prataap snacks ltd Management discussions

ECONOMIC SCENARIO GLOBAL ECONOMY

In calendar year 2022, the global economy continued to recover from the effects of geopolitical tensions and the COVID-19 pandemic. The spike in commodity prices that followed Russias invasion of Ukraine has subsided, but the conflict has persisted and geopolitical tensions have remained high. According to the International Monetary Funds (IMF) April 2023 forecast, the global economy, which grew by 3.4% in CY22, is projected to grow by 2.8% in CY23 and by 3.0% in CY24. Chinas reopening in CY22, intervention by policymakers to strengthen global financial conditions and sustained interest-rate increases have all contributed to a gradual decline in inflation and a favourable start for emerging markets and developing economies in CY23.

Cooling off in commodity prices has meant that crude oil and palm oil prices have witnessed reductions in prices and it is anticipated that this trend will continue in CY23. The STEO (Short Term Energy Outlook) report for April 2023 predicts that the price of crude oil will decrease from USD 101 per barrel in CY22 to USD 85 per barrel in CY23.

The impact of the most recent liquidity issues following a succession of global bank crises appears to have been contained by the quick intervention of central banks. Notwithstanding the continuation of the Russia-Ukraine War, the global macro-economy is showing signs of stabilising, leading to expectations of improved growth momentum in CY24.

INDIAN ECONOMY

Over the last decade, India has steadily moved away from its erstwhile position in the worlds fragile five and emerged as a prominent global economy as a result of the governments consistent efforts to drive balanced growth and inclusive development. Over this period, India has been globally recognised for significant reforms including the implementation of GST (Goods & Services Tax), demonetisation, DBT (Direct Benefit Transfer) continued growth in exports, improvement in infrastructure, enhancement of manufacturing, the signing of free trade agreements, rising energy security, improved ease of doing business and the improvement in trade and fiscal deficit, India is deservingly looked upon as one of the top performing economies.

India has reclaimed its position as the fastest growing large economy in the world following the disruption due to the COVID-19 pandemic and its economic momentum has proven to be highly resilient, even amidst the global interest rate tightening cycle and the resultant volatility in foreign exchange rates. According to the NSOs Second Advance Estimates, the Indian economy has been estimated to grow by 7.0% in FY23 as against 9.1% in FY22.

The emphasis on capital expenditure in the Union Budget 2023-24 is expected to stimulate private investment, increase job creation and demand and enhance Indias potential growth. The capital expenditure budget for FY24 was announced to be Rs 10 lakh crore, or 3.3% of GDP. Indias exports have been estimated to reach USD 770.18 billion in FY23, witnessing a 13.84% increase over FY22. The estimated value of services exports for FY23 stood at USD 322.72 billion, up from USD 254.53 billion in FY22. Indias share in global merchandise trade is close to 1.8% and the government has set a target of 10% going forward. At present, Indias manufacturing sector accounts for about 15-16% of the countrys GDP and there is an aim to increase it to 25% in the coming years. This will be mainly driven by the Governments ‘Make in India initiative measures to boost domestic manufacturing through public procurement orders, the Phased Manufacturing Programme (PMP) as well as through the Production Linked Incentive (PLI) scheme. Indias rising global profile is supported by a number of achievements, such as the unique World Class Digital Public Infrastructure of Aadhaar, Co-Win and UPI; the unprecedented scale and proactive role in frontier areas, such as the accomplishment of climate-related goals, the mission LiFE (Lifestyle for Environment) and the National Hydrogen Mission. The budget FY24 strengthens Indias position to play a leadership role in the three main transformations occurring worldwide viz. the accelerated adoption of digital technology, the rebalancing of supply chains and environmental sustainability.

The provisional figures for Direct Tax collections for FY23 indicate that Net collections stood at Rs 16.61 lakh crore, compared to Rs 14.12 lakh crore in the preceding FY22, representing a 17.63% increase. In FY23, the GST (Goods and Services Tax) gross collection stood at Rs 18.10 lakh crore, a 22% increase from FY22. Reviving economic activity, the governments efforts to improve tax compliance, the introduction of a simplified tax registration system and the use of technology have contributed to improved tax revenues.

According to the Economic Survey of India, the agriculture sector is projected to expand by 3.5% in FY23, compared to 3.9% in FY22; the industrial sector is projected to expand by 4.1%, compared to the 10.3% growth recorded in FY22; and the services sector is anticipated to grow by 9.1% in FY23, compared to 8.4% in FY22. The value of Indias foreign exchange reserves as of 7^th April, 2023, was USD 585 billion.

The PLI (Production-Linked Incentive) initiative for the food processing industry was approved in March 2021 with a budget of Rs 10,900 crore. It will be implemented for seven years, through 2026-27. Under the PLI scheme, the food processing industry has invested Rs 4,900 crore as of CY22, according to MoFPI (Ministry of Food Processing Industries) December 2022 report. Under the PLI programme for the food processing industry, 182 applications in various categories have been approved. This comprises 30 applications under the PLI scheme for millet-based products. In CY22, a total of 46 new initiatives have been approved under Operation Greens.

In order to control inflation, the RBIs (Reserve Bank of India) Monetary Policy Committee (MPC) suspended the rate increase cycle in April 2023 and maintained the repo rate at 6.5%. The MPC kept its "withdrawal of accommodation" position. The average headline Consumer Price Index-Combined (CPI-C) inflation in India moderated to 6.44% in FY23 from 6.95% in FY22. Taking into consideration global and domestic factors, it is anticipated that headline inflation will moderate in FY24. The RBI expects consumer inflation to decrease to 5.2% in FY24 and its SPF (Survey of Professional Forecasters) report projects Indias real GDP growth to be 6.0% in FY24 and 6.4% in FY25. Despite domestic and international challenges, Indias economic growth would be supported by robust financial strength. The governments increased capital expenditures, which would compensate for the private sectors capital expenditure restraints, would also substantially contribute to the countrys overall growth.

Outlook

The investments made by PLI beneficiaries are likely to result in an increase in agricultural product sales and exports. The PLI scheme is anticipated to provide a boost to domestic industry and also facilitate the international promotion of Indian brands. In collaboration with the Confederation of Indian Industry (CII), CRIF High Mark, a prominent credit bureau in India, has released the second edition of its Rural Business Confidence Index. The index provides an outlook on rural business sentiment and indicates that the rural business confidence score in 2022 stood at 73.5, a 9.6-point increase over 2021. According to CRIF Highmarks September 2022 report, the value and volume of loans originated in rural and semi-urban areas accounted for between 59% and 64% of all loans originated between March 2021 and September 2022. Rural India has begun witnessing the rise of new companies and new business models to achieve a localised cycle of growth. The Ministry of Rural Development has been granted Rs 1,59,964 crore under the budget for FY24. Further, various government schemes would also aid in improving the penetration of the retail sector and rural infrastructure as a whole.

The easing of global in flationarypressureled by falling international commodity prices and strong government measures is expected to aid economic growth in India. Recent announcements to increase agricultural productivity, such as the establishment of digital services for crop planning and support for agricultural startup companies, will be crucial to sustaining agricultures development over the medium term. An increase in export demand, a rebound in consumer spending and public capital expenditures have contributed to a recovery in the investment/ manufacturing activities of companies. Improving labour market conditions and consumer confidence will fuel private consumption expansion. Private consumption as a percentage of GDP reached 58.4% in Q2 of FY23, the highest level since Q2 of 2013-14, aided by a rebound in contact-intensive services like trade, hotels and transportation. Startups are achieving success and gaining a firm foothold in the expanding Indian markets. In the near future, the increasing use of dynamic technologies such as data analytics, artificial intelligence and the cloud will transform the Indian economy into one that is digitally oriented, making it one of the most attractive business markets in the world.

INDUSTRY OVERVIEW THE FMCG INDUSTRY

The fast-moving consumer goods (FMCG) industry is the fourth-largest sector and a significant contributor to the Indian economy. The growth in the FMCG industry is primarily driven by an increase in disposable income, a shift in consumer lifestyles, a transition to an organised market, increasing rural consumption, e-commerce, labour migration, increased digital penetration, improved distribution of the FMCG portfolio and a rise in consumer awareness. Additionally, the trend towards sustainable products influences the purchasing behaviour of consumers. Even though the urban sector contributed the largest share, the semi-urban and rural sectors experienced substantial growth over the past decade. The FMCG sector is anticipated to experience continued growth, climbing from USD 110 billion in 2020 to USD 220 billion by 2025.

Market size of FMCG in India (in USD billion)

In 2022, urban India contributed 65% of the total annual FMCG sales, while rural India contributed more than 35%. The country has one of the fastest-growing e-commerce markets in the world. It was estimated that the online FMCG market size in the e-commerce sector would exceed USD 10 billion and that the FMCG industry would expand by at least 20% by 2023.

Since March 2020, in response to the COVID-19 pandemic, online purchasing has become a more viable alternative to offline FMCG purchases.

Over the past year, inflation has had significant impact on consumer expenditure. The FMCG industry in India grew by 8.4% in CY 2022 as against 17.5% growth in CY 2021. Slower growth in the FMCG industry in India was caused partly by the higher base. Further, price growth was 10.0% in 2022, compared to 10.5% in CY 2021. Moreover, the FMCG industrys overall volume growth declined by 1.5% in CY 2022 as compared to the 6.3% growth registered in CY 2021, a year in which it grew off a lower base.

According to Nielsen IQs FMCG Snapshot for the fourth quarter of 2022, price growth in both urban and rural markets has moderated. The traditional trade volume has decreased by 4.8% in both urban and rural markets, resulting in an overall decline in 2021. In 2022, however, urban markets maintained their upward momentum with a volume increase of 1.6%, while rural markets continued their downward trajectory with a decline of 2.8%. Food products were primarily responsible for the development of the FMCG industry over the previous year, while non-food products saw a decline in growth. Rural markets are gradually recovering due to the easing of inflation and rising agricultural income.

Present Scenario in Indian FMCG Sector

In FY24, FMCG companies are anticipated to base their business decisions on inflationary pressures, technological advancements and consumers value-based purchasing criteria. Following are the recent trends that are driving growth in the FMCG industry.

• Input Cost Scenario: As the Russia-Ukraine conflict escalated through 2022, prices for some essential raw materials, witnessed a sharp spike. There has been a K curve effect with some input prices reverting to lower levels during FY23 while others have remained at elevated levels. Consequently, the FMCG industry has witnessed increased margins for certain products and the trend is likely to continue in the near to medium term. However, the persistently rising costs of wheat, flour and rice have been a source of concern for the FMCG industry, specifically for the food and beverage segment.

• Revival of Rural Demand

The rural demand for FMCG products is expected to increase in 2023 as the rural economy exhibits more evidence of normalcy due to an improving labour market and rising terms of trade for rural production. Multiple government initiatives, such as the minimum support price (MSP) for all rabi crops, increased government spending on rural infrastructure projects and rising credit to agriculture and other non-agricultural economic activities, will increase employment and income levels in rural areas, thereby driving demand for FMCG products.

• Changing Customer Preferences

Consumers choose food products based on their utilisation efficacy, in addition to perceived value and shelf life. In an environment of rising prices, consumers also seek innovation in various FMCG products. This requires manufacturers to consider how their business processes, products and marketing collectively represent their brand. Alignment with the criteria of the intended consumer can stimulate and predict spending patterns.

• Digitalisation

Distribution and supply were remarkably altered throughout numerous phases of the COVID-19 pandemic. In a nation where small Kirana stores still account for 80% of sales, it is essential to maintain consistent orders from these channels. Using digital capabilities, FMCG companies are integrating suppliers, inventory management and distributor management into a single ecosystem. Increasingly, FMCG companies are employing AI (Artificial Intelligence), Big Data and Predictive Analysis to accurately predict consumer behaviour, enabling them to gain a deeper understanding of what consumers are interested in. Moreover, it has become easier for rural inhabitants to purchase on e-commerce websites as internet and smartphone penetration increase.

• D2C - Direct Sales to Consumers

Brands with distinct websites for customer sales reported a significant increase in client demand in the past few years. Direct-to-Consumer is becoming a preferred business strategy for fast-moving consumer goods (FMCG) companies and its significance will grow in the coming years.

• Merger and Acquisition Trends

As larger firms seek to consolidate their footprints, leverage technology to increase efficiency and expand outside of metropolitan areas, a wave of consolidation is expected to encompass the rapidly expanding FMCG retail industry across the country. In order to achieve their strategic objectives and shareholder value, FMCG companies will continue to evaluate and refine their portfolios by focussing on transforming their businesses through mergers and acquisitions.

• Government Initiatives

The governments increased capital expenditures would stimulate consumption, create rural and urban employment opportunities and enhance local production. Between April 2000 and June 2022, the FMCG sector attracted FDI worth USD 20.84 billion. The Deendayal Antyodaya Yojana National Rural Livelihood Mission has achieved remarkable success by organising 81 million Self Help Groups comprised of rural women. Strong government support would enable these organisations to reach the next level of economic empowerment by establishing large, professionally managed producer enterprises or collectives with several thousand members each. Various government reforms, such as the start-up drive, GST, the initiation of inland waterways, the PLI scheme, etc., would boost employment, the supply chain and the visibility of FMCG brands in organised retail markets, bolstering consumer spending and encouraging the introduction of new products.

• Focus on Sustainability

Manufacturers and consumers are now placing the highest priority on sustainability. The FMCG industry, which accounts for more than one-third of all greenhouse gas emissions, is rapidly implementing sustainable practices and educating consumers about the shift. Among the most notable sustainability movements and practices presently observed in the FMCG industry are the procurement of eco-friendly ingredients and materials, sustainable packaging, efficient energy use and the implementation of eco-friendly labels.

INDIAN PACKAGED FOODS INDUSTRY OVERVIEW

The Indian packaged food industry ranks sixth globally in terms of production, consumption, exports and anticipated growth. There is an increasing demand for specialty and high-value processed or packaged foods, in addition to ready-to-eat and ready-to-cook foods. The Indian Packaged Food Market is anticipated to reach USD 3.4 billion by 2027, expanding at a CAGR of 4.6% between 2022 and 2027, according to a research report by Industryarc.com. Various packaged foods, including savoury snacks, baked products, breakfast cereals, processed meat, frozen sweet corn and ready-to-eat meals, are readily available in retail stores.

The Indian packaged food market is segmented into offline channels such supermarkets, hypermarkets, convenience stores, brick-and-mortar businesses and e-commerce. Due to their well-established infrastructure, convenient shopping, profitable sale deals and one-stop solution, supermarkets are attracting billions of people worldwide. The majority of Indian purchases are made offline because more than 60% of the population lives in rural areas with poor to moderate e-commerce services. Packaging helps to protect the important nutrients by ensuring that the foods integrity is maintained throughout the process.

Key Drivers of Packaged Food Industry in India

• Continuous urban population growth and increased employment rates have caused consumers to live a hectic lifestyle. Due to the lack of time available for culinary and meal preparation, processed foods such as ready-to-eat products and snacks have gained popularity in urban areas.

• India has one of the worlds largest working populations. With rising discretionary incomes, this demographic can be considered the largest consumer of processed foods. This population is further anticipated to increase steadily over the next five years.

• Increasing penetration levels of organised food retail outlets provide consumers with a variety of products at attractive discounts.

• In both urban and rural areas, the proportion of women who are employed has been steadily rising. As a consequence of their hectic lifestyle, they have less time for domestic tasks such as cooking. This is resulting in an increase in the demand for industrialised and ready-to-eat foods. As the share of the unorganised market in the FMCG sector declines, it is anticipated that the growth of the organised sector will increase, assisted by a rise in brand recognition and the expansion of modern retail.

• The government-sponsored PLI Scheme is also propelling the packaged food industry to new heights of expansion.

• Increasing e-commerce websites have contributed to the accelerated adoption of packaged foods by making them readily accessible online. It is anticipated that online portals will play a pivotal role for businesses seeking to penetrate the hinterlands.

SNACKS FOOD MARKET

Snacks consist of a vast array of foods that are consumed in small quantities as an appetiser between meals. These include, namkeen, potato chips, extruded snacks, popcorn, nut mixes, granola bars, biscuits, cakes and dried fruits, among others. They are widely available in sweet, salted, sour and spicy flavours and include maise, potatoes, cereals, seeds, legumes, pulses and flour among other ingredients. Snacks are packaged in airtight containers or sealed packets to prevent contamination from moisture, grime, pollen and germs. The Indian Savoury snacks organised market size stood at Rs 41,957 crore in 2022 as against Rs 34,874 crore recorded in the previous year, registering an annual growth rate of 20.3%.

Earlier, most of the traditional snacks were unorganised, but many popular items have gradually found a place in the organised packaged snacks industry. People in specific regions previously consumed traditional savoury snacks, but urbanisation

Source: Nielsen and migration of the working population to various areas have increased the demand for regional snacks pan-India. The Indian organised market for savoury snacks is valued at Rs 41,957 crore for CY22.

As the share of the unorganised market in the FMCG sector declines, the growth of the organised sector is anticipated to increase, aided by a rise in brand awareness and the growing popularity of modern retail markets. The organised market share is also increasing for reasons including innovative products being offered, maintenance of hygiene and products with extra shelf life. It has resulted in significant domestic market expansion for a number of large regional and national players. The large brands with a national presence would benefit from their extensive distribution network and could use it to distribute a broader selection of products. This expansion of significant players would also result in the expansion of the organised sector in the Indian snacks market. Moreover, the rising popularity of convenient food products, the increasing implementation of quality standards by the Food Safety and Standards Authority of India (FSSAI) and the increasing number of e-commerce brands and distribution channels represent a few of the main market drivers or organised snacks market.

Organised Savoury Snacks Food Market – Product-wise

(in Rs Crore)

The traditional snacks market, valued at approximately Rs 18,191 crore, accounts for approximately 43% of the total savoury snacks market. The market for traditional snacks includes namkeens, bhujia and ethnic snacks such as dry samosa, kachori and chakli, among others. In 2022, the Western snacks market stood at Rs 23,766 crore and consisted of potato wafers, extruders and a new variety of snacks called "bridges" that have a local flavour but a western appearance. Western snacks continue to hold a 57% market share in the Indian savoury snacks segment in the organised market. The rural market for savoury snacks held approximately 40% of the industrys total market share, while the urban market held approximately 60%. Strong growth in the snacks market has resulted in increased competition within the snacks industry, where the players are now focussing more on innovative product development, expanding the distribution network and price promotions in order to remain competitive.

SWEET SNACKS MARKET

Customers today enjoy sweet snacks between meals or even as replacements. Growing urbanisation, more single-family households, rising middle-class purchasing power, busier lifestyles and the consumption patterns of millennials all contribute to the growth of the sweet snacks industry. According to Research and Markets report, Indian organised biscuits market is expected to surpass Rs 400 million by 2023 and it is anticipated to grow with a CAGR of 5.53% from 2022 to 2028.

Sweets are a very traditional and increasingly common cultural element in Indian households. In the sweet snacks industry, traditional milk-based sweets have been replaced by a variety of cakes, sweet chocolate rolls and confectionery products prepared by organised bakeries and promoted by modern confectioners. The combined sales of confectionery, cakes, ice cream, sweet biscuits and pastries comprise a highly versatile, higher-margin category within packaged food. In India, the market potential for sweet snacks is immense, as consumer demand for packaged products is expanding due to the impact of Western culture and the convenience of packaged goods. Other factors, such as increasing investments in marketing strategies such as social media promotion and digital display and banner advertising, expansion of the e-commerce sector and development in the logistics sector, are driving the growth of the Indian sweet snacks market.

COMPANY OVERVIEW COMPANY BACKGROUND

Prataap Snacks Limited (hereinafter referred to as PSL / the Company / Prataap) is a leading manufacturer of packaged snacks food in India. It offers numerous varieties of Potato Chips, Extruded Snacks, Pellets and Namkeen (traditional Indian snacks) under the well-known and vibrant ‘Yellow Diamond and ‘Avadh brands. Over the years, Yellow Diamond has become a well-known and renowned brand in Indias highly competitive snacks market. A few years ago, the Company has also introduced a line of sweet snacks under the ‘Rich Feast brand. PSL has been committed to offering consumers differentiated value through a variety of pack sizes at reasonable prices. Its products are sold in 27 Indian states and 4 union territories and it is one of the most rapidly expanding packaged snacks food companies in India. Avadh is one of the prominent brands in Gujarat and the fourth-largest savoury snacks brand, offering an extensive selection of namkeen and fryums.

PSL manages 15 manufacturing facilities, including 7 owned facilities (Indore 1&2, Assam 1&2, Bengaluru, Rajkot and Kolkata) and 8 contract manufacturing facilities (Kolkata (2), Bengaluru, Hyderabad, Patna, Kanpur, Karnal and Hisar). Headquartered in Indore, India, PSLs distribution network consists of more than 1,500 major distributors and over 3,700 sub-distributors across the nation. PSL has a substantial presence in metropolitan areas, urban clusters and rural areas, including Tier 2 and Tier 3 cities and villages. PSL products are being sold by independent grocers and small retail establishments in its major marketplaces and the Company is also expanding its presence in supermarkets, hypermarkets and contemporary trade outlets.

PSL is one of Indias most prominent players in the packaged snack food industry and the category leader for Rings. In addition, the Company continues to expand its presence by increasing direct access and optimising cost and capital efficiencies. The Company has a pan-India presence, with products that appeal to metropolitan tastes as well as the tastes and preferences of other cultures and regions. The Company is aware of consumer preferences and inclinations, as well as their requirements. PSL entered the market for sweet snacks in FY18 under the ‘Rich Feast brand. In FY19, the Company acquired Avadh Snacks Private Limited (Avadh Snacks) to strengthen its position in Gujarat, the state with the highest food consumption in India and also to diversify and strengthen its product line with pellets and namkeen. In FY23 Avadh Snacks merged with the Company.

PRODUCT PORTFOLIO

Both traditional and western snacks are included in PSLs extensive product portfolio. The Company constantly introduces new products, varieties and market innovations for its target consumers. The Company has over 125 stock keeping units (SKUs) and daily sales of approximately 12 million packets. The Companys products vary between Rs 5 and Rs 100 in terms of packet size and strategic pricing point. PSLs product line is divided into the following four categories:

Product Portfolio and its Brands

Potato Chips, Extruded Snacks (Chulbule, Rings, Puffs & Kurves), Namkeen and Pellets form PSLs portfolio of Salty Snacks, which are marketed under the Yellow Diamond and Avadh brand. PSL caters to a wide range of products by taking into consideration various regional preferences. The Company has the most diverse portfolio with the highest quality, distinctive taste and exciting flavours at the most affordable price ranges. The extensive product portfolio of Avadh Snacks has been added to PSLs existing selection of salty snacks. PSL has expanded Avadh products outside of Gujarat and successfully taken pellet snacks to a pan-India level using its distribution network. The Company has planned various changes to pack sizes that would further induce sales and increased market penetration.

PSL entered the segment of Sweet Snacks in FY18 by setting up a manufacturing plant for cakes under the Rich Feast brand. Cookie cake, Center filled Cupcake, Yum cake, Tiffin cake, Sandwich cake and Swiss roll are the sweet snacks products under the Rich Feast brand. PSLs entry into the niche sweet snacks business is promising, as the sweet snacks market is still in its infancy and the Company intends to cross-sell its products through its existing distribution network.

KEY PILLARS OF BUSINESS STRATEGY

• Direct and Optimised Distribution Model:

PSL commenced with a conventional three-tier distribution channel model consisting of major stockists, distributors and retailers. To maintain and distribute inventory to distributors and merchants, super stockists were appointed and products were supplied largely from the mother plant in Indore. As the Company evolved into distributed manufacturing and set up hubs across key markets, it has now adopted a two-tier distribution model eliminating the tier of super stockists in order to deal directly with distributors, who will then sell to retailers. PSL has over 5,200 super/sub distributors in 27 states and 4 union territories.

• Expansion of Distribution Channels:

PSL currently serves

27 Indian states and 4 union territories and has access to 2.20 million retail outlets. The Companys reach has increased from an average 2.02 million outlets in FY22 to 2.18 million outlets in FY23 and it continues to expand its distribution network and penetrate existing markets. The Company makes optimal use of its distribution network to increase its reach into core regions in North and West India, which are major regions contributing more than 70% of the overall packaged savoury snacks market. Additionally, the Company is expanding its presence in southern markets.

• Adoption of Technology and Digitalisation:

In recent years, technology has gained prominence in the FMCG sector. The Company is already aware of the situation and is making large investments in the technological infrastructure necessary for distribution. The Company has started implementing Sales Force Automation (SFA) in order to receive orders from retailers. It improves the effectiveness of order processing and gives visibility up to the last-mile to determine the strategy for driving revenue growth.

• Namkeen to be the Highest Growth Segment:

Namkeen has dominated the category of salty snacks by retaining the largest share of the packaged salty snacks market. Furthermore, Namkeen is the largest category in the unorganised market; therefore, it represents a potential opportunity for the Company as customers transition from the unorganised to the organised sector. The Namkeen category has grown tremendously over the past few years, particularly during the pandemic, as a result of a rise in the number of people purchasing branded Namkeen rather than miscellaneous items from local stores out of hygiene concerns. The Company is revamping its namkeen portfolio in response to market demand, introducing family pack sizes and also targeting more namkeen-centric markets.

• Delivering Value for Money Products:

PSL believes it has a deep understanding of local consumer interests and preferences because it offers innovative products at affordable prices. PSLs product portfolio encompasses a wide range of essential pricing variables and pack sizes, with prices ranging from Rs 5 to Rs 100. This allows the Company to concentrate on capitalising on the current trend of demand shifting gradually from unorganised to organised markets. Moreover, the large population with lower income also contributes to the growing share of the organised market.

PSLs innovative pellets offering have been well accepted by the consumers and therefore the category of pellet snacks has outperformed in FY23. This also provides the Company with an opportunity for creativity in terms of shapes, flavours and textures. The pellets category under the fryums segment has reported exceptional growth on account of growing popularity among teens during FY23.

• Range Selling and Larger Pack Sizes to Expand Market Share:

The Company is following a dual strategy to drive growth. In newer markets, it is seeking to add new touch points by leveraging more popular products within its portfolio. In established markets, where it is already popular with customers, it is working on a strategy to increase wallet share and transaction value through range selling and larger pack sizes. Range selling indicates a strategy to push entire range of products onto the retailer shelf space driving up the customer wallet share from each touchpoint. By promoting larger pack sizes, the transaction value with customers is enhanced and the Company can also get a share of family consumption rather than just individual consumption.

• Planned Capex to fuel Growth: The Company began production at its Kolkata facility in FY23, which is expected to optimise regional distribution. The Company has formalised a plan to expand its manufacturing footprint by establishing a facility in the Jammu region of northern India. The proposed investment in the facility will qualify as the committed investment under the PLI schemes approval. The facility is strategically located to serve the Jammu & Kashmir, Punjab and Himachal markets.

• Cost Optimisation: PSL adopted an ongoing cost optimisation strategy, which resulted in a reduction in the expenses associated with its raw materials and transportation. The Company also lowered the quantity of oil used in its recipes and downsised its packets. Additionally, in order to enhance its profitability, the Company implemented a number of efforts, such as squeesing the distribution network, streamlining its product portfolio and improving its operational efficiency.

OPPORTUNITIES AND THREATS
Opportunities	Threats
• Increasing purchasing power	• Inflation of raw material costs
• Urbanisation drive	• Slower pickup in consumer demand
• Increase in e-commerce activities	• Availability and procurement of raw materials
• Demographical advantages	• Competitive pressure from both organised and unorganised peers
• Brand awareness and dynamic lifestyles
• Continuous innovation along with new product launches	• Increasing public health consciousness resulting in dietary adjustments
• Untapped rural and semi-urban areas	• Any adverse effect to brand image
• Increasing brand equity through mergers and acquisitions

FINANCIAL REVIEW

In FY23, the Groups consolidated annual revenue increased to Rs 1,65,293 lakhs from Rs 1,39,662 lakhs in FY22. In the context of a difficult macro environment, the groups revenue increased by 18.4%.

The efforts of PSL to expand its business network through the addition of new distributors and more retail touchpoints, as well as the optimisation of its existing distribution strength, have also contributed to the growth momentum. The improvement in overall activity levels supported by resilient consumption patterns, has led to higher demand and increased revenue streams.

Gross margins increased by 211 basis points (bps) to 27.9% in FY23.

Operating EBITDA decreased by 40 bps to 3.8% in FY23, translating to Rs 6,243 lakhs.

Continually witnessed a sharp increase in the price of key raw materials such as potatoes, corn, wheat and packaging laminate, resulting in about 300-basis point year-over-year negative impact on the margin. The initiative of direct distribution has resulted in a reduction of the distribution layers, which has led to a structural improvement in channel cost. This along with other cost optimisation initiatives has helped to mitigate the negative impact to a large extent.

Profit before tax and exceptional items (PBT) decreased by 74 bps from Rs 1,155 lakhs in FY22 to Rs 151 lakhs in FY23. Finance costs decreased from Rs 672 lakhs in FY22 to Rs 655 lakhs in FY23.

Depreciation increased from Rs 5,377 lakhs in FY22 to Rs 6,213 lakhs in FY23.

The Board of Directors of the Company at its meeting held on 29 September, 2021 approved the Scheme of Amalgamation (the "Scheme") for the merger of its subsidiaries (transferor companies) with the Company (transferee Company). Application seeking approval of the Scheme was subsequently filed with the Honble National Company Law Tribunal (NCLT), Ahmedabad bench and Indore bench on 8 June, 2022 and 12 May, 2022 respectively.

The NCLT, Ahmedabad bench, approved the Scheme and issued its order on 10 February, 2023 and the Company has received certified copy the order on 23 February, 2023. The NCLT, Indore bench, approved the Scheme and issued its order on 3 March, 2023. The order was amended suo moto on 15 March, 2023 and the Company has received certified copy of the order on 21 March, 2023. Accordingly, the Company has given effect to the Scheme from the appointed date i.e., 1 April, 2021 in the financial statements for the year ended 31 March, 2023 by restating the previous year numbers in the financial statements as if the business combination had occurred at the beginning of the preceding period i.e., 1 April, 2021.

Pursuant to the Scheme, all the assets, liabilities, reserves and surplus of the transferor companies have been transferred to and vested in the Company with effect from the appointed date at their respective carrying values as per the requirements of Appendix C to Ind AS 103.

Tax expense in FY23 stood at Rs (1,880) lakhs including a tax adjustment of Rs (1,935) lakhs on account of the merger of its subsidiaries, compared to Rs (530) lakhs in FY22. As a result, the net profit excluding exceptional items for the year has increased and stood at Rs 2,031 lakhs, up 20% from Rs 1,691 lakhs in the previous year.

The EPS excluding post-dilution stood at Rs 8.51 in FY23.

The Board recommended Dividend of Rs 1 per share (Face Value - Rs 5) for FY23.

Net Worth as on 31 March, 2023, stood at Rs 67,623 lakhs, as compared to Rs 62,425 lakhs as on 31 March, 2022. Free cash and bank balance net of short-term borrowing stood at Rs 5,463 lakhs.

Details of Significant Change in Key Financial Ratios

Ratios		FY2023	FY2022	% Change	Change
Net Profit margin*	%	1.2	1.2	-	Decrease in profit on account of increase in key raw materials and packing material prices Increase in profit due to Tax adjustments on account of merger of subsidiaries
Operating Profit margin	%	3.8	4.2	(9.5%)	Rise in prices for key raw materials like Potato, Corn and packing material have adversely impacted the operating profit margin
Debtor turnover	times	107	64.0	67.2%	A reduction in the average credit period offered to customers in the current year have resulted in the improvement of debtor turnover
Stock turnover	times	8.5	7.5	13.3%	Efficient utilisation of inventory has resulted in a better stock turnover ratio
Debt Equity Ratio	%	0.004	0.05	92%	Decrease in short-term unsecured borrowing from bank has resulted in decrease in ratio
Current ratio	times	1.5	1.4	7.1%	A reduction in current liabilities has resulted in increase in this ratio
Interest Coverage Ratio	times	1.2	2.7	(55.6%)	Decreased due to reduction in earnings before interest and taxes (EBIT)
Return on Networth – RoNW*	%	3.1	2.7	14.8%	Increased due to Tax adjustments on account of merger of subsidiaries

*Excluding Exceptional Item due to loss by fire at Kolkata Plant in FY22

In FY23, the Interest Coverage Ratio decreased to 1.2x from 2.7x in FY22. This is primarily due to a decrease in earnings before interest and taxes (EBIT). The debt-to-equity ratio decreased to 0.004x in FY23 from 0.05x in FY22 due to decrease in bank short-term loans.

Change in Return on Networth

Return on Networth (RoNW) increased to 3.1% in FY23 from 2.7% in FY22 as a result of a Tax adjustment on account of the merger of subsidiaries.

OUTLOOK

PSL is one of the most prominent and rapidly expanding packaged snack food companies in India. The Company has expanded its product offerings and remains committed to introducing innovative new products for consumers of all demographics. PSLs assortment of savoury snacks continue to expand both organically and inorganically. Simultaneously, the Company intends to expand its distribution and increase its reach in order to drive revenue growth, while optimising cost and product composition to enhance operating margin. PSLs strategically positioned manufacturing facilities across the nation play a crucial role in satisfying local demand.

PSL is in a strong position to expand its business because it places a strong emphasis on increasing its distribution reach, which helps the Company achieve a larger and more effective footprint. PSLs cost-cutting efforts have also led to a structural improvement in the Companys profits. The Company wishes to increase the 3P model in the future, as it is profitable in terms of rapid expansion without significant capital expenditure. The Company is confident in its ability to sustain long-term growth due to its diversified product portfolio, strong distribution network and strong financial health.

In order to accelerate growth in the near future, the Company will maintain its well-diversified approach to enhance product diversity and regional expansion. From the ability to cross-sell high-quality products at competitive prices to "value-conscious" consumers. PSL is experimenting with new strategies to increase its share of in-home consumption and has introduced family pack sizes in a variety of product categories. The commissioning of the Kolkata plant will substantially strengthen the Companys position in the eastern region and a new plant in Jammu region will help in developing the newer markets in northern region.

Innovation and distribution expansion, synergies from the integration of Avadhs business, a pan-Indian presence with strategically located owned and contract manufacturing facilities, brand positioning as a value-focussed player and a deep understanding of consumer preferences are among the key advantages that augur well for PSLs expansion into less-penetrated areas and emergence as a preferred national brand. The Company is optimistic about continuing the pace of revenue growth against the backdrop of increasing economic activity coupled with slowing inflation.

HUMAN RESOURCES

Human resources have a significant impact on PSLs long-term growth as an industry leader in the FMCG sector. The Company supports a balanced, fair and equitable human resource management system and promotes a positive and welcoming work environment. To achieve excellent business results, a robust talent pool is required and PSL is committed to identifying and preparing successors for key positions within and outside the organisation. The Company has established robust personnel management practices, development interventions, productivity improvement efforts and reward mechanisms, enabling it to achieve organisational objectives and major milestones. The team is comprised of a healthy blend of multigenerational, diverse and dynamic professionals who are keen to learn. The Company strives continuously to improve employee skills and provide them with the competitive edge they need to flourish in a dynamic industry.

PSL also offers an Employee Stock Appreciation Rights Plan (ESARP) that enables all permanent employees to become Companys shareholders by granting them the opportunity to hold shares based on their eligibility. This ensures that employees are invested in the success of the Company.

In addition to contract labour, the Company had 1,503 employees as of the 31 March, 2023. The industrial facilities are devoid of labour or employees unions and no work has been interrupted by labour unrest in FY 23.

CORPORATE SOCIAL RESPONSIBILITY

The Company seeks to contribute significantly to the social and economic development of a sustainable society. The Companys CSR policy describes how its CSR activities contribute to the economic, environmental and social well-being of local communities. PSL aspires to establish a reputation as a dependable, credible and responsible business partner in the communities in which it operates.

In FY23, PSL spent Rs 67.80 lakhs on its various CSR activities. PSLs plantation drive has been helpful in supporting activities, which are beneficial and towards sustainable environment. The Company has made its contribution to the social and economic development of a sustainable society by enhancing the vocational skills of women and their livelihoods through various capacity building and skill development trainings. PSL has provided infrastructure/facility for drinking water and coolers, construction of hand wash and utensils cleaning areas. It has also contributed in developing infrastructure and purchasing equipment & organising training activities for differently abled children. It has also conducted digital literacy programmes, wellness (yoga) programmes and self-awareness workshops for children in Childcare Institutions. Under the health initiative, PSL has distributed high-protein diets to pregnant women and anaemic children and provided medicines, nutrition and beds for geriatric, disabled and mentally challenged people. PSL also provided food for wounded, sick and stray animals residing in the animal shelter.

RISK AND MITIGATION

Risks and concerns are inherent to any business environment and may have a substantial impact on the Companys performance and future prospects. Risk management is an integral part of the Companys long-term business strategy. The cost of basic materials has been rising at a faster rate than in the past, posing a greater threat to the Company. The Company has implemented Enterprise Risk Management in order to manage risks while attaining its business objectives and goals by identifying risks, evaluating risks, developing risk mitigation methods and continuously monitoring risk containment commitments.

The Company has determined a number of multidimensional threats that affect both its external environment and its internal business operations and performance. The Company evaluates and identifies any additional threats that may emerge and become evident in the future.

• Input cost inflation risk:

Key raw materials such as potatoes, palm oil and packaging laminate dominate the Companys raw material basket. Any supply chain disruptions, raw material shortages, or price increases will have a significant impact on the Companys costs and profit margins.

Mitigation:

PSL has developed long-term relationships with its suppliers over the years to assure a steady supply of basic materials. To mitigate risk, the Company enters into long-term contracts for packaging laminates and palm oil whenever possible. In addition, the Company has installed refrigerated storage facilities for volume purchases and is expanding its procurement locations to ensure a year-round supply of potatoes. When feasible, the Company engages in forward contracts to mitigate price volatility. Continual process re-engineering and cost-optimisation aid in mitigating the effect of rising raw materials and packing materials on profitability.

• Macro-economic risk:

The expansion of the Companys product portfolio is reliant on the countrys economic growth as a whole. Severe economic changes might pose the primary source of risk for the firm. Moreover, other macro-economic issues may cause alterations in consumer behaviour, purchasing patterns and working environments, which may present challenges for the organisation.

Mitigation:

PSL confronted the initial difficulties posed by escalating global geopolitical issues and supply chain constraints resulting in rising inflation and it continued to actively monitor key developments in an effort to mitigate the negative impact on its operations. The Company is diligently working to reclaim its growth trajectory through a strong consumer focus, innovative marketing and distribution and operational efficiency.

• Peer risk:

The Company confronts substantial rivalry from both organised and unorganised market players, including larger established businesses and minor regional players, which might have an impact on its overall growth and profit trajectory.

Mitigation:

The Company provides a varied range of products and continues to innovate new ones to help it stay ahead of the competition. As a specialised player, the Company has a comprehensive understanding of consumer preferences and is well-positioned to capitalise on this knowledge. PSL is poised for sustained development and expansion as a result of its extensive distribution network, utilisation of strategically located manufacturing facilities and diverse product portfolio.

• Cyber Security risk:

The possibility of unauthorised personnel accessing the Companys server from a remote location via hacking or virus attack could result in financial and operational losses for the Company. Moreover, any technical error or system malfunction may also have an impact on business operations.

Mitigation: The Company has taken numerous steps to mitigate the cyber risk associated with its operations.

PSL uses passwords, firewalls, VPN and an SSL certificate for its web portal to assure the security of its technical operations. PSL has implemented Disaster Recovery Mechanism (DRM) for real-time server replication to ensure business continuity and reduce operational risk. PSL has installed CCTV cameras with authorised access in the server rooms of its offices. Endpoint Detection and Response (EDR) and Data Leakage Prevention (DLP) have been implemented on all devices and servers by the Company. In addition, the Company has implemented continuous monitoring and assessment of cyber security risk, review of safety features log and real-time mirroring of servers and backups.

INTERNAL CONTROL SYSTEM

The Companys pan-India presence and vast business structure require an extensive and efficient internal control architecture. The Company has implemented a strong internal control framework to monitor the effectiveness of internal controls. The Companys independent internal auditor provides the Audit Committee with an independent and reasonable level of assurance regarding the adequacy and effectiveness of risk management, internal control business processes, operations, financial reporting and compliance. The internal control framework is suitable for the size, scope and complexity of the Companys operations.

Regular internal audits and management evaluations are conducted in areas including procurement, production, information technology, supply chain, sales, marketing and finance. The management team routinely reviews internal auditor reports before putting corrective and remedial measures in place to strengthen controls and improve the effectiveness of current systems. The Audit Committee receives executive summaries of the internal audit reports and action plans for its review and update.

CAUTIONARY STATEMENTS

Certain statements in this document may be forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, like regulatory changes, local political or economic developments and many other factors that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statements. Prataap Snacks Limited will not be in any way responsible for any action taken based on such statements and undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstance.