Prataap Snacks Focused on Margin-Led Profitable Growth (Earnings conference call fourth quarter and fiscal year 2023)

Prataap Snacks recently announced its fourth quarter and fiscal year 2023 results. The company's management discussed the performance and strategy in an earnings conference call. Here are some of the key takeaways:

 

Q1. What's management commentary on Margin Improvement and Outlook. Queries on how close the company is to achieving targeted 10% EBITDA margin, margin drivers, sustainability of margin improvement etc.

- Targeting to get close to double digit EBITDA margin on a run rate basis by end of FY24. 

- Aiming for 9% EBITDA margin in Q4 FY24 specifically.

- Margin expansion to be driven by operating leverage as investments in distribution and sales infrastructure are largely done. Further cost optimization programs underway.

- Compression in distribution network, grammage rationalization and cooling raw material prices have enabled margin improvement despite inflationary pressures.

- Once sustainable 8-9% margin achieved for 2-3 quarters, will start investing in advertising and promotion. But consistent A&P spends only likely beyond double digit margins.

- Confident of managing raw material price fluctuations and maintain bottom-line given the changes implemented over last 2 years.

- Margin guidance of double digit EBITDA includes PLI incentives. Excluding PLI, 9% margin targeted in FY24.

In summary, the management expressed confidence of steadily improving EBITDA margins to double digits over next 12-18 months based on operating leverage, cost control and stability in input prices.

Q2. What's management commentary on Growth Performance? Questions on demand outlook, growth by category, competitive intensity affecting growth.

- Demand was softening across categories and rural markets in Q4 FY23, resulting in slower revenue growth. But seeing pickup in demand from May onwards.

- Growth trends much better in H1 FY23 (27% growth) compared to H2 (11% growth).

- Among categories, Pellet/Fryums category outperformed with very high growth in FY23. Rings category reviving after sharp decline during COVID.

- Gained market share in FY23 along with 1-2 other players as per Nielsen data.

- Avadh Snacks subsidiary also saw topline growth in line with Prataap standalone business.

- Targeting 15%+ revenue growth in FY24, aided by lower inflation and pickup in rural and economic activities.

- Focus on distribution expansion, direct reach and range selling to continue driving volume growth.

In summary, the management acknowledged demand softness in Q4 but expects growth momentum to pick up going forward based on positive outlook for consumer demand and the company's growth initiatives.

Q3. What's management commentary on PLI Incentives - Accounting treatment for PLI incentives this year vs last year, quantum expected in FY24.

- In FY23, PLI incentive was recognized on accrual basis in Q1-Q3 based on expected achievement of targets.

- However, in Q4 the accrued PLI was reversed as the revenue growth threshold was not met.

- For FY24, the company will be more conservative in accounting for PLI and may recognize it fully on an annual basis rather than quarterly.

- To meet minimum PLI target in FY24, need to achieve around 14% revenue growth. 

- At 14-14.5% growth with similar product mix, expect minimum PLI incentive of Rs 26-27 crores in FY24.

- The PLI scheme base year was FY20 when potato chips contribution was around 23-24% of sales. 

- In the guidance, double digit EBITDA margin includes PLI incentive. Excluding PLI, 9% margin targeted for FY24.

In summary, the management has guided for a more conservative accounting for PLI incentive in FY24 compared to FY23. The minimum incentive expected is Rs 26-27 crores at 14% revenue growth.

Q4. What's management commentary on Avadh Snacks Performance - Queries on sales, profitability turnaround and drivers for Avadh business.

On the performance of Avadh Snacks business, the management commented:

- Avadh Snacks revenue was around Rs 215 crores in FY23.

- Topline growth was in line with Prataap standalone business.

- Avadh has delivered double digit EBITDA margin in H2 FY23, significantly higher than earlier years.

- Margin improvement driven by cost optimization initiatives, grammage rationalization and lower freight costs vs national players.

- Avadh has consistently delivered higher margins than Prataap standalone in Q3 and Q4 FY23.

- The merger of Avadh Snacks is now completed which will further help in synergies.

In summary, the Avadh business has seen substantial turnaround with double digit EBITDA margins in H2FY23 compared to 2-2.5% earlier. This was attributed to optimizations in product mix, cost control and freight advantage.

Q5. What's management commentary on Distribution and Channel Mix - Updates sought on direct distribution strategy, wholesale vs retail channel sales mix.

On distribution and sales channel mix, the management commented:

- Direct distribution to retail outlets accounts for over 50% of sales.

- Wholesale channel accounts for around 45% of sales.

- The ratio between direct retail and wholesale has not changed much post-COVID vs pre-COVID. Maybe a 2-3% difference.

- More than 90% sales now shipped through full truck load direct to distributors compared to earlier.

- Initiative of compressed distribution network and removing super stockists helped improve price realization and margins.

- Invested heavily in expanding field force and distribution infrastructure over last year.

- Added 1.6 lakh outlets in FY23 taking total distribution reach to 21.8 lakh outlets.

In summary, the management indicated continued focus on expanding direct distribution reach to retail outlets. Wholesale channel accounts for around 45% of sales currently.

Q6. What's management commentary on Category Growth Opportunities - Discussions on potential in Namkeen category, new product launches.

On category growth opportunities, the management commented:

- Namkeen category constitutes around 50% of the overall snacks market.

- Namkeen has been growing faster than other impulse categories during COVID period.

- Namkeen is currently 12-13% of total sales for the company vs 50% industry average. Looking to expand presence.

- Have launched some new Namkeen products and installed/ordered new machinery.

- Aim to significantly increase Namkeen sales contribution over the next 12 months.

- Financial profile of Namkeen business similar to existing portfolio.

- Had launched many new products over last 1-2 years, now rationalizing portfolio and focusing on faster moving products.

- Discontinued some slow moving Stock Keeping Units (SKUs) to reduce complexity.

In summary, the management is focusing on the growing Namkeen segment through new launches and capacity expansion. Some pruning of portfolio also being done to focus on faster selling products.

Q7. What's management commentary on Cost Control Initiatives - Full truck load delivery to distributors, impact on logistics costs.

On cost control initiatives, specifically related to full truck load delivery, the management commented:

- More than 90% of sales now being shipped through full truck load direct to distributors compared to earlier.

- The initiative of direct distribution and compressed network has reduced logistics costs.

- Full truck load has helped optimize freight costs and improve margins.

- The savings from reduced distribution margins and logistics costs is estimated at around 1.6-1.7% of revenue in FY23.

- Overall margin improvement from compressed distribution network is around 3.25% over last 2 years.

- The reduced distribution and freight costs have been captured in improved price realization and gross margins.

In summary, the management highlighted that direct distribution through full truck load has helped optimize logistics costs and contributed to margin expansion over last 2 years.

Q8. What's management commentary on Capacity and Capex - Utilization levels, upcoming capacity expansion plans and outlay.

On capacity and capex plans, the management commented:

- Current capacity utilization is 55-60% and can optimally go up to 80-85% level.

- Planned capex of Rs 100-105 crores over next 2 years.

- Investment planned under PLI scheme including new plant in Jammu which will add to overall capacity.

- Namkeen production centralized at Indore plant.

- 75% of current production from own plants, 25% through third party contract manufacturers.

- Contract manufacturing used more for regional level production.

- Apart from PLI investment, maintenance capex will continue.

In summary, the management sees good headroom to expand utilization levels. Planned capex will expand production capacity including under PLI scheme for food processing.

Few More questions investors need to look at

Q9. What's management commentary on Working capital management: With reduced working capital days, what's the sustainable level going forward? What are the company's working capital optimization initiatives?

The management did not explicitly discuss their working capital management initiatives during the earnings call.

However, based on the information provided, here are some relevant points:

- The company has reduced average working capital days from 23 days in FY2022 to 13 days in FY2023.

- This has been achieved despite growth in sales and volumes, indicating efficient working capital management.

- The focus on direct distribution and full truck load delivery to distributors has likely helped bring down inventory days.

- Higher payable days could be driven by negotiated credit period elongation with suppliers.

- Going forward, the management aims to sustain lower working capital days to aid cash flows.

- While the sustainable level was not quantified, we can expect it to remain below 15-20 days as volumes grow.

- Further reduction potential may be limited unless there is significant supply chain financing or other initiatives undertaken.

In summary, while specifics were not discussed, we can infer that improved logistics, supplier-side financing and prudent inventory management likely contributed to lower working capital days.

Q10. What's management commentary on Raw material inflation: What's the exposure to key commodities and mitigation strategies? Is there a need for further price hikes?

The management did not provide granular comments on raw material inflation risks and mitigation strategies during the earnings call.

However, here are some relevant points discussed:

- Input costs like edible oils and packaging materials are linked to global commodity prices.

- The company has undertaken changes in product mix, distribution and cost control over last 2 years to offset input cost inflation.

- These initiatives have helped maintain and expand margins despite high inflation in FY22 and FY23.

- For instance, palm oil prices were up 60% vs 5 year average, but margins improved in Q4 FY23.

- The management expressed confidence that any further spikes in input costs can be managed without impacting bottom-line, based on the transformations done.

- There was no indication on specific commodity exposure or hedge positions taken.

- On pricing, the management did not indicate any need for further price hikes. The focus seems to be on cost control and efficiencies.

In summary, while specifics were not provided, the management seemed confident of offsetting any input cost inflation through internal initiatives without the need for further price increases.

Q11. What's management commentary on Demand trends: Category-wise and regional demand patterns and outlook. Impact of reopening on demand across urban and rural markets.

On demand trends and outlook, the management provided the following key comments:

- Demand was softening across categories in Q4, especially in rural markets. This impacted growth.

- However, seeing pickup in demand from May onwards indicating recovery.

- In FY23, demand trends were much better in H1 with 27% growth vs 11% in H2.

- Expect better growth in FY24 aided by lower inflation and pickup in economic activities.

- Among categories, Pellets (Fryums) witnessed very high growth. Rings also reviving after sharp COVID impact.

- Have not seen major shift between wholesale and retail sales during pre-COVID vs post-COVID period.

- On outlook, expect reopening and urban consumption to drive growth. Rural demand likely to be steady.

- Overall, targeting 15%+ revenue growth in FY24 on the back of distribution expansion and economic recovery.

In summary, while near-term demand was soft, the management is optimistic of accelerated growth in FY24 based on positive macro environment and company-specific initiatives.

Q12. What's management commentary on New products: Performance of new product launches over the last 12-18 months. Innovation pipeline and focus areas going forward.

On new products and innovation pipeline, the management made the following key comments:

- Had launched several new products and variants across categories in last 1-2 years.

- Portfolio was becoming too complex, hence have discontinued some slow moving SKUs.

- Focus is now on concentrating on faster selling products for better efficiency.

- The Pellets (Fryums) category saw most successful new product introductions driving high growth.

- In Namkeen segment, have launched some new products and more are planned.

- Namkeen capacity being expanded to grow this category which has high industry growth.

- Rings is an important category where new toy campaigns continue for engagement.

- The management did not provide details on specific new products in pipeline or launch timelines.

- But the focus seems to be on Namkeen, Rings and Pellets where most innovation is happening.

In summary, the management is rationalizing the portfolio and focusing innovation in select growing categories like Namkeen and Pellets based on current business performance.

Q13. What's management commentary on Capital allocation: Priorities for use of cash - growth, debt repayment, dividends etc. Revenue growth and ROCE targets over 3-5 year horizon.

The management did not explicitly discuss their capital allocation priorities or long-term growth and return targets during the earnings call.

However, we can infer the following pointers:

- The company has a strong balance sheet position with minimal debt. This provides flexibility for growth investments.

- For FY23, they have proposed a 20% dividend pay-out indicating focus on shareholder returns.

- Their guidance on EBITDA margin expansion and target to reach 10% shows focus on profitability and return ratios.

- Planned capex of Rs 100-105 crores over next 2 years will expand capacity for growth.

- Investments under PLI scheme will also add capacity and meet export targets.

- Avadh Snacks merger completed to fully integrate operations and capture synergies.

- Once sustained 8-9% margins achieved, intent is to invest in brand building to drive growth.

- While not quantified, we can infer the priority allocation is towards profitable growth through capacity expansion, brand building with shareholder returns.

In summary, though specifics were not discussed, management commentary indicates balanced focus between growth investments, profitability improvement and shareholder returns in capital allocation.

Q14. What's management commentary on Competitive landscape: How does the company plan to compete with larger players gaining market share? What are the emerging competitive threats and how is the company gearing up?

The management did not provide detailed comments on competitive landscape during the earnings call.

However, based on the discussion, here are some relevant points:

- The company highlighted that they gained market share in FY23 along with 1-2 other players as per Nielsen data. This indicates they are competing well with larger players.

- Their focus on distribution expansion through direct reach and adding 1.6 lakh new outlets provides a competitive edge to gain market share.

- Range selling across products and stock keeping units (SKUs) also allows them to cater to varied consumer preferences across regions.

- In terms of emerging competition, the Namkeen segment presents an opportunity where some other players have a stronger position. The company is gearing up through new capacity and products to tap this high growth category.

- Regional players with lower overheads and freight costs may also pose a threat. The management indicated their subsidiary Avadh Snacks is competing well in the UP market.

- The company aims to counter competition through brand building initiatives. However, major ad spends likely only after margins hit 10% levels on a sustained basis.

In summary, while the management did not provide specific comments on competitive threats, their strategy seems to be focused on distribution reach, portfolio depth and cost optimization to counter larger players.