My Reply to an interestingquery on DFM on another forum :
Should we not compare the debt levels of both companies to get a better perspective on the valuation multiples? Do you have any info on Bikaji’s debt-equity ratio?
I am also analyzing DFMs expansion strategy and have a few points to make…
1). They are simultaneously expanding in the eastern as well as the western part of the country.
2). For a product such as Crax which has a very low value to weight ratio (Rs 5 pack for 17 grams), the farther the consumers are from the manufacturing plant, the higher will be the transportation costs and growth will be at lower margins.
3). Is it not better for the company to expand by taking on one territory at a time? Had they expanded only in the west or east, would they not have experienced some economies of scale? A denser distribution network in one territory would have led to reduced transportation costs as well as lesser overheads when compared to expanding in two territories that are geographically apart.
Let me have your thoughts.
Have provided info on Bikaji’s D/E ratio in my last post you can refer that.
On your points :
Yes…farther the manufacturing location higher will be the transportation costs…this is the reason why you find 9MFY14 EBITDA margins under pressure as contribution from West and East has increased as % of sales…
On was it better if co. would have expanded into one territory only and saturated the distribution presesnce there — theoretically Yes but practically NO ----I will explain you why ---- when you enter a new territory, you have to face new challenges not only on taste front but also competition and personnel front…so, if your goal is to expand aggressively you can’t spend undue time in expanding and gauging response in that territory before expanding to other — in such time business dynamics might change in the territory you left over to expand afterwards and you might face more difficulty in expanding there which was easier today…
Now, to explain you specifically, DFM would most probably have a single manufacturing presence for serving both West & East India…So, it was logical for it to expand in both the territories at the same time — Western market is having as larger scope as Northern India but there competitive intensity is far higher, especially in the form of Yellow Diamond – Eastern market is relatively small but competitive intensity is relatively lower too — channel checks suggest, CRAX has done relatively far better in Eastern Indian than Western India if we compare the same timeframe after launch — but, that doesn’t mean you can ignore one geography…
So far the company has done all right moves…key monitorable will be company’s sales & manufacturing expansion plans…remember South is still out of the picture…will be awaiting details on future CAPEX.