Buy DFM Foods Ltd For Target Rs.463 - HDFC Securities
DFM Foods, for the last 3 decades has been one of the pioneers in extruded snack food market in India. Its flagship brand ‘Crax’ commands a strong brand patronage in Northern India. It aims to create niche for itself in a highly competitive snacking industry by its unique innovative product offerings catering mainly the impulsive low ticket (Rs5/packet contributes ~90% of overall revenue) segment. On the distribution side it has adopted a well-balanced strategy whereby it aims to further penetrate deeper in northern markets (contributed ~75% of its FY20 revenues) and at the same time it is in a continuous expansion phase in the rest of India. In order to augment its presence in Western, Central & Southern markets it has already acquired a land in Pune which is likely to be used for future greenfield expansion. Going forward, with the new promoter (Advent International) and new management under the leadership of Mr. Lagan Shastri- MD & CEO, we expect DFM to clearly focus on sustainable and profitable growth which is likely to be driven mainly by multi-product, multichannel and multi-geography approach.
Valuations and Recommendations:
DFM’s earnings grew at a CAGR 21% FY13-20. Going forward, we are positive on the future growth prospects of Indian snacking industry and expect DFM Foods to be ahead of the category performance. In our view, DFM’s revenue and PAT is likely to record a growth of 15% and 33% CAGR over FY20-23E along with consistent FCF generation, negative working capital & high ROE’s (25%+). The stock could benefit out of the strategies implemented by new promoters and the new top management. An early decision on new capacity in Pune or other location could act as a trigger. We expect, low priced impulsive snacking categories (which is less sensitive to economic downturns) to stabilise much faster than other consumer categories.
The stock is currently trading at valuation of 37x FY22E earnings. We feel the base case fair value of the stock is Rs. 417 (41.5x FY22E) and bull case fair value is Rs. 463 (46.0x FY22E). Investors willing to take risk can buy the stock at current levels of Rs. 370 and add on dips to Rs.330-334 band (33.0xFY22E EPS).
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