IPO: Gopal Snacks

Gopal Snacks, an FMCG company selling various ethnic and Western snacks, launched its IPO (initial public offering) on March 6, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Its three-year average ROE and ROCE are 26 and 25 per cent. It also reported positive cash flow from operations in each of the last three financial years.
  
• Growth: Its revenue grew 11 per cent annually between FY21-23. Also, its profit after tax compounded 131 per cent annually in the same period.
  
• Valuation: The stock is valued at a P/E and P/B of 43.1 and 14.4 times, respectively.
  
• Overview: Rapid urbanisation leading to growing demand for packed and processed foods should drive growth. However, the FMCG segment is highly competitive with multiple big players.

About Gopal Snacks

Gopal Snacks is a fast-moving consumer goods (FMCG) company selling ethnic and Western snacks under the brand name 'Gopal'. It has a diverse product range, including papads, noodles, spices, gram flour, etc.

Strengths of Gopal Snacks

• It is the fourth-largest packaged ethnic namkeen manufacturer in India.
  
• High operational efficiency. As of March 31, 2022, it boasted the highest fixed assets turnover ratio (6.86 in Fiscal 2022) among its key peers.
  
• It is fully integrated both vertically and horizontally, providing high control over its products' quality and cost.

Weaknesses of Gopal Snacks

• The FMCG segment is highly competitive.
  
• Revenue concentration. Gujarat and Maharashtra are its major revenue streams, with Gujarat accounting to 73 per cent of total revenue.
  
• Declining capacity utilisation. Capacity utilisation fell from 40 per cent in FY21 to 28 per cent in FY23.

Risk report

Company and business

• Are earnings before tax of Gopal Snacks more than Rs 50 crore in the last 12 months?
  Yes. It reported a profit before tax of Rs 155 crore in the twelve months ending September 2023.
• Will Gopal Snacks be able to scale up its business?
  Yes. Growing demand for packaged foods and its plans to expand its geographical presence should help scale up.
• Do Gopal Snacks have recognisable brands with client stickiness?
  Yes. The company has a recognisable brand, especially in its core market, Gujarat.
• Does the company have a credible moat?
  No. It faces stiff competition from other listed and unlisted players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, the promoters' stake will be 81.5 per cent.
• Do the top three managers have more than 15 years of combined leadership at Gopal Snacks?
  Yes. Key managerial personnel and senior management have over 15 years of combined experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is the company free of promoter pledging of its shares?
  Yes. No shares have been pledged by the promoters at present. However, the promoters have pledged the shares of its parent entity for Rs 540 crore. The pledge has been revoked prior to the IPO on condition that the IPO proceeds will be used to pay off the loan.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE are 26 and 25 per cent, respectively. In the twelve months ending September 2023, its ROE and ROCE were 40 and 45 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flow from operations in each of the last three financial years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio, as of September 2023, was 0.1 times.
• Is Gopal Snacks free from reliance on huge working capital for day-to-day affairs?
  Yes. It does not have a high working capital requirement, with a recorded working capital day of 28.6 days in FY23.
• Can the company run its business without relying on external funding in the next three years?
  Yes. While it occasionally relies on short-term debt for working capital, the IPO proceeds should ensure that it does not have to rely on external funding for the next three years.
• Is Gopal Snacks free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of total equity stood at around 13 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a 3.2 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The stock is valued at a P/E of 43.1 times compared to its peers' median P/E of 52.5 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B of 14.4 times as compared to its peers' median P/B of 7.8 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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