DFM foods - poor man's FMCG play


(Excel Monkey) #1

DFM foods is a snackmanufacturingand marketing company growing by leaps and bounds

becauseof time constraints I am unable to produce full details

but quoting the HBJ capital it isquotingat a FY2014 P/E of 15 based of EPS of 15.3

http://www.screener.in/company/?q=519588

http://www.dfmfoods.com/index.html

http://www.dfmfoods.com/download/earnings/DFM_Foods_Ltd_Q1FY13_Transcripts.pdf


(Subash Nayak) #2

Ahh, one my favorite from my days of ROE/ROCE/PEG table. The reason why avoided this is because of a unusual high DE ratio of 1.85 for a FMCG, and being a small player with a less advertising muscle power. I have seen their products in kirana stores near my home though.

You can see for last 5 quarters Gross Profit is increasing, whereas Net Profit is decreasing because of increasing interest cost.


(Subash Nayak) #3

Went through the transcript. Not giving guidance of future numbers is a big negative for me (especially the DE ratio and interest coverage ratio). So I can’t deduce where these ratios will go in future (east, west north, south?).

one big question from me, without those number how can one decide whether to invest it this company or not?


(Subash Nayak) #4

And not to mention, unlike other big players, they can’t outsource the manufacturing to someone else, so they have to incur capex for each and every expansion, and hence will have lower return ratios for quite long time as compared to other FMCG players.


(Excel Monkey) #5

Many companies don’t give guidance it does makes projecting a bit difficult. On outsourcing : why they would not be able to outsource? I think it is easiest to outsource. Being a bania/lala company probably they would like to capture the value addition at manufacturing level as well.


(Rudra Chowdhury) #6

As discussed in TED too, the main question with this business is sustainability of margins. DFM Foods with their main brand CRAX is visible everywhere across Delhi NCR in and across smaller kirana shops. The ultra low cost SKUs of Rs 2 and Rs5 makes it compete in a market different from the bigger players.

But going forward, will this strategy sustain outside Delhi, will the company be able to expand sales while protecting margins, the heavy debt laden capacity expansion is already playing spoilsport. So the next 2-3 quarters should be monitored closely.


(Ayush Mittal) #7

Hi Guys,

I have been reading on this co for last few days and this looks quite interesting.

I had posted on twitter today and got some good responses -https://twitter.com/ayushmitt/status/262817152468414464

I generally avoid cos at more than 20 PE but here I think we should look at the co caus:

1). It has a strong brand value.
2). The packaged snack business is a quick growing and very exciting business and will fetch a fancy valuation.

3). The co has been growing at 35% CAGR for last 5 years

4). Co has an excellent ROE of more than 35%

5). Co has potential to maintain 25-30% growth for next few years

I was looking at their ARs and concall transcripts and all of them are good and informative. As per them, the product always had a demand but the mgmt was not focused earlier. Since last 5 yrs they have woken up and are expanding aggressively.

They get almost 60% of their business from North India and are now expanding to West. They are expanding their distribution network very aggressively. They had taken a major capex last yr and expanded their capacities by 150%.

They did indicate that they hope to be able to utilize the new capacity in about 2 years.

If they are able to do so, I feel the margins will also expand and the co will be at a new level. So we should try to keep a track of this co.

Views Invited

Ayush

PS: Have bot a small qty to track


(Rudra Chowdhury) #8
[quote="ayushmit, post:7, topic:417413374"] I feel the [/quote]

Hi Ayush,

Good to see your interested on this one. I got interested in this during 2011 from this blogpost. Link: http://annualreports-betweenthelines.blogspot.in/2011/10/dfm-foods-ltd.html

The stock gave decent returns from the 170 levels. But as seen in the last few quarters, the interest burden is hurting the margins and company was not able to maintain the top line growth of the past. Being a small cap and without considerable moat, stock is quite expensive. So decided to book profits and got out.
Rs in Cr. Jun-11 Sep-11 Dec-11 Mar-12 Jun-12
Net Sales Turnover 34.07 38.01 44.28 52.98 50.26
Total Expenses 29.25 33.66 39.2 47.31 44.69
EBITDA 5.39 5.17 5.93 6.28 6.22
%margin 15.8% 13.6% 13.4% 11.9% 12.4%
EBIT 5.03 4.81 5.29 5.26 5.2
%margin 14.8% 12.7% 11.9% 9.9% 10.3%
Interest 0.58 0.42 1.23 2.24 2.29
% of EBIT 11.5% 8.7% 23.3% 42.6% 44.0%
Net Profit 3.01 2.88 2.82 1.65 1.97
%margin 8.8% 7.6% 6.4% 3.1% 3.9%

(Akbar Khan) #9

Looking at the concall, my question is, are the investment companies whose analysts took part in the concall of any repute?

Sumit Duseja of SPA Securities

Rahul Agarwal of Systematix

Ankit Babel of Subhkam Ventures

Shivani Mehra of Techno Shares & Stock Limited

Umesh Gupta of Reliance Wealth Management

Ravi Mehta of Money Logix.

Alok Agarwal of Striver Capital

Apurva Shah from Dalal and Broacha

Deepak Yadav from Emkay Global

I know of Reliance Wealth and Emkay… though Emkay did not participate in August concall. Delhi people?


(srinivasan) #10

Hi Ayush,

I also checked this company. One thing to be noted, is the promoters paying themselves exorbitant salaries. Close to 20% of profits ?

Also the independent director Mr. Mohit Satyanand seems to be caught by SEBI for insider trading and fined for it.

Otherwise this business looks promising.

-https://twitter.com/ayushmitt/status/262817152468414464 Link: https://twitter.com/ayushmitt/status/262817152468414464

1).
2).

3).

4).


(Ayush Mittal) #11

@Rudra -Thanks for sharing the link. Interesting blog.

@Akbar - Interesting observation but I think it happens when one starts concall for a small co and has to show an audience

@srinivasan - yes the remuneration is on the higher side. But other good thing is that promoters have a high stake and hence would be interested in valuations. Regarding the sebi case, went through the order, it doesn’t seem too concerning. the issue is for non-disclosure and qty is small


(Amit) #12

isn’t this essentially a single product company at the moment?

86% of revenues from corn rings

<1% from Natkhat

14% from mixtures


(Bhupesh) #13

Sebi slaps Rs 1.50 lakh on director of DFM Foods

Sebi had found that Satyanand had purchased 4,209 shares of DFM Foods amounting to nearly Rs 5.26 lakh on February 9, 2011.

The regulator also observed that Satyanand had sold 5,000 shares of the company worth Rs 14.09 lakh on October 14, 2011.

Satyanand had allegedly indulged in opposite transactions in shares of the company within less than six months on many occasions, Sebi said.


(Donald Francis) #14

Good discussions.

The investment premise seems dependent on company achieving better distribution reach in Rest of the country (apart from the North Stronghold). This will lead to higher capacity utilisation levels, improve margins and cashflows in the next 2 years.

I just had a quick look. Some questions I would put to those invested/tracking DFM Foods - for coming upto speed quickly

1). What is distribution reach strength currently? Change over FY12? Plans for FY13 & FY14?

2.What is the current capacity utilisation? Should be pretty low given current expansion. What are the plans for FY13E and FY14E?

If we have some details on these 2 aspects, there may be more visibility into the main Investment premise.


(Arjun Chandrappa) #15

Hi Donald,

Please see below the answers to your questions from the latest concall.

1.During March 2012 they had 138,000 outlets from their our own distribution network. Exit September 2012 (that means 6 months later), they are distributing directly to 177,000 outlets, which means they were able to - especially in the West, but also due to consolidation in the North - increase the number of outlets by 28% in a period of 6 months. According to the managements plans, which take the East zone into account as well, they hope by the end of FY13 that means over the next 6 months, to expand their direct distribution to 240,000 outlets.

2.Currently they have two plants running.Old plant is running at around 50% capacity and the new one is at 77%.

This is what the management had to say about expansion " Mohit Satyanand Well, at this point in time it is really going to depend on what the uptake in the Eastern Zone is, as we increase our distribution over there, I would say that for the current financial year, really we do not need additional capacity. This is something that we had mentioned in the last conference call as well - the new capacity would become imperative as we expand into the South Zone. That is a plan which is under formulation right now. Once we decide to go ahead with that capacity expansion, it is something that we would certainly table to the financial community before we make that commitment"

Disc: DFM occupies 1% of my portfolio currently. I’ve initiated a position since June this year. Also find attached a small writeup I wrote for my own reference, I am still tracking the story hence a very small position.

DFM-FOODS-Arjun-Chandrappa.docx (52.8 KB)


(Donald Francis) #16

Thanks Arjun for your Notes. Its a nice summary. Usually something like this is what is encouraged by ValuePickr (Admin) while starting a discussion.

Please copy and paste directly in a new post. And we can get Excel Monkey/others to add comments - especially on the Risks side, which has not had much discussion.

-Donald


(Arjun Chandrappa) #17

When you say a new post ? do you want me to start a new thread alltogether or just here ? like reply to this post ?


(Arjun Chandrappa) #18

Anyways I've pasted my write up here, please feel free to move it if needed. Also please let me know the negatives.

Company: DFM Foods LTD. 06/22/2012

Meaning: Business

A pioneer in the Indian snack foods market, DFM Foods introduced CRAX Corn Rings in 1984.Today, with sales across North, West and Central India, DFM Foods is a public company listed on the Bombay Stock Exchange (BSE).

Corn Rings and Wheat Puffs are marketed under the CRAX and NATKHAT brand names respectively. Both these have become extremely popular snacks, especially among children.

In the nankeens segment, the company offers a complete range of products consisting of 13 distinct product variants that include Bhujiyas, Daals, Mixtures and Nut-Mixes. These are sold in several pack sizes to cater to both casual/impulse consumption as well as consumption at home.

DFM Foods has two processing facilities, one in Ghaziabad, and the other in the Greater NOIDA region, both in close proximity to the Companyâs corporate office in Delhi. The facilities make use of state-of-the-art manufacturing equipment from across the globe, to ensure consistency and quality of all our products.

Stock price movement over the years

3years

5 years

6/21/2012 -214

6/21/2009

6/21/2007

Price

36

12

CAGR

81%

78%

1lakh invested would have grown to

592,974.10

1,786,899.02

Management:

DFM Foods is a Family owned business

Mr. R. P. Jain - Chairman - Father

Mr. Mohit Jain -Vice Chairman & MD â Son â (Finance from Wharton School,PA,USA)

Mr. Rohan Jain -Executive Director - Grandson

Directors

Mr. Pradeep Dinodia

Mr. Mohit Satyanand

Mr. S. C. Nanda

Skin in the game: Promoters hold 69% of the shares & Independent Directors on board.

CMP

214.00

Market Capitalization

213.99 Cr

Sales Fy11

169 Cr

EPS Fy11

10.36

PE Fy11 (excl one time income)

20.66

Book Value Fy11

33

Dividend Per share (excl onetime payment)

2.5

Approximate Payout Ratio

27.87%

Sustainable growth [(RoE (1- payout ratio)}

26.64%

Dividend Yield 9exclextra-ordinaries)

1.10%

Debt to Equity

0.7

Moat/Financials:

Year

Mar ' 12

Mar ' 11

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

CAGR 3yrs 09-12

CAGR 5yrs 07-12

Sales

169.42

119.84

72.19

78.42

48.66

39.70

29.27%

34%

Operating profit

20.00

14.58

7.36

5.86

2.14

1.40

51%

70%

Gross profit

18.30

14.12

7.32

3.59

1.74

1.54

EPS (Rs)

10.36

8.32

4.22

2.00

0.79

0.53

73%

81%

Equity or Book Value

33.00

22.70

16.46

13.99

13.15

12.96

33%

21%

Dividend(amount)

2.50

2.00

1.50

1.00

0.50

0.50

36%

38%

Dividend(%)

25.00

20.00

15.00

10.00

5.00

5.00

cashflow

7.49

10.59

3.07

1.04

1.19

2011

2010

2009

2008

2007

Return On Capital Employed(%)

38.83

23.5

23.03

8.77

12.09

Return On Net Worth(%)

36.65

25.65

14.32

5.92

4.08

Operating margin (%)

12.17

10.18

5.13

4.4

3.52

Gross profit margin (%)

10.99

8.85

4.48

3.7

2.64

Net profit margin (%)

6.84

5.73

2.54

1.54

1.29

RISKS

1. Rising prices of raw materials particularly that of packaging materials caused severe pressure on margins.

2. Increasing organized competition will remain a constant threat.

3. Substantial slowdown in the growth momentum of existing product sales could lower the returns on the new investment in capacity creation.

4. A major challenge being faced is the continued development and stabilization of organizationalcapacity and management systems to manage and sustain the high growth of the business.

Steps to counter Risks & Grow

* Efforts to expand and intensify the sales distribution system continued through the year as did efforts to improve its productivity. Organization structures were strengthened and new initiatives in marketing and product development were taken

* Work on the establishing of a new manufacturing facility in UP was initiated with

the acquisition of industrial land during the year. The investment in this new state

of the art facility is likely to be around Rs. 70 crores and is expected to go on

stream during the third quarter of this year

* A two-pronged strategy is under implementation. Namely to enter new markets to

generate additional growth momentum and to develop new variants products to

enlarge the customer base.Yet to enter the south Indian market.

I was however let down by the recent news of the director being fined by the SEBI. Basically he violated one of the rules where in a insider cannot involve himself in a opposite trade within six months of his first trade. Also he failed to disclose it. Anyways I'llwait to hear more on it in the next earnings call.


(Akbar Khan) #19

Thanks Arjun,

DFM used to raise prices periodically by reducing the content in the packets. I had read a news item about Government enforcing standardisation of packet size. Is this applicable to DFM as well? If they have to comply, this would actually bring a stop to such practice of surreptitiously raising prices. Any information on this?


(Tony) #20

Hi Akbar,

Here is the piece of information you are looking for:

The Indian government has relaxed the standardized packaging norms and made it mandatory for fast moving consumer goods (FMCG) companies to pack and sell products such as biscuits and milk powder in standard packaging sizes.

The government has modified the Legal Metrology (Packaged Commodities) Rules 2011, following complaints regarding unfair reduction in the quantity of packaged products from some consumer organisation, PTI said.

Expected to come into force from 1 November 2012, the revised norms will bar the sale of 19 categories of FMCG products in sachets/packs of irregular sizes such as 65, 73, 85, 92, 175, 425 (grams/millilitre). It is also mandatory for the companies to adhere to standardized packaging of 25, 50, 100 and multiples of 100 units (gm/ml), as per the new norms.

The products that need to be packed and sold in standard pack sizes include baby food, weaning food, biscuits, bread, butter, coffee, tea, cereals, pulses, milk powder, salt, edible oils, rice and wheat flour, aerated soft drink, drinking water, cement and paints.

According to analysts, due to the relaxation in norms, FMCG companies such as ITC, Tata, Hindustan Unilever, Britannia, Parle, Dabur and others find it easy to switch to the uniform packaging norms that have been prescribed for selling their products.

On a plain reading it seems that snacks like the one’s sold by DFM Foods are not covered.