Gopal Snacks IPO review (Apply)

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Review By Dilip Davda on March 2, 2024

•    GSL is India's fastest growing, fully integrated FMCG company. 
•    It derives major revenue from Gujarat and holds lion market share in few products.
•    The company has posted growth in its top and bottom lines for the reported periods. 
•    Based on FY24 annualized earnings, the issue appears fully priced. 
•    Investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
Gopal Snacks Ltd. (GSL) is a fast moving and prominent consumer goods company in India offering ethnic snacks, western snacks and other products under its own brand "GOPAL". It is majorly dependent on the sale of its products i.e. namkeen, gathiya and snack pellets which has been on an average of 85% of its total revenue posting declining trends. Its revenue from sales from Gujarat accounted for around 77% average for the last three fiscals with scaling up trends.

The capacity utilization has shown declining trends for the last three fiscals and raising concerns. However, management is confident of scaling it up in coming years with its aggressive marketing strategy and launch of new products.  The company has received few notices under Food Safety and Standards Act 2006, about their packaging, misbranding, misleading advertisement of its products etc. The management is dealing with all these and is confident that there will be no harm to company's image and the working and they will come clear from such claims/allegations. 

It is one of India's fastest growing and fully integrated fast-moving consumer goods (FMCG) company. Rajkot based Gopal was established in 1999. It was Extruder Snacks).

GSL has its manufacturing plants located in Rajkot, Nagpur and Modasa. The plants are strategically located to ensure easy procurement of the raw material. The Modasa facility location provides convenient access to essential raw materials such as potatoes. Additionally, with regards to the supply of namkeen and snack pellets, this facility being situated in Gujarat and close to Rajasthan - regions where ethnic snacks and western snack pellets are widely consumed. These factors comprehensively enhance this facility's advantageous positioning.

The Rajkot plant operates in three units constituting of a main unit engaged in the production of finished goods; another one for papad, raw snack pellets, and spices & seasonings manufacturing (mainly for captive consumption, other than papad); and the third unit for chickpea flour/Besan production (mainly for captive consumption). The plant located in Nagpur manufactures finished products while the Modasa plant is dedicated towards production of finished goods and raw snack pellets. Nagpur being situated in the central region of India enables the company to cater to a range of states such as Jharkhand, Chhattisgarh, Uttar Pradesh, Bihar, Telangana, Andhra Pradesh, Madhya Pradesh, and the Vidarbha region of Maharashtra.

In Fiscal 2023, in terms of sales revenue through the segments, GSL stood as the second largest organized ethnic namkeen manufacturer in Gujarat, and fourth largest packaged ethnic namkeen and papad manufacture in India. Further, in Fiscal 2023 the company holds the position of being the largest manufacturer of gathiya (in terms of production volume and sales revenue) and snack pellets (in terms of production volume) in India. The entity accounts for approximately 20% of the market share in the ethnic savories, 8% in western snacks and 6% in the papad industry in Gujarat (including organized and unorganized sectors) in Fiscal 2023. Gujarat is considered to be one of the most lucrative markets in the snacks segment and hence established entities like GSL faces fierce competition from local players such as Gokul Snacks.

The company has 276 SKUs (as on September 30, 2023) in its portfolio. The company is dedicated on providing customers with differentiated value through a range of SKUs at affordable prices. It is the first company to launch gram flour or Besan in Rs.10 SKU. The company sells its products in 10 Indian states and 2 union territories with over 617 distributors and is one of the fastest-growing snack companies in India. GSL has 263 own logistic vehicles and over 3300 employees as of September 30, 2023.

In addition, it engages third party manufacturers on a need basis to produce its products such as chikki, nachos, noodles, rusk, soan papdi and washing bar.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden secondary book building route IPO of Rs. 650 cr. (16209478 equity shares at the upper cap). The company has announced a price band of Rs. 381 - Rs. 401 per share of Re. 1 each. The issue opens for subscription on March 06, 2024, and will close on March 11, 2024. The minimum application to be made is for 37 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 13% of the post-IPO paid-up capital of the company. This being a pure Offer for Sale (OFS), no funds are going to the company. 

As per the management, this OFS is being made to meet promoter's funding needs to settle the dispute with the split family members. 

The company has reserved shares worth Rs. 3.5 cr. for the eligible employees and offering them a discount of Rs. 38 per share. From the rest, it has allocated note more than 50% for QIBs, not less than 15% for HNIs, and not less than 35% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) to this issue are Intensive Fiscal Services Pvt. Ltd., Axis Capital Ltd., and JM Financial Ltd., while Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further shares in the price range of Rs. 10 - Rs. 11 (on the basis of Re. 1 FV) between December 2009 and March 2015. It has also issued bonus shares in the ratio of 10 for 1 in January 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.35, Rs.0.57, Rs. 158.22, and Rs. Nil per share. 

This being a pure Offer for Sale issue, its paid-up equity capital of Rs. 12.46 cr. will remain same. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 4996.64 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, it has posted a total income/net profit of Rs. 1129.84 cr. / Rs. 21.12 cr. (FY21), Rs. 1356.48 cr. / Rs. 41.54 cr. (FY22), and Rs. 1398.54 cr. / Rs. 112.37 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earned a net profit of Rs. 55.57 cr. on a total income of Rs. 677.97 cr. The sudden boost in its margins from FY23 onwards raises eyebrows. The management is confident of improving its performance with scaling up of capacity utilization with new high margin products.

For the last three fiscals, the company has reported an average EPS of Rs. 5.90 and an average RoNW of 29.70%. The issue is priced at a P/BV of 14.44 based on its NAV of Rs. 27.78 as of September 30, 2024, as well as on post-IPO basis. 

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 44.96. Thus the IPO appears fully priced. The company is operating on a lower debt. 

For the reported periods, the company posted PAT margins of 8.22% (FY21), 7.43% (FY22), 8.06% (FY23),1.87% (H1-FY24), and RoCE margins of 20.83%, 21.43%, 43.08%, 13.48% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy post listing on the basis of its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Bikaji Foods, and Prataap Snacks as their listed peers. They are trading at a P/E of 68.2 and 42.31 (as of March 01, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLMs associated with the issue have handled 82 public issues in the past three fiscals, out of which 24 issues closed below the offer price on the listing date. 

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