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Indore-based Prataap Snacks is a little-known food company but its sales are close to Rs 700 crore a year, thanks to its Yellow Diamond range of chips and snacks. The buzz is, this Sequoia Capital-backed company might consider going for an initial public offering (IPO) in about three years, to give its private equity partners, which have invested Rs 180 crore for an undisclosed stake since May 2011, an exit.
If the current price-to-earnings (PE) ratio of consumer product companies is anything to go by, the valuation could be steep. Consider this: Apparel maker Monte Carlo, which launched its IPO last week in the price band of Rs 630 to Rs 645 a unit, valued its Rs 350-crore issue at 25 times its PE. Manpasand Beverages, the maker of the Mango Sip brand of juices that just filed its draft red-herring prospectus with the Securities & Exchange Board of India (Sebi), is expected to command a similar valuation for its Rs 400-crore issue, likely in the middle of next year.
Ditto for Rajkot-based Balaji Wafers, which, after its failure to raise money through the private equity route, is now considering an IPO. Balaji’s rumoured talks of stake sale to PepsiCo and Kelloggs did not go through, given the steep valuation demanded by the Viranis, the promoter family. But the company appears firm on its enterprise valuation.
In a conversation with Business Standard a few months ago, Balaji Wafers Director Keyur Virani had pegged the value of his firm at over three times its 2013-14 sales of Rs 1,200 crore. He had said he was looking to raise Rs 400 crore from the capital market to fund his expansion plans.
These examples suggest small and mid-sized consumer product companies are going for the kill when it comes to IPO valuations. The prospect of a good response even at a steep price, the continued interest of investors in India’s consumption story, and future earnings of the company concerned are prompting promoters to be aggressive in valuations.
Ritesh Chandra, head of the consumer group at investment bank Avendus Capital, says: “The potential of these Tier-II and -III companies to grow as national players is high. Besides, these tightly controlled businesses of promoter-driven companies have better profit margins than national players. It is these advantages of high profitability and high return on capital that is pushing these companies to demand high valuations.”
The prospect of having to dilute less at a high price is also what appears to push these firms to consider steep valuations. Navroz Mahudawala, founder & managing director of Candle Partners, a Mumbai-based investment advisory firm, says: “Many of these companies are great concept buys, which typically attract institutional investors. The prospect of raising a decent amount without having to dilute much could also be one of the reasons for the steep valuations of their IPOs.”
Besides, as Harish HV, partner at Grant Thornton, an investment advisory and deal tracking firm, says: “The endeavour to make a significant gain on listing is also what could be pushing firms to price an IPO at the maximum level possible.”
Year-to-date PE activity in the consumer & retail segment touched Rs 5,676 crore for 2014, nearly 57 per cent more than last year, according to Grant Thornton. Market experts say these PE investors will look for an exit five years from now, implying the pressure on valuations is not likely to ease anytime soon.
“Most privately held FMCG companies located in Tier-II and -III cities have grown their businesses through internal accruals. When such companies look for private equity investment, it is more of discretionary choice than necessity. There is bound to be a valuation mismatch at the time of entry (of a private equity firm), as well as exit,” says Ankur Bisen, senior vice-president (retail & consumer products), Technopak.
Even steeper valuations, it seems, could be expected for small, privately held consumer goods companies in the coming months.
If the current price-to-earnings (PE) ratio of consumer product companies is anything to go by, the valuation could be steep. Consider this: Apparel maker Monte Carlo, which launched its IPO last week in the price band of Rs 630 to Rs 645 a unit, valued its Rs 350-crore issue at 25 times its PE. Manpasand Beverages, the maker of the Mango Sip brand of juices that just filed its draft red-herring prospectus with the Securities & Exchange Board of India (Sebi), is expected to command a similar valuation for its Rs 400-crore issue, likely in the middle of next year.
Ditto for Rajkot-based Balaji Wafers, which, after its failure to raise money through the private equity route, is now considering an IPO. Balaji’s rumoured talks of stake sale to PepsiCo and Kelloggs did not go through, given the steep valuation demanded by the Viranis, the promoter family. But the company appears firm on its enterprise valuation.
In a conversation with Business Standard a few months ago, Balaji Wafers Director Keyur Virani had pegged the value of his firm at over three times its 2013-14 sales of Rs 1,200 crore. He had said he was looking to raise Rs 400 crore from the capital market to fund his expansion plans.
These examples suggest small and mid-sized consumer product companies are going for the kill when it comes to IPO valuations. The prospect of a good response even at a steep price, the continued interest of investors in India’s consumption story, and future earnings of the company concerned are prompting promoters to be aggressive in valuations.
Ritesh Chandra, head of the consumer group at investment bank Avendus Capital, says: “The potential of these Tier-II and -III companies to grow as national players is high. Besides, these tightly controlled businesses of promoter-driven companies have better profit margins than national players. It is these advantages of high profitability and high return on capital that is pushing these companies to demand high valuations.”
The prospect of having to dilute less at a high price is also what appears to push these firms to consider steep valuations. Navroz Mahudawala, founder & managing director of Candle Partners, a Mumbai-based investment advisory firm, says: “Many of these companies are great concept buys, which typically attract institutional investors. The prospect of raising a decent amount without having to dilute much could also be one of the reasons for the steep valuations of their IPOs.”
Besides, as Harish HV, partner at Grant Thornton, an investment advisory and deal tracking firm, says: “The endeavour to make a significant gain on listing is also what could be pushing firms to price an IPO at the maximum level possible.”
Year-to-date PE activity in the consumer & retail segment touched Rs 5,676 crore for 2014, nearly 57 per cent more than last year, according to Grant Thornton. Market experts say these PE investors will look for an exit five years from now, implying the pressure on valuations is not likely to ease anytime soon.
“Most privately held FMCG companies located in Tier-II and -III cities have grown their businesses through internal accruals. When such companies look for private equity investment, it is more of discretionary choice than necessity. There is bound to be a valuation mismatch at the time of entry (of a private equity firm), as well as exit,” says Ankur Bisen, senior vice-president (retail & consumer products), Technopak.
Even steeper valuations, it seems, could be expected for small, privately held consumer goods companies in the coming months.
