Dear Sir,

We would like to share with you a detailed report on DFM Foods (BSE – 519588).

Recently, in Apr’15 we shared our findings on DFM Foods (BSE Code – 519588) which is well known for its CRAX and NATKHAT packaged snacks. The report was initiated for Alpha and Alpha plus members in April 2015 at around levels of 330 (CMP – 620)

Note: The report is being shared only for the purpose of information and is not an investment advice. In case you invest in DFM Foods or for that matter any company, please carry out your own due diligence.

DFM Foods – Basic details

(19th Apr’15 note on the stock)

DFM Foods is the company behind the well-known CRAX corn rings. The company is engaged in the business of manufacturing, selling and marketing of packaged snack foods and pioneered the entry of packaged snacks in the Indian market with the introduction of Crax Corn Rings product. Corn Rings and Wheat Puffs are marketed under the CRAX and NATKHAT brand names respectively.

DFM’s products are focused primarily on ready-to-eat snacks for children. Corn Rings sold under CRAX brand remains the company’s main product, contributing ~75-80% to revenues and 10-11% contribution each from NATKHAT and Namkeens.

Differentiated product positioning and pricing – CRAX corn rings command leadership position in the roasted corn snacks segment and cater largely to the ready to eat snacks demand of children in the age group of 6-14 years.

In fact, company has priced CRAX corn rings at Rs 5/10 per pack and NATKHAT at Rs 2/5 per pack and offers free gifts with every pack to lure in children. The company focuses its promotional activities on children and runs its advertisements on cartoon based channels.

Going forward, DFM plans to leverage the CRAX brand by launching it across a wider product range and age group outside the current target group.

Geographical expansion – DFM sells its products primarily across North and Central India, however since the last 2-3 years it has been expanding in West and East India as well and the two regions now contribute 15% to the sales of the company against 0% three-four years back.

The company’s focus is on penetration of existing markets and gradual expansion into unchartered territories as there’s huge score for expansion of distribution network and leverage the brand equity of CRAX.

Industry OutlookThe total market for salty snacks in India is worth Rs 13,000 crore. The Ready-to-eat snacks market is growing at ~15% p.a. and ~40-45% of the market for salty snacks is unregulated, thus offering huge scope for DFM to grow consistently and expand its market share over the foreseeable future.

As per the latest report by CRISIL, Tier-2 FMCG players have increased their share in the domestic Food and Beverages (F&B) market to 30% from 20%, and grown at nearly twice the pace of Tier-1 players. Further, the report suggests that Tier-2 players will increase their market share to 40% by 2019.

PerformanceDFM’s performance has been excellent over the last 5 and 10 years cycles. The company has consistently delivered sales and profits growth in excess of 25% and has also maintained return on investments in the range of 22-25%.

DFM’s working capital requirement is zero (even negative) as the company sells its product on cash and maintains very low level of inventory which is more than covered by the payables and the advances from the customers. The same also results in very strong cash flows from operations.

In 2012-13 the company expanded its capacity from ~6500 tonnes per annum to around 16,500 tonnes per annum and the current capacity utilization is ~75%. The 75 crores CAPEX was funded through a mix of internal accruals and debt and impacted the profitability of the company in the last 2 years on account of both higher interest and depreciation charges, however the company now has only about 10 crores of net debt and with gradual scale up in utilization we expect improvement in margins and profitability on both EBITDA and net profit level.

Also, no major CAPEX is expected for the next 12-18 months, while a brownfield expansion at the existing facility can be funded through internal accruals and shall result in additional capacity of around 5000 tonnes.

For FY 16, assuming very modest growth of 15-18% (over the last 3, 5 and 10 years cycles the company has consistently recorded 20% growth) and EBITDA margins of 9.6-10%, we expect the company to record pre-tax earnings of 22-23.50 crores.

Disclosure: I have personal investment in DFM Foods.


Best Regards,

Ekansh Mittal

Ph.: +91-72-75050062, Mob: +91-9818866676

Email: [email protected]

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