DFM Foods

Anand Rathi Research

A play l on the h growing i ready-to-eat d snacks k market; k we initiate i i i coverage with ihaB Buy
Rating: Buy Target Price: `460 Share Price: `289
Ke data Key 52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding DFM IN / DFM.BO DFM BO `329/ `147 21740/6483 US$0.1m `3bn / US$47m 10m

DFM is s a niche c ep player, aye , focused ocused o on ready-to-eat eady to eat s snacks ac s for o c children. de O Over e FY1993993 2013 this segment has exhibited a 15% CAGR. Increase in ad-spend over FY09-13 from 4.3% of net sales to 4.6% has helped the p y improve p pricing p gp power and thus the EBITDA margin g from 5% to 9.3% company It has aggressive plans to expand its distribution network. It plans to expand retail outlets to 0.4m by end-FY16, from 0.2m in FY13. It also plans to expand distribution over FY15-16 to the Canteen Stores Department, p modern trade and the Railways y We initiate coverage with a Buy, and a price target of `460, at a PE of 25x FY16e Key risks. Increase in raw material prices and competitive pressures
Financials (YE Mar)

Shareholding (%) Promoters Foreign Institutions Domestic Institutions Public

Dec13 69.0* 31.0

Sep'13 69.0 31.0

Jun'13 69.0 31.0

Note West bridge acquired 25% stake in 4QFY14 from promoters.

Aniruddha Joshi
+9122 6626 6732 aniruddhajoshi1@rathi.com i ddh j hi1@ thi

Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Company Company, Anand Rathi Research

FY12 1,692 104 10 4 10.4 24.5 27.9 8.3 34 4 34.4 25.9 0.9 163.8

FY13 2,250 63 63 6.3 (39.1) 45.8 7.1 16 7 16.7 17.0 0.9 146.9

FY14e 2,722 89 89 8.9 40.3 32.6 6.3 20 5 20.5 22.0 1.0 78.7

FY15e 3,266 142 14 2 14.2 60.3 20.4 5.2 28 0 28.0 29.0 1.4 59.5

FY16e 3,920 184 18 4 18.4 29.5 15.7 4.2 29 8 29.8 32.5 1.7 46.7

Shilpi Taparia
shilpitaparia@rathi.com 21 March 2014

DFM Foods: Financials

Fig 1 Income statement (` m)
Year-end: Mar Net sales Sales growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest - Depreciation + Other income - Tax Income tax rate PAT Extraordinary items Minority Interest Adjusted PAT FDEPS (`/sh) FDEPS growth (%)
Source: Company, Anand Rathi Research

Anand Rathi Research

Fig 2 Balance sheet (` m)

FY13 2,250 33.0 2,040 209 9.3 94 44 29 37 37.2 63 63 6.3 (39.1) FY14e 2,722 21.0 2,467 254 9.3 75 50 6 48 35.0 89 89 8.9 40.3 FY15e 3,266 20.0 2,954 312 9.5 45 56 7 76 35.0 142 142 14.2 60.3 FY16e 3,920 20.0 3,537 382 9.7 43 65 9 99 35.0 184 184 18.4 29.5 Year-end: Mar Share capital Reserves & surpluses Shareholders funds Minority interests Debt Deferred tax liability Capital employed Fixed assets Investments of which, Liquid Working capital Cash Capital deployed Net Debt W C turn (%) Book value (`/sh)
Source: Company, Anand Rathi Research

FY12 1,692 41.2 1,494 198 11.7 45 24 30 56 34.9 104 104 10.4 24.5

FY12 100 202 302 583 47 932 885 (19) 11 932 619 (1.1) 34.9

FY13 100 236 336 613 70 1 018 1,018 974 (8) 17 1,018 665 (0.4) 40.5

FY14e 100 289 389 388 70 847 1,024 (239) 26 847 431 (8.8) 45.9

FY15e 100 385 485 368 70 922 1,148 (299) 37 922 400 (9.2) 55.5

FY16e 100 511 611 348 70 1 028 1,028 1,333 (371) 30 1,028 387 (9.5) 68.0

Fig 3 Cash-flow statement (`m)

Year-end: Mar Consolidated PAT +Depreciation Cash profit - Incr./(Decr.) in WC Operating cash-flow -Capex Free cash-flow -Dividend + Equity raised + Debt D b raised i d -Investments -Misc. items Net cash-flow +Opening cash Closing g cash
Source: Company, Anand Rathi Research

FY12 104 24 156 5 161 (553) (391) (23) 470 (73) (18) 29 11

FY13 63 44 124 9 134 (132) 1 (29) 60 (27) 6 11 17

FY14e 89 50 138 231 369 (100) 269 (35) (225) 9 17 26 6

FY15e 142 56 198 60 257 (180) 77 (46) (20) 11 26 37 3

FY16e 184 65 249 72 321 (250) 71 (58) (20) (7) 37 30

Fig 4 Ratio analysis @ `289

Year-end: Mar P/E (x) P/B (x) EV/sales (x) EV/EBITDA (x) RoAE (%) RoACE (%) Dividend yield (%) Dividend payout (%) RM to sales (%) Ad spend to sales (%) EBITDA growth (%) EPS growth (%) PAT margin (%) FCF/EPS (%) OCF to sales (%)
Source: Company, Anand Rathi Research

FY12 27.9 8.3 2.1 17 6 17.6 34.4 25.9 0.9 24.1 63.8 4.0 35.4 24.5 6.1 (377.5) 9.5

FY13 45.8 7.1 1.5 16 7 16.7 16.7 17.0 0.9 39.6 63.4 4.6 5.9 (39.1) 2.8 2.1 5.9

FY14e 32.6 6.3 1.3 13 7 13.7 20.5 22.0 1.0 33.9 63.4 4.7 21.7 40.3 3.3 303.9 13.6

FY15e 20.4 5.2 1.1 11 2 11.2 28.0 29.0 1.4 28.2 63.3 4.7 22.6 60.3 4.3 54.6 7.9

FY16e 15.7 4.2 0.9 91 9.1 29.8 32.5 1.7 27.2 63.1 4.7 22.5 29.5 4.7 38.5 8.2

Investment argument

Anand Rathi Research

Niche operator in snacks for children

Crax has strong positioning as a snack, especially for kids Apart from niche positioning, Crax is also less expensive than most other snacks To retain young consumers, strategy of giving free gifts (toys) in each pack Increase in ad-spend has helped expand the EBITDA margin. However, higher staff cost and freight cost resulted in slight drop i EBITDA margin in i in i FY13.
Competitive positioning of various brands
Brand Crax Lays Kurkure Haldiram Balaji Act II Parle Target customers Children Young customers Family consumption Family consumption No customer preference No customer preference No customer preference
Source: Company, Anand Rathi Research

Lowest-priced snack

Source: Company, Anand Rathi Research

Strategy of free gift a toy in each pack

Improving ad-spend driving margin upward

Source: Company

Source: Company

Investment argument

Anand Rathi Research

Widening distribution network

Healthy scope to expand distribution in east and west India With its healthy distributionexpansion strategy, we expect a 20% CAGR in revenue over FY14-16
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Distribution network of consumer companies

Geographical revenue breakup (FY13)

Roll-out of products through institutions would also help boost revenue growth rates

Strategy to expand its distribution network

FY15e Current retail outlets: 225,000 Expansion of the distribution network 300,000 Urban West Urban East Canteen Stores Department Modern trade FY16e 400,000 Urban West Rural East Urban South Institutional sales
Source: Company, Anand Rathi Research

Railways

Investment argument

Anand Rathi Research

Launch of brands in a growing segment

Over FY93-13 the packaged foods segment registered a 15% CAGR The profit margin in packaged foods is on an upswing If successful, Krunchoids, the new brand, would reduce dependence on Crax and help erase the single-productsingle product company tag Forty percent of the snacks market is unregulated. This offers DFM room to gain market share
Source: Company, Anand Rathi Research * CAGR of 15% Source: Company, Anand Rathi Research *Salty snacks Source: Company Source: Company, Anand Rathi Research

Launch of Krunchoids in FY14

Brand-wise revenue breakup (FY13)

Packaged foods*: a growing segment

Huge unregulated market*- Healthy scope

Investment argument

Anand Rathi Research

Healthy strategy in place

The company has in place a healthy subsegmentation strategy. As brands are launched under Crax, the benefit of umbrella advertising CPI of salty snacks has recorded a healthy 12% CAGR. CAGR This indicates the ability of most regulated operators to pass on higher hi h raw-material prices Considering EBITDA margins i of f other th food f d companies, DFM has healthy scope to improve p margins g
Sub-segmentation strategy
Crax

Focus on price point SKUs (FY13)

Corn Rings (5 variants)

Namkeen

Krunchoids (4 variants)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Healthy scope to expand the margin*

Acceptance of price hikes in salty snacks

Source: Company, Anand Rathi Research *EBITDA margin FY13

Source: GoI

CPI registering a 12% CAGR

Investment Argument

Anand Rathi Research

Maintained gross margin despite volatile RMs

The company has maintained a ~ 35% gross margin despite volatile raw-material prices. Corn (maize) is the companys largest raw material Packaging material (HDPE) and palm oil are other raw materials for DFM Foods
Source: Company, Anand Rathi Research Source: Bloomberg

Gross margin maintained despite volatile costs

Palm-oil prices

Packaging-material (HDPE) prices

WPI of corn (maize)

Source: RIL

Source: GoI

Financials

Anand Rathi Research

Financial overview
We expect a 20% CAGR in revenue, mainly driven by a 15% CAGR in volume over FY13-16 We expect the EBITDA margin to be steady over FY14-16 We expect PAT to record a 44% CAGR, driven by healthy revenue growth and debt repayment Over FY14-16, we expect the company to see healthy return ratios (more than 20%)
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Expect a 20% CAGR in revenue over FY14-16

Margin to be steady, at ~10%

PAT to see a 44% CAGR over FY14-16

Healthy return ratios

Valuation

Anand Rathi Research

Valuation
After a weaker FY13, multiples have expanded because of a better FY14 The stock is quoting slightly above its mean PE of the past five years It trades at a discount to other food companies despite its better growth rates and comparable return ratios Risks. Higher raw material prices and increase in competitive pressure
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

PE band

Mean PE (x) and Standard deviation

Relative valuation
Price Company DFM Foods Nestle GSK Consumer Britannia Industries Agro Tech Zydus Wellness (`) 289 4,820 4,261 850 473 495 M.Cap (`m) 2,890 464,648 179,388 102,000 11,541 19,305 RoE (%) FY14e 20.5 49.9 34.9 57.9 17.0 37.1 FY15e 28.0 48.2 34.4 48.1 19.2 34.2 RoCE (%) FY14e 22.0 35.7 29.6 50.9 21.5 34.1 CAGR FY13-15 (%) EPS 50.0 14.6 16.8 42.8 19.1 18.0 PE (x) FY14e 32.6 41.0 35.6 24.9 25.7 17.2 Div Yield FY15e FY14e (%) 20.4 32.1 30.1 21.3 19.4 14.3 1.0 1.0 1.4 1.2 0.5 1.6

FY15e Revenue 29.0 37.9 30.8 50.3 24.3 31.0 20.5 12.9 17.8 16.2 9.4 15.9

Source: Company, Anand Rathi Research

Valuation

Anand Rathi Research

Discounted cash-flow (DCF)

At a 7% terminal growth rate and a 12.5% discount rate, the value per share works out to `473 We expect the company to maintain growth rates of 20% over the next decade as well as a 9.7% 9 7% EBITDA margin Repayment of debt, negative working capital and limited capex are expected to drive the strong f free-cash-flow h fl generation
Discounted-cash-flow valuation
(` m) Net sales Growth in revenues ( (%) ) EBITDA margin (%) EBITDA Depreciation Other income Interest expenses PBT Income taxes PAT Increase in working capital Capex F -cash-flows Free h fl Discounted free-cash-flows Terminal growth rate (%) Terminal value Discounted terminal value Net value to shareholders No. of shares (m) Value per share (`) Discounting factors (%) Risk-free-rate Beta (x) Market return ret rn Cost of equity
Source: Company, Anand Rathi Research

FY14e 2,722 21.0 9.3 254 50 6 75 136 48 89 231 (100) 269 1,197 7 10,199 3,533 4,730 10 473

FY15e 3,266 20.0 9.5 312 56 7 45 218 76 142 60 (180) 77

FY16e 3,920 20.0 9.7 382 65 9 43 283 99 184 72 (250) 71

FY17e 4,703 20.0 9.7 456 78 10 18 371 115 256 76 (300) 110

FY18e 5,644 20.0 9.7 547 94 13 466 145 322 98 (360) 153

FY19e 6,773 20.0 9.7 657 113 15 559 173 386 109 (432) 176

FY20e 8,128 20.0 9.7 788 135 18 671 208 463 131 (518) 211

FY21e 9,753 20.0 9.7 946 162 22 806 250 556 157 (622) 253

FY22e 11,704 20.0 9.7 1,135 195 26 967 300 667 188 (746) 303

FY23e 14,044 20.0 9.7 1,362 234 31 1 160 1,160 360 800 226 (896) 364

FY24e 16,853 20.0 9.7 1,635 280 38 1 392 1,392 432 961 271 (1,075) 437

FY25e 20,224 20.0 9.7 1,962 336 45 1 670 1,670 518 1,153 325 (1,290) 524

9.0 0.7 14 0 14.0 12.5

10

Business

Company background
Promoters and Management

Anand Rathi Research

Company background

DFM Foods has been manufacturing and marketing packaged foods since 1984 Its key brands are Crax and Natkhat. Natkhat It has recently introduced Krunchiods and will continue to introduce new products / brands in the snacks segment The manufacturing units are at Noida and Delhi Well W ll established t bli h d in i north th India I di and d is i in i the th process of expanding its distribution network to east and west India

DFM Foods is a 44% subsidiary of Delhi Flour Mills and the Mohit Jain family. In Q4 FY14, Westbridge acquired a 24.9% stake in DFM Foods Chairman: Mohit Jain looks after overall strategy and business administration Managing Director: Rohan Jain is responsible for y y operations p and looks after sales & day-to-day marketing

11

Anand Rathi Research Appendix

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Anand Rathi Ratings Definitions

Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

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