Consumer

India I Equities
Company Update
Change in Estimates  Target  Reco 

17 November 2017

DFM Foods Rating: Sell

Target Price: `1,350
Exciting opportunity in snacks; but valuations rich; retaining a Sell Share Price: `1,950
Steady double-digit growth would be seen in Indian snacks in the next
five years. We expect the Indian extruded-snacks market to post an Key data DFMF IN / DFMF.BO
18% CAGR over FY17-20 to ~`100bn. DFM, with its new capacities 52-week high / low `2,141 / 1,122
coming on stream and expansion to newer areas, would see robust Sensex / Nifty 33433 / 10313
growth though concentration risk is high (most of its revenue still 3-m average volume $0.2m
Market cap `20bn / $301m
arises from North India). Also, with a lower retail margin than newer
Shares outstanding 10m
competition and rich valuation, risk reward remains unfavourable.
Hence, we retain our Sell.
Penetration strategy in West and South India needs to be vigorous. The
company is focused on expanding its geographical operations in West India Shareholding pattern (%) Sep ’17 Jun ’17 Mar ’17

(~8% of revenue), East India (~8%) and South India (~4%) along with Promoters 38.3 38.3 38.3
deepening penetration in Northern markets. Chips are predominant in the - of which, Pledged - - -
Free Float 61.7 61.7 61.7
South, and namkeen in the West. Penetration here will require the following
- Foreign Institutions 15.9 15.1 16.4
three initiatives 1) higher channel margin, 2) higher credit line and 3) timely
- Domestic Institutions - - -
supply of products with return of damaged goods. Failing any of the above, 45.7 46.6 45.2
- Public
retailers may push other competitive brands which offer something similar as
~65-75% of snacks are sold by small retailers in India.
DFM to continue to post a 26% revenue CAGR over FY17-20. The
company’s capacity expansion at its Noida plant has recently been
commissioned, raising it by 10,000 tpa. The greater focus on present Relative price performance
2,400
operations and category growth would drive revenue momentum. DFM’s
2,200
Crax Curls, Crax Cheese Balls and a colour-changing toy along with a snack 2,000 Sensex
pack are receiving an overwhelming response from young consumers. 1,800
` 1,600
Valuations expensive. We are optimistic about the snacks market in India 1,400
and about the fact that DFM would grow faster than the category growth. 1,200 DFMF
Yet, even on factoring in 26% and 35% CAGRs in revenue and earnings 1,000
respectively over FY17-20, we value the stock at 35x FY20e EPS to arrive at a
Jan-17

Jul-17

Sep-17
May-17
Nov-16

Mar-17

Nov-17
revised target of `1,350 and maintain our Sell rating. Risks. Keener
competition and rise in input costs. Source: Bloomberg

Key financials (YE Mar) FY16 FY17 FY18e FY19e FY20e

Sales (`m) 3,895 3,449 4,373 5,466 6,832
EBITDA (`m) 471 342 466 599 781
Net profit (`m) 250 159 192 277 386 Sonam Somani
EPS (`) 25.0 15.9 19.2 27.7 38.6 sonamsomani@rathi.com
PE (x) 77.9 122.9 101.6 70.4 50.5
Aditya Joshi
EVEBITDA (x) 41.5 58.6 42.7 32.9 24.9
Research Analyst
PBV (x) 30.1 24.1 20.7 16.8 13.1 +9122 6626 6728
RoE (%) 45.3 21.8 22.0 26.4 29.2 adityajoshi@rathi.com
RoCE (%) 24.7 12.6 12.1 15.0 17.8 Darshan Parekh
Dividend yield (%) 0.3 0.3 0.3 0.3 0.3 darshanparekh@rathi.com
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities

17 November 2017 DFM Foods -- Exciting opportunity in snacks; but valuations rich; retaining a Sell

Quick Glance – Financials and Valuations

Fig 1 – Income statement (` m) Fig 2 – Balance sheet (` m)
Year-end: Mar FY16 FY17 FY18e FY19e FY20e Year-end: Mar FY16 FY17 FY18e FY19e FY20e
Net revenues 3,895 3,449 4,373 5,466 6,832 Share capital 100 100 100 100 100
Growth (%) 34.7 -11.5 26.8 25.0 25.0 Net worth 648 808 941 1,160 1,487
Direct costs 2,380 2,083 2,630 3,277 4,090 Total debt (incl. pref.) 568 998 1,000 1,000 1,000
SG&A 1,044 1,023 1,277 1,591 1,961 Minority interest - - - - -
EBITDA 471 342 466 599 781 DTL / (asset) 94 143 143 143 143
EBITDA margins (%) 12.1 9.9 10.7 11.0 11.4 Capital employed 1,310 1,948 2,084 2,302 2,630
Depreciation 66 73 99 102 119 Net tangible assets 1,118 1,781 1,882 2,030 2,261
Other income 17 5 8 10 12 Net Intangible assets 1 1 1 1 1
Interest expenses 57 63 80 80 80 Goodwill - - - - -
PBT 365 211 295 426 594 CWIP (tang. & intang.) 7 4 4 4 4
Effective tax rate (%) 31.4 24.9 35.0 35.0 35.0 Investments (strategic) - - - - -
+ Associates / (minorities) - - - - - Investments (financial) 423 423 400 400 400
Net Income 250 159 192 277 386 Current assets (ex cash) 233 355 436 515 610
Adjusted income 250 159 192 277 386 Cash 128 18 192 417 654
WANS 10 10 10 10 10 Current liabilities 600 634 831 1,064 1,300
FDEPS (`/ sh) 25.0 15.9 19.2 27.7 38.6 Working capital -367 -279 -396 -550 -690
Gross Margin (%) 38.9 39.6 39.9 40.1 40.1 Capital deployed 1,310 1,948 2,084 2,302 2,630

Fig 3 – Cash-flow statement (` m) Fig 4 – Ratio analysis @ `1,950

Year-end: Mar FY16 FY17 FY18e FY19e FY20e Year-end: Mar FY16 FY17 FY18e FY19e FY20e
PBT 365 211 295 426 594 P/E (x) 77.9 122.9 101.6 70.4 50.5
+ Non-cash items 84 122 99 102 119 EV / EBITDA (x) 41.5 58.6 42.7 32.9 24.9
Oper. prof. before WC 449 334 394 529 713 EV / sales (x) 5.0 5.8 4.6 3.6 2.8
- Incr. / (decr.) in WC -200 88 -117 -154 -140 P/B (x) 30.1 24.1 20.7 16.8 13.1
Others incl. taxes 115 53 103 149 208 RoE (%) 45.3 21.8 22.0 26.4 29.2
Operating cash-flow 535 193 408 533 645 RoCE (%) - after tax 24.7 12.6 12.1 15.0 17.8
- Capex (tang.+ intang.) 309 734 200 250 350 Fixed asset T/O (x) 3.5 1.9 2.3 2.7 3.0
Free cash-flow 226 -541 208 283 295 DPS (` / sh) 5.0 5.0 5.0 5.0 5.0
Acquisitions Dividend yield (%) 0.3 0.3 0.3 0.3 0.3
- Div.(incl. buyback, & taxes) 60 59 59 59 59 Div. payout (%) - incl. DDT 24.0 36.9 30.5 21.1 15.1
+ Equity raised - - - - - Net debt / equity (x) 0.0 0.7 0.4 0.2 -0.0
+ Debt raised 67 430 2 - - Receivables (days) 0 0 0 0 0
- Fin investments 115 - -23 - - Inventory (days) 14 20 20 18 18
- Misc. (CFI + CFF) (1) (59) 0 0 (0) Payables (days) 30 41 44 45 44
Net cash-flow 119 -110 175 225 236 CFO:PAT% 213.5 121.6 212.6 192.5 167.0
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 – Price movement Fig 6 – Revenue break-up (FY17)

(`)
2,500
Natkhat
DFMF 10%

2,000 Namkeen
10%
1,500

1,000

500

0
Feb-13

Feb-14

Feb-15

Feb-16

Feb-17
Nov-12

Aug-13
Nov-13

Aug-14
Nov-14

Aug-15
Nov-15

Aug-16
Nov-16

Aug-17
Nov-17
May-13

May-14

May-15

May-16

May-17

Crax
80%
Source: Bloomberg Source: Company

Anand Rathi Research 2

17 November 2017 DFM Foodss -- Exciting opporrtunity in snacks; but valuations ricch; retaining a Selll

Compaany upd
date
Crax: the flagship brand
b
Crax Corn Rings
R were inntroduced byy DFM in 19984 and, oveer the years,
emerged as the
t first succeessful packagged snack in IIndia. It is thee company’s
best-selling product, com mprising 80-82% of salles (contribuutions from
namkeen and natkhat are respectively
r 1
10% and 8-9%
%). It is avaiilable in five
variants: Chaatpata, Tangyy Tomato, Maasala Mania, M Mast Cheese and Pudina
Punch and iss attractively priced at `5 anda `10 (95% % of the com mpany’s Crax
sales are in th with low fat content and
he `5 packs).. Healthier baaked snacks w
attractive priicing with freee gifts with every
e pack m
make it a popuular product
among childdren aged bettween 6-14 years.y Prataap
p Snack’s Diaamond with
similar toy offferings woulld raise the teempo of commpetition.

Fig 7 – Differeent variants of Crax availablee

Source: Company

Fig 8 – New laaunches

Source: Company

The compan ny is focusingg on developiing products and variantss to enhance

its product range.
r In this endeavour,, it recently (in Mar’17) rolled
r out a
variant, Craxx Curls (of 255gm), priced at `5 incl. th
he extra gram
mmage. Crax
Cheese Ballss have been laaunched in Mumbai
M and B Bengaluru an
nd would be
launched acrross India in a phased man nner.
Attractively priced varieed range
DFM offers corn rings and a wheat puuffs marketedd respectivelly under the
Crax and Naatkhat brandss. It has five variants
v of thhe Crax brand, one in its
Natkhat bran nd and 13 in n namkeen, in
ncluding bhujjiyas, daals, mixtures
m and
nut-mixes. Natkhat
N retails in one packk size, pricedd at `2, Crax Corn Rings
is available in
n two pack sizes priced att `5 and `10,, while namkeeen is sold in
five pack sizzes at `2, `5, `10 and `15 price points;; the price off the 300gm
packs varies with variantts. Thus, mo ore than 95% % of sales of Crax Rings
arises from the
t `5 SKU, reflecting itss popularity and affordab bility among
children, andd driving saless growth.

Anand Rathi Reseearch 3

17 November 2017 DFM Foods -- Exciting opportunity in snacks; but valuations rich; retaining a Sell

Fig 9 – Pricing of products

M.R.P (`) Gms `/gm
Crax corn rings 5 15 33
Kurkure puffcorn 10 30 33
Diamond corn rings 10 33 30
Balaji Corn rings 5 30 17
Act II cheese bakes 20 80 25
Source: Anand Rathi Research

Expanding geographical foot-print remains tedious in Indian

snacking environment
Most of DFM’s retail operations are in North India. Here, it serves all
towns with a population of over 40,000. Further, its marketing being
through national TV channels such as Cartoon Network and Pogo opens
up ample opportunities to expand its footprint to other regions. Recently,
it made a foray into the South with a Crax launch in Hyderabad, Bengaluru
and Chennai. Its increased direct reach would offer ample opportunities to
grow in other zones besides the North. It focuses on deepening its
penetration in the Eastern and Western markets as well on strengthening
its sales and distribution teams. It is offering higher, ~12%, distribution
margins in other parts of India vs ~9% in North India. Also, DFM has
extended subsidies in the South to make distribution margin viable.
High concentration risk to continue
The North zone being the company’s core market accounts for~75-80%
of business; the balance comes from other regions (West and East ~8%
each, the South ~4% of revenue). It continues to expand its reach through
the hub-and-spoke model to smaller towns, and deepening penetration in
existing markets. We believe that the company has been unable to diversify
its operations in India and still depends on North India, which increases its
concentration risk. While South India is still a chips market, a traditional
namkeen market is dominant in Western India.

Fig 10 – Greater dependence on North India than on the rest of the country
(%)
90 85
80
80
70
60
50
40
30
20
10 8 8 6 8
4
1
0
North West East South

FY15 FY17
Source: Anand Rathi Research

Greenfield and brownfield capacity augmentation

DFM’s capacity utilisation is now more than 60%. To enhance its present
capacity and meet increasing demand, at its Greater Noida plant it
undertook a second brownfield capacity expansion, commissioned at Mar-
end. This expansion has increased capacity by 10,000 tpa (to 26,500 tpa)
and is expected to generate additional revenue of `1.75-2bn a year. Of the

Anand Rathi Research 4

17 November 2017 DFM Foods -- Exciting opportunity in snacks; but valuations rich; retaining a Sell

`620m invested in the project, `560m has been raised as fresh term loans.
The additional capacity would be utilised in developing products and
support greater expenditure on the brand. Capacity utilisation, post
expansion, would depend on sales performance.
In the context of its greenfield capacity expansion plan, it has recently
acquired land near Pune at `110m to develop a manufacturing plant which
would enable it to reduce the lead time and cater to the needs of the
Western zone.
Business outlook: Three-pronged strategy
The continuing growth momentum in the economy, rise in disposable
incomes, rapid urbanization and rising aspirations throw up immense
potential for sustained growth. To capture these opportunities; the
company will focus on a three-point strategy to drive the revenue-growth
momentum: (a) distribution expansion to newer areas, (b) introducing new
products/ product categories and (c) increasing marketing investment in
existing and new products in the next 12-18 months.

Anand Rathi Research 5

17 November 2017 DFM Foods -- Exciting opportunity in snacks; but valuations rich; retaining a Sell

Quarterly result highlights

Stellar show in Q2 FY18
Revenue during the quarter grew 20.6% y/y to `1,068m. We attribute that
revenue growth primarily to the low base (from Q2 FY17, a 9% decline)
and improved demand in North India. Comparable sales growth was 25%.
The EBITDA margin expanded 300bps y/y to 12.9% largely driven by the
gross margin expanding 230bps to 40%, lower other overheads (down
50bps y/y) and lower employee spends (down 30bps y/y). Thus, adj PAT
increased 17% y/y to `66m, helped by the better operating performance,
which was partially offset, though, by higher finance charges and
deprecation costs.

Fig 11 – Quarterly result summary

YE Mar (`m) Q2 FY17 Q2 FY18 % yoy H1 FY17 H1 FY18 % yoy
Sales 886 1,068 20.6 1,630 2,008 23.2
Gross Margin (%) 37.8 40.1 225bps 38.4 39.1 69bps
EBITDA 87 137 58.1 158 217 37.0
EBITDA margin (%) 9.8 12.9 305bps 9.7 10.8 109bps
Interest 12 21 68.5 27 41 55.8
Depreciation 18 25 35.9 36 50 39.9
Other income 15 9 -40.0 25 14 -42.4
PBT 71 101 41.4 121 140 15.6
Tax 15 35 131.8 32 48 48.1
Tax rate (%) 21.2 34.8 1359bps 26.7 34.2 752bps
Adj. PAT 56 66 17.0 88 92 3.7
Source: Anand Rathi Research

 Q2 is seasonally better for the company, with school reopening and

summer easing. This, along with the robust response to the new
product, ‘Crax Curls’, and the distribution expansion undertaken in
recent quarters led to a surge in revenue.
 Crax Curls was rolled out across India in Mar’17 and stabilised in Q1.
It is a lower-margin product than Crax Rings and thus was launched as
a “value-for-money” product with extra weight (in a 25gm pack)
priced at `5 in chatpata masala flavour.
 Finance charges and depreciation costs increased during the quarter
due to the inclusion of capitalisation costs of the second brownfield
expansion at Greater Noida, commissioned in Mar’17.
 New launch. Crax Cheese Balls were launched in Mumbai and
Bengaluru during the quarter and are expected to be launched across
India in a staggered manner. A new flavour variant in natkhat is
expected to be launched in the coming quarter.
 GST. The GST roll-out primarily had a neutral impact on the
company as the higher tax rate on products is being offset by higher
input tax credit on material purchases.
 Outlook. Ahead, the company intends to focus on distribution
expansion along with increased investment in advertising and
innovative consumer promotions.

Anand Rathi Research 6

17 November 2017 DFM Foods -- Exciting opportunity in snacks; but valuations rich; retaining a Sell

Fig 12 – Revenue growth trend Fig 13 – EBITDA margin trend

(`m) (%) (`m) (%)
1,400 60.0 200 16.0
50.0
1,200
40.0 160 14.0
1,000
30.0
800 120 12.0
20.0

600 10.0
80 10.0
0.0
400
-10.0 40 8.0
200 -20.0
0 -30.0 0 6.0
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18

Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Revenue Revenue growth (RHS) EBITDA EBITDA margin (RHS)
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 14 – PAT growth trend

(`m) (%)
120 200.0

100 160.0

120.0
80
80.0
60
40.0
40
0.0
20 -40.0

0 -80.0
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
PAT Profit growth (RHS) Q2FY18
Source: Company, Anand Rathi Research

Anand Rathi Research 7

17 November 2017 DFM Foods -- Exciting opportunity in snacks; but valuations rich; retaining a Sell

Valuations
Valuations rich
We are optimistic about the snacks market in India and growth in extruded
snacks in India. DFM would see strong growth momentum, driven by its
sticky kids-snacking positioning and it’s focused investment in its brands
through distribution expansion and innovative consumer promotions.
However, the risk-reward ratio at present valuations is quite unappetising.
DFM Foods’ current valuation of 51x FY20e looks too stretched for
comfort; therefore, we maintain our Sell call.
Factoring in 26% and 35% CAGR in revenue and earnings respectively
over FY17-20, we value the stock at 35x FY20e EPS to arrive at a TP of
`1,350 vs. `1,400 earlier.

Fig 15 – Standard deviation Fig 16 – PE band

(`)
160
3,000
140
120 2,500 100x
+2SD
100
2,000
80 +1SD
70x
60 1,500
Mean
40
20 1,000 40x
-1SD
-
500
(20) 10x
-2SD
(40) 0
Feb-13

Feb-14

Feb-15

Feb-16

Feb-17
Nov-12

Aug-13
Nov-13

Aug-14
Nov-14

Aug-15
Nov-15

Aug-16
Nov-16

Aug-17
Nov-17
May-13

May-14

May-15

May-16

May-17
Aug-12
Nov-12

Aug-13
Nov-13

Aug-14
Nov-14

Aug-15
Nov-15

Aug-16
Nov-16

Aug-17
Nov-17
May-12

Feb-13
May-13

Feb-14
May-14

Feb-15
May-15

Feb-16
May-16

Feb-17
May-17

Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Risks
 Successful product launches and consistent performance are driving a
re-rating.
 Keen competition in the kids sub-segment could impact growth and
profitability.
 Rise in input costs.

Anand Rathi Research 8

Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.

Important Disclosures on subject companies

Rating and Target Price History (as of 17 November 2017)
TP Share
DFM Foods Date Rating (`) Price (`)
1 19-Oct-15 Buy 650 518
2640 2 12-Feb-16 Buy 1,090 904
3 12-May-16 Sell 1,500 1,932
2140 4 5 4 10-Jan-17 Sell 1,600 1,844
3
5 03-Feb-17 Sell 1,400 1,915
1640

1140
1 2
640

140
Mar-15

May-15

Jul-15

Sep-15

Mar-16

May-16

Jul-16

Sep-16

Mar-17

May-17

Jul-17

Sep-17
Jan-15

Nov-15

Jan-16

Nov-16

Jan-17

Nov-17
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:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%

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