DFM foods - poor man's FMCG play


(Mahesh Shah) #61

Anand Rathi initiates coverage on DFM Foods Ltd. with a Buy – A Play on the Growing Ready-to-Eat Snacks Market – Target Rs. 460

Link to report :

http://www.scribd.com/doc/214096768/

DFM is a niche player, focused on ready-to-eat snacks for children.

Over FY1993-2013 this segment has exhibited a 15% CAGR.

a– Increase in ad-spend over FY09-13 from 4.3% of net sales to 4.6% has helped the company improve pricing power and thus the EBITDA margin from 5% to 9.3%

a– It has aggressive plans to expand its distribution network. It plans to expand retail outlets to 0.4m by end-FY16, from 0.2m in FY13. It also plans to expand distribution over FY15-16 to the Canteen Stores Department, modern trade and the Railways

a– We initiate coverage with a Buy, and a price target of `460, at a PE of 25x FY16e

Key risks. Increase in raw material prices and competitive pressures


(Sridhar) #62

Hi Mahesh,

It looks like a capital incentive business. Depreciation = Net profit.

What is the remedy for this?


(Sridhar) #63

Sorry… intensive.


(Mahesh Shah) #64

Hi Sridhar,

No…its not strictly a capital intensive business…but, yes, in normal FMCG businesses you see 8-10 times asset turns thats absent and will remain absent from this industry as ‘Savoury Snacks Segment’ has normal asset turns of 2.5-3.5…However, its a zero working capital business wherein once CAPEX phase is over/stabilised, and brand is established in the marketplace, you will see continuous cash generation…a normal plant set-up in this industry takes ~4 years for payback…

DFM is currently in an expansion mode wherein it needs to establish a pan-India presence…hence, you will see atleast for next three years, pressure on finances, however, if you just subtract 31 cr. ICD given out of the debt as on books at 9MFY14 then debt position is also comfortable…

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

Rgds.


(Vivek Gautam) #65

Mahesh,

At what price did Westbrige entered in DFM n any other institution n MF entered it post this move?

Your take on this development n On Westbridge track record n also on another co Mayur Uniquoters where Westbridge has very recently entered.

Thanks in advance.


(Mahesh Shah) #66

Hi Vivek,

Westbridge has purchased 24.90 % equity stake in DFM Foods from promoters at a price of Rs. 259.10 per share. Whether any other institution/MF has entered post stake purchase that we will be able to know only when March’14 shareholding is out or when its reflected in MF factsheets. However, I believe, it will be PMS that will enter aggressively first because of thinly traded nature of the stock atpresent and MFs might come into picture when funds are to be raised via equity dilution as it is hard to purchase reasonable quantity (from MF perspective) from the market.

Just one thing I would like to mention here Vivek, always focus on company’s fundamentals, its positioning in the industry and scope of the industry/company to perform in medium-long term…all other things like liquidity, MF investments, etc. will follow and normally come at a later stage…

Rgdg. your query of Westbridge track-record, they started their second innings only from 2011 (after separating from Sequoia) and so their real exits post 2011 investment will only reflect now on…however, in their first innings before merging with Sequoia in 2006, they had exceptional trackrecord and their exits out of investments made pre-2006 and post-2006 jointly with Sequoia generated ~3-5 times returns

The quality of portfolio built post separation from Sequoia has been exemplary and this is what I like most about this public markets focussed fund.

Anotherkey thing to note here is that still they are sitting on USD 475 mn. free capital that they can invest/support their portfolio companies and thats great in current economic scenario. Its portfolio companies in which they have active involvement will benefit the most going ahead.

Rgdg. Mayur, I don’t track it so can’t comment.

Rgds.


(Rudra Chowdhury) #67
[quote="Mahesh, post:67, topic:417413374"] be able to [/quote]

Item FY10 FY11 FY12 FY13 TTM CAGR
Sales 72.19 119.84 169.42 225.24 256.65 37%
EBIT 8.58 16.37 22.77 23.84 27.12 33%
PAT 4.21 8.32 10.36 6.31 7.61 16%
NPM 5.8% 6.9% 6.1% 2.8% 3.0%






The key takeaway from the Anand Rathi report is the 40% hold of un-organized sector, which provides enough headroom for a player like DFM to grow.

As the company embark on higher distribution reach along with front loaded Capex led production augmentation, PAT will suffer the most. Only post reaching an optimum distribution spread when sales mature with new outlets, company can start de-leveraging yielding the NPM upwards.

The other trigger will come from production outsourcing which will result in the 2nd leg of NPM uplift to the range of 8-10%. Again that would depend on attaining the required scale and quality levels.

If sales continue at 35% CAGR over next 6 years, from current 257 Cr it should reach 1556 Cr by FY20. Assuming NPM of 5% the PAT should be 78 Cr which yields a 47% CAGR profit growth (FY14 - FY20).

Even from the CMP of 309, assuming a modest 20x trailing P/E price should reach Rs 1556 per share, which points towards a 31% CAGR opportunity over next 6 years ( 5X in 6 Yrs).

The unfolding of the two levers for NPM is more complex and requires prudent management above everything else. With Westbridge on board, they would provide the guidance and funding.Still for investors, additional margin of safety in terms of lower entry point would be ideal.

Disc: No positions. On watchlist


(Mahesh Shah) #68

Hi Rudra,

Nice Assessment from Anand Rathi Report…however, will like to point out a few more things for a more better assessment :

(1) Reportseems to be missing the crucial capacity addition aspect as it hasassumed a modest Asset addition till FY16e. This can only happen in two scenarios – first, company aggressively embarks on an outsourcing model or second, it goes slow on geographical manufacturing expansion by only adding capacities to existing plant. Both of these scenarios are highly unlikely.

(2) Report assumes reduction in Debt levels in FY14e over FY16e possibility of which again seems remote unless there is more of an equity dilution or support from Westbridge in the form of CCPS. Although in FY14e, with repayment of ICD of 31 cr., cash levels might increase but repayment of debt might not be a prudent strategy in the near future.

(3) Peers are compared in the report in a broad sense and not like-to-like…DFM might not be able to reach the margins of Zydus or Nestle as the product profile and operational segment are completely different…With the product profile of DFM and competitive scenario in the marketplace, DFM’s EBITDA margins might remain in the range of 8.5-11.5 %. DFM needs to be compared to Prataap or Venkataramana with its larger competitors being Pepsico & ITC. Even haldiram has very low contribution from Extruded Snacks and its TakaTak range, although has gained marketshare over years, but still at a lower marketshare than CRAX or YD.

Chips (Wafers) are not in strict competition to DFM’s product profile, although if you want to compare entire salty snacks segment then its a different matter (then you need to include namkeens also in it). Extruded Snacks targetted at children below 12 years of age are real peer-set for DFM’s Crax corn rings with other general-targeted extruded snacks like kurkure and cheetos constituting second peer-set as children also prefer to consume them.

(4) Unorganised segment is having a great hold on Traditional Snacks segment but in Western Snacks, particularly Extruded Snacks, the hold is not so great. However, if you consider per capita spending on Branded Sweet & Savoury Snacks, at the level of INR 88.8 or just 384 gm. is too low to provide any downside risk considering the fact that Indians are habitual snack consumers. Hence although shift from unorganised to organised might happen at a gradual pace, but, without that, Extruded Snacks have good scope for growth because of the price points involved.

Extruded Snacks is the fastest growing segment amongst Sweet & Savoury Snacks having grown in volume terms at a 5 years’ CAGR of 21.92 % over 2008-2013 and in value terms at a 5 years’ CAGR of25.74 % over 2008-2013. Even future holds promise for this segment as it is expected to outperform all other segments to grow in volume at a 5 Years’ CAGR of 16.88 % and invalue at a 5 Years’ CAGR of23.12 % over 2013-2018 (all data from Euromonitor International report).

If we just draw a comparison here, then, DFM has grown at a 5 Years’ CAGR of 32.49 % in volume terms over FY08-FY13 and at a 5 Years’ CAGR of48.05 % in value terms over FY08-FY13.

DFM seems to be on a sound wicket, with history backing itself, and right moves taken at the right time so far. It needs to expand capacities in time, seal funding for it in a prudent way (I expect ~180 cr. CAPEX over next 3 years), do some product innovations and design wise marketing strategies for it to become a great wealth creator of future. I will value this more on EV basis then pure P/E basis as its in an aggressive expansion phase.

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

Rgds.

Discl.- Hold & Accumulating


(Rudra Chowdhury) #69

Thanks Mahesh.

Agree with your views. No debt reduction till FY16-17 at least, in spite of company already working on negative working capital. Capex requirements will be high in the interim. Also depreciation heavy balance sheet means company need to refurbish plants, until they decide to outsource.

Agree the market structure is different, hence I have only assumed a steady NPM of 5%, once the cash requirements reduce, company should reach that NPM level. The two key monitorable remains

a) Sales growth overall and geographical spread in sales(vis-a-vis increased distribution reach)
b) Operating margins and Debt servicing along with opportune de-leveraging.

This will be an excellent SIP candidate for slow and steady accumulation over next 2-3 years, keeping one’s sight at the bigger picture over FY19-FY20.

of48.05


(Mahesh Shah) #70

Some additional Data Points for members' ref. :

( Growth YoY )

2013

2012

2011

2010

2009

Indian Packaged Food Segment

19.50 %

18.98 %

17.87 %

19.26 %

15.71 %

Indian Sweet & Savoury Snacks Segment

24.94 %

23.92 %

26.99 %

30.63 %

24.93 %

Western Snacks

25.75 %

25.15 %

27.42 %

32.79 %

22.99 %

Traditional Snacks

23.42 %

21.90 %

26.35 %

27.07 %

28.06 %

Chips / Crisps

23.37 %

23.06 %

29.14 %

33.62 %

29.63 %

Extruded Snacks Segment

28.69 %

27.83 %

25.29 %

31.78 %

15.71 %

Projected Growth :

( Growth YoY )

2014

2015

2016

2017

2018

Volume Growth :

Chips / Crisps

( Volume Growth )

11.64 %

10.82 %

9.19 %

8.22 %

7.96 %

Extruded Snacks

( Volume Growth )

19.54 %

17.92 %

16.42 %

15.49 %

15.10 %

Value Growth :

Chips / Crisps

( factoring-in normal price increase

based on price trend till 2013 )

20.78 %

19.38 %

17.21 %

15.90 %

15.10 %

Extruded Snacks Segment

( factoring-in normal price increase

based on price trend till 2013 )

26.57 %

24.54 %

22.62 %

21.31 %

20.65 %

Key Players in Indian Sweet & Savoury Snacks Segment

( Note â These Players together control 90 % + marketshare of the segment )

Large Players

( by FY13 Annual Sales )

` 500 cr. +

Pepsico

Balaji Wafers

Haldiram

ITC

Mid-Size Players

( by FY13 Annual Sales )

` 200 â 500 cr.

Parle Products

Prataap Snacks

Bikaji Foods

Bikanervala

DFM Foods

Small Players

( by FY13 Annual Sales )

` 100 â 200 cr.

Parle Agro

Cavinkare

Venkataramana Food Specialities

Agrotech Foods

Micro Players

( by FY13 Annual Sales )

` 1 â 100 cr.

Perfetti Van Melle

Jabson Food

Euro India Fresh Foods

Atop Food Products

Crax Brand Key Marketshare Figures

Sweet & Savoury

Snacks Segment

Extruded Snacks Segment

Corn-based Extruded Snacks Segment

CRAX MarketShare

( 2013 )

2.03 %

5.61 %

9.19 %


Extruded Snacks Marketshare Trend of Key Brands

2013

2012

2011

2010

2009

Kurkure & Cheetos

( Pepsico )

52.7 %

55.2 %

53.8 %

49.2 %

52.9 %

Bingo

( ITC )

10.8 %

10 %

11 %

11.9 %

11.5 %

Yellow Diamond

( Prataap )

5.9 %

4.7 %

4.6 %

4.9 %

4.8 %

CRAX

( DFM )

5.6 %

5.3 %

5.1 %

4.1 %

3.9 %

TakaTak

( Haldiram )

4.3 %

4.3 %

4.2 %

3.8 %

3.3 %

Peppy & Piknik

( Venkataramana )

2.7 %

3,3 %

4.0 %

4.8 %

6.0 %


(Mahesh Shah) #71

My Reply to some interesting queries on DFM on another forum :

  1. DFM Foods has pre-dominantly been in the extruded snacks and specialized in kids category. I guess they should leverage their distribution capacity to aggressively distribute other snacks segment ? What has stopped them to do it till now considering the fact that they being in North India would have cannibalized the unorganized sector and not compete with formidable players like Balaji which is known for its distribution skills ?

Let me make one thing clear before starting my reply, that, DFM has so far done exceptionally well if you consider many facts that it faced…first, it has focused on Snacks segment only from FY09 as before that it was just another line of business for it…if you just look at the growth attained by the co. post 09, then it has outperformed all peers…this is really commendable…second, it has chalked out a shrewd strategy of isolation in an otherwise competitive industry where at one side it had MNC and on the other it had unorganised segment, between them to grow so well speaks highly of the management…third, the margins which it has maintained in double digits so far despite free gift component…

Now, to answer your specific query, the management has so far maintained that it doesn’t want to introduce any me-too product…that is the reason why you don’t see it competing with lays, kurkure, etc…having said management’s version, if you ask me then I think they lacked depth in management and personnel level to take and manage such risk and so what they did was concentrated on what worked well for them…north concentration that you find as also no-outsourcing of manufacturing are because of that…

another thing is their conservatism which is the thing with many family-run enterprises…they sticked on the double digit margins and also did’t expand too aggressively…

third thing is the capacity constraint, – company’s 10 year average capacity utilisation has been 79.26 % )-- with FY08 and FY09’s capacity utilisation being at 89.32 % and 90.27 % and FY11’s being 109.8 %. Company did major capacity expansion in FY12 (November 2011) and last year i.e in FY13 it operated at 74.08 % utilisation with FY15 surely seeing 100 % utilisation. Now, when you have your existing product line (CRAX Corn Rings) having such a demand-pull in the marketplace wherein without exploring modern trade channel completely you are getting out of capacities within three years of expanding them by 166 % (6000 to 16,000 MT in FY12) then you don’t risk exploring other options.

All these is not bad and the journey so far is very satisfactory for DFM…the key thing to note for us being shareholders is that the company has taken right moves at right time…so to rampup middle-level management before geographical sales expansion in FY12 was also the right thing and to invite Westbridge at a time when they could fumble on geographical sales/manufacturing expansion is also the best thing they could have done. With Westbridge on board, it will insist on sales ramp-up quickly, and it is now you will find company introducing more me-too products by innovating on flavours and exploring modern retail channel / institutional sales that it has refrained from doing so far. Prataap is a real example to consider here, wherein after taking on Lay’s in 2005 it took on Kurkure & Cheetos in 2007 by launching Chulbule & Puffs and then took on CRAX in 2012 â all these was done by improving on existing flavours and innovatively distributing its products and Prataap has been quite succesful in that.

  1. Can DFM Foods repeat the sales growth of past 5 years ? Obviously, they ventured into a segment where no one was there earlier and they got this first mover advantage but Pratap is slowly taking away a pie of the growth in this segment and others are introducing their products in this segment too ?

Well, whether DFM will be able to grow at 48.05 % 5 Yrs. CAGR in value terms which it has grown over last 5 years is a question mark ; and frankly speaking I don’t see such an aggressive growth over next 5 years, but, the company will surely be able to outperform the industry growth rate — you have extruded snacks industry itself likely to grow at a 5 Years’ CAGR of 23.12 % in value terms and so I don’t see any threat for DFM to grow at more than 20 % p.a. over next 5 years despite rising competition. You see, there are still lot of unexplored areas for the low price points of Rs. 5, Rs. 10 and DFM also has another Rs. 2 price point for Natkhat. Rural sales are still at just 28 % of Indian Branded Sweet & Savoury Snacks segment (up from 18 % in 2003 and 13 % in 1999) and so still there is a lot of room for each of the organised player to grow as the size of the market itself is expanding aggressively.

  1. I guess the current generation of promoter of DFM foods is a Wharton graduate and obviously will bring in professional management. Do you think they will get someone from say HUL or ITC who are known for their skills in FMCG sector and increase the valuation of the company in terms of p/e valuation ?

No…I don’t see any management change or induction of any ex-MNC or like personnel at senior level till the promoters completely sell-out to a larger player. Family has clearly demarcated the family business between siblings â DFM to Rohan Jain and Delhi Flour Mills to Rashad Jain.

  1. What is the right way to value the company considering that there are not many players listed in this segment ?

I will and have valued the company based on EV and that is the reason why I have bought aggressively into it post Westbridge entry and still accumulating (as the thinly traded nature doesn’t let the required exposure getting built). It will be worthwhile to note here the following fact :

**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 66 % of Indian Sweet & Savoury Snacks Market : **

[ Covered in valuepickr posts before ]

If you look at above table closely then you will find that Prataap got lowest EV/Sales (TTM) at 1.05 times in 2011 whereas DFM got lowest EV/EBITDA (TTM) in 2014 from the PE player. One possible reason for this is because DFM already enjoys relatively rich EBITDA margins which are likely to taper off or come under pressure in the lifecycle of PE investment and this is natural as Dfm will embark on an aggressive expansion phase.

Another aspect to consider while valuing DFM is its underowned equity structure. Such underowned equity structures normally trade at rich valuations once visibility of growth arrives. Even leaving that factor aside, I would love to accumulate more of DFM at a valuation below PE-deal valuation, i.e. below 1.5 times EV/Sales TTM (with base FY14 for TTM v/s FY13 for PE deal) and as the fiscals go by I expect this valuation multiple to expand.

Having said all these, one thing every investor should always keep in mind that he/she should always invest for long term (minimum 2-3 years) in such stories as the valuations could wildly fluctuate on both sides depending on demand supply situation in the market. One needs to study the company in detail, build in future projections as per his study, assign right current valuation based on likely future valuation as per the study and then take an investment call. Conviction can’t be build in a day or two, it requires deep study of the industry as well as company only then a right decision can be made.

  1. DFM has been operating with negative working capital I guess ? Sometimes, to grow revenue, companies lose focus on smaller aspect - WC being one of them ? Where do you think other negative factors may crop up ?

  2. What can be other risks knowing that it is a commodity business but for the distribution skills and little bit of branding ?

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 (because of small marketsize of kids extruded snacks segment)

  1. Any other downsides in terms of financials ?

EBITDA margins could remain under pressure with worst case being 8-8.5 % and best case being 11-11.5 %. I believe Westbridge should provide further capital or arrange for it in a cost effective manner rather than burdening the balance sheet with external debt (as Sequoia had done by repaying all debt of Prataap and making it Debt-free in FY12 â only now debt is taken to start manufacturing of Noodles).

Apologies to ask so many questions at one go but I like the industry considering the fact that Balaji Wafers, the leader, being scouted by MNCs at very high valuation- this being a growth sector. And, DFM being one of the very few listed, it can be a good story in next 5 years.

Yes DFM could be a great wealth creator over 2-3 years period but in such stories rerating is always sharp and sudden rather than gradual. It will not be proper to compare it to Balaji Wafers as its a great company any investor or peer will love to invest in because of its net cash balance sheet, great brand-pull and strong distribution network. Balaji Wafers will get the richest valuation any Indian Snack food player could get. The next snack player any investor would love to invest in is Haldiram but because of its family fractions with each fraction having hold on each geography will make it difficult to get it a rich valuation. In third and fourth position will be Prataap and DFM. This is a good growing industry and players have great scope for growth and PE players getting present in majority of the players is an indication of the times to come. We should keep our fingers crossed and hope for the best.

Feel free to get back in case of any further query. I will reply to the best of my knowledge.

Rgds.


(Mahesh Shah) #72

DFM gets aggressive in taking on competition…after Holi toys, launches CRAX Corn Rings with rechargeable glowing toys…will start promoting this attractive toy package with specific ads…marketing circles indicate more such initiatives from the brand mainly circling around innovation in free gifts with new ads for every novelty …a nice strategy to retain and attract more of its target consumers…

This initiative has coincided well with Prataap Snacks getting aggressive in Traditional Snacks (Namkeens) space and lowering its marketing concentration on YD Rings.

Rgds.


(Mahesh Shah) #73

My Q4FY14 & FY14 estimates for DFM Foods :

( fig. in Rs. cr. )

Q4FY14e

Q4FY13

Revenue

61 â 68

56.87

EBITDA

5.3 â 5.8

5.03

PAT

1.3 â 1.8

1.06

( fig. in Rs. cr. )

FY14e

FY13

Revenue

261 â 268

225.24

EBITDA

23.4 â 23.9

21.21

PAT

7.8 â 8.3

6.31


(Ankit Gupta) #74

Mahesh,

I don’t know anything about the company but thought I should share this information with you and other boarders. I was talking to a retailer who lives near my house about Crax. He told me that they have entered the Gujarat market a year back and the response for the product is good. The supply for the product is good and there are no issues. He told me that Crax sells more if they are offering a toy like they recently did for Holi by selling a small pickhari.


(Mahesh Shah) #75

Hi Ankit,

Thanks for your valuable input…such feedbacks help alot…

Yes…you are right…I don’t know in which particular area you live in but in Gujarat, particularly in some areas like Surat, the sales feedbackfor CRAX has been excellent…Free gift is a key selling point of CRAX and since last month what company has done is it has become aggressive in taking on competition and has innovated in its free gifts itself…so far, Holi packet sales have been good (will not say excellent as per channel checks – especially in Western India) and the forthcoming ’Mind Glowing Masti’ packet (carrying glowing toys) sales are likely to be very positive gauging from the buzz it has created amongst the channels so far…

Do keep such feedbacks coming as we seem to have agood emergingpure Indian Snack Food company in the making…

Rgds.


(Mahesh Shah) #76

Bikaji Foods PE-deal details out…The valuation part of the deal isnoteworthy as it is much higher than earlier reported and the stake dilution is almost half than earlier reported in press…

Majumdar & Partners acted as advisors for the deal where Lighthouse has picked up 12.5 % equity stake in Bikaji for INR 90 cr…Bikaji (FY13 Revenues = 325.50 cr. & EBITDA = 24.39 cr.) is valued at an EV of INR 739 cr. much higher than previously anticipated of 499 cr.

Valuation multiples at which deal is stuck :

EV/Sales (TTM) = 2.27

EV/EBITDA (TTM) = 30.29

just to draw a comparison :

3 Years’ CAGR in Sales of Bikaji is 28.39 % v/s DFM’s 3 Years’ CAGR in Sales at 46.13 %

3 Years’ CAGR inEBITDA of Bikaji is35.01 % v/s DFM’s 3 Years’ CAGR inEBITDA at40.31 %

4 Years’ Average EBITDA Margin of Bikaji is 7.39 % v/s DFM’s 4 Years’ Average EBITDA Margin at 11.94 %.

Contribution of Savoury Snacks to FY13 Revenues of Bikaji is 89 % v/s Contribution of Savoury Snacks to FY13 Revenues ofDFMat100 %

Seems Westbridge has stuck a good deal in DFM (@ TTM - EV/Sales = 1.41 & EV/EBITDA = 13.32) and could very well fetch good returns from it. The Bikaji-Lighthouse deal seems to be a comforting news for DFM shareholders.

Rgds.


(ricky76) #77

Hi Mahesh,

I read through the posts in this forum and do find this story interesting , this one has a good track record and is in a fast growing segment with great long term potential, few thoughts from my side:

1). A good part of the story hinges on whether they can increase sales at a good pace over the years WITHOUT much marketing and advertising expenses, this is when the operating leverage will really kick in to beef up the bottom line otherwise there will be constant pressure on margins. The product needs to create a strong demand pull over time ( an extreme example would be Buffet’s Sees Candy). Whether they can do it in other regions remains to be seen.

2). The capacity expansion problem is actually a good one as it means there is demand for the product, but this should be in tandem with some pricing power and low marketing expenses for the bottom line to grow.

3). Outsourcing production even at later stages won’t be easy as the manufacturer can simply copy their product and set up their own brand or leak it to other players - this happens frequently in China. It is easy for big branded players such as Pepsi to outsource as they sell on brand value not that much on intrinsics of the product.

4). PE players in my experience are more hit and miss, they lack the business sense of an entrepreneur who has been in an industry for years. I wouldn’t read too much into Westbridge’s investment.

5). Not clear why they don’t raise equity through placement or a rights issue if they really believe in their growth story? I don’t think it is prudent to leverage highly during “uncertain” ( no guarantee their products will click Pan India) expansion.

I will be watching their sales growth and marketing spend keenly, if top line grows without much effort then everything else will fall into place.

rgds

Bobby


(Utkarsh Patel) #78

HI Mahesh,

Do u have idea about the business model of Bikaji? Were they outsourcing the production ? What were there levels of Asset Turnovers?


(Mahesh Shah) #79

Hi Utkarsh,

)–Business Model of Bikaji revolves around Traditional Snacks business with 77 % of FY13 revenues coming from sales of Bhujia & Namkeen.

)–Rajasthan contributes 50 % of the sales turnover while exports contribute less than 1 % of FY13 revenues.

)–Sales are primarily made via 400 distributors & C&F agents.

)–Goods are sold on almost cash basis but its debtor level (FY13 = 7.98 cr.) is higher than that we have seen in DFM (DFM at 0.01 % of sales v/s Bikaji at 2.45 % of sales). This is because of the short credit period extended to few large distributors by Bikaji v/s having cash settlement system with almost all distributors by DFM.

)–Asset Turnover of Bikaji as at FY13 is 3.74 whereas the same for FY12 was 3.06 and for FY11 it was 2.42 (in the range of 2.40-2.42 for FY10, FY09 & FY08)

)–Meaningful Outsourcing of production is almost absent in all previous years (traded goods less than 0.2 % of sales) except in FY13 where it seems to have inched up to 0.86 % of sales.

)–D/E for Bikaji as at FY13 is at 0.63.

)–Bikaji has purchased land in RIICO Industrial Area and is looking at doubling its production capacity by FY16. Project cost is 100 cr. for which 90 cr. is raised from Lighthouse PE Fund by diluting 12.5 % equity stake. This is historically most substantial CAPEX being incurred by the company.

)–Since FY09, Bikaji has also expanded into a sort of fast-food outlet format by setting up Food Junction in Malad, Mumbai. So far it has four such outlets in mumbai and two more planned to be opened in Andheri & Jaipur Airport. Its revenue from these outlets is not meaningful.

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

Rgds.


(Mahesh Shah) #80

Hi Bobby,

Please find my views on your points below :

(1) Yes…but if you think that marketing & advertising expense is likely to come down in future ; that is unlikely…whatwe could expectis higher utilisation of marketing expense i.e. so far the same advert for a product which is playing on national channelswas getting its sales presence in only North India but now this advert will also have sales presence in West and East India so what will happen is incresing utilisation of same advert rather than lower expenditure on adverts. Also, one point I would like to make here is that impulsive products, especially for kids,are all occupying mind space game – so company will have to become aggressive and spend more on advertising rather than curtail expenditure.

Second point is increasing competition, especially from Yellow Diamond, which is going all out to make a dent in rings marketshare – after associating with Chota Bheem it has now associated with Bhootnath Returns movie – these are quite aggressive moves and DFM will have to counter them – DFM is also seen getting more aggressive on marketing front as since last two and a half years I have tracked this company, I have never seen three different adverts being made by the company for the same product in just three months — one advert was for taking advantage of Holi festival, second one for Glowing Toys and third one with Sumo Wrestler playing with kids on an Airport – all for CRAX Corn Rings.

(2) Yes…Capacity constraint is a good thing and channel checks suggest real demand for the product which is evident from the fact that company has so far explored only traditional retail channel and is still absent in modern retail as well as institutional sales. Pricing Power is definetly there with the company but lower marketing expenses are unlikely — bottomline growth could come from two counts – first decrease in debt cost and decrese intransportation costs – Remember one thing that EBITDA margin at which DFM operates (till FY13) are second best in the industry and so its the PAT Margins which are suffering because of higher interest outgo. If Westbridge is able to prvide low cost funding support then this problem should get resolved.

(3) You have misunderstood the outsourcing concept slightly – let me clarify

)-- first, contract manufacturer is bound by legal contract and its of long term nature not short term

)— second, CRAX as a brand also commands significant mindshare amongst target audience just as Kurkure does only the appeal is not that wide and long lasting

)— third, its the quality which is the major issue in outsourcing which can be handled by an MNC like Pepsi quite well because of its experience worldwide but for a small player like DFM its very difficult and this is the primary reason you don’t find DFM outsourcing manufacturing its products

)—fourth, in outsourcing, critical things like flavouring come directly from the outsourcerand so contract manufacturer doesn’t have complete hold on the product.

As the scale of operation increases, this is a natural progression and it has to happen eventually with DFM too, especially in current phase where it will face regional capacity constraints…Just to cite here an example, Prataap (Yellow Diamond) has been outsourcing manufacturing since Sequoia entered as it had towiden its manufacturing base…only now it has created capacities to generate revenues of 700 cr. p.a. and is still in the process of setting up another extruded snacks plant at Guwahati…but, if you just observe closely, it is still outsourcing manufacturing although to a limited extent.

(4) Although its the promoters and senior management on which the success of any business will reside but, a PE player plays a vital role in formulating aggressive growth strategies by providing financial support as well as other resources which are crucial for an expanding company. The larger the PE player has stake, the higher will be its involvement in seeing the company go through well as its ultimate vision is to realise multifold return on its investments and a failure in it puts a dark spot on its image as other managements will then be reluctant to dilute major stake in favour of such PE player. Another aspect which is important to note by us as being shareholders is that entry of a good PE player like Westbridge ensures that books are clean – although disclosure level might decrease going forward, especially on brandwise sales and all because of peer reasons – but, growth is unlikely to stop when the industry itself is growing @ 20 % + p.a.

(5) Fund raising, especially via equity route should follow soon — Westbridge’s entry seems a precursor to it — PE players seldom let funds go outside of their system – i.e., what they do is retire external debt and structure an internal low cost debt so that company’s market value increases because of higher bottomline and the interest part goes directly into their kitty…If company would have expanded on its own by only raising debt then it could have got on its books 100 cr.+ debt in FY15 which could have trapped the company’s sustainability and there were higher chances of it faltering ----the next CAPEX plans and source of funds for it will be crucial thing to watch.

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

Rgds.