​This is an audio transcript of The Morning Brief podcast episode: From Bikaner to BSE: Snacking Away​

Ratna Bhushan 0:10

From Bikaner to the BSC, this has been a billion dollar saga that sports Namkeen and chatpata. But added space. The secret spice has been as basic as the DNA of the Agarwal family and that of patriarch Haldiram Bishan Agarwal,

Deepak Agarwal 0:28
late 80s and early 90s. There were not many Haldirams. So there were some confusions among the territories and among the brand so everyone is decided to be restricted with some territories and some geographical restrictions. And as my father was a visionary and he never wanted to settle for a specific state or for a specific area, that's how he withdraw the brand Haldiram and he introduced his own brand Bikaji.

Ratna Bhushan 0:56
Deepak Agarwal is the managing director of Bikaji foods that got listed a fortnight back, a second gen entrepreneur, Son of founder Shiv Ratan Agarwal, who branched out in 1993 to start an independent ethnic snacks brand that is rooted in his hometown in Rajastan.

BG Sound 1:15
Can I have some Bhujia. Thank you.

BG Sound 1:19
BYOB, bring your own Bhujia. He loves Bikaji

BG Sound 1:28
Bikaji foods IPO will hit the street this week on November 3, the IPO is a complete offer for sale and certain promoters will be offloading their shares right there. The IPO price pan has been fixed between 285 to 300 rupees per share. Also through this issue, the company looks to mop up a total of over 880 crores at the higher end of the price pan out.

Ratna Bhushan 1:50
If Pratap snacks added the crunch by listing at a 33% premium to its issue price five years back then Bikaji foods further added bite to the story with its stock listing 8% higher to its IPO price. These ethnic snack brands have clearly shown they are recession proof, enjoy mouthwatering valuations and remain the constant envy of multinational giants. The Bhujia billionaires, primarily from Rajastan have spawned several regional players to rise up and take the fight straight to deep pocketed rivals like PepsiCo, ITC or a Kellogg that recently decided to split into three. The jury is still out on whether Indians are indeed trading taste for health.

Navroz Mahudawala 2:40
So traditionally, these snacks have been very high on Salt, Sugar Fat, and most of the consumers don't have it because they are healthy they have it because of the tastes right? I think it'd be incorrect to say that India is a healthy snacking market. The way I would put it is that health gets consumed by very select people and that's only in metros, as soon as you go to a typical joint family household right you will rarely find consumption of process health food snack pack then it's essentially the likes of you know, the Haldirams or the Bikaji, etc.

Ratna Bhushan 3:13
That's Navroz Mahudawala founder candle partners, the Mumbai based tea advisory firm that specializes in consumer chemicals and the pharma space. Joining Navroz was will also be Deepak whom you heard first, giving us a first hand account of Bikaji foods. And Sachin Bhartiya, Partner at Lighthouse Funds, an investor in bikaji foods since 2014, as on the company board as nominee director

Sachin Bhartiya 3:44
See we invested into this company in 2014. You know, this was the first tranche of private equity that the company took. And for any company which actually you know, get into this, eventually their dream will be to do a listing provide an exit route to the investors and eventually also unlock value for the company. And this has been no different.

Ratna Bhushan 4:03
The business models of ethnic snacks are in fact, pretty much similar to FMCG companies high on capital, efficiency and brand pull. More importantly, many of these family owned businesses have been among India's biggest wealth creators. It's Tuesday, November 29. I'm your host Ratna Bhushan from the economic times and you're listening to from Bikaner to BSC snacking away on the morning brief.

Ratna Bhushan 4:40
In this episode, we will crack crunch and chip into the thika dynamics that work in favor of a Balaji, a Haldiram or Pratap or even a Bikaji and a yellow diamond and see if these family businesses can sustain intense competition, raw material inflation and regulatory scrutiny on high levels of salt and sugar on packaged foods. But first, let us go back to the arid desert of Rajasthan, where Mithai and and Namkeen are a way of life. Here's Deepak Agarwal, promoter and Managing Director at Bikaji foods pretty much steering the show at the company and instrumental in managing its expansion, Deepak your company has been making a lot of news in the past few weeks with the listing etc. So, to begin with, Bikaji's revenue trajectory has been strong and consistent, can you sustain this

Deepak Agarwal 5:37
in last four to five years, if you see then you know, our growth rate is always on the consistent basis. So, we are expecting the same for next three to four years as the market is very large and the kind of a basket what we have in product mix is a huge one and we have opened many other manufacturing units at different places. So hopefully, we will able to continue the same CAGR growth rates,

Ratna Bhushan 6:03
okay, what gives you this confidence if I may just add to that,

Deepak Agarwal 6:07
this company is actually an ethnic based savories companies and NSCT is very well known for Indian savories Bhujia, pappad and sweets. So this makes us unique and the experience and the legacy what we have from the last 40 - 50 years is make us different from other competitors.

Ratna Bhushan 6:27
Okay, interesting point, you've raised there Deepak that this makes you different from competitors. Which brings me to my next question, the lineage still traces back to the founder of Haldiram Ganga Bishan Agarwal, can you tell us how the family tree has evolved and how you set up the business independently,

Deepak Agarwal 6:45
here I would like to mention that Haldiramji was my real great grandfather, who started this business in 1940s. And you know, from a small shop, he started selling the Bujia and He manufactured himself and by his handmade Bucha, he has become very famous. So, after independence, there is a lot of migration happened from Rajasthan, specially in Marwadi culture to northeast Calcutta, Madras and some other parts of the country. So, two of my cousin grandfather also shifted to Calcutta in early 60s. And in 70s, my father generation has come so my father are four real brothers, and one of my elder uncle has shifted Nagpur in early 70s like 73 - 74 and which is called today Haldiram's Nagpur and second is my father and two of my younger uncle has shifted to Delhi in 1983 84, which is called today Haldiram's Delhi. So, my father are four brothers and this is a third generation and we all are fourth generation and Delhi, Nagpur and Bikaner are real sister concerned companies, but late 80s and early 90s, there were lot many Haldirams like Haldiram Delhi, Nagpur Bikaner in Calcutta itself, there were three Haldirams Haldiram Prabhuji Haldiram and sons. So there were some confusions among the directories and among the brand so everyone has decided to be restricted with some territories and some geographical restrictions. And as my father was a visionary and he never wanted to settle for a specific state or for a specific area, that's how he withdraw the brand Haldiram and he introduced his own brand, Bikaji why Bikaji because Rao Bikaji was a king of Jodhpur who founded this Bikaner and Bikaner city is very famous for manufacturing Indian savories, Bujia, and pappad and sweets. And you must have seen in every city or in every village, whether it is tire three or tire to one, you will find somewhere Bikaner sweet store Bikaner Namkeen store Bikaner mistan bunda

Ratna Bhushan 8:53
that's very, very interesting. And the point you made Deepak that you know, your father broke out and sort of started his own brand. Today, do you see Haldiram as a competitor?

Deepak Agarwal 9:02
Yes, we are the competitors. It's a big time competition between us. But as in, you know, we always sees as a healthy competition and we always see our own growth and our own style of selling and manufacturing.

Ratna Bhushan 9:18
Okay, I want to ask you, have you been approached by other corporate houses, multinationals or private equity firms for the buyout or, you know, for selling off of any stake? So have you been wooed by any of these and did you consider it

Deepak Agarwal 9:32
before IPO? We really got a good offers from the private equity companies for the secondary sales, but after post IPO, we are not seeing any offers. And this is the first kind of a company in ethic snacks IPO and so it's a unique brand and unique categories where everyone is very excited and we are glad that we got a really good response.

Ratna Bhushan 9:55
Okay. About three years ago, you took on a very aggressive branding and brand ambassador strategy, which was new for bhikaji, as well as for anybody in this snacks business, you brought in Amitabh Bachchan, no less, do you see that part of the business expanding? What has getting someone like Mr. Bachchan got to the table for the brand and are they more stars in the pipeline,

Deepak Agarwal 10:16
it is very important point which even I didn't mention, but in 2019, we endorsed AMITABH Bachchanji as our brand ambasador and you know, after his endorsement, we really got a good feedback at and off tech from the consumer side, but especially the confidence among the channel partners and the distributors, you know, nowadays the distributor says, inca tho add aata hai tho inca maal bhik jayega. So, this kind of confidence comes from you know, different channel partners and buying from a different market. So, our other than our core market in focus market, we will definitely get leverage and advantage of this branding and Amitabhji as an a brand ambassador and to cover and to compete our competitors and in you know, to put our products on the shelves, it would really you know, support us in a big way.

Ratna Bhushan 11:10
Okay, Deepak snacks is a 1.5 lakh crore market of which only 55% is organized. So, do you see this as an opportunity or a challenge

Deepak Agarwal 11:21
Ratna here I just want to mention about the sweet market that the organized market is only 10% balance all is unorganized, I give you example of chocolates, you know 40 - 50 years back in the chocolate, which was unorganized and only freshly on the counters not on the package, but in last 40 years all the chocolate has become into packaging, the same will happen in India for the next decade for almost next two decades. And you will find that the sweets will be available only the package ones and it will become unorganized to organized very rapidly in next two decades. So, sweet market is a huge and snacks market also. It's growing every year by 15%. So with the 15% market growth rate, you can imagine that you know how the market is growing. So it's a good opportunity and we are also looking positive.

Ratna Bhushan 12:21
All right. But is this also a reason why it's rare to have large national plays for ethnic snacks? Unlike other categories like beverages or staples? What do you have to say about that?

Deepak Agarwal 12:33
Like you know, there's a lot of large snacks player and upcoming is also you know, large snacks like ITC and Tooyumm has also come into the Indian ethnic market and market is growing and I'm very positive in all kinds of aspects.

Ratna Bhushan 12:52
Deepak Are you also looking at moving towards diet snacks because that's what's catching on. Now we even have regulations from the fssai talking about warning labels on all foods about high salt sugar and fat is all of that going to be a pressure point for the business.

Deepak Agarwal 13:08
Nowadays we also have a you know, roasted Namkeen we also introduced and launched some of the diet based snacks and toasted Namkeen we have a jowar mix we have a multigrain Bujia we have a bajra mix, we have a multigrain puffs we also trying to Reducing the salt and sweet percentage as per the FSSI norms and we are on the same line as per the consumer demand as per the consumer behavior and in upcoming time maybe after five years 10 years we will also you know make changes accordingly to the market and we are on healthy snacks also on the practically side still the Indian market is not yet accepted very well about the roasted Namkeen it is a very niche market, but we are positive and we also have the same ranges and introduced and we are ready to change ourselves in next five to 10 years as for the market behave,

Ratna Bhushan 14:04
okay. All right. And are you looking to tap global markets too

Deepak Agarwal 14:08
yes we do exports also and here I want to mention that we have entering into a frozen food and we are almost covered 30 to 35 countries worldwide. And we are exporting around four to 5% of our total sales. And we are looking for you know doubling the exports in next three years. In frozen we are introducing the categories like sweets, snacks, curries and breads, but our core focus would be mostly on the sweets and our snacks.

Ratna Bhushan 14:40
Okay. And my final question to you Deepak is are you looking at any further joint ventures, any tie ups any smaller acquisitions in the market now?

Deepak Agarwal 14:50
Ratna Yes, definitely. We will. Now we are open and we would like to do some ventures and some acquisitions if the better opportunity comes but will always be more of strategic whether it is on the product side or process or on the sales distribution side. So, we are open and now we will look for some of the markets for acquisitions or for joint ventures

Ratna Bhushan 15:15
okay and these acquisitions would be like regional brands in in sweets and snacks in the ethnic space itself,

Deepak Agarwal 15:22
Ratna here I just want to mention that now this brand is called as an ethnic snacks but in next three to four years or five years my vision is to call as a food brand and in food brand all kinds of food comes under one umbrella so I'm looking for good opportunities but first and foremost priority is on the regional branch acquisition or ventures.

Ratna Bhushan 15:45
A personal question to you Deepak What is your favorite snack?

Deepak Agarwal 15:50
My favorite is still the Bujia you know, since childhood we are eating the Bujia and Papad. So these two are my favorite and definitely other snacks but these two are my favorites.

Ratna Bhushan 16:04
The story goes that in 2012 - 13, the PepsiCo global chief Indra Nooyi visited Balaji wafers offices in Gujarat for a lesson or two on how to run her snack foods business. She apparently even moved Haldirams for a buyout, but failed, so did Kelloggs as recently as 2019 but failed again. Now Mukesh Ambani wants to chomp away at this piece too. Navroz has been watching several of these developments keenly for many years. First in E&Y where he worked and then at candle his own firm. Navroz to begin with Pratap snacks, the first ethnic snacks company to list Bikaji foods is the latest, both had a good listing, how have they fared since listing.

Navroz Mahudawala 16:52
So Pratap snacks was listed in if I remember correctly, September 2017. And it's been five years since then. And the IPO price was around 949 - 950. It did track well, I guess for a year or two. But since then, it's actually never reached the IPO price and its been consistently under the IPO price. So Pratap snacks has had its share of challenges and probably a lot got to do with the fact that I guess overall the snacks market has shared as seen a share of challenges in terms of growth. However, I guess what we have seen is an awesome debut in terms of Bikaji and you know, it's kind of trading almost 30 - 33% over its IPO price. And probably it's the scale here matters also because both DFM and Pratap when they listed probably they were slightly subscale Bikaji is coming at a at a revenue level, which is much larger than what these guys when they were listed, right. So title, I guess, is also making some level of difference.

Ratna Bhushan 17:47
Okay, interesting. Are both these companies very richly valued, and deservedly so,

Navroz Mahudawala 17:53
you know, consumer Ratna, as you're very well aware in India anyway gets rich valuations. And especially if you're a relatively smaller cap, and I say smaller caps being defined as anything less than a billion dollar market cap, right, it because of just the liquidity around or a lack of liquidity, most of these scripts generally track on the higher side. So yes, DFM and Pratap consistently were in the range of, you know, upwards of 50 times PE. I guess today, Pratap is at an even higher levels, because the earnings are on the lower side. And of course, Bikaji is upwards of 100 PE and you know, even more now, after its run up by 30 - 35%, well, deservedly so not I guess that time will tell markets generally want a certain level of growth before they want either re rating to happen. So we will have to just wait and watch. As far as some of the growth challenges are concerned.

Ratna Bhushan 18:47
Wait and watch? Yes, of course. But tell me Navroz institutional investors and PE funds have traditionally walked away at the idea of betting on these companies. Why is it so?

Navroz Mahudawala 18:59
Probably I guess there are several reasons behind this. One is the fact that you know, many of these have been very small family managed businesses earlier. Right. And they were never structured as a corporate. So you a you had structural issues, it's always tough. There must have been I think in the earlier years some level of accounting challenges also, because probably these were not as per the standards, which most PEs expect. Also, probably one aspect that we all need to recognize is that for a PE It's important that his exit is very clearly laid out. His thought process needs to completely aligned with the promoters on this. And many of them do expect a strategic exit. I guess today a lot of Indian entrepreneurs may not have or at least most of these family managed businesses may not be very open to giving a strategic exit after five years or seven years right. So the only option for a PE then is either look at an IPO or look at another financial see which probably sometimes is subpar. So A mix of these challenges could have been, I guess one of the issue here.

Ratna Bhushan 20:05
Okay, but what about deeper issues around governance and systems and processes? Is that also it?

Navroz Mahudawala 20:10
Ratna, Again here, I would think this is very typical for any relatively smaller business in India. It's not just Indian snack business, right? And any sector where you probably can purchase in cash and you can sell in cash right, would always have governance issues. So you have several examples in India, I think the edible oil sector suffers from that some of the textile areas suffer from that, right. But there is a case here that the purchase is also called probably sizable amount because of which there are leakages in the system. This is one sector where anyway, there are too many smaller regional players, extreme fragmentation. And thanks to that, there could be governance issues here. So, it could be one of the issues. But typically, what we've seen is in sectors like this, as long as there is growth and the ability to structure it, a lot of financial investors are open to looking at it, I guess, time will tell whether more deals could happen in the sector or not.

Ratna Bhushan 21:06
Absolutely, time will tell. But Navroz India's also supposed to be snacking healthy, right? These Bhujias are anything but healthy. What do you have to say about that?

Navroz Mahudawala 21:16
Traditionally, and I think we should, instead of taking judgmental calls. Let's lay it out correctly. So traditionally, these snacks have been very high on salt, sugar, fat, and most of the consumers don't have it because they are healthy. They have it because of the tastes right. I think it'd be incorrect to say that India has a healthy snacking market. In fact, except in metros, you haven't seen that many business plans emerge where you know, health has really done so well. health foods have probably made some inroads in metros however, our experience consistently seems to suggest that the Indian consumer wants taste even in healthy foods, and may pay some premium however, they ideally want similar price points for health. So that's very clear. So unless some of the Indian Health Food guys end up, probably scaling up to a level where the price points are similar, it is extremely unlikely that you're going to see some major companies emerge. It's still very early days on the health food side, most businesses are you know kind of sub 100 crores in fact, most of them are sub 50 crores right. And at price points, which still probably is very, very Metro and you know, kind of, I would say, you know, very select consumers can really afford to kind of consume some of these products on a consistent basis.

Ratna Bhushan 22:36
Interesting now, rose at this point, maybe it's safe to say that Indians are talking health but not necessarily walking health all that much, right?

Navroz Mahudawala 22:45
Absolutely. No, I completely agree. It's, it's still a phenomenon, which is, the way I would put it is that health gets consumed by very select people. And that's only in kind of probably, if you see the snacking, it's more in offices or where a single bachelor stays you know, stuff like that. As soon as you go to a typical joint family household, right, you will rarely find consumption of a process healthful snack pack then it's essentially the likes of you know, the Haldirams or the Bikaji etc. So the penetration level, it we are still talking of very, very low numbers here.

Ratna Bhushan 23:21
Okay. And finally, Navroz Do you see industry consolidation happening? Haldiram was in talks with Kellogg's, Lays, and ITC have been on the lookout for potential targets? There's a lot of activity in the m&a space in in the snacking industry. What's your take?

Navroz Mahudawala 23:36
On actually our take here would be that probably there has been some initial consolidation in the last four or five years, right. So we saw Pratap buying snacks and I think it was 17 or 18. And then we had, we had controlled deal even in DFM foods, because adwind is a controlling shareholder there. So in that sense, that was a buyout, then probably RPG group has done one transaction which was that Elita brand, but other than that, it's been relatively limited and our senses that it will be difficult to execute a larger transaction because of the fact that in the listed space today, you know the comparables so I'm not sure whether anybody in the private space will pay up to that level in terms of valuation multiples valuation in any sector like this would continue to be a challenge, probably the maximum consolidation that we will see and it will happen is the players in that 50 - 100 Crore category where there could be some local entrepreneur who should have built a 50 - 100 Crore business which will be tempted to monetize but there's enough growth available. So our sense is that probably a lot of the guys may not be tempted to sell right now till we reach a certain scale.

Ratna Bhushan 24:46
So far, there is data to suggest that Indians are talking health, not walking health, with sugar free variants or diet namkeens, still contributing to less than 10% of most food companies portfolios? Is this what gives an investor an uncontrollable urge to indulge as well? Let's ask Sachin of Lighthouse Sachin as you know, we're going to talk about the ethnics tax category, which is very much the flavor of the season. What with the Bikaji IPO? And so on? So my first question is, what kind of valuations do you expect for the ethnic snacks category?

Sachin Bhartiya 25:23
See, ethnic snacks industry, if you look at the in terms of nature of the business, it is pretty much like any FMCG company with a very high capital efficiency, you know, hardly any working capital, most of these businesses actually sell on cash or even on advance basis. So if you look at in terms of the comparison, they would probably peg it. However, you know, we think that this is pretty much part of the FMCG basket and, you know, somewhere, this will find valuation range that will fit most of the other listed companies in the same sector.

Ratna Bhushan 26:00
Okay, so you don't see hiring top talent as a challenge, either.

Sachin Bhartiya 26:05
Yes, and no, it depends entirely on the management. We have seen many companies, you know, very, very good businesses still run by the family members. And there's nothing wrong about it. When I spoke about for moving towards an organization, it is all about hiring the right talent. And we have seen now a lot of family businesses, hiring people, you know, we call it Crorepati Club, where you have people, you know, getting hired at crore plus salary at CXO levels, and I think they are really helping these businesses move to the next level. And when I talk about family owned and professionally run business, it is not about just hiring people, it is about having right kind of an auditor, you know, right kind of board, you know, overall organization behind the business.

Ratna Bhushan 26:51
Okay, very interesting. Sachin, you said that, you know, they are looking to hire talent, which is taking their businesses to the next level. So my question to you is, can these ethnic snacks providers compete against the more organized Western snacks market which has many deep pocketed competitors, like there's a PepsiCo, there's the ITC, there's a Parle some of them have, you know, large backing linkages, like ITC, PepsiCo has global backing. So, what do you have to say about that

Sachin Bhartiya 27:21
Western snacks and ethnic snacks are two very different business though they appear to be same, but dramatically different in terms of making in terms of processing in terms of ingredients, you know, in fact, if you look at in terms of the Western snacks, there's hardly any entry barrier, you can get the same machine that is available, you can get the same raw material and you can have the same production, you know, two different companies making, let's say one product from the same machine can be very, very similar. But in terms of ethnic snacks, it is all about having ethnic, and it is it is it is whether it's sweet or snacks, it's about having a particular recipe particular tastes that customers love, they've been buying it for a long, long time. And in terms of competition, if you look at you know, 1.5 lakh crore worth of industry estimates, you know, these are cases where we went into such a unorganized industry, if you go to rural India, tier one, tier two, tier three cities, it will be surprising, you know, somebody to see how things are changing in terms of consumption pattern is nothing to point about a particular company, but in terms Im talking more about how consumption patterns are changing, you know, to many different business and cannot be compared.

Ratna Bhushan 28:33
Okay, but what about competition from regional brands Sachin because this is a category where there are very strong local regional brands, and they have the distribution might in their territories, and India as a market where tastes change, like with every state?

Sachin Bhartiya 28:49
That is right, I think probably that, you know, when you say regional test, I think that is what sort of sets apart these businesses when you talk about Western snacks, very difficult to copy paste formula, these are very specific, regional, very unique taste with backed by unique recipes developed over a period. And there's a particular set of customers who are sort of continuing to buy and when you talk about the competition, my guess is the customer sets are very different. You know, it's a very vast industry, you know, multi billion dollar industry, multi test, Multi Product, sort of multi recipes industry, so very difficult to generalize. But if you asked me to put it in one line, I would probably suggest, you know, being regional is actually a strength versus a weakness. You own a particular market and you continue to penetrate that, you know, where there is a humongous fan following of your brand, and it's good thing to have.

Ratna Bhushan 29:44
All right. Can you tell us some insights, anecdotal information on how the idea of the IPOs was generated and what it took to get it in the market

Sachin Bhartiya 29:56
See we invested into this company in 2014? You know, this was the first tranche of private equity that the company took. And for any company which actually, you know, gets into this, eventually their dream will be to do a listing provide an exit route to the investors and eventually also unlock value, you know, for the company and this has been no different

Ratna Bhushan 30:19
for the Bujia, and mithai kings so far on top of the snacking curve, this may be the time they will have to pivot to healthier offerings, or appear to get cracking on regional competition, higher top tier challenge, and maybe need to deal with consolidation. There's also a compelling need to tap global markets bridge the gap between Western and Indian snacks and appeal to younger consumers. Richly valued, but possible deeper issues around governance and processes, warding off competition from globally snack majors on one hand, and very strongly entrenched local players on the other. It's a space surely at inflection point. That's all for now. I'm your host, Ratna Bhushan, and you've been listening to from Bikaner to BSC snacking away on the morning brief. be signing off now and hope you enjoyed listening to this episode.

Ratna Bhushan 31:16
This episode was produced by Sumit Pande, Sound Design- Rajas Naik, , Executive Producer – Anupriya Bahadur, Anirban Chaudhary & Arijit Barman. Do share this episode if you liked it. Listen to new episodes of the morning brief every Tuesday, Thursday and Friday on all your favorite listening platforms, Amazon Music gaana.com, Spotify, Apple and Google podcasts, the Economic Times website and of course, our very own audio platform et play. Also, tune in to the latest podcast from et business of sports where we decode all about sports as a business. Tune in every Wednesday for fresh episodes. Credits and disclaimers are in the description. Any reference to invest into the industry or company is independent of this discussion.

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