DFM foods - poor man's FMCG play

DFM is on a cusp of a major expansion and likely resumption of topline and PAT growth:

  1. DFM’s expansion of Rs60cr which would likely add topline by Rs200cr would complete by the month end which would lead to 1. new product launches 2. entry into newer segments 3. greater earnings visibility
  2. DFM is a pioneer with a differentiated offering through corn based snacks
  3. It has a toy in its Crax corn rings product which is very much sought after by children in the age group of 4-14 years.
  4. It sells about 20lakh packets per day
  5. Its working capital cycle is mind blowing - it has zero debts and hardly any inventory and it get suppliers credit. So its cash from operations are more than 2.5x is profit after tax
  6. With the new product launches and better earnings visibility, you could see a big re-rating after the last few quarters of subdued topline growth…

VIdeos like this may create fear aong consumers and avoid them completely.
These kinds of plastic claim attack is going on many consumer products like egg, cabbage. This may damage the snacks industry as a whole.

No, i’m not tracking. Got out very early :((

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With Ashish Kacholia jumping in, it seems naysayers will have some pause. Another classic example of irrational exhuberance- both in upside and downside. Today any company trading above 25 PE looks untouchable. Of late CRISIL has been following many cos,with no revert. Is there a shift happening to other rating agencies??

My presentation on DFM Foods at Valuepickr Chintan Baithak 2019.

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Hi @manish962

Thanks for the presentation. I have been researching this co due to its good growth but unable to find the reason for almost no receivables for the past so many years. Mgt in the last several calls has said that they have no real receivables and dispatch goods against 100% advance. But am not sure i understand the reasons why distributors would not want a credit period. DFM has close to ~1400 distributors

I know that ready to eat snacks is a low wc intense biz but i would assume that at least 5-10% of topline should be locked up in receivables as is the case with other cos. Maybe this is an industry practice in North India but am not too sure about other parts of India

Could you help me understand this?

Thanks
Bheeshma

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This practice is not new in the snacks business. I have seen Balaji Wafers having such practice of no receivables. Dividend payouts gives comfort that the cash is real.

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Hello Bheesma,
Negative Cash Conversion Cycle (CCC) has been commonly associated with FMCG companies. You might be interested to look into this further here

I do not follow DFM closely, but it seems it has a favorable negative working capital cycle which potentially bears testimony of the demand pull in its core geographies.

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Hi @Prdnt_investor

Thanks for sharing the above doc. Low working cap intensity certainly seems to be a persistent industry-wide practice esp in the ready to eat snacking industry

One of the side-effects of this small cap & mid cap carnage since Jan 2018 is that people have forgotten that valuation is an important determinant of stock returns. This is because the expensive stocks (which also supposedly didn’t suffer from quality shocks in the past 1.5 years) are the only ones which have gone up since.

But this does not mean that the next 5 to 10 years returns from stocks will not be dependent on the price one pays to buy the piece of the business today.

Coming back to DFM Foods, last 5 years sales CAGR is only 13%, last 3 years is just 7% and last year is 14% (even last year they did less than 10% growth in three out of four quarters). This is despite no funding challenges for the growth of this business. Also this is despite new product launches and new geographies.

I am yet to understand through the discussion in this forum as to why any circumspect and conservative minded investor would think that the next 5 to 10 years would be drastically different from the last 5 years in terms of growth.

Even if one applies an aggressive exit P/E of 30 times with 15% sales CAGR over next 5 years keeping the NP margin same as FY19, the stock returns would come to just 7-8%. Any reduction in either the growth or the exit P/E would further negatively impact the expected returns.

So the discussion on this stock should revolve around why DFM, with a high degree of probability, grow at 20-25% over the next 5 years and not at 15% like it did last 5 years. Certainly it is no HUL or Nestle who have multiple successful products, topmost quality of management at every level of business and extensive global R&D along with deep distribution every where to command an astronomical P/E for eternity despite far lower levels of growth. Unless this question on growth is answered through the discussion, there are much better opportunities else in my honest opinion.

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DFM till 2017 was dependent on a single product - Crax Rings which contributed 85 to 90 % of their revenues. After introduction of new product - Curls, the contribution of Rings came down to 50%. So the change in strategy from single product seems to have worked well. The two new products were launched in 2019 and will take time to penetrate. Also moving into newer geographies, moving into the rural/semi urban market along with newer products could be the trigger in the next couple of years.
Agree that the growth has not been fantastic in the last year but they have maintained & improved the gross margins whereas their competitor Pratap Snacks has struggled. The competition remains a big risk. The margins may come under pressure in near future due to rise in the prices of Maize which is their main raw material.

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Is the raw material same in both DFM and Prataap snacks ?
In one of the TV interview, Prataap snacks said that their main raw material potato increased from Rs 12/Kg to 20 Per Kg and the oil price also increased due to increase in import duty from 10% to 50%.

In one of the concall, DFM foods said they use about 10% of corn meal. Not sure if they also use potato

Their raw material composition may not be the same. DFM’s main raw material is corn, corn meal & oil apart from other raw material used for Namkeens(10%). Pratap produces around 50% Namkeens which has different raw materials while it should have same raw materials for the quantum of corn based extruded snacks.

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Q1 FY20 results

Highlights from the latest presentation:

"Sales of Rings which have shown a great deal of consistency in recent quarters remained strong in Q1 as well.

On the new product front, Curls continued to grow in Q1 while Fritts which was launched in Q3 of last year , also contributed to the increased revenue. Fritts has seen good traction in the marketplace in particular the Cream and Onion Flavour and we hope to grow sales in coming quarters with continued advertising support and increased penetration in both retail and wholesale.

As for Pasta crunch which was only recently launched in Mar 19, the general market feedback is positive. Given the lean season in Q1, the product has so far only been launched in retail stores in major markets of the North Zone. During Q2, we intend to activate the wholesale channel as well as extend distribution to smaller cities.

On the capacity expansion front, work continued during the quarter and we are on track to commission our new extrusion line of 5000MTPA by the end of Q2 FY 20. The expansion which is being done at our Gr. Noida facility shall require a capital expenditure of approx… Rs. 20 crores and result in an incremental revenue potential of approximately Rs. 100 crores per annum. Furthermore, the company has taken an industrial premises on a long term lease also in Gr.Noida, for future expansion. "

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Latest development in this co:-

I think this is negative - I would think that promoters and Westbridge Capital (which is more of an Indian company) are much more glued to the long term potential of the business (compared to Advent) and they logging out and selling the entire shareholding to Advent (at a price lower than traded price) signifies that all juice is out in the valuations and upside from here might be limited. Infact, given how so many private equity backed firms have spiced up the numbers before the sale, I would see the growth exhibited in the last few quarters with a pinch of salt. Caveat to the above arguments is if Advent has any plans to make it a platform for doing a lot of other things then it needs to be independently thought about.

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There has been a complete turnaround in the ownership…advent bought the entire stake of promoters and i think westbridge also at approx 250-260/share in Sept/Oct 2019.

Old management/promoters: Mohit jain/Rohan jain are out fully(They started the company in 1984).There is a new CEO Lagan shastri who joined few days back: he is an Ex Coca Cola guy and spent 21 years there in various roles( IIM Pass out).So now that Advent has the full control, it is a clean slate as to how the new management wants to run the ship.

Looks like a turnaround play, but a lot depends on how new management behaves- It can go anyways; but looking at the PE guy(Advent) and the new CEO, chances of a good fortune seem more likely for me, thats my intuition.

Here is the linkedin profile of the new CEO: https://www.linkedin.com/in/laganshastri/

Disclaimer: Added a little for tracking purpose.Kindly do your own due diligence.

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In my opinion, it is better to watch few quarters as new owners may have to do some clean up of financials of this promoter owned company (remember USL takeover by Diageo, although this is takeover by global PE rather than global competitor so one could expect better due diligence). This means possibility of one off negative surprises…

Disclosure - interested but watching.

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Q3FY20 results:

Commenting on the Quarter results, the Company’s incoming Managing Director & CEO, Lagan Shastri said, “Pursuant to the SPA and completion of open offer, AI Global Investments (Cyprus) PCC Limited now holds 73.94% of the equity of the company, and the Board of directors has been re—constituted. The company is recruiting a new leadership team, which will be in place soon. Sales were flat as new product launches were deferred. Gross margins fell due to abnormal increase in palmolein oil prices. EBITDA fell sharply due to fall in gross margins and certain onetime costs during the quarter. The pressure on gross margins due to oil is expected to continue. The growth potential remains intact, with new management focused on key growth levers of the business.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/244787f6-c423-4b05-adee-02e68f0e59db.pdf (Investor brief)

https://www.bseindia.com/xml-data/corpfiling/AttachLive/7686b4d1-a16d-4988-bbf6-d78d3156063e.pdf (Results)

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