It is hard to find somebody in north India who hasn’t had Crax as a kid; many even have it today after growing up just like I do 🙂

Crax brand is owned by a listed company called DFM Foods Limited. DFM stands for Delhi Flour Mills which was their original business and later got demerged into a private company of the promoter group.

Without getting into too much detail; I’ll give an overview of the company and then straight come to the point.

DFM now owns three brands: Crax (corn rings) being the flagship brand accounts for 76% of the topline,  Natkhat (wheat puffs) 5%, Krunchoids  which is the latest addition 5% and remaining from Namkeens.

Three decades old Crax corn rings are available at Rs 5 SKU (95% of sales) and Rs 10 SKU. Natkhat is available at Rs 2 SKU and Krunchoids at Rs 5 SKU. Overall DFM Foods has a retail reach of 2.07 lac stores.

83% sales come from North India, 7% and 8% from east & west respectively. Company last year moved its production facilities to Greater Noida.

So to cut it short, DFM is largely a one product company (Crax corn rings) with one plant (Greater Noida, operating@80% capacity) and operations concentrated in North India (83% of sales).

For any FMCG company aiming a pan India presence, it is very crucial to have multiple plants to cater to different regions. Its helps you save a lot on freight cost and also improve availability through an efficient distribution network. In DFM’s case it is all the more important as Crax corn rings have a very short shelf life (~3months)

Now the key question is ‘Does DFM has a strong balance sheet to be a pan-India brand backed by regional manufacturing and an efficient distribution’?

The answer most likely is NO because debt-equity ratio is already at 1.45 times.

I think instead of taking more debt to have a plant in east or west India, management would most likely spend 18-20 crores and increase capacity by 30-35% at the existing plant in Greater Noida (sufficient land is available)

Then what could be the trigger for this stock?

There is only one trigger: A sell-off.

DFM last year clocked a topline of 243 crores whereas its market cap currently is 200 crores i.e. 0.8 times sales (current market price Rs 200). It is such a well established brand with a decent franchise value, I think biggies like PepsiCo could be interested in such a regional brand which they can take pan-India using their financial and distribution muscle. Though majority of the sales come from North India, the product is well known across the length and breadth of our country and is very famous among kids (you can ask any kid). Credit goes to those age old tempting TV commercials, with rings in each finger, shown on Cartoon Network and association with movies like Ice Age.

If someone buys this, as per industry standard it could be anywhere in the range of 3-5 times sales. Assume it is at the lower end of the range at 3 times sales, the transaction would happen at valuation of ~750 crores, after settling the ~50 crore debt , one is still left with 3.5 times the current market cap making it a probable multi-bagger opportunity.

What if we forget the deal, would it still be a good addition to the portfolio? At less than one time sales I find the valuation attractive. Though it’s a great business with a strong brand/franchise value, as of now they don’t seem to have financial strength to expand manufacturing facilities and distribution network across India. Once ICD of 30 crore is settled with parent, the apparent corporate governance issues would go away and it could get re-rated. Either ways, it can clock 20% compounding in sales & earnings and even without any re-rating, the stock should at least mimic the earnings growth.

To summarize, I don’t see any major downside in the stock so one might consider allocating a portion of long-term portfolio in expectation of such a sale ultimately going through. When could something like this be announced is anybody’s guess.

Some info about the company:

• Company Website       http://www.dfmfoods.com/
• Earnings Concall         http://www.dfmfoods.com/earnings-conference-call.html
• FY13 Annual Report    http://www.dfmfoods.com/investor.html
• Interesting ET Article: PepsiCo’s Lays, Kurkure lose market share to local players like Yellow Diamond and  Balaji http://articles.economictimes.indiatimes.com/2012-11-23/news/35317367_1_snacks-market-lehar-foods-balaji-wafers