Impact of Demonetization
- Market growth and demand is impacted due to tight liquidity in present market scenario.
- Reduced buying appetite among consumers holding back cash available for bare essentials
- Channels experienced reduced pipelines among wholesale channels. They have initiated a back in December but, are still at lower levels than normal.
- On the geographical front, North and East zones suffered the most since they majorly deal with cash transactions. Small townships and rural areas with lesser banks were also impacted.
- The effect of demonetization lays heavy in terms that the first step of the channel by which the product reaches the consumer is being affected. That is the wholesaler is operating on very low inventories due to low in hand cash. The bright side is this that the retail sales has reverted to a higher degree
Rresponse of DFM Foods Ltd
- Smarter approach to consistent innovative consumer promotions and expansion of distribution network.
- Did rampant promotion of CRAX Rings and Natkhat during the quarter.
- Use of “hub-and-spoke” model to expand distribution in North. Also opened up nearby District towns of the three suburban cities.
- Simultaneously keeping a check on the gradual overall market recovery.
- The company is keeping focus on medium term and long term goals.
- Growth rate in October to November is typically low due to the festivities in the EAST.
- At par with aggressive launching of new products, DFM Foods Limited test launched CRAX
- Curls at Rs. 5 offering 25 grams per packet. It has no gifts inside
- In Q3 the company continued work on the brownfield capacity expansion that is to be commissioned within Q4.
- The above will add 10,000 tons to the annual distribution capacity to a currently installed base of 20,000 metric ton per annum
- The brownfield Project will need an investment of Rs. 60 crores with the expected ROI of Rs. 200 crores
- Q2 promotions were not as well received as the one in the corresponding quarter of last year. The impact of the better promotion inQ3 has been overshadowed by Demonetization.
- The distribution ramp consists of about 250,000 outlets. The distribution expansion was majorly north based. The company did spread in the smaller towns but, having an exact number on the outlet is not possible because they won’t take the small town outlets into consideration as of now.
- Demonetization has its effect mainly from the wholesalers point in the North and Easter sides as they deal in cash.
- Madhya Pradesh and Chhattisgarh which were primarily in the North zone have now been reclassified in the West Zone. The sales market of the North covers 75% whereas the West would cover 15% and the rest would be balance out by the other two zones.
- Q3 promotions were well received by consumers.
- Q3 Sales- Rs.87.15 crores (Lower than Q2’s Rs.89.03 crores). It is also 13.8% lower than corresponding quarter last year.
- High Q3 Gross margin- 40.05% (due to lower gift cost)
- The company over ran Q2’s and last year’s 210 basis points by 230 basis points.
- Owing to additional recruitment and annual bonuses the Employee benefit expenses is Rs. 9.17crores as compared to Q2FY17
- Other expenses- Rs. 16.02 crores (low in comparison to both Q2 and corresponding quarter due to lower turnover)
- EBITDA growth- 17.5% (From Rs. 8.65 crores to Rs. 10.17 crores)
- Higher working capital requirements led to higher Interest cost.
- Depreciation- Rs.1.82 crores (same as last quarter)
- Pre-tax Profit- Rs.6.64 crores (Q2- Rs.5.57 crores & Rs.10.06 crores in corresponding quarter)
- Low Tax Rate- 24% owing to Rs. 70 lakhs savings due to the investment allowance for the brownfield capacity
- PAT- Rs. 5.04 crores (Q2- Rs. 4.59 crores & Rs.6.59 crores in the corresponding quarter)
- Secondary sales fell due to limited cash. The trade did not have any cash and the system was very destructed. Thus, sales in November remained low. Despite the improvement in December it is too early to conclude anything on the overall impact
- Sales- Rs.251.3 crores (5.58% lower than FY16)
- Gross margin has improved by 130 basis points
- Employee costs were marginally higher
- Other expenses (variable in nature)- Rs. 47.6 compared to 48.6 crores of FY16
- EBITDA- Rs.25.88 crores which is 9.2% lower than that of FY16
- Other income was Rs. 31 lakhs against Rs. 91 lakhs due to non-recognition of gains on investments.
- PAT (9% lower than FY16)- Rs. 12.1 crores against Rs. 13.42 crores
Capex and Expansion Plans
- In FY18, the number for the brownfield capacity expansion will be the same as FY17 i.e. Rs.70 lakhs savings. Any capacity expansion that is undertaken in future will have similar numbers.
- The company has already achieved 50% of the capacity expansion via Brownfield expansions which will suffice the demands of FY18. After that they are planning to spread outside of North.
- The overall set up of a Greenfield would take maximum 15 months.
- The company is extremely positive about matching the north with the taste acceptance of CRAX Corn Rings in the South as well. The south being a new market, success rates will increase with time as the retail channel has already started giving successful results.
Future outlook and strategies
- DFM Foods Limited is hopeful about the growth rate and trend since they feel that the worst impact of Demonetization is over.
- The retail channels have reverted fairly to the liquidity crunch but, the wholesale channel is still slow.
- The company’s wholesale contribution in the North zone markets would be about 40%
- Currently the utilization rate of the new unit that was commissioned in FY16 with 5000 ton is Rs.90 crores
- In Q2FY17 they primarily operated in Bangalore, Hyderabad and Chennai. However the company has recently begun opening outlets in towns outside and near the metro cities.
- The response is good outside North in terms of product and the retail acceptance on the brand equity. However the wholesale contributions are different in different geographies.
- The company has a very strong distribution team and heavily relies on it. Thus, they have opted not to spend on any kind of publicity for the test launch of CRAX Curls. The distribution team will place the product in the market and ensure its successful visibility.
- There is hope that CRAX Curls would go slightly beyond 4 to 14 year-old children in terms of target audience owing to the more quantity and lack of gift inside the packet.
- Mega Magic is still in the advertisement phase for promotion. So, at the moment it is difficult to conclude on whether the sales number would increase or remain where it is.
- The viability of the distributor is ensured by the company. They ensure that they give adequate
- ROIs to the distributors and thus, are not worried about how the competitors deal with the incentives of their distribution network. Thus, the attrition rate in the company’s distribution channel is zero because they maintain stability with the client.
- DFM Foods Limited is not negative about competition in the market in terms of new product launches. They are more concerned on taking their new products one step higher with aggressive marketing strategies.
- The reduction in the cost of the toys varies in accordance with the promotion. Q3FY17 promotion had efficient gift pricing that was reflected in the gross margin.
- The company has been adding a gift to the packet for the past 10-12 years. They have a good understanding of the preferences of the consumers and in every scheme change they do research to assess whether the gift is something that excites them, before the launch of a new promotion.
- DFM Foods has lower trade schemes because of their huge contribution on consumer marketing. So, having a strong consumer pull will automatically force the retailers to stock their products.
- The company is focused on building Pull products rather than Push ones. Brand loyalty is thus, maintained and ensured on the consumer front.
- GST rules are expected to come out by the end of February. The calculation will be done post that and as of now no such negative impact has been speculated.
- The capacity in Western zone was the first to come up outside of North in 2011-2012. The company is looking to penetrate deeper and at the same time optimizing and expanding coverage in the cities which are above 5 lakhs, whenever possible.
- The company is continuing with the hiring process as per needs. The operational field positions are filled up based on market expansion.
- Apart from quality product, robust distribution network and the brand make good barriers to the existing competition. So, these two forms the key to the company’s future growth prospects.
- They are being open to open to opportunities of inorganic growth if the target contributes in either portfolio expansion or distribution reach without hampering the quality.