DFM foods - poor man's FMCG play


(Tony) #21

Does any one track Hatsun Agro Product Ltd. Need your views on the fundamentals of this company.

http://www.hatsun.com/

I will help in the technical analysis of this company.


(Arjun Chandrappa) #22

Hi Akbar,

In Q1 DFM did take a price increase by reducing the grammage in the Crax Corn Rings & Namkeen Packs. This was done in the last part of june , so the impact of 6% improvement in realization was seen in Q2. As per your question if they come under the new norms I am not sure on that.

Thanks.


(Tony) #23

Hi Akbar,

Here is one more article on the subject of packaging sizes. Outllook Business has this to say:

http://business.outlookindia.com/article.aspx?282955

Hope this clarifies your question


(Arjun Chandrappa) #24

Thanks for the link Tony. I think this link does clarify that the rule does not apply to DFM as DFM prices its products below 10Rs.


(Donald Francis) #25

Arjun,

Yes I meant a new post with all details in this thread only. This helps immensely for a quick reference -and bringing everyone on same page quickly. Thanks for your initiative.

Need to go thru concalls, etc study ARs for a few years. Think there is lot of information put out by the company but numbers aren’t really adding up…why are operating Cash flows lagging so much behind Sales, for example. In last 2 years Sales have doubled, but Op cash Flows are at almost the same levels.

Higher Debt and Capex is playing spoilsport with bottomline figures. Enhancing distribution coming at high costs, etc, etc. All in all…don’t get an immediate good feel about this business! See if you can take these initial thoughts ahead…am starting on vacation in a couple of days, so will check/work only sporadically.

Noticed your other post in Greenply…now that’s something I get a much better immediate feel! If I were to choose among the 2 to spend more energies on - Greenply is way ahead.

-Donald


(Akbar Khan) #26

Thanks Tony for that information.


(Arjun Chandrappa) #27

Hi Donald,

Sorry for the late reply, I’d been busy going through the earnings reports and AR’s of DFM. I’ve some more ground to cover but

Here are some more points for now.

Reasons for not munch increase in cashflow/bottomline.

)- strong invesment into distrubtion infrastructure,mostly in East Zone

)- Increase in depriciation and financing cost

)- Emplyee costs are up,results to be seen in Q3.

)- expanded distribution in East Zone(EZ) in last 2 weeks of september,impact to be seen in Q3.

On Competition

-For CRAX: Pepsi & ITC (But they dont have offerings in current product area)

-For Namkeen only local players.

Seasonality of business?

Slack Quarters : Q1,Q4 - 1st half of the year due to exams & Vacations,kids mostly indoors.

Good/Best Quarters : Q2,Q3 - 2nd half of the year due to kids in School.

Revene mix?

Region wise : What percentage from which zone.

North-88%

West -12%

East - 0.1% or 0% as of now

Product wise: what percentage from each product.

Crax Corn Rings - 84%

Namkeen - 15%

Natkhat - 1%

Utilization:

-Greater NOida plant runs at 77% utilization.

-New plant more efficient runs @ 77% ,old plant at 50%.

Analysts question on why DFM Does not outsource manufacturing to increase ROA, like major FMCG’s

1). Business model unlike big FMCG, who outsource manufacturing to subcontractors, you increase leverate & reduce Return ratios by not outsourcing.

2). HUL increaesd ROA by subcontracting, Mohit satyanand worked for HUL during 70s. very small percentage 1% outsourced back then

3). DFM’s REasons for not outsourcing :

1). not a big company

2). Quality standards not satisfactory

3). Food products companies are different from paste/soap

4). Confidence/quality of management trust.Management does not have ability.

On single product dependency

1). we are single product of a single zone.

2). constraint of capital.

3). Limited Management resource

we have the following questions on Where to put money?

1). Investe in monetory /non monetry resource in New brand or

2). Invest in new distribution for existing brand.

second choice is less risky, costs is same but predictability of success is more in 2 than choice 1.

so currently company channeling its resources on expanding existing brands to new regions and also bringing in variants of existing products.

Raw Materials?

)- RM (price changes) - packaging(stable,mild upward bias) , flavors(stable), edible oil ( softened in last 4-5 weeks)

)- Crax products dont use corn directly but instead use Corn Meal/Corn Grits so Managing inventory of corn is suppliers job.

)- Natkhat - wheat brand

)- Crax - 100% corn product.

)- 26% of RM is edible oil…

)- 3-4 Monhts ago commodity/RM prices were up, so company took a price hike , now prices have softened.

Ad & Promotional :

1). Costs equal to 15% of Revenue.i.e over 25 crores.

2). communication strategy is segmented - only cartoon channels, lower expenses, niche mkt, less head on competition.

3). Namkeens - no ads, only word of moth. Namkeens present in NZ(North Zone) only…due to strong local players in other zones.

Products:

1). Natkhat is 2 Rs Pack, traction is small ,markets only in NZ, company has plans to increase distribution

2). Crax corn rigns - Small pack-5Rs Big packs-10Rs - target pop 6-12 year olds

3). Price changes:

BUlk sales comes from Crax COrn Rings - Rs 5 Pack

Crax Corn Rs 5 Pack reduced from 18-17gms - 5.5% in terms of price realization.

Rs 10 packs price realiation 7.5% - 8%

Namkeens price realiation 7-8%.

4). Namkeens present in NZ only …currently grows at 18-20%

Negatives:

1). slackness in demand seen across Consumer goods companies

2). Single brand.

3). New plant in Noida, not able to draw power from grid as yet, huge load to operating cost.

4). Have to see how the company does in East zone.

Positives:

1). Advertising has already been spent in cartoons (national channels). Distribution in south & East is not there, once we distribute, the mkt/ad spend has already been done…so only rev realizaitn will happen…AD efficiencies are increasing as the distribution is going up every day…

2.sanity in managements thinking- strategic advantange for small companies that are 1/10th of kurkure - we cater to Niche makret , cannot take on huge companies

3). Company does not give credit to distribution system.

4). pricing power : Company has been able to do a price increase without impact to sales.

5). Crax Mkt share in NZ - 2-3% , so untapped mkt is huge.

6). Capex has gone from 600kilos an hour to 1600kgs per hours…so an increase of 150%. at peak operation/utilization, this 1600kgs/hour will ranslate to a topline of 325 crores…factoring in the seasonality of the biz. So a topline going for 170 - 325 in 2 years is a 40% growth…

7). Company does not plan for any Equity Dilution.

8). debt/equity - has come down from 1.41 - 1.24 dude to small pay of longterm debt to the xtent of 2-7 crores…Networth has gone up.

Future plans

1). Sales team in place to expand into Bihar & Bengal - 2 regions in Q3

2). Crax pan India brand by 2014

3). Key task for Management for rest of year - Expand Natkat distribution

4). Capex of 70Crores…Revenue realziation of over 300 crores

Some inferences about Management:

1). Management is well aware of how to deal with the competition. There is a saying in the book ‘Art of War’ If the opposition is strong you evade, if inferior fight. Since the opposition to DFM is strong, it is evading it by going into niche markets and segments.

2). Management does not want to enter all markets at once and create a capacity constraints.see below words of the management.

RUles of business is that : Managing success is more difficult than managing failure. IF u fail,you fail, there is nothing to be done about it. But in being toosuccessful you do not want to trip up. So we don’t want to create a situation where we expand into south, into the east,into the west and we run up against a capacityconstraint.

2006-07 AR…

1). Efforts made : A weightmetric package system was commisioned

Benefits.: Lower costs & higher weight accuracy of the finished products.

2007-08 AR…

)-------

1.Based on expert legal advice, some of the products manufactured by the Company were reclassified under theCentral Excise Tariff Act, such that with effect from 1st December, 2007, they attract nil rate of duty. Consequentlyno excise duty is being paid since then. The department has rejected the re-classification. An appeal has been filedwhich is pending adjudication.

2). Further, based on legal opinion, the company has stopped paying mandi fees on purchases of agricultural producefrom outside Uttar Pradesh and used in the manufacture of our products. The payment was stopped with effect fromJanuary, 2007 and our representation in the matter is pending adjudication by the Mandi Samiti, Ghaziabad.


(Arjun Chandrappa) #28

Donald,

The formatting of the above post looks pretty bad,I copy pasted from a notepad.

Thought I would get a preview before posting. Please let me know how to reformat.

Thanks.


(Donald Francis) #29

Hi Arjun,

Thanks a lot. This is informative.

The attractiveness of this investment prospect depends a lot on Valuations.

We need a focus on Valuations - is this fairly priced, or richly priced at the moment. Without having done any study myself/or developing any feel, I would say the answer depends on how next 12-24 months pan out. And essentially that would perhaps boil down to how the distribution efforts play out in generating incremental sales.

Can you project sales for next 12-24 months? With how much confidence?

Are the distribution costs high, too high. How do they compare with other smaller players. form When will these costs normalise.

These are some of the answers I would like to get answered.

(Apologise - all comments are without any benefit of having read ARs/Conf call transcripts/other stuff). Appreciate your highlighting learnings/inferences form 2007 and 2008 ARs. Please highlight yopur inferences from the recent ARs too

Thanks a lot Arjun. You are doing a great job in bringing everyone on the same page.

-Donald


(JatinK) #30

Ate a newly launched Corn flavour from Kurkure… Nd found it good…

Can this act as a direct competitor to Crax??

Price point also same at 10/-


(Rakesh) #31

i dont liked this company.


(Deepak Swamy) #32

Q3/Fy-13 Results out…

Total Income up 27.7% to 56.54 Cr from 44.28 Cr.
Thats it!
EBIDTA DOWN 10.6% to 4.54 Cr from 4.08 Cr.
Net Profit more than halved to 1.09 Cr from 2.82 Cr.

EBIDTA margin is 8% v/s 9.9% (SQ-12) and 11.5% (DQ-11)
NET Profit margin is 1.9% v/s 3.6% (SQ-12) and 6.4% (DQ-11)

Total Raw material costs as a %ge to Income is 63.7% v/s 62.5% (SQ-12) and 64.1% (DQ-11)
Employee costs to Income is 7.9% v/s 7.8% (SQ-12) and 6.4% (DQ-11)
Other expenses to Income is 20.3% v/s 19.9% (SQ-12) and 18% (DQ-11)

Financial costs to EBIT is 68.4% v/s 48.5% (SQ-12) and 27.7% (DQ-11)
Tax Rate 32.7% v/s 32.4% (SQ-12) and 30.5% (DQ-11)

Employee costs and other expenses increased more than sales affecting EBIDTA.
Thereafter,
Almost 80% increase in Depreciation, 35% fall in other income, and
Almost 90% rise in financial costs which, as can be seen above, eaten almost 70% of Operating profits.

9M/Fy-13 v/s 9M/Fy-12:
Total Income up 44.6% to 168.37 Cr from 116.44 Cr (Fy/11-12: 169.42 Cr)
EBIDTA up 12.9% to 16.18 Cr from 14.33 Cr (Fy/11-12: 20 Cr)
Net Profit DOWN 39.7% to 5.25 Cr from 8.71 Cr (Fy/11-12: 10.36 Cr)

Reported 9-month EPS 5.25 v/s 8.71 (Fy/11-12: 10.36)

On 01/02/2013, stock on BSE Closed at Rs. 225/- Up 4.7%
(Results declared after market hours)


(Safir Anand) #33

Over exaggerated company with nothing worthwhile to claim at current valuations


(JatinK) #34

When is the Concall? Kindly share the number also…


(Rajiv Subramanian) #35

The current quarter earnings are certainly a surprise. However, is this because of competition in the market or just a temporary softening in demand? The entire investment thesis for this stock hinges on this question.


(jagadeeshwar reddy) #36

Canthis company be a good Acquisition target for bigger players?Promoters also facing capital crunch for expansion.


(Jatin Khemani) #37

Have shared my thoughts on this company here:

http://jatinkhemani.wordpress.com/2013/11/18/cracks-in-taking-crax-pan-india/

I am meeting the Mgt day after (26th Dec), if you have specific questions kindly let me know @ [email protected]

Cheers!


(Mahesh Shah) #38

Attaching scribd link to my research note on DFM Foods Ltd.

http://www.scribd.com/doc/206360873/

Reproducingin this and next postings, important sections from said research note for members’ quick reference :

Company Overview :

  • DFM Foods Ltd. [ BSE Code a 519588 ] is operating in one of the fastest growing FMCG segment viz., Packaged Snack Food segment and is competing with brands like Kurkure, Lay’s, Yellow Diamond, etc…

  • Company is a pioneer in introducing branded (packaged) extruded snacks with the brand name ‘CRAX’ in 1984 which even today enjoys ~8 % marketshare in North India.

  • Despite stiff competition, company has grown its sales (by value) at 10 Years’ CAGR of 27.20 % and at 5 Years’ CAGR of 48.08 %.

  • Volume growth has been equally impressive with 10 Years’ CAGR in sales by volume at 16.65 % and 5 Years’ CAGR in sales by volume at 32.49 %.

  • Company increased its manufacturing capacity by ~167 % in FY12 (precisely in November 2011) and within 3 years, it is sitting on verge of approaching 100 % utilisation in its old & new capacities combined which speaks highly of acceptance of company’s products in the marketplace.

  • Westbridge Capital, one of the largest and most successful public markets fund, has recently, on 30th January 2014, taken a significant 24.90 % equity stake in the company, at INR 259.10 per share, which augurs very well for future scalability and profitable growth of the company.

  • Company is working on a three pronged growth strategy of –

)–diversifying geographical sales presence,

)–diversifying geographical manufacturing presence, &

)–diversifying product offerings via new launches.

  • Management has been proactive in its IR initiatives by regular hosting of concalls and publishing of detailed presentations/press releases after every quarterly result. Senior management is professional with decades of experience in the business.

  • Despite all positives as also underowned equity structure with low floating stock, company is trading at reasonable :

1.22x Mcap/Sales TTM, 1.01x Mcap/Sales Forward, 1.45x EV/Sales TTM, 1.26x EV/Sales Forward

which leaves considerable scope for wealth creation once concrete future growth strategies are announced by the management in the medium term.


(Mahesh Shah) #39

(3) Exceptional growth attained by the company over last 10 years in its branded snacks food business. Growth is volume-led rather than pricing-led which augurs very well for the future of the company.

(fig. In ` cr)

9MFY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

Sales by Value

200.11

225.24

169.42

119.84

72.18

53.33

31.66

23.88

18.44

20.51

20.76

Volume

( in MT )

NA

11853

9328

6590

4504

3611

2903

2407

2178

2466

2563

Value Growth

18.85 %

32.94 %

41.37 %

66.02 %

35.34 %

68.44 %

32.57 %

29.50 %

(10.51) %

(1.20) %

2.16 %

Volume Growth

NA

27.06 %

41.54 %

46.31 %

24.72 %

24.38 %

20.60 %

10.51 %

(11.67) %

(3.78) %

0.90 %

(4) Company's flagship brand CRAX Corn Rings is the major contributor to the growth and the growth has been so well that it has not allowed the company to focus on any other product as entire production capacity needed to be channelised to manufacture this product. In current FY14, management has initiated derisking exercise which also seems to be giving somewhat fruitful results so far. However, its too early to talk about success of other product with conviction.

( fig. In ` cr. )

9MFY14

FY13

FY12

Crax Corn Rings

160

189

142

Namkeen

22

31

25

Natkhat

11

5

2

Krunchoids

( launched in Q2FY14 )

6.5

(5) Company was predominantly a North Indian company selling 100 % of its produce in only that geography till FY11. From FY12 it started divsersifying into other geographies starting from Western India in FY12-end to Eastern India in FY13-end. Considering the fact that its only two full years of company selling its products in West and one full year of company selling its products in East, the progress seems more than satisfactory. Channel checks, particularly in East India, suggest good pick-up in company's products in the region.

10 Years' Geographical Sales Breakup

( in ` cr. )

9MFY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

North

166

191

160

119

72

53

31

23

18

20

20

West

19

28

9

-

-

-

-

-

-

-

-

-

East

15

6

-

-

-

-

-

-

-

-

-

(6) Profitability seems to be a bit under pressure over last two fiscals mainly because of three reasons :

(a) Company aggressively marketing its products in order to facilitate strong sales in West & East where it diversified recently.

(b) Since company's manufacturing plants are located in North India, it results in increased freight costs for sales into West & East India which pressures EBITDA to an extent.

(c) For increasing its capacity by 167 %, company undertook debt-funded CAPEX because of which interest burden has increased thereby putting pressure on Net Profitability.

Given below is an overview of Sales, PBT, Interest costs as well as Gross Debt, Gross Block and Operating Cash Flows of the company over the period of last 10 years.

( fig. In ` cr. )

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

Sales

225.24

169.42

119.84

72.18

53.33

31.66

23.88

18.44

20.51

20.76

PBT

10.04

15.92

12.71

6.34

7.49

2.08

0.16

0.85

1.64

0.09

Interest Expense

9.42

4.47

2.00

1.32

2.27

2.03

0.93

0.65

0.62

1.09

OCF

19.87

17.48

14.09

15.94

14.66

(13.85)

0.98

0.40

3.17

(1.16)

Gross Block

105.08

89.71

36.46

25.85

11.16

9.21

7.88

7.47

7.24

7.47

Gross Debt

60.90

57.73

15.79

15.97

9.83

26.08

4.02

4.15

4.10

6.66


(Mahesh Shah) #40

(7) Company should run out of existing capacities by FY15, so, going forward, the growth strategy of the management could be either or all of the following four :

(a) To serve the growing regions of West & East India out of its existing Noida plant (in North India) where company has built enough common infrastructure to accomodate additional ~65 % capacity over and above existing capacities (old & new combined) with minimal time and monetary investment. However, while doing this, company will have to incur high freight costs required to transport produce from North to West & East India. Hence, since North India is also a growing region for DFM, it will be in the best interest of the company to keep such additional capacities to serve the Northern region itself in the long run while for a short while, till alternate facilities are built, West & East can easily get served by the Northern plant.

(b) To set-up a greenfield facility at a location which is best suited to serve West & East regions combined.

(c) To set-up a greenfield facility in South India to cater to the market there as company is actively considering entering Southern region which is a high growth region for extruded snacks segment.

(d) To buy out any existing manufacturing facility in any of the above stated regions and upgrade it to match company's quality standards so that considerable time can be saved which is otherwise required to set-up a greenfield facility.

With Westbridge as its key partner in guiding out future growth strategies, focus should surely be on charting out profitable aggressive growth as funding the growth should now not be a problem for the company.

(8) If we extrapolate the said strategies into numbers, company should easily be able to achieve following financials over coming two years. We have tried to remain as conservative as possible in order to be on a safer side.

( fig. in ` cr. )

FY14e

FY15e

FY16e

Sales

265

318

410

EBITDA

26

30

43

PAT

7.50

9.5

16.9