn, including 0.7mn directly serviced,

Prataap has clearly spent ahead of time on distribution expansion. The quality of
distribution is also ahead of most FMCG peers despite a significantly smaller
scale. Also, logistics is one of the key costs in a packaged snacks business due to
weaker value per volume metrics. We expect significant improvement in this cost
as the distribution network sweats better on rising sales. Also, as Prataap is
contracting more third-party manufacturing lines that are closer to its markets,
logistics costs are expected to come down further.
Exhibit 36: Commensurate to Prataap’s scale, it has a Exhibit 37: …and a higher logistic cost as a percentage of
higher distribution reach, resulting in lower sales per sales
store…
Outlet reach Sales/Store/Month(`)
Logistics cost as % of sales, FY17
Direct Indirect Total Directly Indirectly
9%
HUL 3.0 5.5 8.5 7,241 1,693
Marico 1.0 3.7 4.7 3,304 440 6%

Nestle 1.3 2.7 4.0 4,171 1,254
3%
GSK CH 1.0 3.3 4.3 2,325 302
Britannia 1.8 3.0 4.8 3,353 503 0%

Dabur
HUL
ITC
Nestle
Colgate
Prataap
Britannia
ITC 2.0 5.5 7.5 8,743 3,843
Prataap 0.7 0.5 1.2 700 527
Source: Ambit Capital research Source: Company, Ambit Capital research
Premiumisation is a longer-term positive trend

In the near term, we expect the bulk of margin improvement to come from rising
scale efficiencies for Prataap. However, mix improvement will be a key margin gain
driver in the longer run. Introduction of higher price point packs (Nachos and Yum
Pie are recent examples) as well as migration of consumers from `5 to higher price
points aid this product mix improvement. Encouragingly, the company is able to drive
this product mix improvement without abandoning its price/value leadership
positioning. A key example is the launch of Nachos and Yum Pie at `10, which will
help drive average unit price for Prataap higher. However, despite being at a 2x price
point, within their categories both Yum Pie and Nachos are value leaders as none of
the peers sell at that price point or have lower grammage.

Prataap Snacks
Cash generation should rise hereon

While Prataap’s profit margins have been low, it has still maintained discipline to
ensure cash generation remains positive. As margins improve and Prataap increases
reliance on third-party manufacturing, we expect cash generation as well as return
ratios to improve hereon.
Rising margins to aid improvement in cash generation
Prataap’s pre-tax CFO/EBITDA has been a healthy 88%. Also, high capex intensity to
build capacity for growth has resulted in FCF being negative for the last five years. As
margins improve, we expect CFO growth to be a strong at 24% CAGR over FY18-21E
with working capital discipline ensuring pre-tax CFO/EBITDA improves to ~110%.
Capex will also moderate as Prataap has new facilities that are underutilised and also
because it is focusing on more third-party contract manufacturing tie-ups. Hence,
increased CFO combined with moderate capex should result in positive FCF.
Exhibit 38: We expect Prataap’s CFO/EBITDA to improve… Exhibit 39: …and FCF to turn positive
CFO(Rs Mn) CFO/EBITDA FCF (Rs Mn) FCF/Sales

2,500 120%
1,600 8.00%
2,000
115%
1,200
1,500 4.00%
110% 800
1,000
400
105% 0.00%
500
-
- 100% FY17 FY18E FY19E FY20E FY21E
FY17 FY18E FY19E FY20E FY21E (400) -4.00%
Lower-end portfolio + wider reach => outsourcing works well

We, for now, support Prataap’s strategy to grow using third-party contract
manufacturing. We believe, given products are positioned at the lower end of value
proposition versus peers, Prataap will be able to find sufficient third-party contract
manufacturing capacity to hire. While third-party contract manufacturing can lead to
lower GM, having these facilities closer to markets can reduce logistics cost and make
up for the lost GM. This may sound contrary to our stance for Britannia, where we
highlight moving from third-party manufacturing to in-house manufacturing as the
key source of cost efficiencies. The difference between the two lies in these factors: 1)
Britannia’s products are more premium and differentiated, requiring in-house
manufacturing, and 2) Britannia’s business is big enough to support own
manufacturing footprint efficiently. As Prataap scales up and its product mix
premiumises, we expect it will also shift towards own manufacturing as it has already
done for more sophisticated and differentiated products like Yum Pie.
This should aid improvement in return ratios
A combination of margin expansion and capex moderation should improve asset
turns. These should result in improvement in RoIC and RoE. We estimate Prataap’s
RoIC (post tax, average) to move up from 16% to 37% over FY18-21E. RoE should
improve from 13% to 16% over FY18-21E.
Exhibit 40: Du Pont analysis for Prataap Snacks shows improvement in asset turns
and operating leverage will offset financial leverage reduction
FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E
PAT Margin 1.2% 1.9% 4.4% 1.1% 4.7% 5.3% 5.7% 6.5%
Asset turns 2.04 2.45 2.80 2.89 1.80 1.97 2.08 2.13
Leverage 1.23 1.20 1.24 1.31 1.07 1.06 1.05 1.04
RoE 3% 6% 15% 4% 9% 11% 13% 15%

Prataap Snacks
Key assumptions
Exhibit 41: Summary of our key assumptions
FY16 FY17 FY18E FY19E FY20E FY21E Comments
Profit and Loss
Sales (` mn) 7,572 9,039 10,395 12,682 15,218 18,110 Expect sales CAGR of 20% over FY18-21E led by new product launches (such
as curls, Yumpie, nachos) and distribution expansion; we expect sales from
Sales growth 35.5% 19.4% 15.0% 22.0% 20.0% 19.0% new launches (both incremental and transformational) to account for ~15-
20% of incremental sales over FY18-21
GM increase of ~100bps over FY18-21 led by premiumisation and mix
Gross margin 31.0% 29.6% 34.0% 34.5% 35.0% 35.5%
change in favour of new higher margin categories like Yumpie and Nachos
Employee cost (%
2.3% 2.8% 2.9% 2.8% 2.7% 2.6% Expect growth in employee cost to be less than increase in sales
of sales)
A&P spends (% of Expect increase in A&P spends to continue increasing to support new product
4.1% 4.1% 4.3% 4.6% 4.9% 5.2%
sales) launches
Power & Fuel (% of Expect Power & Fuel to moderate by 20bps over FY18-21E as incremental
2.4% 2.3% 2.4% 2.3% 2.2% 2.1%
sales) production is outsourced
Carriage Outwards Expect Carriage Outwards to fall by 100bps over FY18-21E as distribution
7.6% 8.0% 7.8% 7.6% 7.4% 6.8%
(% of sales) network is sweated out
Other expenditure Expect Other Expenditure to decline as a percentage of sales through
7.2% 7.8% 8.0% 7.9% 7.8% 7.7%
(% of sales) operating leverage
EBITDA (` mn) 565 409 894 1,175 1,514 2,001 Expect 250bps of EBITDA margin expansion over FY18-21 led by GM
expansion and operating leverage in fuel and logistics costs offsetting
EBITDA margin 7.5% 4.5% 8.6% 9.3% 10.0% 11.1% increased A&P spends
Depreciation (`
180 250 308 348 397 453 Expect increase in depreciation as new factory in Indore is commercialised
mn)
PAT should witness 34% CAGR over FY18-21 with deleverage, margin
PAT (` mn) 332 99 487 666 871 1,181
expansion and strong revenue growth
EPS 13.2 4.8 20.7 28.4 37.0 50.3
Cash EPS 24.6 16.8 33.9 43.2 54.0 69.5
Balance Sheet
Capex (` mn) 463 586 300 450 500 550 ~10% of FY17 sales from outsourced capacities; capex represents institution
Capital WIP (` mn) 303 518 518 518 518 518 of in-house capex capabilities once category has scaled up sufficiently
Expect moderate reduction in debtors days from 9 to 7 over FY17-20 as the
Debtors days 9 8 7 7 7 7
company is able to sweat channel better
Expect moderate reduction in inventory days from 45 days to 42 days due to
Inventories days 48 45 45 44 43 42
increase in operating efficiency
Expect moderate increase in creditors day from 44 days to 55 days as better
Creditors days 39 44 49 51 53 55
scale allows them to negotiate better trade terms
Working Capital
35 24 114 110 110 114 Expect net working capital days to reduce on operational efficiency
Days
Debt expected to be repaid through IPO proceeds; reduction in working
Net debt/ equity 0.2 0.2 (0.5) (0.5) (0.6) (0.6)
capital requirement leads to reduction in net debt-equity
Cash flow
statement
Operating cash
433 426 907 1,050 1,336 1,739
flow (` mn) Expect the company to turn FCF positive in FY18, led by revenue growth;
Free cash flow (` expect healthy CFO and FCF over FY17-20
(30) (160) 607 600 836 1,189
mn)
Ambit vs consensus
Given Prataap is a recently listed company and is not well covered, there is only one
analyst estimate available for peer comparison. Hence, we are unable to compare
our estimates with Street expectations.

Prataap Snacks
Power of compounding will drive this one

Given the strong 34% EPS CAGR that we expect Prataap to deliver over FY18-
21E, bulk of stock market returns should be driven by earnings growth.
Given the long and strong growth ramp that Prataap potentially has, valuing
it on near-term multiples will not capture the value creation to its fullest. DCF
is therefore a preferred valuation methodology with which we derive our TP
of `1,825 (50% upside), implying 51x FY20E P/E. While this looks expensive
(especially given 47% premium to an overvalued FMCG sector), even by
FY21E Prataap would be at a sub-optimal earnings level (EBIT margin of 8%
vs long-term margin of 13%). Therefore, multiples look rich. Even if we
assume Prataap will de-rate to the sector multiple of 40x one-year forward
P/E, given the strong earnings trajectory, Prataap would still deliver a ~20-
40% stock market return CAGR over the next three years.
Sub-optimal earnings make multiples redundant

At CMP, Prataap Snacks is trading at 46x FY19E P/E, which is at a 15% premium to
the FMCG sector. We, however, believe the multiple looks expensive due to sub-
optimal earnings level of Prataap and not because the stock is richly valued as can be
seen in the 40% discount that it trades at on P/sales basis vs the FMCG sector. Given
the strong earnings growth expectations (~34% EPS CAGR over FY18E-21E), we
believe the multiples will moderate with the stock still delivering strong equity returns.
Exhibit 42: Relative valuations
Div.
CMP Mcap Target Up / P/E based on Implied P/E Y ield Rev EPS
Relative valuations Stance
Price Down CMP EV/Sales ROC E (%) based on TP (%) growth Growth
(Rs) (LC bn) FY 19E FY 20E FY 19E FY 20E FY 19E FY 20E FY 19E FY 20E FY 16 FY 17-20 FY 17-20
Staples
HUL 1,346 2,914 BUY 1,500 11% 46.4 38.5 7.1 6.1 82.6 92.3 51.7 42.9 1.2% 13.0% 21.1%
Nestle 7,760 748 SELL 6,650 -14% 52.0 43.1 6.2 5.4 42.2 46.4 44.6 36.9 0.6% 13.1% 19.7%
GSK Consumer 6,734 283 SELL 5,395 -20% 34.2 29.8 4.9 4.3 23.8 24.3 27.4 23.9 0.8% 11.6% 13.1%
Colgate 1,049 285 SELL 950 -9% 37.0 31.6 5.8 5.1 49.5 51.1 33.5 28.6 1.0% 10.4% 16.0%
Godrej Consumer 1,091 744 SELL 657 -40% 45.2 38.1 6.6 5.7 18.3 19.9 27.2 22.9 0.3% 11.0% 14.2%
Dabur 328 578 BUY 395 20% 34.7 28.8 5.8 4.9 25.5 27.5 41.8 34.7 0.7% 11.9% 16.2%
Marico 313 403 SELL 240 -23% 43.3 35.4 5.4 4.7 29.2 32.2 33.2 27.2 1.1% 11.6% 12.0%
Britannia 4,952 595 BUY 5,280 7% 47.5 38.3 4.9 4.1 34.4 35.6 50.6 40.8 0.4% 14.6% 20.6%
Emami Ltd 1,094 248 BUY 1,400 28% 36.6 31.0 8.2 7.1 35.8 50.9 46.8 39.7 0.6% 11.7% 13.3%
ITC 266 3,249 BUY 370 39% 25.1 21.5 6.2 5.3 28.0 29.9 34.9 29.8 2.1% 11.5% 12.9%
Prataap 1,219 29 BUY 1,825 50% 43.0 32.9 2.3 1.9 21.5 27.6 64.3 49.3 0.0% 19.0% 98.2%
Average 4% 40.5 33.5 5.8 5.0 35.5 39.8 41.5 34.2 0.8% 12.7% 23.4%
Dairy
Hatsun Agro 767 117 BUY 925 21% 47.4 31.1 2.2 1.8 20.4 27.5 57.2 37.5 0.4% 17.3% 41.0%
Paints
Asian Paints 1,110 1,065 SELL 960 -13% 48.4 44.1 5.4 4.7 34.4 35.0 41.9 38.2 0.7% 12.7% 7.6%
Berger Paints 247 240 SELL 217 -12% 41.8 34.7 3.9 3.3 30.8 35.2 36.7 30.5 0.7% 15.1% 18.1%
Average -13% 45.1 39.4 4.6 4.0 32.6 35.1 39.3 34.3 0.7% 13.9% 12.9%
Alco-Bev
United Spirits 3,280 477 BUY 3,860 18% 55.0 37.2 4.8 4.1 17.2 21.8 64.8 43.7 0.0% 11.8% 51.9%
United Breweries 1,065 282 SELL 693 -35% 65.7 55.6 4.6 4.1 14.3 15.5 42.8 36.2 0.1% 12.7% 30.1%
Average -9% 60.4 46.4 4.7 4.1 15.7 18.6 53.8 40.0 0.1% 12.2% 41.0%
Source: Bloomberg, Ambit Capital research
DCF captures long-term value creation better

Stocks like Prataap which offer sub-optimal near-term earnings but strong and long
growth ramps are best valued on DCF. Valuations based on near-term multiples tend
to under-value the business as it does not take into account future growth which
holds the true value accretion for these businesses.
Longevity of the growth ramp is in place
Given low penetration, share gain potential from unorganised and higher priced
national peers, possibility of expansion of new categories, and continued
geographical expansion should support a strong and long growth ramp for Prataap.
We expect Prataap to increase sales at 15% CAGR, EBIT at 20% CAGR and FCF at
18% CAGR over FY18E-40E.

Prataap Snacks
Exhibit 43: Ahead of category growth can help Prataap achieve 15% Sales CAGR over the next two decades
Prataap’s Prataap’s
Market size Historical 14 Yr Future 20YR Market size in Prataap’s Sales
Category current market market share in
(` Mn) CAGR (FY03-17) CAGR (FY18-38) FY38 (` Mn) in FY38 (` Mn)
share FY38
Chips 83,483 24% 10% 561,633 3% 4% 22,465
Extruded Snacks 86,284 21% 12% 832,323 13% 15% 124,848
Namkeen 54,926 35% 15% 898,945 3% 5% 44,947
Chocolates 120,883 19% 10% 813,242 0% 1% 8,132
Compounding earnings to offset de-rating from current levels

Given such strong compounding of earnings, even if we assume that Prataap will de-
rate to the sector multiple of ~40x one-year forward P/E, it would generate 23%
CAGR equity returns over the next three years. Subsequent returns would still track
earnings growth, which we expect to compound at 18% CAGR over FY20-40E. This
should lead to Prataap delivering ~20% return over FY17-40E.
Exhibit 44: Equity returns are more sensitive to change in earnings growth than
rerating/derating of P/E
3-year CAGR stock returns
1Yr Forward P/E - 5Yr EPS CAGR 25% 35% 45% 55% 65% 75%
30 -30% -20% -10% 1% 12% 23%
40 -23% -12% -1% 11% 23% 36%
50 -17% -5% 7% 19% 33% 46%
60 -11% 1% 14% 27% 41% 55%
70 -7% 6% 20% 34% 48% 64%
Shareholding structure – A blessing in disguise? If we assume that the stock derates

to sector multiple one-year forward
One of the key technical arguments against Prataap’s ability to generate healthy P/E, it would still deliver a ~23%
equity returns for minority shareholders is the large shareholding by PE investors, stock returns over the next 3 years
which at some stage could be available for sale and lead to oversupply pressure and
risk of change in management control. While we admit this risk is tangible, we
believe it could also make Prataap a potential buyout candidate by a larger F&B
company (like Britannia) which may have ambitions to become a national packaged
snacks company.
Private equity players hold more than promoters
Sequoia Partners and Faering Partners own 50.5% stake in Prataap. This compares
with only 23% stake held by promoters. Despite the majority stake, the board of
directors is dominated by the promoter group, which also manages the business on a
day-to-day basis. High quality of promoters is a key strength and any change in
management control due to this lopsided holding structure would be a negative.
Exhibit 45: P/E investors hold 50.5% in Prataap Snacks vs 23% holding of Promoters
Shareholding Pattern
Promoter, 23.0%
Public, 26.5%
Faering (PE),
2.1%
Sequoia (PE),
48.4%


Prataap Snacks
Fear of excess liquidity in the medium term is justified…

Also, as and when PE investors will look to lower their investment, there is a
likelihood of oversupply of Prataap’s shares, leading to pressure on the stock price.
Even a calibrated exit over a long period by PE investors will be seen negatively as it
would create a constant supply of equity stock.
…but we believe it also creates possibility of strategic buyout by peers
We believe PE investors would be aware of the potential negative impact of stake sale
on the stock price. They would at some stage, therefore, prefer to do a bulk sale of
their stake in the company. This could trigger a change in management in the
company. Also, given the low stake that promoters have in this company, they could
be open to monetizing stake as fear of loss of control of the business would be
weighing on their minds. Given the strong branding, a wide product portfolio and
national reach of Prataap, it is an attractive buyout candidate for any large Indian or
global F&B company with ambitions of becoming a national packaged snacks brand
in India.
Exhibit 46: Potential takeover candidates of Prataap Snacks
Product Brand Distribution Positioning Ability to
Remarks
synergy synergy synergy synergy buy
No presence in savoury snacks; strong presence in MT
and SEC A, B outlets where Prataap is weak; acquisition
Britannia fuels Britannia's "Total Foods Company" ambitions;
value category positioning complements Britannia's
premium positioning
Lacks significant presence in potato chips and
namkeens, cannibalisation potential with nachos; ITC
ITC
already has pan-India presence; cigarettes' cash-
generative nature could provide finance acquisition
Cannibalisation with namkeens; Haldiram lacks
Haldiram presence in South and East (where Prataap has reach);
however, scale relative to others restricts ability to buy
Pepsico (Lays) Lays already has strong recall and premium branding
Potential cannibalisation with Yumpie; recent
Lotte
acquisition of Havmor reduces ability to buy
Source: Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak
Initiate with BUY and DCF-based TP of `1,825

Given the cash-generative nature of the business, we use a three-stage DCF-based
model to arrive at a fair value. The assumptions for the weighted average cost of
capital and terminal growth rates are shown in the exhibit on the right margin. We
have assumed zero long-term debt-equity ratio given its strong cash position and free
cash flow generation. Hence, the company has enough surplus cash on its balance
sheet for future capex.
Stage 1 (FY17-21): Over FY18-21E, we expect revenue CAGR of 20% on the back of
new product launches, expansion of distribution and share gain from unorganised
and branded national peers. We expect EBITDA margin improvement of ~245bps Our assumptions for WACC
over FY18-21E. This will result in adjusted PAT CAGR of 34% over FY18-21E and RoE
Item Value
increase from 4% to 15% by FY21.
Cost of equity 15%
Stage 2 (FY22-40): Over FY22-40, we assume that Prataap’s revenue growth will Cost of debt 12%
moderate from 19% in FY21 to 12% in FY40. We assume a gradual increase in EBIT
Debt/Equity 0%
margin from 8.4% in FY21 to 13% in FY30 due to expansion of operations and
premiumisation of the product portfolio. Beyond FY30, EBIT margin would remain Corporate tax rate 30%
stable at 13% until FY40. We assume sales/EBIT CAGR of 15%/20% over FY21-40. WACC 15%
Stage 3 (FY40 onwards): Beyond FY40, we factor in terminal growth of 5% Terminal growth rate 5%
assuming ~3% inflation and ~2% volume growth led by population growth and
increasing consumption levels.
Based on these forecasts, we arrive at a DCF-based valuation of `1,825 (upside of
50%), implying FY20E P/E of 51x. The cash flow and return profiles generated by our
model are shown in the exhibits below.

Prataap Snacks
Exhibit 47: Prataap’s return profile Exhibit 48: Prataap’s cash flow profile
ROE
EBITDA Margin CFO (Rs Mn) FCF(Rs Mn,RHS)
EPS growth (RHS) 2,000 1,400
1,200
20% 400% 1,000
1,500
800
16% 300% 600
12% 200% 1,000 400
200
8% 100% -
500
(200)
4% 0% (400)
0% -100% - (600)
FY14
FY15
FY16
FY17
FY18 E
FY19 E
FY20 E
FY21 E
FY14
FY15
FY16
FY17
FY18 E
FY19 E
FY20 E
FY21 E
Exhibit 49: Our assumption of operating metrics in the fade period of our DCF
FCF (Rs Mn) EBIT Margin (RHS) WACC (RHS) ROE (RHS)
25,000 40%
20,000
30%
15,000
20%
10,000
10%
5,000
0 0%
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
FY36
FY37
FY38
FY39
FY40
Growth premium vs scale discount – how to solve this puzzle

One of the key aspects of valuation that needs to be addressed for Prataap is whether
it should be assigned a premium to the FMCG sector for superior growth or a
discount to the sector due to higher risk associated with its smaller scale. We believe
that by assuming WACC of 15% vs 13.75% for the rest of the FMCG sector, we
capture the higher risk associated with business with smaller scale and sub-optimal
profitability. If despite the higher WACC, our TP is at a premium on P/E multiple, it is
because near-term earnings is too low and that the stronger growth ramp is the true
value driver of the business – both of which the multiple is not capturing well. Also, if
we compare Prataap on EV/sales (which negates the impact of low margins), even at
our DCF-implied TP of `1,825, it would be trading at 2x FY19E-EV/sales, which is at a
67% discount to the FMCG sector. This discount, despite stronger growth potential,
captures the higher risk associated with Prataap.
Scarcity premium for a high quality business in a preferred segment
We see a case for Prataap to actually trade above the FMCG sector as and when it
scales up to a comparable risk profile. This is because we believe F&B is the best-
placed segment in FMCG. Low penetration, rising affordability, strong innovation and
changing lifestyles (preference for impulse, convenience and health & wellness
products) should support growth. Growth led by shift of share from unorganised to
organised is also likely to be the highest for the F&B segment. Investments to drive
growth have already been made to a large extent and, hence, return ratios should
improve. We expect valuations to expand from above-sector-average levels and
Prataap is likely to be an outperformer even within the F&B space.

Prataap Snacks
Exhibit 50: Our framework to assess attractiveness of sub-segment within the

consumer space
6 Tobacco Tobacco Fut

High
5 HPC Fut HPC
4 Paints F&B Fut

Medium
ROCE
3 AlcoBev Fut Paints Fut F&B
1 AlcoBev
Low
-
-Low 1 2 Medium
3 4 5 High 6
Growth
Source: Ambit Capital research, Size of the bubble denotes valuations
Mirror, mirror on the wall, who is fairest of them all?

We realise that given the small scale and evolving business model, Prataap is not
truly comparable to older companies that have achieved significant scale in our
coverage. We factor in the higher risk associated with a sub-scale evolving business
model by taking higher WACC (15%) for Prataap than that of the sector (13.75%).
However, for an investor there might still be an issue of lack of comparability
between Prataap and the FMCG sector. Such investors should look at other small-cap
FMCG names like Jyothy Labs, Bajaj Corp, DFM Foods and Manpasand Beverages.
Among these comparable peers, we believe Prataap stands out as the best due to its
unique combination of scalability of category, high quality of management and
growth-focused investment strategy.
Prataap’s business strategy is superior to peers like DFM Foods, Manpasand
Comparing Prataap on business fundamentals with peers such as DFM Foods,
Manpasand shows that it has superior category mix with higher growth potential,
which is comparable only with Manpasand’s presence in Fruit Drinks. However,
Prataap’s rate of entering new categories has been most impressive besides the
growth of its distribution expansion. Though Prataap has not grown inorganically, it
has still managed to gain market share which has eluded peers. In terms of brand
positioning, Bajaj Corp has a premium positioning but Manpasand, Prataap and
Jyothy have entry-level to mid-level positioning. In F&B, we prefer entry-level
positioning as it helps capture share from the unorganised segment, whereas in HPC
we prefer premium positioning. In terms of margin growth, Prataap has the highest
potential (from current base) whereas Manpasand and Bajaj Corp are likely to
witness margin declines.

Prataap Snacks
Exhibit 51: Prataap has invested in developing the right capabilities for long-term sustainable growth
Category Distribution Distribution Market Inorganic Margin
Company Innovation Branding Remarks
Mix quality expansion Shares Growth ramp
Innovation and distribution expansion in
high growth category combined with
Prataap market-share gains should allow
margins to improve from scale leverage
and mix improvement
While puffed snacks category is high
growth and DFM is servicing its limited
DFM Foods geography well, limited new launches
and distribution expansion will hurt
future growth
Manpasand is over earning which is
offsetting its advantage of being in a
Manpasand
high growth category and market-share
gains through new launches
Weak homecare-focused category mix
with limited innovation and failed
expansion into North has offset strong
Jyothy Labs
brand recall in South. Market-share
losses have negated inorganic growth
for Jyothy
Single category company losing market
share offsets strong point of being in a
Bajaj Corp
high growth category with premium
positioning
Source: Ambit Capital research.h Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak
Growth-focused model of Prataap to yield results in the long run

For the growth that it has been clocking (higher than Jyothy, Bajaj and DFM but lower
than Manpasand), Prataap is doing well in terms of cash generation (CFO/EBITDA is
the highest) and capital intensity (marginally negative FCF/sales; compares well with
the only faster growing company, Manpasand). Also, while Prataap’s margins are the
lowest, it has improved the most. Prataap’s RoIC is also the lowest but we expect
significant improvement as profit margins pick up and capital intensity moderates. In
terms of valuations, Prataap is by far the cheapest on EV/sales, which is the right
metric to compare these companies given Prataap’s low profit margin at this stage.
Even on depressed margins, we believe Prataap’s P/E is at a justified premium to
Jyothy (higher growth), Manpasand (superior cash generation) and Bajaj (significantly
higher growth). DFM is at a premium to the rest of the pack but appears overvalued.
Exhibit 52: Prataap has invested on growth which has resulted in lower profitability but superior operating metrics
3 year EBIT PE EV/sales
Change in CFO/EBITDA FCF/sales ROIC over
sales margins in
last 3 years over FY15-17 over FY15-17 FY18E FY19E FY18E FY19E FY15-17
CAGR FY18E
Jyothy 5% 13% 0% 57% 6% 39.4 31.9 3.6 3.2 11.5%
Manpasand 32% 9% -2% 84% -28% 48.0 40.4 5.2 4.3 11.5%
DFM 13% 9% 0% 83% -1% 81.6 64.2 4.2 3.3 18.0%
Bajaj 1% 32% 1% 88% 26% 31.1 26.9 8.1 7.1 41.0%
Prataap 23% 6% 2% 102% -1% 58.8 43.0 2.5 2.0 9.0%

Prataap Snacks
Catalysts
 Acceleration in sales growth from FY19: On a low base of FY18 which was
impacted by GST implementation (leading to wholesale channel disruption),
shortage of raw materials and capacity constraints, we expect sales growth to
revive to 22% in FY19. This will also be aided by continued new launches (like
Nachos and Yum Pie) especially at higher price points. Recovery in sales growth
will restore investor confidence that Prataap Snacks can potentially deliver more
than 20% sales growth in foreseeable future.
 Improvement in margins: We expect margin gain trajectory to continue for
Prataap Snacks and build a 50bps GM and 40bps EBIT margin gain in FY19. This
will be led by acceleration in sales growth which will bring operating leverage
with it and premiumisation of product mix due to new launches. Continued
improvement in margins will settle one key investor concern of Prataap’s inability
to improve margins due to its value/price leader positioning.
Risks
 Management changes: Given the fact that PE investors and not the Promoters
hold majority stake in the company, it is possible that there could be
management change in case of non-alignment of interests between the PE
investors and promoters. High quality of promoters is a key strength of Prataap
Snacks and any change in management is a risk to our BUY stance.
 Insufficient hedging for raw materials: Prataap does not have backward
integration or contract farming in place for its key raw materials. Most of the key
raw materials (potatoes, palm oil, corn, gram flour) are agri commodities which
tend to witness price volatility based on production cycles each year. There can
also be shortages in some years for these commodities (As was the case with
potatoes in FY18) which could lead to both cost escalation as well as production
disruptions. While Prataap is working on reducing these risks by creating storage
facilities and taking forward covers, these are not yet sufficient to remove this risk
completely.
 Regulatory restrictions: Several countries have regulatory restrictions in place
regarding toys being sold in same pack as eatables or higher taxation on food
products considered to be ‘unhealthy’. Even in India there are currently
discussions being held on banning sale of food products (especially catering to
children) on cigarette kiosks and also ban on advertising of such products which
are ‘unhealthy’ on children’s TV channels. Any of these regulatory restrictions if
put in place can severely hurt Prataap Snacks given its extruded snacks products
(63% of sales) are largely geared towards children as key consumers.
Exhibit 53: Explanation for our accounting score

Segment Score Comments
Prataap scores low compared with its FMCG peers due to volatile depreciation rate and low cash yield but scores high
on parameters such as contingent liabilities, which are negligible. Prataap is in D7 in our Ambit Hawk framework,
Accounting AMBER
which is one notch above companies that are to be avoided due to accounting policies. Given it is a sub-scale, evolving
business, we believe the weaker financial metrics are justified now.
Prior to listing, earnings were volatile due to sub-scale, ahead-of-time investments to build the brand, revamp
Predictability AMBER manufacturing facilities and leverage; however, as high quality PE investors increased stake, the company revenue and
earnings showed less volatility.
Historical earnings were disrupted by GST and demonetisation. Additionally, earnings suffered on account of RM
Earnings Momentum AMBER (potato) procurement challenges. Given that the business was not fully scaled, earnings were more susceptible to
external stimuli.

Prataap Snacks
Balance Sheet
Year to March (` mn) FY16 FY17 FY18E FY19E FY20E
Shareholders' equity 15 31 33 33 33
Reserves & surpluses 2,158 2,353 5,379 6,046 6,916
Total networth 2,172 2,383 5,412 6,079 6,950
Minority Interest 0 0 0 0 0
Preference share capital 0 0 0 0 0
Debt 475 656 268 268 268
Deferred tax liability 55 85 85 85 85
Total liabilities 2,702 3,125 5,765 6,432 7,302
Gross block 2,214 2,785 3,085 3,535 4,035
Net block 1,682 2,008 2,000 2,102 2,205
CWIP 303 518 518 518 518
Investments 0 0 0 0 0
Cash & equivalents 61 111 2,853 3,434 4,252
Debtors 183 197 198 242 290
Inventory 685 789 854 1,008 1,167
Loans & advances 426 516 565 655 744
Other current assets 74 132 152 185 222
Total current assets 1,429 1,745 4,622 5,524 6,676
Current liabilities 700 1,127 1,353 1,685 2,064
Provisions 12 20 23 28 33
Total current liabilities 712 1,146 1,375 1,713 2,097
Net current assets 717 598 3,247 3,811 4,579
Miscellaneous 0 0 0 0 0
Total assets 2,702 3,125 5,765 6,432 7,302
Income statement
Operating income 7,572 9,039 10,395 12,682 15,218
% growth 35.5% 19.4% 15.0% 22.0% 20.0%
Operating expenditure 7,007 8,630 9,501 11,507 13,704
Operating profit 565 409 894 1,175 1,514
% growth 66.8% -27.7% 118.8% 31.5% 28.8%
Depreciation 180 250 308 348 397
EBIT 385 159 586 828 1,117
Interest expenditure 59 45 18 18 18
Non-operating income 7 15 70 85 102
Adjusted PBT 333 129 637 895 1,201
Tax 2 30 150 228 330
Adjusted PAT/ Net profit 332 99 487 666 871
% growth 205% -70% 393% 37% 31%
Extra Ordinary Items (58) - - - -
Reported PAT / Net profit 274 99 487 666 871
Minority Interest - - - - -
Share of associates 0 0 0 0 0
Adjusted Consolidated net profit 274 99 487 666 871
Reported Consolidated net profit 274 99 487 666 871

Prataap Snacks
Cash flow statement

EBIT 385 159 586 828 1,117
Depreciation 180 250 308 348 397
Others 66 2 - - -
Tax (72) (46) (150) (228) (330)
(Incr) / decr in net working capital (60) 50 93 17 50
Cash flow from operations 433 426 907 1,050 1,336
Capex (463) (586) (300) (450) (500)
(Incr) / decr in investments (6) (10) - - -
Interest/Dividend Received 3 5 - - -
Others 0 (107) - - -
Cash flow from investments (466) (698) (300) (450) (500)
Net borrowings 93 261 (389) - -
Issuance of equity - 112 2,542 - -
Interest paid (45) (50) (18) (18) (18)
Dividend paid - - - - -
Others 2 (0) 28 - -
Cash flow from financing 51 323 2,163 (18) (18)
Net change in cash 18 51 2,770 582 818
Closing cash balance 33 83 2,853 3,434 4,252
Free cash flow (30) (160) 607 600 836
Ratio analysis
Year to March (%) FY16 FY17 FY18E FY19E FY20E
EBITDA margin (%) 7.5% 4.5% 8.6% 9.3% 10.0%
EBIT margin (%) 5.1% 1.8% 5.6% 6.5% 7.3%
Net profit margin (%) 4.4% 1.1% 4.7% 5.3% 5.7%
Dividend payout ratio (%) 0.0% 0.0% 0.0% 0.0% 0.0%
Net debt: equity (x) 0.2 0.2 (0.5) (0.5) (0.6)
Working capital turnover (x) 34.6 24.2 114.0 109.7 109.8
Gross block turnover (x) 3.6 3.6 3.5 3.8 4.0
RoCE (%) 16.1% 4.4% 15.6% 21.5% 27.6%
RoE (%) 16.3% 4.3% 12.5% 11.6% 13.4%
Valuation Parameters
EPS (`) 13.2 4.8 20.7 28.4 37.0
Diluted EPS (`) 13.2 4.8 20.7 28.4 37.0
Book value per share (`) 104.5 114.6 230.3 258.7 295.7
Dividend per share (`) - - - - -
P/E (x) 92.7 256.4 58.8 43.0 32.9
P/BV (x) 11.7 10.6 5.3 4.7 4.1
EV/EBITDA (x) 45.6 63.4 29.2 21.7 16.3
Price/Sales (x) 3.3 2.8 2.8 2.3 1.9

Prataap Snacks
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 saurabh.mukherjea@ambit.co
Pramod Gubbi, CFA Head of Equities (022) 30433124 pramod.gubbi@ambit.co
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 abhishek.r@ambit.co
Amandeep Singh Grover Small Caps (022) 30433082 amandeep.grover@ambit.co
Anuj Bansal Consumer (022) 30433122 anuj.bansal@ambit.co
Archit Varshney Consumer (022) 30433275 archit.varshney@ambit.co
Ariha Doshi Consumer (022) 30433228 ariha.doshi@ambit.co
Basudeb Banerjee Automobiles / Auto Ancillaries (022) 30433141 basudeb.banerjee@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods / Small Caps (022) 30433252 bhargav.buddhadev@ambit.co
Deep Shah Media / Telecom (022) 30433064 deep.shah@ambit.co
Gaurav Khandelwal, CFA Oil & Gas (022) 30433132 gaurav.khandelwal@ambit.co
Gaurav Kochar Banking / Financial Services (022) 30433246 gaurav.kochar@ambit.co
Girisha Saraf Home Building (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy / Small Caps (022) 30433251 karan.khanna@ambit.co
Kushagra Bhattar Agri Inputs / Chemicals (022) 30433062 kushagra.bhattar@ambit.co
Nikhil Mathur Small Caps (022) 30433220 nikhil.mathur@ambit.co
Mayank Porwal Retail / Consumer Discretionary (022) 30433214 mayank.porwal@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Prateek Maheshwari Cement / E&C / Infrastructure (022) 30433234 prateek.maheshwari@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Rasik Pandita Healthcare (022) 30433293 rasik.pandita@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Agri Inputs / Chemicals (022) 30433242 ritesh.gupta@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Ronil Dalal, CFA Conglomerates (022) 30433278 ronil.dalal@ambit.co
Sudheer Guntupalli Technology / Staffing (022) 30433203 sudheer.guntupalli@ambit.co
Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co
Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 sarojini.r@ambit.co
Anmol Arya India (022) 30433079 anmol.arya@ambit.co
Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co
Dipti Mehta India (022) 30433053 dipti.mehta@ambit.co
Krishnan V India / Asia (022) 30433295 krishnanv@ambit.co
Nityam Shah, CFA Europe (022) 30433259 nityam.shah@ambit.co
Punitraj Mehra, CFA India / Asia (022) 30433198 punitraj.mehra@ambit.co
Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co
Singapore
Praveena Pattabiraman Singapore +65 6536 0481 praveena.pattabiraman@ambit.co
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Production
Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co
Jestin George Editor (022) 30433272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 30433273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

Prataap Snacks
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like
change in stance/estimates) to make the recommendation consistent with the rating legend.
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Prataap Snacks
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CONSUMER

Food for thought and more

Anuj Bansal Archit Varshney

For F&B, the time has come ………………………………………………………..4

Consumption tide will NOT raise all boats ……………………………………..19

And the winners are ……………………………………………………………….25

Value for growth and not profitability ……………………………………………33

Food for thought and more Key Recommendations

For F&B, the time has come

Why now – because the consumer is ready for it!

HPC categories revenue growth F&B categories revenue growth

March 01, 2018 Ambit Capital Pvt. Ltd. Page 4

100% Penetration level (%) 90% 90%

Source: Ambit Capital research

March 01, 2018 Ambit Capital Pvt. Ltd. Page 5

 With a change in demographics, Indian lifestyles will evolve to mirror

Ability of modern trade to change consumer behavior is effective now

March 01, 2018 Ambit Capital Pvt. Ltd. Page 6

Exhibit 7: Modern trade offers products at significant discount to general trade

Share of modern trade FY12 Share of modern trade FY17

March 01, 2018 Ambit Capital Pvt. Ltd. Page 7

40% % sales from modern trade in CY17

F&B is no longer a need; it is a Want

Category growth over FY12-17

March 01, 2018 Ambit Capital Pvt. Ltd. Page 8

Source: Ambit Capital research

 Indulgence: We believe that with changes in lifestyle and rising affordability,

Growth rates over FY12-17

 Premiumisation: Compared to HPC, we concede that F&B will witness a

March 01, 2018 Ambit Capital Pvt. Ltd. Page 9

Headwinds abound; but companies are working to

March 01, 2018 Ambit Capital Pvt. Ltd. Page 10

• Raw material availability • Climatic impact on food habits

Source: Ambit Capital research

Source: Ambit Capital research

Consistent supply of good quality and quantity of agri-inputs is a challenge

March 01, 2018 Ambit Capital Pvt. Ltd. Page 11

 Case study 1: Collaborative/contract farming by Pepsi for potato

Lack of adequate cold chain

Packhouses, Storage, 2015, Reefer vehicles, Ripening Retail/front end, 2015,

March 01, 2018 Ambit Capital Pvt. Ltd. Page 12

Higher competition is better as it will help categories

March 01, 2018 Ambit Capital Pvt. Ltd. Page 13

Market share of MNCs Market share of Indian Companies

Large number of new entrants and startups…

March 01, 2018 Ambit Capital Pvt. Ltd. Page 14

Change in market share of top-3 players over FY13-17

… has resulted in a fragmented industry

March 01, 2018 Ambit Capital Pvt. Ltd. Page 15

Increasing formalization through shift to organized and M&A

March 01, 2018 Ambit Capital Pvt. Ltd. Page 16

Exhibit 26: Share of unorganised sector in various F&B categories

90% Share of unorganised segment

Soft drink (Juices)

Source: Ambit Capital research

 Increasing formalization as unorganized and smaller players are scaling

 Increasing consolidation through mergers and acquisitions: In the natural

March 01, 2018 Ambit Capital Pvt. Ltd. Page 17

Exhibit 28: Recent M&A activities (select) in the sector

March 01, 2018 Ambit Capital Pvt. Ltd. Page 18

Consumption tide will NOT raise all boats

Consumer demand is the key to determine scalability

March 01, 2018 Ambit Capital Pvt. Ltd. Page 19