DFM Foods- Brand Equity commanding premium valuations
Quarterly update-Demonetization impacted sales in Q3,Q4 of last year affecting overall sales for the year which showed a de growth for the year
Managment believe the underlying demand is resilient and will enable trade channels to revive sooner than later. Coming to the financial performance, sale for the fourth quarter increased by 6.75% from Rs.87.2 Crores to Rs.93.17 Crores when compared to last year; however, sales were considerably lower. During the corresponding quarter, they saw a sharp surge in sales owing to the superlative response to the magic promo, which has not been seen during the current quarter. Gross margins stood at 39.84% marginally lower than 40.5% in the previous quarter and 40.38% in the corresponding quarter. The primary reason for the fall when compared to the previous quarter are the higher cost of gifts and higher refined oil prices, which have now begin to soften.
During the quarter, post the successful test marketing of CRAX Curls the company launched the product at a pan India level in the month of March and the initial sales response is extremely encouraging. They are hopeful of the brand adding significantly to our existing business. In keeping with their aggressive stance on new products, they have also started the test market of another product CRAX Cheese Balls
Capacity expansion-On the capacity front, the second brown field expansion was successfully undertaking and commissioned in March at a capital cost of approximately Rs.62 Crores, thus giving them an additional revenue generation potential of Rs.175 to 200 Crores depending on the product type. In addition, the company has also acquired land in Pune for setting up a manufacturing facility to cater to the Western, Central and Southern zones. With GST coming in, the sector may undergo some structural and operational changes while demand may be disrupted in the short run, they believe that in the long run GST will be beneficial for the organized FMCG players and create a level playing field
Current Revenue mix-80% from Crax Corn rings and remaining from Namkeens and Nakhats
Current capacity utilization is 60% or so and it varies from season to season. From a revenue potential as they mentioned they did about 390 odd Crores in 2015-2016 and in Q4 FY 2015-16 they did about 125 Crores, rounding off to about 500 Crores for the annual. Then they have added another 170 to 200 odd Crores, with the new line coming in, so that is the kind of 650 plus Crores of revenue potential is now possible so this we can take an estimate for FY19 Revenue
Geographic mix-North gives about 75-80% of total business and south contributes the rest
Valuations and Views
With brownfield expansion beginning to contribute to revenues from first quarter of FY17-18 this will lead to incremental revenues and with the demand situation picking up after sluggish activity due to demonetization in FY16-17. Therefore we value the company based on P/S and take the base case scenario of revenues being Rs 450crores in FY18 and Rs 600crores in FY19(and not Rs 650crores as indicated by management). Therefore investors can buy at current levels and on dips for a target price of Rs2100(3.5xP/S FY19S)
Long term perspective that emerges from this weekly chart indicates that the prospects of the prices rise in the coming months is quite strong. 7x gains witnessed from the lows of 310 to 2435 levels in around 13 months. Stock thereafter witnessed correction towards 61.8% retracement levels that also confluence of 100% retracement of ABC pattern with 161.8% extension of the recent advance as annoted. Additionally, Intermediate resistance levels is seen acting as supports as of now. Volumes have started to rise again which were negligible throughout the decline indicates accumulation by long term investors on periodic basis. One should keep this stock on radar.