JMFL
Prataap Snacks (Buy)
CMP: ₹878.65
Target: ₹1,280
Prataap Snacks’ analyst meet gives us greater comfort on our assumption of steady expansion in its operating profit margin - OPM (key factor driving our preference) as it is now transitioning to distributed manufacturing which could help drive substantial savings in freight and supply-chain costs (expects to have 33 per cent of business on direct distribution which could drive 1 ppt OPM expansion). However, revenue growth opportunity in its core extruded snacks business, though attractive (double-digit CAGR over medium term), appears lower than what we had earlier envisaged (mid-teens CAGR).
The hunger for driving growth remains as Prataap is now looking to fill this gap through scaling-up sweet snacks business and geographical expansion of pellets business of Avadh Snacks; we expect only a partial bridging here given lower contribution of these segments (c.15 per cent in FY20).
In our view, management’s target of 20 per cent return on invested capital (ROIC) over the next five yers is quite achievable given its focus on scaling-up revenues through asset light model (3P manufacturing) and clocking a 9.5-10 per cent OPM through supply-chain cost savings. Maintain positive bias with new DCF based target price of ₹1,280.