DFM foods - poor man's FMCG play

Mahesh · February 11, 2014, 9:12am

Views are invited from members on this promising company…

Rgds.

Discl.- Accumulating

jk321 · February 11, 2014, 5:23pm

Positives you already know Mahesh…

Negatives-

High (rather very high) PE.
Company target class is age group 6-12. They don’t have deep pockets to buy. So, company’s pricing power won’t be too strong.
Competition… Corn flavor has already been launched by Kurkure.

Mahesh · February 24, 2014, 7:10am

Co. launches Crax Holi packs with Holi gifts for kids…commercial already posted on youtube to be aired from current week…sound strategy ; co. seems to be moving on right track.

Rgds.

srinii_mm · February 24, 2014, 10:52am

Mahesh,

I have a query regarding ICD(Inter Corporate Deposit) given to Delhi Floor Mills company. Since details are not available in ar 2011-12 or ar 2012-13, let me know if you know about it.

Actually ICD oustanding on Mar 31 2011, is 5.5 crores

On Mar 31 2012( ICD due for current year 2011-12 is 13.25 crores). So Ideally March 2012 ICD due should be 13.25(current year) + 5.5(March 2011 due) = 18.75 crores, but ar 2011-12, says ICD due is only 13.25 crore, so 5.5 crore due is left out. Did Delhi Floor mills spent that ICD given and not returned to DFM and so unaccounted, or any other reason ?

So query is if 5.5 crores is spent by parent co, Delhi Floor mills for any business development purpose of DFM ? Thanks

Mahesh · February 24, 2014, 1:58pm

Hi Srinivasan,

When you want to look at any particular date’s, for ex., FY13 ICD figure, you have to look at outstanding figure given in related party transactions…during the year there are many repayments and giving of funds amongst two cos…I have already provided table rgdg. Outstanding ICD amounts in my posting before in this thread…as at 9m FY14 the figure is 31 cr…

Rgdg. Your query asto whether the ICD is used for Dfm Foods…NO…Delhi flour mills was and is In requirement of funds for relocating flour milling project to noida whose project cost is 170 cr…banks are likely to fund 120 cr. and another 50 odd cr. is likely to come from promoters for which this ICD was part…now, since promoters have already raised 64 cr. from westbridge stake sale, the entire ICD will be repaid and promoters will fund the project of Delhi flour mills in their personal capacity…

Feel free to get back to me in case of any further query.

Rgds.

srinii_mm · February 24, 2014, 2:21pm

Ok…SO I would assume, 5.5 crore ICD was also utilized for plant expansion purposes of Delhi Flour Mills. I was able to tally ICD placed by DFM for all previous years, but only for 2011-12 I was not able to tally. Even if there are multiple part payments of ICD during a year, the year end accounts should tally with what is given, what is repaid, and what is due, in related party transactions. This was ok for all previous years(2006-07-08-09-10-11), except for 2011-12. Even 2012-13 tallied ok. Looks like parent co is increasing manufacturing capacity and raising funds whatever way possible. As always problem with small companies, disclosure levels can improve a lot more. A small note at the end of related transactions, would help investors understand better.
- Can you also throw light, what is their strategy for improving business in Nameen areas. I feel the market is bigger than Crax here, as target folk are in all age groups. Why the co is not scaling this area more. Is it because the margins are less here ?
- Also in Wheat puff nathkhat, are they going to introduce more price points apart from Rs.2/- pack. Say Rs.5 or 10 packs ?

Thanks.

Mahesh · February 25, 2014, 3:38am

Yes Srinivasan you are right, disclosures have a lot of scope for improvement and this should happen from next year onwards because of the presence of a good pe player in it…

I don’t think increasing focus on namkeens before fully saturating other main brands demand will be prudent strategy as margins are thin, price points are higher and competitive intensity is higher as also specialisation is lacking…namkeen is more of me-too product than like corn rings which is even today considered a unique product.

Rgdg. Natkhat, management has said it is testing the possibility of launching it at higher price points in markets other than north but for north, I don’t think it will move for a higher price point than rs. 2 as its only from current FY that co. has started focussing more on this brand as a selling strategy in remote areas of north…also, since 1Hfy15 will see co. reaching almost 95 % capacity utilisation, I doubt natkhat will receive proper attention as crax is taking up most of the capacities because of its visible growth…in case krunchoids fares well, it will be prudent on management’s part to focus more on it rather than natkhat…

Just to elaborate slightly, retailer checks in remote areas suggest that rs. 2 price point could be a great selling portfolio as majority of the consumers are impulsive buyers and in current inflationary environment, this is the best price point for driving sales…but for achieving that co. will first have to ramp up its manufacturing presence, have distributors in each region in place and then move on to aggressively go for natkhat sales…I don’t see that happening in medium term.

Feel free to get back to me in case of any further query.

Rgds.

Mahesh · March 19, 2014, 7:52am

Private equity investor Lighthouse to buy 25% in Bikaji Foods

BySneha Shah, ET Bureau | 19 Mar, 2014, 06.44AM IST

MUMBAI: Global private equity investor Lighthouse Funds will purchase a 25% stake in snacks maker Bikaji Foods International for Rs 120 crore, said two people with direct knowledge of the development.

The Rajasthan-based snack maker will use the funds to expand its manufacturing and distribution to markets outside North India and to enter the fastest growing ready-toeat food market. “Lighthouse Funds has signed the agreement to invest in the company. The investment will be adeferred one,” said an investment banker with knowledge of the development.

ET was the first to report the company’s plans to raise capital on November 27. Unlisted Bikaji Foods makes snacks like bhujia, papad, namkeens and sweets, and exports a few of these products, besides running quick-service restaurants in Mumbai under the Bikaji Food Junxon brand.

Lighthouse Funds’ partner Sachin Bhartiya declined comment, while Bikaji Foods managing director Deepak Kumar could not be reached for comments despite repeated attempts.

In 2013, Indian Credit Rating Agency or ICRA, had considered Bikaji’s strong brand and established distribution network for its rating. “Financial health of the company also remains comfortable, as reflected in the relatively low gearing of the company, low working capital intensity of operations and healthy debt protection indicators,” ICRABSE 0.41 % said. It, however, raised concerns on the fragmented and unorganised market in whichlocal companies compete with brands like Bikaji and the pressure on the company’s gearing ratio, as it chose to expand through debt.

Lighthouse Funds provides early and growth stage investments to mid-market companies. Through its 2008 vintage fund, it invests in healthcare, education, rural consumption and agribusiness companies.

The PE fund is in the process of raising its second fund, India 2020 Fund II, of around $150 million, with firm commitments of over $75 millionfrom investors or Limited Partners in industry parlance.

Mahesh · March 21, 2014, 3:55am

CIPEF may buy 15% in BalajiâWafers

Stake sale talks are in an advanced stage and the transaction may be closed within a month, says company official

FIRST PUBLISHED: FRI, MAR 21 2014. 12 26 AM IST

Mumbai: Balaji Wafers Pvt. Ltd is in advanced talks with Capital International Private Equity Funds (CIPEF) to sell nearly 15% in the snacks maker according to two people familiar with the development, who did not want to be named. One of them is directly involved with the transaction.

âIt is the decision of the next generation and since they have to run the business in future I have left the decision (of stake dilution) to them,â said Chandubhai Virani, managing director and founder, Balaji Wafers. Virani confirmed that talks were at an advanced stage with CIPEF. âWe are looking at closing the deal with Capital International in a monthâs time. We are looking at diluting close to 15% stake at a valuation of about Rs.4,000 crore for the company,â said a top official of Balaji Wafers who asked not to be named because of a non-disclosure agreement with the PE fund.

Emails sent to the media relations team as well as to a US-based spokesperson of CIPEF on Wednesday did not elicit any response. A singapore official of the firm on Wednesday also declined to comment.

In December, Mint reported that investment firms Actis Capital and CIPEF were the frontrunners to buy the stake in Balaji Wafers and that EY was advising the seller on the transaction.

âApart from the money that will be used for setting up new plants, Capital International will also bring their rich global experience to our management. We have seen in the past how other homegrown companies like Paras Pharma have turned around and grown with the help of PE firms,â said the Balaji Wafers official cited above.

In 2006, Actis acquired a minority stake in Paras Pharmaceuticals Ltd; by 2008, it held 63% in the company. In 2010, Reckitt Benckiser Group Plc agreed to buy Paras Pharmaceuticals for about Rs.3,260 crore, acquiring Actisâs shareholding. Actis made more than a threefold gain on its 2006 investment in Paras, Bloomberg reported in December 2010.

Balaji Wafers, with revenues of about Rs.1,000 crore in 2013-14, initiated talks with PE and strategic investors last year to raise capital. Founded in 1976, Balaji Wafers is one of the countryâs largest makers of potato chips. The regional brand has a presence in states such as Gujarat, Madhya Pradesh, Rajasthan, Maharashtra and Goa. The company claims it has a 60-65% share in the wafers and snack market in Western India, and is eyeing entry into the Northern and Southern markets.

The stake sale is in line with the companyâs plan to generate sales of Rs.1,500 crore by 2015, Keyur Virani, director of Balaji Wafers, told Mint in July.

Investors canât get enough of the food business in India. In February, Mint reported that three private equity firms, Kedaara Capital, TA Associates and Carlyle, were separately in talks for a substantial stake in the bakery business of Cremica Group, a Ludhiana-based company.

Last month, Singapore based agri-commodity firm Wilmar International picked up 27.5% stake in the first phase of a larger deal in Shree Renuka Sugars for Rs.517 crore. In January, WestBridge Capital Partners bought nearly 25% stake in DFM Foods, which makes salted snacks under the Crax brand, from its promoters for over $10 million (around Rs.60 crore). The same month, DSG Consumer Partners invested Rs.10 crore to buy an undisclosed stake in Vadodara-based freeze dried agricultural products company Saraf Foods Ltd. In January, Europeâs biggest dairy company Groupe Lactalis SA agreed to acquire a controlling stake in Tirumala Milk Products Pvt. Ltd for $250 million to $300 million.

Private equity and strategic investors have always been keen on these firms, said Siddharth Bafna, partner and head of the corporate finance and transaction services practice at Lodha and Co. Processed foods is a well-accepted growth story and the demand for such products is expected to only go up in the future, he added

âIndians consume a very small percentage of processed food as compared to the rest of the world. With an increase in nuclear families and working women, longer work hours and a younger population, consumption of these products will only go up,â Bafna said. âThere have just not been enough investment opportunities available as successful processed or packaged food brands have very healthy cash flows and the need for capital is typically limited.â

manish962 · March 21, 2014, 5:22am

âIt them,â âWe monthâs company,â

** Mahesh, what is the source of this information? Has anyone directly spoke to Chandubhai Virani? As far as I know, they were in investors in Dec but the things didn’t got materialise then.

**

ankitgupta · March 21, 2014, 5:56am

Manish Bhai,

There was an article in today’s Mint about the whole deal… Balaji selling its stake to PE (CIPEF)

talks with PE

manish962 · March 21, 2014, 5:59am

Ok. Thanks Ankit.

Mahesh · March 21, 2014, 6:33am

Hi Manish,

Ankit has already mentioned the source ;

As per investment banking sources, Balajiwas in talks for stake sale since last July-August 2013, first, feelers were sent to MNC peers, but talks didn’t materialse on two counts – they wanted larger controlling stake and they were unwilling to pay hefty valuations which promoters were demanding for a minority stake – on failure of such talks, PE investors came into picture and talks seem to have reached final stages.

One thing you need to remember that, Balaji Wafers, is the strongest snack food player in India if you consider their operating matrix – they operate at highest EBITDA and PAT margins in the industry and that too inspite of them being largelyregional player instad of Pan-India player. If you consider just last 4 years’ average EBITDA then its 18.55 % which is highest in the industry. Such EBITDA margins have come with more than doubling of scale from just 387 cr. in FY10 to 913 cr. in FY13. This is a great company in which every PE investor would love to invest in with just 69 cr. gross debt against 159 cr. held as cash & FDs as at FY13 and strongest distribution network in western India, particularly Gujarat. I am not surprised in senior promoter Mr. Chandubhai Virani leaving stake dilution decision to his next generation as there is no financial need for this company to dilute any sort of stake.

As reported in the article of more than 4 times TTM (FY13) EV/Sales valuation seems reasonable for this company.

Rgds.

manish962 · March 21, 2014, 7:00am

Mahesh, yes Balaji is a great company. I know the way they have grown this company. The distribution network is one of the strongest. In fact their distribution network is worth a case study for the management students.

RahulChauhan · March 21, 2014, 8:49am

Mahesh,

Do you mean to suggest that DFM owners will also sell out? Is it a buy at this level? P/E is very high. I want to buy such brands business. Please suggest what are the risks of buying now.

Mahesh · March 22, 2014, 6:09am

Hi Rahul,

DFM promoters are unlikely to sell out in near future as otherwise there was no logic of inviting a PE investor.....to offer a significant 25 % equity stake to a strong PE investor suggests the will of the promoters to build the company and scale the business more efficiently....

Rgdg. Your second query asto is it a buy at current level, look, investment is a personal decision as everyone is deploying his/her hard earned money, so for that, everyone needs to work hard, spend some time on researching the stock, industry, assess it from every angle and then build conviction and take the call.....any investment decision should not be based on anyone's advice....I can talk of me but you don't have to follow me as what appeals to me might not appeal to you or anyone else......

based on my analysis, I am still accumulating DFM Foods as because of its illiquid nature, required quantity and exposure is still not made to the company.....

Rgdg. High P/E, yes P/E on TTM as well as FY14e is quite high but I will value this business more on EV/Sales as the company is in an expansion mode in almost zero working capital consuming business...on that count it looks reasonable if not cheap to me......this I am saying based on analysis of entire Indian Savoury Snacks segment that I have done since last two months.....there are not many organised players available in this segment and the segment is growing pretty handsomely.....what I can look at is because of the low price points involved of Rs. 5 and Rs. 10 and in some cases even Rs. 2, the entire rural sector is still least penetrated and I see no problem in topline growth of major players at least for next 3-5 years....shift from unorganised to organised segment is also happening gradually and that is an additional opportunity in front of all players.....although there are not much entry barriers in this segment as far manufacturing is concerned but to build a credible brand takes many years.....one caution here is that analysis suggest that brand loyality is absent in this segment although brand preference is present.......entire 125+ cr. population is served by only 8 major organised players (including DFM) and that itself suggests the opportunity ahead despite rising competition.....

If I give a brief overview of the industry here, Indian Snacks segment can be broadly classified into two segments viz.,

Traditional Snacks like Namkeen, bhujia, etc. &

Western Snacks like Chips &Extruded Snacks.

Haldirams (all family fractions geographies combined as a brand) is the market leader in Traditional Snacks segment with other major players being Balaji, Bikaji andBikanervala.

In Western Snacks segment, Pepsico is the market leader with other major players being ITC, Balaji, Prataap Snacks, DFM Foods, Parle Products & Parle Agro.

If we go further down western snacks segment then we find that Chips (like Lay's) constitue major portion of that segment and has grown exceptionally well since last 5 years at a CAGR of more than 30 %. Extruded Snacks (like kurkure, Crax Rings, Puffs) is the second largest and fastest growing segment which has grown at a CAGR of more than 24 % over last 5 years. If we go by industry growth projections then from now on, over next 5 years, Extruded Snacks segment growth is projected to outpace Chips segment growth.

In Extruded Snacks segment, major players are Pepsico, ITC, Prataap Snacks, DFM Foods & Parle (Products & Agro). If we talk in relation to DFM, then :

(1) DFM Foods over last many years sustained and outpaced competition by adopting a sound strategy of targeting a specific age group and concentrating on marketing & distribution strategies circling around only that age group. Entire competiton's products were targeted to all age groups (with majorly being adults above 15 years of age) while DFM targeted children with age group 6-12 years.

(2) DFM was the first company to include 'Free Gift' with every CRAX Corn Rings pack of Rs. 5 and this isolation (i.e., catering to only specific audience) strategy enabled it to distinguish itself from competition as also sustain and grow amidst strong financial power of Pepsico & ITC.

(3) Since last year or so (2013) competiton has become intense with Pepsico intorducing similar (to CRAX) product 'Corn Cups' targeted at children and Yellow Diamond (Prataap Snacks) introducing 'Rings' â a replica of CRAX Corn Rings.

(4) If we talk specifically for CRAX Corn Rings (which contributes 75 % + to DFM's revenues), then, Pepsico's 'Corn Cups' price point is higher whereas the player which could threaten the market position of CRAX in real sense is Prataap Sancks and as per our analysis, it is this player which DFM will find it hard to compete with.

(5) Prataap Snacks is taking on DFM Foods in-and-out by striking on every corner. It has introduced almost identical shaped product which is a replica of Crax Corn Rings and has offered it in almost every flavour in which CRAX is available (except Pudina & Chatpata).

(6) In addition to offering similar product with similar flavours, what Prataap has done is it has targeted the same age group with same strategy of including 'Free Gift' with every pack. Prataap has got associated with one of the most popular children tv show 'Chota Bheem' and has introduced free gifts revolved around the main chracter of the show in its every YD Rings pack.

(7) On Distribution front, DFM & Prataap are almost neck-to-neck if we consider regionwise-spread, but, if we go into detail and talk specific, then distribtion reach of Prataap is almost double that of DFM. However, each company has its strength and weaknesses in each region, with DFM far stronger in North India while Prataap a clear leader in West India. Visibility and availability of Prataap's Yellow Diamond is far better in West India (relative to CRAX) while in North India DFM's CRAX is slightly ahead than Prataap.

What Prataap has done is, in whichever areas it is present, it has covered as many retail outlets as possible which gives it great visibility (only second to Lay's & Kurkure) in respective areas. In contrast, DFM has focussed on covering more areas which gives it relatively low visibility relative to Prataap, especially in Western India.

(8) To give a brief background of Prataap Snacks, it is a company backed by PE player Sequoia Capital which invested in it in 2011 and has so far invested ~180 cr. in the company. As per sources, it holds ~51 % equity stake in the entity as at FY13. It is worthwhile to note here the growth attained by Prataap over last seven years :

( fig. In ` cr. )	FY13	FY12	FY11	FY10	FY09	FY08	FY07

Prataap	343.80	257.69	189.57	154.47	100.20	66.60	35.50
DFM Foods	225.24	169.42	119.84	72.18	53.33	31.66	23.88

Sequoia invested in the company in May'2011

Three things to note here is that :

first, DFM started focussing aggressively on its Snack Food segment only from FY09,
second, Prataap aggressively introduced Rings in the market only from FY13 as previously its main focus was competing with Lay's, kurkure & Cheetos (by introducing YD Chips, Chulbule & Puffs),
third, as at FY13, Extruded Snacks segment contributes 199 cr. to Prataap's Revenues as against 194 cr. to DFM's Revenues.

(9) Another interesting aspect to note here is that, it is the same person, Mr. Sandeep Singhal, who was instrumental in guiding Westbridge Capital's investment into DFM Foods in January'2014, was also one of the key person who led Sequoia's investment into Prataap Snacks (then Prakash Snacks) in 2011 before leaving Sequoia in the same year to form Westbridge Capital.

(10) To sum-up, Snack Foods Industry in itself is likely to grow handsomely at a CAGR of 12 % + by 2018 as also shift towards organised from ungrganised segment is projected to continue, albeit at a gradual pace. These two things combined, offers immense opportunity for each of the organised players in the segment to grow aggressively as they have done in the past. However, competition is likely to intensify going forward as more of the organised business groups enter into this space to grab their share of opportunity as also existing players make a dent in peers' stronghold by offering similar products with superior distribution and marketing reach.

(11) If we look at last four years, then DFM has outperformed almost all its peers, including Prataap Snacks as far as revenue growth is concerned (Prataap 4 Yrs. Revenue CAGR = 36.10 % against DFM = 43.35 %).

(12) DFM Foods is unlikely to face strong threat in the medium term as far revenue growth is concerned, provided it can expand manufacturing capacities intime. However, EBITDA margins could remain under pressure untill a new product success is met on the lines of CRAX Corn Rings. This is because, all the efforts towards any sort of significant improvement in EBITDA margins will be met by cut-throat competition, especially from Prataap Snacks (YD Rings) which will put-in its every effort to fully utilise its Rings manufacturing plant which commenced operations in 2013. DFM Foods definetly has a first mover advantage in the space and has a strong brand credibility amongst its target audience (majorly in North India). However, to counter Prataap's aggressive low margin model, DFM will need to innovate more on the product front and fill the many gaps prevalent in its distribution network as also design a wise consumer-pulling marketing strategy.

With Westbridge's entry into DFM by acquiring 24.90 % equity stake in it and Mr. Sandeep Singhal joining the board and promising an active involvement into formulating company's growth strategies, DFM might be able to identify gaps more proactively and fill them with ease.

Will cover your possible risks query in my next post.

Feel free to get back to me in case of any query.