DFM foods - poor man's FMCG play

Stock Opportunities Untested - but worth a good look
103

Thank you mahesh.When a small cmpany like DFM is trying to expand,execution skills along with innovation in their product line would be the key.If these 2 are not happening it is better to look for oppurtunities elsewhere.

What is disheartening to see is when their peers are comfortably growing at double digits,DFM is not making the right moves to achieve that target.

I would avoid this for now,spent like 2 weeks to read all your reports here and TED.Thanks a lot for all your hard work.Quite amazes me the way you put things together without missing any minute details.

104

Mahesh,
Actually what I understand is they recently introduced a product called Krunchoids which management has accepted as a failure. Sales was flat and the product was slowly withdrawn. Nathkhat their snack was relaunched from Rs.2 to Rs 5 pack. So they are concentrating on nathkhat and crax again as per last concall available on site. Also debt has been brought down very well from dangerous levels after entry of PE player. It’s just 2 qtrs gone after PE player entered already you’ve turned from super bullish to super bearish. The company is slowly expanding from north to west and east. Sales value can double from here without further capex is what is known from con-call details. Don’t know why company is not posting con-calls anymore on their website. Do you know why ? Though the results are not great, still co. can improve sales, especially after facing hiccups in new product failures. What do you say ?

105

Hi Srinii,

Krunchoids was introduced in FY14 and because of tepid response was immediately withdrawn.

Natkhat is their old brand which was only sold in North India previously and they are now slowly making it pan-India as also testing the waters at higher price point which is good.

Westbridge entered in Q4FY14 (Feb’2014) and already 4 quarters have passed…Its not lack of growth that I am concerned about but its actually the lack of strategy that is concerning me…immediately in second concall post westbridge’e entry, management sounded caution of the ground situation and postponed expansion…

When I make any investment, I always note down the reasons of such investment and expected time-frame (maximum) within which the expected milestones should materialise…as investment is based on future expectations, one needs to revisit the basis of an investment again and again to check whether the investee company is walking on right path as if it loses its way our investment is at risk…in DFM case, I have no hesitation in admitting that management decided to take a static path, which was completely opposite to my expectations.

Regarding doubling of sales value without CAPEX, unless they outsource manufacturing, thats not possible…and frankly speaking, manufacturing is not that of a concern to me, for me expansion into various categories is key to growth as without that it is impossible for the company to scale-up…you see now this ‘Sweet & Savoury Snacks’ segment is highly competitive one ; if demand of a category firms up immediately organised as well as unorganised players rush-in to feel that category…hence, what you need is not only presence pan-India but also across categories…

Concentration on CRAX Rings was ok till now but over-concentration on CRAX Rings will eventually be a disaster…this is because competition is fast catching up in this stronghold of DFM…success of CRAX Rings needs to be taken as a headstart to launch the company firmly into Snacks segment…

If you want to really study this segment as well as company and what it should eventually do to be a formidable player in the segment, you must study in deep Prataap Snacks, DFM’s closest competitor (although now almost double its size)…Being predominantly a potato chips player, it went on to challenge DFM’s stonghold extruded snacks segment and now is going into Noodles as also Sweets. This is what I expect from DFM if it really wants to remain in business.

Also, in my last post I mentioned ‘time lost is opportunity lost’ in this segment. This you will be easily able to understand from the comparative figures of DFM & Prataap :

( fig. In ` cr. )
FY14
FY13
FY12

Prataap
Extruded Snacks Division Sales
211.99
155.88
115.53

DFM
Extruded Snacks Division Sales
234
194
144

Prataap
Namkeen Division Sales
46.79
27.54
5.96

DFM
Namkeen Division Sales
29
31
25

As you can see from above, Extruded Snacks, which was the stronghold of DFM riding on its success, company came this far, Prataap will overtake it in FY15…Not only this, Namkeens, in which DFM is present since last many years, has turned out to be only a flat performer for DFM since FY12, but Prataap has scored well in that also…Prataap is only one of the aggressive player out there and there are many such players including biggies like ITC, Parle, Pepsi, Haldiram, etc. If you want to compete with them and be a winner you need to be aggressive.

Having said all these, I reiterate, DFM deserves a close monitoring.

Rgds.

Discl. - Negligible Holding

Note – This is not a buy/sell/hold recommendation of any kind and is only part of a general discussion.

6 Likes
106

Mahesh,
I understand the strong reasons you’ve given. The comparative data shown from Prataap snacks is enlightening and convincing. From that data it is evident of mgmt lethargy. I especially liked this phrase of yours…
"When I make any investment, I always note down the reasons of such investment and expected time-frame (maximum) within which the expected milestones should materialise…as investment is based on future expectations, one needs to revisit the basis of an investment again and again to check whether the investee company is walking on right path as if it loses its way our investment is at risk"
Since the stock has been a doubler for me, without any breathtaking performance from the company, I may be kind of biased. I kind of get amazed how the market likes this illiquid company so much. Even though I expect only a Rs.10/- eps max for fy15, just see the valuations the market gives the co. If only the co., gives a mild improvement in performance, I don’t know where the stock will shoot(My dreams obviously). Thanks for the comparative data of Prataap snacks. It just tilted this argument in your favour.

Also wanted to add, the co, was never much interested in boosting namkeen sales, this is evident from past con-calls posted. They only wanted to make crax pan india, after that maybe nathkhat and only then namkeen will be taken up. So you had obsessive expectations in the first place anyway :wink:

107

Conference Call - from Capital Markets

Expanding capacity by the end of Q3 or start of Q4
The company held its conference call for discussing result performance for the quarter and year ended March 2015. Top management of the company addressed the meet.

Key highlights
• The net sales for Q4 FY15 increased by 35% to Rs 84.97 crore while net profit inclined by 407% to Rs 2.79 crore. The company’s marketing intuitive helped for Q4 growth. Overall FMCG market is moving slowly.
• The net sales for FY15 increased by 10% to Rs 288.73 crore while net profit inclined by 55% to Rs 11 crore.
• In FY15, the company has concentrated more on consolidation of existing markets rather than expansion. This along with innovative consumer promotions, price hike in the way of grammage reduction and softer raw material prices yielded significant growth & margin improvement despite challenging market environment.
• The company successfully launched the Rs 5 pack of Natkhat and expanded distribution in the Northern zone. The brand grew close to 60% this year alone. Going forward, the company plan to further build upon this momentum and invest behind the brand.
• In the quarter, the company undertook a special consumer promotion for Crax, the gift shared in the pack was different from that in the past and had a unique theme around it. The company also supplemented this with a TV advertisement. The result of this particular activity led to a surge in sales both on a sequential and corresponding basis. This goes on to reiterate our success with innovative marketing to capture consumer mind space even in a tough and crowded market.
• The company commenced sales in the 3 metro cities of the South Zone during the quarter i.e. Bangalore, Hyderabad and Chennai. In all other zones, focus continued to remain on enhancing sales and distribution effectiveness rather than on expansion.
• The company’s focus in the coming fiscal will be to drive sales and profitability through innovative marketing and consumer promotions, as well as distribution expansion by ways of opening up newer markets including South and also retail coverage expansion in existing markets. The company will also continue to grow the Natkhat Brand.
• The annual turnover potential from present capacity is Rs 325 crore. The company is expanding capacity which will add turnover by Rs 100 crore annually. It will come by the end of Q3 or start of Q4.
• The mgmt will expand product domain in long term and not in near term.
• The company’s direct outlet reach is 2.2 lakh.
• The mgmt will try to maintain the present OPM in FY16.
• The company will see some higher advertisement cost and promotional cost gng fwd to keep the growth momentum.
• The capex for FY16 will be Rs 25 crore.
• The tax rate for FY16 will be 35%.

Disc: Not Invested

2 Likes
108

Prepared notes from the AR (DFM_2015AR_Notes.pdf (561.2 KB).
Please find attached.

(First page summarizes what I liked & I didn’t liked in the AR).

1 Like
109

Fantastic summary Jatin - Thanks!

110

DFM’s gross margins are also ~50% and the company is spending almost 40 crores i.e. 17-18% of its sales on advertisement and sales. This is essential to this sector, scale will not be achieved without such spends.

Despite much smaller size, the company has outgrown competition and has been gaining market share while Pepsico has been losing market share.

However, my concerns is that - while this is essentially a niche business which is making money the current valuations are too rich. It remains to be seen if the company can replicate the success to other products.

111

Yes, stock has run well after q4 results.
And looks expensive on ttm valuations.

However, q4 margins were good thanks to drop in raw material prices & economies of scale.
If they can repeat q4 margins & build sales from there, stock can do well.

Need to watch that!

112

Hi Jatin,

Thanks for the notes on AR, made for a nice read.
Any idea on what justification management gives for such high hike to themselves this year and also the high %tage of commission (10%) on profit.

Regards
Raja

113

Couldn’t find any reason for such high commissions anywhere… neither in AR nor in previous concalls.

Maybe we need to ask them in the concall.

114

Thanks Jatin - your succinct summary helped me point to the places I ought to be focussing on when i read them.

One good aspect is that their OCF has improved a lot from 19 Cr. to 26 Cr. and that’s reflected in a healthy increase in cash balances from Rs.14 Cr. to Rs. 30 Cr. even thought net debt is up about Rs. 9 Cr. Given that receivables is near zero, it points to a healthy moat in the company.

Discl: Not invested, but your notes prompted me to look at it.

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115

As always, I seem to be late here. Added it to the watchlist and hoping that some corrections will give me a chance to enter. Otherwise, at this PE, it scars the hell out of me !

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116

Key highlights of Conf Call by Capital Mkt
The net sales increased by 33% to Rs 97.05 crore while net profit inclined by 98% to Rs 4.74 crore. Top-line growth was fully volume drive.
Investment in innovative marketing helped sales to grow. However, innovative gift impacted the gross margin.Employee cost was high due to recruitment at top level and in south market.
Marketing expenses for Q2 was lower on innovative consumer promotion.
Crax and Natkhat both recorded healthy growth.Natkhat has shown good growth in Rs 5 pack.The company has seen healthy growth across all zones.The company is increasing production capacity at existing Noida location at cpaex of Rs 25 crore which will be done through 75% external debt and 25% internal accrual. Rs 100 crore additional revneu is expected from this capex.
The mgmt said that it is working on new products.The company’ term loan is Rs 35- 36 crore at present. After capex, term loan will go up Rs 52 crore. The cost of loan will be 11%.The company’s direct reach is at 2 lakh outlets,Q1 is lean quarter as schools are closed. Q2 is strong quarter. At end of Q3, sales drop due to winter. Q3 and Q4 are good.The last time price hike taken by the company was in April 2014.2-2.5% ad spends to sales in Q2

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117

Westbridge Capital has made an open offer of 26% shares of DFM Foods to take a majority stake, where the open offer price is 1,320, 15% lower than current market price of 1520. Westbridge had invested in this company in 2014 by buying 25% stake from the Promoters, and now have given an open offer. This is the first such move by Westbridge to take a majority stake who has been an active investor in listed companies with a stellar performance over the last 4 years, and prior to that at Sequoia Capital.

Company has performed well since Westbridge invested with expansion into Southern and Western regions. Stock has shot up from 300 to 1500 in the last one year, and Westbridge had initially invested at ~250 per share.

Will be interesting to see how this unfolds.

1 Like
118

CONFERENCE CALL - from Capital Markets

Second brownfield expansion will commissioned towards the end of the calendar year

The company held its conference call for discussing result performance for the quarter ended March 2016. Top management of the company addressed the meet.

Key highlights

  • The net sales increased by 44.5% to Rs 85 crore while net profit inclined by 70% to Rs 6.9 crore. Top-line growth was fully volume drive. The quality product offerings backed with innovative consumer promotions, increased media spends and improved distribution continued to yield strong results. The increased sales coupled with benign input costs also helped improve margins significantly.

  • During the quarter, the company introduced a new flavour in the Rings category – Thai Sweet Chilli which was well received in the market. However, no marketing initiatives could be taken up for Natkhat with capacity being constrained despite the recent brown field expansion

  • Work on the second brownfield expansion at Gr. Noida facility commenced during the quarter and expect the same to be commissioned towards the end of the calendar year. The expansion shall come at a cost of Rs 75 crore and have a revenue potential of Rs. 200 crore per annum.

  • Crax ring growth in FY16 was back of innovative marketing, increased spend and distribution helped growth.

  • Natkhat had steady sales for most part of the year.

  • Increase in finance cost is due to term loan.

  • Investment allowance helped tax rate to come down to 27% in Q4.

  • The mgmt said going forward it will carry growth momentum. Expects rings sales back on innovative products and marketing spend. Natkhat sales will be helped by creation of addition production capacity and marketing spend.

  • The company’s 70-80% sales came from North, 8-9% each from East and West, while 3% came from South.

  • The mgmt said that gross margin also covers cost of gift. Raw material and laminates prices has reached bottom. As such, it can’t comment on gross margin trend.

  • The company has increased its distribution in South India with 3 metro cities and cover of 40K retail outlets.

  • The company’s direct retail outlet coverage is around 2.5 lac.

  • Rs 5 pack contributes more than 90% of sales. The company had tried to increase Rs 10 sales in FY16 and it is happening and will focus on strategy of pushing Rs 10 pack sales, gng fwd.

  • The mgmt said that gift also plays important role in driving the sales along with the taste of products.

  • Extruded snack market size in India is Rs 2500 crore and it is growing at faster pace. The company will capitalize Extruded snack growth.

  • The mgmt focus on Crax followed by Natkhat. Natkhat has annual turnover of Rs 25 crore.

  • The mgmt said that the company is considering new products launches in coming year. It will also increase its distribution network. Considering all this, the mgmt is confident of achieving of Rs 1000 crore turnover.

  • ASP is usually around 2.5-3% of sales.

  • At beginning of the year, Natkhat saw grammage correction by 3 gms.

  • The mgmt will focus on maintaining annual margin on annual basis…

  • North has grown at 25%.

2 Likes
119

Where can I get to listen or read the transcript of the Earnings call. Researchbytes has not yet uploaded it.

120

I had taken a small plunge few months back at 1000 levels as found this company interesting. However, to take a long tern call and decide on whether this company can be a significant part of my portfolio, went through last 5 years of annual reports, research reports, concall transcripts and quarterly results in details. My thoughts:

Strengths:

  1. A good product brand and a distribution strength built around that with consistent growth in revenue, PAT, CFO, FCF with good ROE and ROA numbers without receivables and working capital requirement
  2. Increasing geographical penetration in terms of employee strength and distribution which can be leveraged
  3. Management reducing their salary in few years when profitability was hit
  4. No major negative points on corporate governance (still need to check on one loan which was given without interest rate)
  5. Inclusion of people on board who can be a better guide for strategic vision (last 2 appointments including westbridge)

Weakness:

  1. The current CEO does not seem to have a strategic vision. If you go through concall transcripts, for most of questions regarding 2-3 years down the line, the answers are ,“I dont know”, “it depends”. I mean you should have some perspective and some basic numbers in place , at least some range.whether it is about launching new products, manufacturing vs outsourcing, greenfield vs brownfield. There is no perspective and no quantitative reflection of qualitative perspective. So, long term strategic growth story is a big big question mark.

  2. The existing CEO is almost managing business from early age of 26 after finishing graduation in finance from renowned university. I am not against learning on ground but for a FMCG business fighting with MNCs, a good PG could have been helpful. The more I hear his answers on cll transcripts, the more it raises doubts (it is my personal view and may be wrong). You need to have a strong leadership team in marketing. 1 successful product can be by luck or by hard work or by vision but building multiple successful product do need vision.

  3. When company has almost 35 crore of cash, the need to take 75% of capex amount as loan, i believe this ration could have been 50%:50%

  4. Inability to launch another successful product in last 10 years and no signs of impetus on innovation and product launch

  5. Over-reliance on one product is a risk

Conclusion : It looks to me that the company is driving on success of crax corn rings and still the same product can easily drive another 200 crore of sales (North contributing 80% of revenue and still growing, with west, east and south to have huge scope to contribute where they have not even got into <5 lakh population cities), growth should not be a problem. However, my major concern is lack of any strategic thought process or vision on long term growth, innovation, new product identification. The CEO shows signs of managing financial operations but not one who can lay down a future for next 10 years. With current valuations, apprehensive of making any further investments until signs of strategic growth and focus are visible.

Disc : Invested around 1000 levels at less than 1% of portfolio and not looking to invest further currently

5 Likes
121

The stock is up 10x in 2.5 years. Congrats to the investors. @Mahesh Are you still following this company? If so, what is your view on this business and stock now?

122

@chintans

Business is good but valuations look very stretched now. There might be some corporate development which we are unaware of and which might unfold over future that might justify valuations but as it is as per current scenario IO doesn’t look appealing.

Rgds.

Discl. - No holding

1 Like