Detailed Rationale

CRISIL Ratings has downgraded its rating on the bank facilities of D F M Foods Limited (DFM) to ‘CRISIL BBB+/Stable/CRISIL A2’ from ‘CRISIL A-/Negative/CRISL A2+’.

 

The ratings downgrade reflect deterioration of business risk profile with significant drop in operating margin, resulting in lower-than-expected cash accruals in FY22 owning to increased marketing expenses towards brand building and go-to-market expansion. DFM has reported operating margin (EBIDTA) of -2.35% (Rs. -13.10 crore) during fiscal 2022 from 10.74% (Rs.56.37 crore) in fiscal 2021 as it had incurred selling and marketing expenses of around Rs.65 crore in fiscal 2022 to penetrate its presence in large value packs segment and diversify its geographical reach. A similar expenditure is expected during fiscal 2023 also with the strategic intent to expand into domestic markets other than North India. Such marketing expenses are likely to keep the margin constrained for the near to medium term; ability of the company to derive benefits from such expenditure in term of increase in top line or revival in profitability will remain key rating sensitivity factors. DFM has reported revenue of Rs.554 crore in fiscal 2022 at an against Rs 524 crore. Revenue is expected to improve by 15-20% during fiscal 2023, timely ramp-up of capex undertaken in FY23 remains critical for ratings. The ratings are supported by the strong brand name, Crax, established market position, and comfortable financial and liquidity risk profiles. Liquidity of over Rs.85 crore as of March 31, 2022 provides substantial support to the overall credit risk profile.

 

The ratings also factor DFM's established market position, marked by wide distribution network and strong brand image, efficient working capital management, and healthy financial risk profile. These strengths are partially offset by susceptibility to risks of volatility in commodity prices, intense competition and product concentration in the revenue profile.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position marked by wide distribution network and strong brand image

Revenue increased at an annual growth rate of 6% for the three years ended March 31, 2022, driven by longstanding presence in the industry that leads to strong brand image and large distribution network of over 1,500 dealers. Historically, the company operates mainly in North Indian States (Uttar Pradesh, Delhi, Haryana, Punjab, Himachal Pradesh and Rajasthan); however, it has increased its presence in West and East India in recent years and entered the South Indian market as well.

 

DFM plans to penetrate areas other than north India through increase in marketing initiatives to ensure higher presence in rural and urban regions, and addition of ecommerce and modern trade channel to market itself. Further, DFM added its presence in the higher-value segment like the Rs 10, 20-25/- segment. Improvement in the visibility of products and higher penetration across India should lead to sizeable growth in scale over the medium term.

 

• Efficient working capital management

DFM has a negative working capital cycle, which is reflected in minimal reliance on short-term working capital debt. Because of fast movement of its products in the market and the relatively short shelf life of food products, DFM maintains inventory of 15-25 days. Furthermore, the inventory is against confirmed purchase orders from dealers and the company takes advances for such orders. Debtors are comfortable owing to the strong brand presence and better bargaining power. Gross current assets were comfortable at 74 days as on March 31, 2022, and are projected at less than 60 days, driven by nil credit period offered to dealers and the low inventory policy.

 

• Healthy financial risk profile

Financial risk profile should remain supported by lower reliance on external funds and healthy profitability. Gearing was comfortable at 0.60 time as on March 31, 2022, and total outside liabilities to adjusted networth ratio at 1.56 times. Due to negative margins in FY22 the debt protection matrix remain week in FY22. With the increase in operating scale of operations and with the improvement in the margins the debt protection matrix can improve.

 

Weaknesses:

• Susceptibility of operating margin to volatility in commodity prices

The key raw materials (edible oil, pulses, flavours, corn meal and packaging material) account for over 60% of cost. Their prices depend on geo-climatic conditions, international prices and the domestic demand-supply situation. Hence, profitability remains susceptible to fluctuations in raw material prices or inflationary pressures. However, gross margin of 35-40% has been maintained for the three fiscals through March 2022 despite severe inflation reported in commodities owing to cost-control measures opted by the management and grammage reduction in the products offered.

 

However, the operating margin dropped during fiscal 2022 as DFM decided to increase marketing-related expenditure to increase its presence in regions other than north India the margins are expected to remain low in FY23 as well.

 

• Exposure to intense competition

The ready­to­eat food industry is highly fragmented owing to low entry barriers such as minimal capital requirement. Some of the organised players such as Haldiram Manufacturing Company Ltd, Bikanerwala Foods Pvt Ltd, Balaji Wafers Pvt Ltd, PepsiCo, and ITC Ltd operate at pan-India level, with strong brands and established and well-diversified marketing networks. Such players operate on a much larger scale and have a varied product mix, apart from namkeen products. Though DFM offers traditional namkeens as well, the revenue contribution from this segment has been low over the years owing to intense competitive pressure from the numerous regional/unorganised and large, organised branded players.

 

• Product concentration in revenue profile

DFM operates mainly in the corn-based extruded snacks segment, wherein different products namely Rings, Curls, Fritts and Natkhat cumulatively contributes 70-75% to the top line, exposing the company to risks related to product concentration. However, DFM has made consistent efforts to reduce this risk, as reflected in decline in contribution of Rings to 29% in fiscal 2022 from 84% in fiscal 2017. Further, the company launched potato chips (other than corn-based snacks) under the brand, Crax, into the northern market and plans to expand its reach to rest of India as well. Continuous efforts to diversify its product profile and reduce concentration on few products should improve the market position; these will be key rating monitorables over the medium term.

Liquidity: Adequate:

The cash credit limit was utilised at just around 50-60% for the 12 months through May 2022. The company also avails of need-based overdraft limit against fixed deposits.

 

Annual cash accruals are expected to remain at least over Rs. 15-18 crore which will be sufficient against moderate term debt obligation of Rs. 12-15 crore in the medium term.

 

Current ratio was declined to 0.89 times on March 31, 2022. Cash and bank balance along with marketable securities were high at around Rs 85 crore as on March 31, 2022; this balance, however, is expected to be rationalised to fund the higher marketing expenditures and other obligations in the near term.

Outlook: Stable

CRISIL Ratings believe DFM will continue to benefit from established market position of its brands and its efficient working capital cycle.

Rating Sensitivity factors

Upward factors

• Significant improvement in scale of operation by more than 30% marked by higher regions other than north.
• Revival in operating margin to around 5% or absolute EBIDTA (earnings before interest, taxes, depreciation, and amortization) backed by increase in scale of operations and leading to increase in net cash accruals.

 

Downward factors

• Any decline in the scale of operations by more than 20% or deterioration in market position of company.
• Continued lower profitability levels leading lower than expected net cash accruals.
• Any significant debt funded capex or stretch in working capital cycle impacting financial risk profile and liquidity of the company.

About the Company

DFM started as a division of Delhi Floor Mills Pvt Ltd as a diversification measure, was incorporated in its current form in 1993 in Delhi.  As on February-2020, 73.95% of the stake was acquired by a US based private equity firm, Advent International, through its company AI Global Investments (Cyprus) PCC Ltd.

 

DFM is engaged in the business of manufacturing, selling, and marketing of packaged foods such as ready-to-eat packaged snacks, mainly corn-based extruded snacks and namkeen’s. DFM’s products profile consists of 18 distinct product variants and sells it under the brand of ‘CRAX’, ‘CURLS’ and ‘NATKHAT’. It has two manufacturing facilities located in Uttar Pradesh (Ghaziabad and Greater Noida) with the total capacity of the company at 48,400 M.T. per annum.

Key Financial Indicators

As on / for the period ended March 31*		2022	2021	2020
Operating income	Rs crore	556.57	523.3	508.08
Reported profit after tax	Rs crore	-24.76	28.70	24.42
PAT margins	%	-4.45	5.47	4.81
Adjusted Debt/Adjusted Net worth	Times	0.60	0.45	0.63
Interest coverage	Times	-1.47	5.22	4.26

*CRISIL Ratings adjusted numbers

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Levels	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	10.00	NA	CRISIL BBB+/Stable
NA	Bill Discounting	NA	NA	NA	15.00	NA	CRISIL A2
NA	Bank Guarantee	NA	NA	NA	13.81	NA	CRISIL A2
NA	Long Term Loan	NA	NA	Sep-22	0.18	NA	CRISIL BBB+/Stable
NA	Long Term Loan	NA	NA	Sep-27	12.19	NA	CRISIL BBB+/Stable
NA	Long Term Loan	NA	NA	Jun-25	17.61	NA	CRISIL BBB+/Stable
NA	Long Term Loan	NA	NA	Dec-23	5.46	NA	CRISIL BBB+/Stable
NA	Long Term Loan	NA	NA	Mar-26	22.92	NA	CRISIL BBB+/Stable
NA	Long Term Loan	NA	NA	Mar-26	2.83	NA	CRISIL BBB+/Stable