PepsiCo (NYSE:PEP) is reportedly considering acquiring a stake in Indian potato chips company Balaji Wafers Pvt., according to Bloomberg. The deal could help PepsiCo increase its share of the fast-growing snacks market in India, where it has been losing out to the local players of late. However, we do not expect the company to pay a huge premium as the acquisition will negatively impact its volume mix and gross margin. 
Why The Indian Snack Market?
The Indian snacks market has been growing at a rapid pace on rising income levels, growing urbanization, and busy lifestyle. The country has been one of the primary growth drivers of PepsiCo’s Asia, Middle East & Africa (AMEA) division over the past few years. PepsiCo recorded high single digit growth in revenues from its Indian snacks business during the first six months of this year despite losing market share to the local players.  Per capita consumption of salted snacks in the country is still just a fraction of that developed parts of the world which reflects an immense growth opportunity for PepsiCo. Market research firm Euromonitor expects the Indian snacks market to be worth more than $4 billion by 2018. 
Why PepsiCo Might Be Interested?
Although PepsiCo still controls a lion’s share of the Indian snacks market, the local players have been competing hard. PepsiCo’s market share of the fast-growing potato and vegetable chips market in India declined by 1,300 basis points in the last four years to 57% due to growing availability of lower price offerings from local players such as Balaji.
Balaji has also gained by offering a product mix that specifically targets a particular region or state based on the most popular flavor. For example, the product mix is tilted towards sweet & salty flavors in the company’s home state of Gujarat where people mostly prefer sweet snacks. However, Balaji and other local players lack the scale required to meet the growing demand from the second most populous country in the world. Balaji’s operations are primarily concentrated in the four western states of India where it holds ~65% of the market. This is where PepsiCo can leverage its existing infrastructure and countrywide distribution network to grow the local brand while tightening its grip over the Indian market. 
PepsiCo also has a great track record of acquiring and growing local brands, which gives it an edge over the other suitors. The company has built a strong snacks business globally primarily through mergers and acquisitions. Frito Lays and Quarker Oats in North America, Wimm-Bill-Dann in Europe and Sabritas in Mexico and several other joint ventures have helped the company continue the growth momentum despite declining cola consumption in the developed markets.
What Might Prevent The Deal?
While PepsiCo can tighten its hold on the Indian snacks market by acquiring a stake in Balaji, it will negatively impact its volume mix and gross margins. This is because lower prices have been the key to Balaji’s success against PepsiCo’s Lays and Kurkure brands in the country. While Balaji held ~20% of the Indian wafers market by volume in 2012, its value share actually stood at just ~14%. Moreover, its gross margins are merely one-fourth of the industry average in the country. 
Hence we think that PepsiCo won’t be willing to pay a heavy premium for Balaji. In fact, the company had initial discussions with Balaji three years ago which did not work out on valuation concerns. With annual sales of over $160 million, the privately held Balaji Foods has been valued at ~$600 million by E&Y, which has been mandated by the company to locate an investor for it. Notes:
- PepsiCo Said to Be Exploring Offer for India’s Balaji Wafers, bloomberg.com [↩] [↩] [↩]
- PepsiCo 2013 Q2 10-Q, sec.gov [↩]
- PepsiCo’s Lays, Kurkure lose market share to local players like Yellow Diamond and Balaji, economictimes.indiatimes.com [↩] [↩]