DFM Foods Ltd: Research Report By SMIFS

DFM Foods Ltd.: Pioneers in extruded snack food

DFM Foods Ltd (DFM), one of the pioneers of packaged snack foods in the Indian market is engaged in the business of manufacturing, selling and marketing of packaged foods for over 35 years. DFM sell its products under the brand name ‘CRAX’, ‘CURLS’, ‘NATKHAT’ and ‘FRITTS’ and its products profile consists of 18 distinct product variants across namkeen and snacks segment. Company has two state of the art processing units located at Ghaziabad and Greater Noida with a strong focus on revenue & distribution, innovative marketing and new product development. The key investment thesis which draw attention to DFM’s business are:

New management team to accelerate growth—With the new promoter (Advent International) and new management under the leadership of Mr. Lagan Shastri – MD & CEO (appointed w.e.f. January 2020), we believe business growth to accelerate going forward with new product launches and distribution expansion. He carries with him 21+ years’ of experience from working with Hindustan Coca-Cola Beverages Pvt Ltd under different roles.

High quality cash generating business with negative working capital—DFM is a high quality cash generating business as it operates on cash & carry basis. This has resulted in robust net debt free balance sheet with negative working capital days, strong FCF generation and superior return ratios. Company has reported stable gross margins in the range of 39%-40% in the last six-year period which is also better than some of its peers.

Operating leverage to drive margins and return ratio’s—Company has been continuously expanding its capacity and the total manufacturing capacity of the company stood at ~48,400 MTPA as on FY20 end from 20,000 MTPA in FY15. With the current capacity company can generate peak sales of ~Rs. 700 cr depending on the product mix. We expect company to reach peak sales by FY23E which should help the company to benefit from scale and operating leverage thus would lead to improvement of margins and return ratios.

Rising urbanisation & preference of non-fried food to benefit the company in long run—Presently consumers demand a range of products that deliver health benefits in convenient formats and thus DFM focuses on developing snacks that contain healthy ingredients, non-fried and thus satisfying cravings of the consumer. Currently DFM’s all extruded products (excluding Namkeen) are non-fried such as Rings, Curls, Fritts & Cheese Balls.

Innovative marketing—DFM’s CRAX brand has high visibility on television, with a special focus on cartoon channels aimed at children. Gifting toys as far as Crax Rings sales are concerned is an integral part of the offering since FY 2005-2006. DFM spends ~3.5%-4% (average) of its total revenue on advertisements and sales promotion.

We have valued the stock at 40x FY23E EPS to arrive at a Target Price of Rs. 520 offering return potential of ~32% based on the CMP over the next 9-12 months. We initiate this coverage with a “Strong Buy” rating on the stock.