DFM foods - poor man's FMCG play


(Mahesh Shah) #41

Concerns :

(1) Inter Corporate Deposit (ICD) given to parent The Delhi Flour Mills Co. Ltd.

9MFY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

I. C. D.

( in ` cr. )

31

19

13.25

5.50

3.60

5.50

13.30

6.95

7.40

6.90

2.50

Here, it is also worthwhile to note the financial performance of The Delhi Flour Mills Co. Ltd. over last 10 years as also its Gross Debt and Equity over same period :

Delhi Flour Mills Financials

( in ` cr. )

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

Sales

276.63

233.99

250.82

244.88

223.12

220.16

172.72

133.91

121.05

99.90

EBITDA

16.18

15.19

11.02

7.68

9.31

8.13

3.50

2.75

2.18

2.16

PAT

3.10

2.92

3.38

1.93

0.19

0.37

0.35

0.31

0.15

0.21

Equity

0.43

0.43

0.43

0.43

0.43

0.43

0.43

0.43

0.43

0.43

Debt

119.80

61.09

35.96

30.96

46.48

40.14

16.11

15.09

10.08

11.67

Over last two fiscals i.e. FY12 & FY13, the parent company is relocating its flour milling operations to Plot No. 86-B,C,D,E, Sector Ecotech-I, Extension-I, Greater Noida (U.P.) from current location 8377-8381, Roshanara Road, Delhi. Plant & Machinery are imported from Ocrim SPA during FY13 which were already received and civil constuction was going on at the site. Total Project cost was estimated at INR 172 cr. out of which INR 64.73 cr. were spent till FY13. Commercial Production at the said new facility is expected to commence from September 2014 as per company estimates.

To Fund this project, management had approached its Bankers for an additional project finance of INR 58 cr. over and above INR 67.15 cr. project finance tied up in FY12. In addition, company was looking at raising funds via equity route which should be to the tune of ~INR 46 cr..

Now, before discussing any further let's go to our Concern No. 2 and then check whether both concerns stand addressed as on date.

(2) DFM Foods Ltd. promoters sold their personal stake in the company to the tune of 24.90 % at INR 259.10 per share to Westbridge Capital on 30th January 2014 and raised INR 64.52 cr. in their personal capacity of which no funds came to the company's books.

Here, three things need to be noted :

(a) In the concall hosted by the management after declaration of Q3FY14 results which also coincided with the event of said promoters stake sale, management assured that out of the INR 64.52 cr. raised, 31 cr. will come to DFM Foods books via repayment of ICD given to the parent.

(b) Since parent promoter co., The Delhi Flour Mills Co. Ltd. was already in the requirement of funds in order to finance its project (as discussed above in Concern No. 1), the additional 33 cr. which were raised by the said promoter stake sale seem perfectly fine and exactly matches with the funds requirement as discussed in Concern_1.

(c) Significant investment by a renowned PE Player like Westbridge taking maximum permissible ( w/o triggering open offer ) equity stake of 24.90 % and the fact that one of its founding members, Mr. Sandeep Singhal, has also joined company's board augurs very well for the future of the company and puts to rest both Cocern_1 & Concern_2.

(3) Company operates in a very competitive environment and that too at low price points of Rs. 5 and Rs. 10 per pack. Competitors are biggies like Pepsi, ITC, Parle and the new entrant GCL (Gopal Corporation) as also strong mid-size players like Balaji and Prakash Snacks; forget here numerous regional players which operate at small scale.

Here, two things need to be noted :

(a) Company has carved out a niche for itself in 6-10 years age bracket and concentrates its marketing activities on said genre. Its âgift with every packâ strategy is one of its kind amogst competition and has enabled it to sustain as well as grow handsomely against competition.

(b) Company increased its capacity by 167 % in FY12 (precisely in November 2011) and old plus new capacity should get to 100 % utilisation well before FY15-end which means in just 3 years timeframe, entire increased capacity got absorbed by the market which speaks highly of acceptance of company's products in the marketplace. If we look at volume growth attained by the company over last 5 years, the picture gets more clearer :

FY13

FY12

FY11

FY10

FY09

Sales by Value

( in ` cr. )

225.24

169.42

119.84

72.18

53.33

Sales by Volume

( in M.T. )

11853

9328

6590

4504

3611

Volume Growth

( YoY )

27.06 %

41.54 %

46.31 %

24.72 %

24.38 %

Key Monitorables :

(1) Repayment of ICD :

Management has assured the shareholders about repayment of INR 31 cr. ICD given to The Delhi Flour Mills Co. Ltd. out of the funds raised via promoters' stake sale to Westbridge Capital. We need to monitor whether the actual repayment happens during Q4FY14 or not.

(2) Increase in Manufacturing Capacity :

As discussed before, company should run out of existing capacities (old & new combined) in FY15 and so it will require to draw plans for capacity augmentation soon (before Q1FY15). Since the company has now expanded into West & East India as also it is actively looking for entering into Southern market, so, the roadmap towards increase in existing capacities will be key monitorable aspect asto where and how the company plans to increase its manufacturing presence.

(3) Sales Growth :

Company's sales growth, particularly in West & East India will be key monitorable to check whether the company's products are finding same level of acceptance as they have found in North India. Also, sales growth in North India will also need to be closely watched out for to ensure company doesn't loose out in its home market.

(4) Sales Mix :

Starting FY14, company has started to focus on 'Natkhat' brand which is at Rs. 2 price point as also has launched new product in the form of 'Kruchoids'. Going forward it will be interesting to see the sales mix as to whether other products gain sales momentum vis-a-vis company's flagship brand 'Crax' Corn Rings or not.

(5) Debt & Equity Dilution :

How the company manages CAPEX plans over next two years will be key aspect to monitor â whether it goes for entire debt funded CAPEX or dilutes equity to what extent or how it balances debt-equity structure to finance CAPEX.

(6) New Product Launches :

Company, in all likelihood, is going to go for aggressive new product launches starting FY15. Profile of products launched, its respective peer scenario as well as how well they get received in the marketplace will be key monitorable.


(Mahesh Shah) #42

Views are invited from members on this promising company…

Rgds.

Discl.- Accumulating


(JatinK) #43

Positives you already know Mahesh…

Negatives-

  1. High (rather very high) PE.
  2. 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.
  3. Competition… Corn flavor has already been launched by Kurkure.

(Mahesh Shah) #44

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.


(srinivasan) #45

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 Shah) #46

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.


(srinivasan) #47
  • 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 Shah) #48

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 Shah) #49

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 Shah) #50

CIPEF may buy 15% in BalajiâŠWafers

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


(Manish Vachhani) #51

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.

**


(Ankit Gupta) #52

Manish Bhai,

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

talks with PE


(Manish Vachhani) #53

Ok. Thanks Ankit.


(Mahesh Shah) #54

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.


(Manish Vachhani) #55

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.


(Rahul Chauhan) #56

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 Shah) #57

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.

Rgds.

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.

Rgds.


(Mahesh Shah) #58

Possible Risks :

(1) Not increasing capacities intime could very well threaten DFM’s strong position against competition.

(2) Entire Debt-funded CAPEX will be detrimental to long term interests of the company as company will need to incur ~200 cr. CAPEX over next 3 years to cover entire India and continue the growth it has exhibited in the past.

(3) Company will need to innovate on product front as also introduce new products in the stronghold of its peers. Any failure on that front could put pressure on finances.

(4) Distribution (except North India) is the weakest spot for DFM. It will need to plug-in this gap fast.

(5) Marketing will also need to be aggressive going forward and if its not supported by reasonable growth in scale could prove detrimental to company’s finances.

(6) ICD repayment is the key thing to monitor and it has to happen in this quarter.

(7) Any significant equity dilution could stretch the already high valuations further.

(8) More players trying to target DFM’s stronghold as Prataap has done could put a cap on strong growth – however, possibility of this thing happening is remote.

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

Rgds.


(Rahul Chauhan) #59

Thanks Mahesh for the detailed write up.


(Mahesh Shah) #60

Mentioned below is 3 Years' CAGR in Sales attained by 8 major Indian Organised Snack Food companies. Key thing to note here is that these eight companies constitute ~70 % of Indian Sweet & Savoury Snacks Market :



3 Years' CAGR in Sales



Pepsi

[ Snacks ]

19.93 %




Haldiram

[ All Geographies Combined ]

25.58 %




Balaji Wafers

33.15 %




ITC

N.A.




Bikaji Foods

28.39 %




Bikanervala

17.29 %




Prataap Snacks

30.56 %




DFM Foods

46.13 %




Also interesting to note here is the EBITDA & PAT Margins (4 years' Avg. & of FY13) of each company :





4 Years' Average

FY13




Pepsi

[ Snacks ]

EBIT Margin


PAT Margin



4.52 %


N.A.



2.93 %


N.A.




Haldiram

[ All Geographies Combined ]


EBIDTA Margin


PAT Margin



10.61 %


5.79 %



10.03 %


5.36 %




Balaji Wafers


EBITDA Margin


PAT Margin



18.55 %


12.07 %



19.45 %


12.41 %




ITC


EBITDA Margin


PAT Margin




N.A.


N.A.




N.A.


N.A.




Bikaji Foods


EBITDA Margin


PAT Margin



7.39 %


3.71 %



7.49 %


4.07 %




Bikanervala


EBITDA Margin


PAT Margin



8.33 %


4.02 %



8.53 %


4.26 %




Prataap Snacks


EBITDA Margin


PAT Margin



8.83 %


4.63 %



7.99 %


3.72 %




DFM Foods


EBITDA Margin


PAT Margin



11.94 %


5.42 %



10.58 %


2.80 %


Key things to note from above :


DFM Foods has registered highest 3 Years' CAGR in Sales over FY10-FY13. It has outperformed all the peers quite handsomely.


EBITDA margins of DFM are at par with Haldiram & just second best to Balaji Wafers which is a very satisfying thing. Its important to note here that Haldiram's major sales come from Sweets & Namkeen and Extruded Snacks forms only a small portion of its sales. Similarly, Balaji Wafers' major Sales contributors are Chips (Wafers) & Namkeens. Its only Pepsico & Prataap which have major contributions coming from Extruded Snacks.


DFM Foods' Scale of Operation (FY13) is smallest amongst all the companies mentioned with Pepsico & Haldiram at 2500+ cr. and Balaji at 913 cr. with ITC, Bikaji, Bikanervala and Prataap at 500 cr., 325.5 cr., 350.2 cr., and 343.8 cr. respectively.


Out of these 8 companies, Prataap has got Sequoia backing (51 % stake), Bikaji recently got Lighthouse PE backing (25 % stake), DFM got Westbridge backing (24.90 % stake) and Balaji is in final talks with Capital International PE (15 % stake). Pepsico and ITC are capable conglomerate while Haldiram has each family fraction catering to respective region. Its only bikanervala which is the weakest amongst the lot that is looking for a funding partner since last many years but has not got anyone yet.


Since four out of eight companies have got (or about to get) PE investors, its worthwhile to note here the valuations at which each respective PE-investment deal was stuck :




EV/Sales TTM

EV/EBITDA TTM

PE Deal Happened in Year





Prataap Snacks

1.05

15.47

2011





Bikaji Foods

1.56

20.82

2014





DFM Foods

1.41

13.32

2014





Balaji Wafers

4.37

22.50

Most Likely in 2014