Dfm foods hbj capital

DFM Foods Ltd
- An Attractive Bet on Increasing Snacks Consumption

Content Index
• DFM Foods – Investment Snapshot :- Slide #3
• Industry Opportunity – An Overview:- Slide #5
• DFM Foods – Business Overview :- Slide #10
• Investment Rationale :- Slide #17

• DFM Foods – Financials:- Slide #24
• Concerns & Reasoning :- Slide #26
• Conclusion :- Slide #29

“ Specialists in discovering Multibagger stocks “

DFM Foods Ltd – Investment Snapshot
(as on July 30, 2012)
Recommendation :- BUY
Accumulation Range :- 180-220
• Invest 30% of Investment allocation at the

current Price.
• Have enough Cash to average down over the
next 6 Months Time-frame.
Current Market Price – Rs. 216
Bloomberg / Reuters Code – DFMF IN/ DFMF.BO
BSE / NSE Code – 519588 / DFMFOO
Mkt Cap (INR BN / USD Mn) – 2.28 / 41.01
[1 USD – Rs. 55.60]
Total Equity Shares [Mn]– 10
Face Value – Rs. 10
52 Week High / Low – Rs. 295 / Rs. 132
Promoter’s Holding – 69.02 %
Institutional Holding – 0.01 %

The Delhi Flour Mills Co ltd (DFM Foods) has been in the
business of Extrusion Snack Manufacturing, Wheat Storage
and Trading for the past several years.
Management had taken a conscious decision in 2009 to
stop its Wheat business which was a drag on its Bottomline and focus on the High growth Snacks business.
DFM Foods had launched its Crax brand on Corn Rings, as
early as 1984 and is a pioneer in the Snacks food industry in
the country. Crax is one of the Oldest Food brands in the
country with sales much below is potential.
DFM Foods is promoted by Mr. Mohit Jain and is well
supported by his two sons Mr. Rohan Jain & Mr. Rashad
Jain. Management is well experienced with strong Industry
knowledge built over the years.
Stock Markets has taken note of the Company’s strong
performance over the past 3 years. Its share prices has
appreciated by over 4X in the past two years of troubled
Market conditions.


Key Investment Highlights
Huge Growth Opportunities – Indian Snacks Industry is going through a High-Growth phase and it is just at
the starting of a Multi-Decade growth story. Presently India’s Per Capital consumption of Snacks is lower
than even some of our Peer countries which highlights the demand potential. More importantly, Market
Share has slowly started shifting from Un-Organized segment to the Branded Manufacturers.
A Niche Brand – DFM Foods with its Crax brand of Corn Rings is being positioned in the Market as a Niche
Brand with leadership position in the Roasted Corn Snacks segment. Moreover, Crax caters to only Children
in the age group of 6-14 Years which helps it to position differently from the Industry biggies like PepsiCo,
ITC, Haldirams etc. All the operations of DFM Foods are aligned towards strengthening this Niche Brand.
Strong Working Capital Management – The best Highlight for the Investor in DFM Foods is its Negative
Working Capital requirements which clearly shows the Huge Demand and Brand trust its products command
in the market. This highly efficient working capital management helps to reduce the earnings volatility
because of Shorter production cycles, Lower Inventories and Negative Debt.
Young and Dynamic Management – DFM Foods has transformed itself from a Low-Value business to a
Focused Snacks player over the past 4 years. This is majorly attributed to the induction of, Wharton educated
Promoter’s Son – Mr. Rohan Jain. He understands the potential of the Branded Snacks industry and also
strengths of his company well. He is intently focused on building a strong customer brand and is keen to take
the company to greater heights.

Decent Valuations – DFM Foods at the current valuations might not look attractive, but its quoting at decent
valuations considering its future growth. DFM is currently quoting at less than 15X its FY-14 Earnings
estimates which is attractive considering its ROE’s of >35% and ROCE’s of >30%. We expect the company to
maintain its Growth and deliver strong earnings over the next few years.


Industry Opportunity & Potential
- An Overview


Global Snacks Industry

• There has been a Structural increase in Snacks consumption across the Globe. There has been a social
change in eating Snacks and its consumption% relative to consumption of regular meals has gone higher.

• Snacks have been termed by Health advocates as “Junk Food”, but still people’s appetite for these snacks
has only been increasing for several years now.
• Increasing consumption is especially high in the under-18 Age category which has taken up to Snacks in a
big way. This can also be seen from the growth of Global Snacks brands across geographies.


Huge Opportunities
Per Capita Consumption of Snacks in Kg’s

• India’s Per Capital consumption of Snacks is a meager 0.5 Kg’s compared with the high consumption levels
across the globe. This difference is more of an affordability issue than any social difference amongst these
countries. Its generally seen that the consumption levels increase with higher discretionary income among
the people in Emerging economies.
• This can be validated from the fact that India’s Urban consumption stands at around 7X (>0.8 Kg’s) its rural
consumption and this mix has been changing over the past few years with the Increasing prosperity of India’s
rural consumers. They now nearly contribute more than 35% of the overall snacks market.
• In monetary terms, Indians spend only 3$’s on an average in Snack foods. This pales in comparison with the
65 Billion $ snack industry in USA. With a huge population which is Young and has a consumerist mindset,
the potential for the growth of this Industry in India is Huge.


Indian Snack Food Industry
Company

Brands

Major Product

Frito-Lay
( Parent Company : Pepsi )

Lays, Lehar, Kurkure

Potato Chips

ITC

Bingo

Extrusion Snacks

Haldirams

Haldirams

Namkeen

Prakash Snacks

Yellow Diamond

Potato Chips

Balaji Wafers

Balaji

Namkeen

SM Dye Chem

Peppy

Cheese Balls

Fun Flips

Flippo

Peanuts, Namkeens

• Indian Snacks market is rich with several Strong National and Regional brands which cater to a wide variety
of taste buds offering products across various price points.
• PepsiCo in line with its Global strategy is clearly the most aggressive players in the Indian market. Its “Lays”
brand of chips, “Kurkure” brand of Namkeens and “Lehar” range of snacks have a clear positioning.

• PepsiCo’s strongest focus and growth is from its “Lehar” brand which caters to the customers at the
bottom of the Pyramid with an affordable price. This segment is expected to continue its Fast growth.
• Several Regional players like Balaji and Prakash snacks have set-up bigger manufacturing facilities and are
on course for a strong growth over the next 3 years.


Major Indian Brands


DFM Foods – Business Overview


Key Highlights
Pure-Play Snacks Company

Efficient Capital
Allocation
DFM Foods has a very strong
Balance Sheet. Its Debt: Equity ratio
is very comfortable and with good
cash flows, company can plan its
next CAPEX with Internal Accruals.

DFM Foods which was into low-value
businesses like Wheat Storage, Trading
etc has stopped these activities and is
currently a Pure-Play Snacks company.
It’s the only listed company in this Snacks
Industry which will attract Investors.

Company efficient Capital allocation
can be seen from its tight Working
Capital cycle.

Growth Opportunities
DFM Foods is expected to grow strongly
at over 35% over the next 2-3 years
which will result in the business reaching
substantial scale.
More Importantly, unlike other Growing
segments – We expect DFM to maintain
its Margins and its high Return Ratios.

DFM Foods

Capacity Expansion
DFM Foods has recently expanded
its Capacity by more than 2.5X,
from 600 Kg/ Hr to around 1600
Kg/ Hr which will take care of its
supply requirements for the next
couple of years.

Leveraging CRAX
DFM Foods with its popular Crax brand is
hugely underleveraged in terms of
Distribution Network.

Company has now started entering several
new geographies and is increasing its
Retail presence. DFM’s future growth will
mainly come from its entry into new
Geographies and a growing Sales Network.


DFM Foods - Products

Corn Rings

Namkeens

Natkhat

• DFM Foods has 3-Primary products (Corn Rings, Namkeens and Natkhat). Out of these products, Corn Rings
is its Flagship product and contributes more than 80% of its overall revenues and 90% of its overall profits.
• Its flagship – Corn Rings and Namkeens are sold at a Price point of 5Rs/- and 10Rs/-. Its Natkhat is being
sold at a price point of 2Rs/- which makes all its products affordable to customers across the Bottom of the
Pyramid. Also these lower points expand the Target customer base significantly.
• Crax is basically an extrusion Snack and the company has continued to create new flavors to engage its
customers. One of its “Pudina flavor” which was launched recently has gained significant Market traction
and company aims to delight its customers with tasty flavors regularly.


A Niche Brand Crax – Product Differentiation

Target : 6-12 Age Kids

• Corn Rings is a relatively untouched segment by the bigger
brands and hence DFM Foods is the leader in this Niche segment.
• DFM Foods has also tried to position Crax Corn Rings as a snack
for Kids in the Age bracket of 6-14 and hence has concentrated all
its activities based on that.

• For example, all its Advertisement is purely on Cartoon
Network, Pogo and other Kids related medium and also its Sales
points is skewed towards reaching the Kids.
• This has helped it to differentiate in a Crowded Snacks market.
Also in terms of Products, Crax attracts Kids considering its
Flavors, Structure (Rings in their Fingers) etc.
• Company’s major promotions is based on the attractive Gifts
which it packs with the Product. This is the major Promotional
expense and with this, DFM’s total Marketing costs include 9% of
these gifts and 3% of advertisement costs.

• DFM continues to focus on its Corn Rings and even the recent
Capacity expansion is on this product line. Considering its
leadership status and relatively lower competition, DFM foods
would continue to do strongly in this segment.


Strong Growth

• DFM Foods in spite of being a pioneer in the Snacks category, never really focused on this business.
Management had completely stopped Marketing and Advertising the brand from the late 1990’s to the early
-2000’s. But even with the explosion of Brands like Lays, Kurkure etc – Crax was able to do decent business
without any investments.
• This show of Brand strength finally resulted in the Managements focus to build this business and from
2005 onwards, DFM has been investing in the Brand through promotional activities across Kids Television.
• DFM Foods has grown strongly and its Major Product “Crax” Corn Rings has continued to expand its market
over the past few years. This product has the highest Gross Margins amongst its 3-Products and hence any
growth in this would be of healthy Margins leading to better PAT numbers.


Geographical Expansion
• There are over 5-Million
distribution points for Snack
Products across India.
• DFM Foods has just scratched
the surface in terms of its
distribution reach.

Total Retail Points :- Aprox-1,35,000
Existing Geographical Presence :- North India (2/3rd),
Western India (Mainly Mumbai & Pune – 1/3rd)

Future Expansion :-

Complete Western India (Gujarat,
Madhya Pradesh) & Eastern India (Bihar, Bengal)

Strong Markets :-

Delhi, UP, Punjab, Haryana, Rajasthan

• With expanded capacities,
DFM has been increasing its
presence in New Geographies.
• These new geographies
continue to work on the same
sales model as its Strong
Northern Markets.

• DFM Foods has been an under-leveraged brand. While all its Marketing has been on National Platforms
like Cartoon Network and Pogo, its retail presence was only in North India. Hence, company Investments in
its Brand was not fully exploited.
• This can be seen from the response Crax has got from New Markets in Mumbai and Pune. Actually the per
store sales in these locations has been 20% higher than its traditional strongholds. The product has been
lapped up well and has captured the Mind share of Kids in these regions quickly.


Efficient Working Capital Management

• DFM Foods has been working on a Negative Working Capital cycle with Strong Advances from its
customers which shows the brand strength and the demand for its products. Even in terms of its Debtor and
Creditor days, DFM has been managing it well.
• This efficient Working Capital management might get a little hit in the Newer markets because of increased
transport time leading to Higher Inventory, but the core Sales cycle will continue to be strong. This negative
Working Capital cycle puts zero pressure on Growth and hence DFM Foods can continue to grow at very high
rates, if its get its Supply right.


Investment Rationale


Strong Capacity Expansion
Previous Processing Details
Old Processing Capacity :- 600 Kg/ Hr

• DFM Foods has expanded its
Manufacturing Capacity in Greater Noida,
UP which is catering to all its markets.

Revenue Potential from its earlier Capacity :- 150 Cr Rs • This expansion is a Greenfield capacity
FY-12’s Capacity Utilization :- >100%
Expanded Processing Details

and the company has enough headroom to
create additional Brownfield capacity, if
there is a need. This Brownfield expansion
will certainly improve Return ratios.

New Processing Capacity :- 1600 Kg/ Hr

• Company expects strong demand to fill
these capacities fast enough and is aiming
New Revenue Potential :- 325 Cr Rs
to reach 100% utilization in 2-years.
Management says that, demand was never
Projected Capacity Utilization :- New Plant is expected a problem and it is the supply which was a
constraint previously.
to reach 100% Capacity Utilization around FY-14
• Transportation Cost is a major % of expenses for a Snack Manufacturer. Hence, when the sales of Western
Region becomes large enough – DFM Foods would be scouting to set up a new manufacturing location in
Maharashtra to cater to these Geographies.
• Our Conversation with the Management revealed that the Company has gone for a deduction of 10%
Volumes in its SKU’s which is nearly equal to a 10% Price hike in July, 2012, to maintain its margins in light of
its higher transportation and Raw Material costs. This Price hike shows the Brand's pricing power and
Management’s Rationality in pursuing growth.


Past 5-Year Performance
• Since the focus shifted to
transforming DFM to a Pure Snacks
company, it has shown strong
Performance in all its Financial
Parameters.
• Company has a very strong balance
sheet with a comfortable leverage for
its latest Capacity expansion. It has
strong Cash flows to service Long
term debt.
• DFM Foods has been continuously
paying healthy Dividends for the past
5 Years.
• Depreciation and Interest Costs are
expected to increase in FY-13 because
of the Capitalization of the new
Manufacturing facility.
• With little Cash drain, we expect the
company to re-invest a Portion of its
Cash flow for setting up new
manufacturing facilities and return
good dividends in the future.


Healthy Margin Expansion

• DFM’s growth has been Margin accretive, with its Operating Profit Margin almost doubling in the past 5Years which is even more appreciate able considering the tough environment.

• Company PAT Margins have expanded even better, but the base was very low. Company’s earnings have
clearly outperformed its Cost growth due to better efficiencies.
• DFM’s every other Financial ratios like Current Ratio, Gross Margin, Interest Cover Ratio etc looks attractive
for any Long term Investor.


Decent Valuations

• DFM Foods has little growth constraints in terms of demand. With an expanded capacity and increasing
distribution, it would be able to grow its earnings at a healthy pace going forward.
• DFM Foods business model with a High Asset Turnover, Negative Working Capital and Healthy Margins
will help it to continue posting very strong Return Ratios.
• The turnaround in business operations is best established in the Earnings Per Share which has grown from
about 0.78 Rs to over 10 Rs in just about 5 Years. We expect the company to continue posting strong EPS.
• On Classic Financial terms, DFM Foods might look over valued. But with all the above positive factors, we
believe that DFM Foods trades at a decent Valuation with potential upsides from Earnings.


Recent Deal Flow

• Sequoia Capital India has invested $30 million ( Rs.145 Cr Rs) in Indore-based Prakash Snacks Pvt Ltd for an
undisclosed minority stake (speculated to be in the region of 30%) in June 2011.
• Prakash Snacks had sales of 154 Cr Rs in 2010-11. Comparing with a much Stronger “Crax Brand” with
revenues of around 170 Cr Rs, quoting at around 220 Cr Rs which shows the Valuation Potential in the Stock.

• Rajkot-based Balaji Wafers (owned by local entrepreneur Chandubhai Virani and his family) has an
estimated turnover of Rs 450 crore. It was keenly sought after by Frito-Lay at an aggressive Valuation.
• Balaji was willing to dilute only a minority 30% stake to Frito-Lay, but they were keen to acquire 51%-plus
share. So, after several round of negotiations lasting for close to two years, the talks broke down a year back.


Operational Levers
With Margins compressing over the past 2 Quarters, we have reasons to believe that the Management will be able
to meet its Margin Guidance of about 13% on its EBIDTA numbers and around 6-6.5% on its PAT numbers, over the
course of the next 3-4 Quarters. This is because of its Operational levers like,
• Power Consumption :Due to the Huge power shortages in Uttar Pradesh where DFM’s manufacturing plant is located, it’s
Power costs has been high. The plant has been virtually running out of Diesel Generators and the cost per unit of
Power has been at 10 Rs. This is very high compared with Grid power and hence with power situation expected to
improve over the next 2-years, we expect savings in Expenses to boost Margins.
• Defending Gross Margins :DFM Foods had not taken any price increase over the past 4-years, despite the Huge increasing the
several commodity prices. But the company was still able to maintain its margins, because of better Operational
efficiencies. DFM Foods as mentioned earlier has taken a Price increase, through decreased volumes which will help
it to maintain its margins. Past performance gives us confidence on its ability to defend its Margins, even in a
challenging environment.
• Efficient and Modern Processing Plant :DFM’s huge capacity expansion in one location will provide it with economies of scale in terms of
manufacturing, procurement capabilities etc. Also this manufacturing is a new modern plant which will bring in
several operational efficiencies in terms of lower overheads and Expenses and is an important lever for the
management to maintain margins.
• Level Playing Field :With the GST expected to be implemented over the next 1-2 Years, It would help these branded players
to compete with the unorganized sector on a level playing field because of tax uniformity. This will definitely
provide a fillip to the company’s earnings.


Financials


Earnings Projection
Income Statement (INR Cr)

FY 11

FY 12

FY 13E

FY 14E

Sales

120

170

220

295

Raw Material Cost

76

110

145

190

Power & Fuel Cost

2.4

3.5

4.5

8.5

Employee Cost

6.3

9.41

11.5

14

Selling Expenses

14.6

20.4

25

40

Miscellaneous Expenses

3.6

5

6

6.5

EBIDTA

16.27

22.77

28

36

Interest

2.17

4.47

7.5

8.5

Depreciation

1.4

2.3

3.5

4.5

Profit Before Tax (PBT)

12.71

15.92

17

23

Tax

4.39

5.56

5.69

7.7

Profit After Tax (PAT)

8.34

10.36

11.31

15.3

Earnings Per Share (EPS)

8.34

10.36

11.31

15.3

• We have taken conservative

estimates with revenue growth
of around 30% over the next
two years.

• Also the Margin Compression
at both the EBIDTA and PAT level
is being factored in the future
earnings estimates.
• Company Tax Rate has been
consistently above 33%, which
gives us confidence about the
company’s accounting practices.
• Since all this growth is without
any equity dilution, any upsides
in margins will lead to higher
ROE’s and EPS which lead to a
re-rating in the share price.

Specialists in discovering Multibagger stocks “

Concerns & Reasoning
1.) Small Market Size – Corn Rings :
Corn Rings as a category has not been huge enough to attract Bigger Brands. It is still being dominated by
Local brands and even Globally, there is no considerable peer in this category. Hence, Scaling up of Crax
requires creating a new market which is a strong Challenge. But we feel that Crax is well positioned to
capture the transition from Un-organized products to Organized Brands in the Packaged foods space and
hence in Corn Rings, Crax will be able to grow its market share and a expanding market is a good topping.

2.) Inflationary Cost Input Pressures :
With the Agri Raw material prices increasing constantly across the globe, there will be severe pressure on
the Margins of DFM Foods. But we are confident that the Management will be able to manage this,
considering its good performance over the past 4-years which is probably one of the most volatile phases in
the commodity prices and also it abilityvary its per Unit Volumes to maintain Margins.

3.) Management’s Execution Capability in New Markets :
DFM’s biggest growth is expected to come from new markets where it does not have a Big Mind share of the
customer or a well established Distribution network. Hence there is an execution Risk involved based on
Managements plans. This is mitigated to an extent by the acceptance and growth of Crax in Mumbai & Pune
which is a new market and more importantly without any changes in the WC or distribution expenses.

4.) Valuations not Cheap :
The biggest Risk in DFM Foods is the valuations. They are certainly not cheap when compared with the
broader markets and peer small cap companies. Also, growth mix can reduce the margins by a few % points.
Hence there is a downside risk associated which will be mitigated only with Strong Profit growth.


Conclusion


Price Chart

Share
Holding %

Mar
2012

Dec
2011

Sep
2011

June
2011

Promoters

69.02

69.02

69.02

69.02

FII

0

0

0

0

DII

0.01

0.01

0.01

0.01

• DFM Foods has seen its share price rising well in spite of

Broader Stock Market correction. Market has actually
recognized the Company’s business shift from Low-value
business to the High Potential Brand business.
• Institutional Investors don’t have any interest in this
Small-Cap stock and if the company does well, their entry
will be a huge Trigger for the Stock.
• Company has recently started giving Conference Calls to
Analysts and Investors, which helps Market Participants to
have better view on its Business operations.


Conclusion
Its common sense to understand that, Consumption of snacks in India is expected to grow at healthy
rates for the next many years. But this market has been targeted by several Large National and Small
Regional Brands. There is also competition from the Unorganized market and even in the Snacks category,
there are various products which show different growth rates. Hence its difficult to grow profitably in such a
scenario where Companies don’t have Pricing power. We expect that 5-Years down the line, Companies
which flourish will have either a portfolio of Strong Brands across categories (or) A very strong Positioning in
a Niche Sub-Category of the overall snacks market which helps them to grow without any Margin Dilution.

The only Pure-play listed Stock in this attractive Snacks Industry is DFM Foods. Company’s new found
focus and energy has helped it to create a significant Growth traction in the market over the past 4 years. Its
Crax Brand being a niche play will help it to Grow, Protect its Margins and Improve its Return on Investments
going forward. DFM Foods capacity expansion which has been capitalized will help it to grow at high growth
rates for the next 2-3 years.
DFM’s financials gives us the biggest confidence in recommending the stock. Company has continued to
show prudent Financial Management on both its Working Capital front and also on it Balance Sheet. We
believe that the company is strengthening all dimensions of its business like Sales, Marketing, Distribution,
Brand Building, Product Improvisations etc to take the company to a Higher Orbit.
DFM Foods currently quotes at around 20X its earnings which is not cheap. But considering its Growth
potential, High ROE’s etc – we feel that the Stock will continue with this High earnings Multiple. Hence, all
our bet in this case is on the Future Earnings growth and hence this stock is a risky bet. Contrary to our
Alpha Investing stocks (Higher Risk Adjusted Returns), DFM foods is a High Risk- High Return stock. So,
Invest slowly in the stock over a period of time opportunistically (During the next 2 Quarters) and don’t
expose more than 5% of your Portfolio.


THANK YOU


Dfm foods hbj capital

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