Company Overview :

• DFM Foods Ltd. [ BSE Code – 519588 ] is operating in one of the fastest growing FMCG segment viz., Packaged Snack Food segment and is competing with brands like Kurkure, Lay's, Yellow Diamond, etc..

• Company is a pioneer in introducing branded (packaged) extruded snacks with the brand name 'CRAX' in 1984 which even today enjoys ~8 % marketshare in North India.

• Despite stiff competition, company has grown its sales (by value) at 10 Years' CAGR of 27.20 % and

  at 5 Years' CAGR of 48.08 %.

• Volume growth has been equally impressive with 10 Years' CAGR in sales by volume at 16.65 % and

  5 Years' CAGR in sales by volume at 32.49 %.

• Company increased its manufacturing capacity by ~167 % in FY12 (precisely in November 2011) and within 3 years, it is sitting on verge of approaching 100 % utilisation in its old & new capacities combined which speaks highly of acceptance of company's products in the marketplace.

• Westbridge Capital, one of the largest and most successful public markets fund, has recently, on 30^th January 2014, taken a significant 24.90 % equity stake in the company, at INR 259.10 per share, which augurs very well for future scalability and profitable growth of the company.

• Company is working on a three pronged growth strategy of --

  --diversifying geographical sales presence,

  --diversifying geographical manufacturing presence, &

  --diversifying product offerings via new launches.

• Management has been proactive in its IR initiatives by regular hosting of concalls and publishing of detailed presentations/press releases after every quarterly result. Senior management is professional with decades of experience in the business.

• Despite all positives as also underowned equity structure with low floating stock, company is trading at reasonable :

  1.22x Mcap/Sales TTM,

  1.01x Mcap/Sales Forward

  1.45x EV/Sales TTM

  1.26x EV/Sales Forward

Concerns :

(1) Inter Corporate Deposit (ICD) given to parent The Delhi Flour Mills Co. Ltd.

Here, it is also worthwhile to note the financial performance of The Delhi Flour Mills Co. Ltd. over last 10 years as also its Gross Debt and Equity over same period :

Delhi Flour Mills Financials

Over last two fiscals i.e. FY12 & FY13, the parent company is relocating its flour milling operations to Plot No. 86-B,C,D,E, Sector Ecotech-I, Extension-I, Greater Noida (U.P.) from current location 8377-8381, Roshanara Road, Delhi. Plant & Machinery are imported from Ocrim SPA during FY13 which were already received and civil constuction was going on at the site. Total Project cost was estimated at INR 172 cr. out of which INR 64.73 cr. were spent till FY13. Commercial Production at the said new facility is expected to commence from September 2014 as per company estimates.

To Fund this project, management had approached its Bankers for an additional project finance of INR 58 cr. over and above INR 67.15 cr. project finance tied up in FY12. In addition, company was looking at raising funds via equity route which should be to the tune of ~INR 46 cr..

Now, before discussing any further let's go to our Concern No. 2 and then check whether both concerns stand addressed as on date.

(2) DFM Foods Ltd. promoters sold their personal stake in the company to the tune of 24.90 % at INR 259.10 per share to Westbridge Capital on 30^th January 2014 and raised INR 64.52 cr. in their personal capacity of which no funds came to the company's books.

Here, three things need to be noted :

(a) In the concall hosted by the management after declaration of Q3FY14 results which also coincided with the event of said promoters stake sale, management assured that out of the INR 64.52 cr. raised, 31 cr. will come to DFM Foods books via repayment of ICD given to the parent.

(b) Since parent promoter co., The Delhi Flour Mills Co. Ltd. was already in the requirement of funds in order to finance its project (as discussed above in Concern No. 1), the additional 33 cr. which were raised by the said promoter stake sale seem perfectly fine and exactly matches with the funds requirement as discussed in Concern_1.

(c) Significant investment by a renowned PE Player like Westbridge taking maximum permissible ( w/o triggering open offer ) equity stake of 24.90 % and the fact that one of its founding members, Mr. Sandeep Singhal, has also joined company's board augurs very well for the future of the company and puts to rest both Cocern_1 & Concern_2.

(3) Company operates in a very competitive environment and that too at low price points of Rs. 5 and Rs. 10 per pack. Competitors are biggies like Pepsi, ITC, Parle and the new entrant GCL (Gopal Corporation) as also strong mid-size players like Balaji and Prakash Snacks; forget here numerous regional players which operate at small scale.

Here, two things need to be noted :

(a) Company has carved out a niche for itself in 6-10 years age bracket and concentrates its marketing activities on said genre. Its “gift with every pack” strategy is one of its kind amogst competition and has enabled it to sustain as well as grow handsomely against competition.

(b) Company increased its capacity by 167 % in FY12 (precisely in November 2011) and old plus new capacity should get to 100 % utilisation well before FY15-end which means in just 3 years timeframe, entire increased capacity got absorbed by the market which speaks highly of acceptance of company's products in the marketplace. If we look at volume growth attained by the company over last 5 years, the picture gets more clearer :

Key Monitorables :

(1) Repayment of ICD :

Management has assured the shareholders about repayment of INR 31 cr. ICD given to The Delhi Flour Mills Co. Ltd. out of the funds raised via promoters' stake sale to Westbridge Capital. We need to monitor whether the actual repayment happens during Q4FY14 or not.

(2) Increase in Manufacturing Capacity :

As discussed before, company should run out of existing capacities (old & new combined) in FY15 and so it will require to draw plans for capacity augmentation soon (before Q1FY15). Since the company has now expanded into West & East India as also it is actively looking for entering into Southern market, so, the roadmap towards increase in existing capacities will be key monitorable aspect asto where and how the company plans to increase its manufacturing presence.

(3) Sales Growth :

Company's sales growth, particularly in West & East India will be key monitorable to check whether the company's products are finding same level of acceptance as they have found in North India. Also, sales growth in North India will also need to be closely watched out for to ensure company doesn't loose out in its home market.

(4) Sales Mix :

Starting FY14, company has started to focus on 'Natkhat' brand which is at Rs. 2 price point as also has launched new product in the form of 'Kruchoids'. Going forward it will be interesting to see the sales mix as to whether other products gain sales momentum vis-a-vis company's flagship brand 'Crax' Corn Rings or not.

(5) Debt & Equity Dilution :

How the company manages CAPEX plans over next two years will be key aspect to monitor – whether it goes for entire debt funded CAPEX or dilutes equity to what extent or how it balances debt-equity structure to finance CAPEX.

(6) New Product Launches :

Company, in all likelihood, is going to go for aggressive new product launches starting FY15. Profile of products launched, its respective peer scenario as well as how well they get received in the marketplace will be key monitorable.