DFM Foods Ltd
NSE:DFMFOODS
DFM Foods Ltd
NSE:DFMFOODS
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Earnings Call Transcript
Transcript
Other Earnings Calls
Ladies and gentlemen, good day, and welcome to the DFM Foods Limited Q2 FY '23 Results Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Himanshu Nayyar from Systematix Institutional Equities. Thank you, and over to you, sir.
Thank you, Faizan. Good afternoon, everyone, and welcome to DSM Foods Earnings Conference Call. Today for the call, we have the senior management represented by Mr. Lagan Shastri, Managing Director and CEO; and Mr. Nikhil Mathur, company's CFO.Before we start, I would like to mention that in today's conference call, some of the statements might be forward-looking in nature. Actual results could differ from those expressed or implied.At this point in time, I would request Mr. Lagan Shastri to make his opening remarks. Thank you, and over to you, sir.
This is the operator. Sir, we are not able to hear you.
Yes. Sorry. Good afternoon, everybody, and welcome to today's call. Like I have been doing in the past, I'm going to kick off the session with a recap of our priorities. Four strategic pillars that I've always been talking about are as follows: The first one is driving accelerated growth; the second is sustaining profitability; the third is focusing on people and talent; and the fourth is setting up scalable systems and governance standards.I will talk about each of these pillars one by one. So on driving accelerated growth in Q2, the extruded market continued to grow at a healthy rate of 26.6% year-on-year. DFM grew faster than the market and thus grew share by 20 basis points year-on-year at an all-India level. Also, our Q2 revenues on a year-on-year and Q-on-Q sequential basis grew 12.1% and 13.1%, respectively, while for the full half year, we grew 20.7% year-on-year. Clearly, our sustained investments in brand building and sales structure has started working. We continue to strengthen our retail channel infrastructure.Our investments have increased, our weighted distribution for Natkhat, Curls and Fritts by 120 to 770 basis points in our core geographies, that is North India. Our expansion efforts outside of north are also bearing fruit with continued increase in sales of the other geographies every month.As you are aware, our approach has been to invest behind building our core brands. Accordingly, in Q2, we forged ahead on this agenda with some impactful campaigns. We launched an integrated campaign with on-ground activation for our Fritts brand. We supported our large pack business with an attractive cashback consumer promotion, which is still running. We also collaborated with the Discovery Kids channel, integrating our Rings brand with a popular cartoon character, Little Singham. We feel these initiatives will help strengthen our core brand assets and propel our business forward.As we do this on growth, we continue to focus on sustaining our profitability. After battling the inflationary storms over the past few quarters, we finally started to see some softening of commodity prices through Q2. The prices of palmolein oil and cartons exceeded by 16% and 9%, respectively, in Q2 over the previous quarter. However, key inputs such as palm oil, laminates and corn meal still remain priced much higher than a year ago. The prices of fuel, that is P&G contributed rise in Q2. Even as the commodity cycle turned a little bit behind or has moved towards a little bit benignness, we continue to push hard on our ongoing omni-wide cost management program to extract as much cost efficiency as possible from operations.The commodity inflation and our cost management efforts helped improve our material margins by 410 basis points from Q1 to 40.2% in Q2, excluding our new category expansions. I'm happy to highlight that our large pack business continues to grow and add to our overall profitability. I'm also very pleased to state that our foray to the new segment of potato chips is also going as per plan. I've already placed great emphasis on building the organizational capabilities to capitalize on all the exciting opportunities before us. In accordance with that, we have stayed with the strategy of investing in our brands, sales infrastructure, technology and talent.Our investment in advertising and marketing grew from 9.1% of net sales in Q2 FY '22 to 9.9% in Q2 this year, and our go-to-market expenses and investments grew from 2.4% of net sales to 3.3% over the same period. I feel we are beginning to see the results of our efforts in our revenue growth numbers in the quarter gone by.The third aspect of one of our pillars is focusing on people and talent to make all of this sustainable. We move further on our agenda of building a strong future-ready organization. We have set up processes to proactively identify and cultivate the future leaders of the company in a systematic manner. This will go a long way, including a high-performance culture of the company. At the same time, we are putting in place mechanisms to track and build engagement levels across the company, so that lasting bonds are created across teams. We've also invested in people and strengthened our Tier 2 management even as we build and inspire our core leadership team.The last -- one of the most important things of building a scalable organization is to add systems and governance standards that are excellent. Q2 saw the successful implementation and stabilization of the last of the ERP models across the company. This and our earlier IT initiatives will make our operations faster and more efficient.Our work in the area of environment protection gathered pace. We successfully obtained our brand owner registration under the plastic waste management rules. We also recently initiated a program around ESG compliance, which will operate cross-functionally and get embedded deep into the organization.To conclude, I would like to say that the Q2 that went by showed good revenue growth as well as market share gains. Commodity receded, which together with our cost management program, boosted our material margins quite significantly. Our focus on building brands and strengthening sales infrastructure remains unwavering, and we are seeing the results of this approach in our sales performance.As always, I am very grateful to you all for taking the time to join our earnings call today. Thanks a lot.
[Operator Instructions] The first question is from the line of Kunal Patel from Equilligence Capital.
My first question is regarding volume growth. So if you can just talk about out of the 13.7% growth, how much is volume and how much is pricing? Secondly, also, if you can just bifurcate this growth between INR 5 packs and non-INR 5 pack, because we are clearly focusing more on higher value packs? Also, if you could just give this growth number for GTM and our existing markets, so that would be my first question. So if you want me to ask all the questions altogether, then I'll do it. Otherwise, one by one I can ask.
So the pricing growth of 13.1% is sequential, and it does not have too grammage changes, except for some grammage changes in our potato chips category. And aside of that, all of this is basically grassroot growth of the business not related to grammage. The second question I think you asked was how is INR 5 and INR 10 doing. INR 10 is a very nascent -- or INR 10 and above, I would say, INR 20 and above is a very nascent intervention done by us. While on the 13.1% astute growth in terms of large packs will be obviously higher because that has an inherent small base. So that's how it is. So the growth on core is a little less than 13%. And most of the growth then that -- obviously is coming from the larger packs. That's how we are putting it. But both are growing, that's very important. Both are growing.
And finally, on the GTM and...
About the core geography versus the new geographies? The growth, again, as the start in new geographies, the growths are on a lower base. So they are always going to be higher than the core. The core itself is also growing.
Okay. Sir, regarding our raw material sourcing. So this quarter, we have done roughly around 40% of gross margin. What was our average of our raw materials last quarter? And how do you see that has come down to this, say, right now? And where -- how much delta do you see our gross margins will improve because of this softening in the raw material prices?
Yes. So as the commodity cycle ceded, right, in terms of the heat that we had in the previous quarter to this quarter, the quarter has a sequential reduction like the industry that the industry norm is whatever stocks that we had transit around this month and you move to the new baseline. So what you're seeing here is the margin is an average out of that number. So between the previous quarters, this quarter, the sequential improvement has happened. And all I can say during the quarter also because we -- all the prices itself are public information, has received it and we have received in that same manner. So how it'll look out in the future, I will not say, but you can make your own estimates.
Okay. But just to get some sense. So palm oil roughly is around what, INR 100 and INR 110 as an average for this quarter? Or do you see going down further?
So we won't be -- so the commodity prices of palmolein oil, I'm only able to share what we are precluding at. We will be -- you can safely assume we'll be similar to the industry that's currently in the market. And there has been reduction over the last 4, 5 months. And part of that we have seen in this quarter. What is the actual rate of palmolein oil? Unfortunately, I'll not be able to share, but that is the reduction.
Understood. And lastly, sir, on the expense side, our employee cost is roughly around INR 40 crores per 6 months and other expenses roughly around INR 60-odd crores. So combined together, they are roughly around INR 100-odd crores. So do you see any meaningful jump in this number of roughly around INR 50 crores per quarter for the year ahead? And how do you see this expense trending for the next couple of years because we are in investment mode?
So the investments in people are sustained and continue. As we move forward, we'll continue to calibrate our investments on people, so that the talent pool is maintained. So to that extent, what is being paid is going to sustain to that extent. Now whether we move it up or down, I again don't want to comment. But the way we look at it is the historical number that you see is the investment that has been made by which we plan to continue.
And that is for other expenses as well? Or you see a larger part of fixed expenses already there in the other expense and we don't see a significant jump despite a good growth that we may see over the next couple of years?
Yes. So this is Nikhil Mathur, I'll take that question. What you're seeing in other expenses largely are variable in nature. They are of the nature of freight and other expenses which are variable with respect to production and sales. So they largely will vary with the level of turnover that we have. But having said that, as I had mentioned that -- Lagan had mentioned, we have an ongoing cost management program that -- and that is there with the intent of taking out costs. So there is an ongoing effort to see how those costs can be optimized. But largely, they are variable in nature, but there is scope for optimization.
[Operator Instructions] The next question is from the line of Himanshu Nayyar from Systematix Institutional Equities.
So firstly, I just wanted to understand on the growth side of it. Can you just throw some more color on the current demand environment in both rural as well as urban markets? And in light of your plans that you would have on distribution expansion and the traction that you are witnessing in new products, what's the medium-term growth target? I mean, any quantitative targets if you can share with us?
So unfortunately, I'll not be able to share our growth ambition and targets. What I can do say is that we would like to keep beating the market and the market growth. And the market growth, we will try and gain -- continue to gain share in the marketplace and therefore, keep winning against other competitors. So that's our overall approach. And therefore, that will be consistent and that's how our investments are planned. So as the market grows further, we hope to continue to grow faster than the market. But an absolute number, I won't be able to share.In terms of color on overall growth, as I said, between our strategies of piloting potato chips, our strategies of expanding into these geographies, our strategies of investing into large pack continue to pay off and growth is being driven not only in the core, but also on those spaces. So that's the flavor I can give and that continues to be consistent to what we wanted to achieve.
Understood. And any -- in terms of distribution expansion, where do you think we are in the journey? As in -- I mean, at least in our focus stage, are we, I mean, happy with where we have reached on the distribution front or there is a lot more that needs to be done?
There's enough -- more geographies that continues to be major and massive scope in terms of building distribution. So not only the opportunity to go and do this in other territories, but more importantly and most importantly, our core geographies remain a significant area of future opportunity from a distribution standpoint.
Understood. And secondly, on the margin side, I mean, obviously, we are in an investment phase right now. So our EBITDA margins are obviously much lower than a normalized level. So what -- I mean, by when do you think we'll sort of reach a stage where we are able to reach a steady state margins and all our expenses, especially on A&P and GTM expansions normalize? Any color if you can sort of give on that?
So we normally work on a 3- to 5-year planning cycle and along with that annual operating plan. So we are in line with our ambition and plan around that. And therefore, we continue to look at this closely. Our investments are in line with our current EBITDA plans. And over a period of time, over a particular planning horizon, we should be able to get to a normal state again. The planning horizon is the only thing I can tell you, normally 3 to 5 years.
[Operator Instructions] Next question is from the line of Naitik Mody from Ohm Portfolio.
Sir, you referred to the investments into advertising bearing fruits. Could you please elaborate more on the same?
So our investments continue in the space of ADL, BDL and digital. We have invested in all these 3 media spaces. And all of them in combination have worked not only for our core brands of Fritts, Curls and even Rings to some extent, but also in terms of getting our larger packs into the market through appropriate retail intervention and support of marketing.
And would you be able to share where is the predominant investment going into geographically? Is it more towards your stronger areas? Or is it also into -- so is there a proportion? Is there a ratio there?
So we continue to believe our current areas, core markets and core brands are the place where we believe is the maximum protection. So we continue to invest appropriately for those current areas, current geographies and current brands even as we spend some investments and bandwidth into expanding into other trading -- other areas, spaces. So it is continue to be investing in our core is the approach, overarching approach.
Okay. And any sense on new product addition in over and above the potato chips that you started?
Unfortunately, I won't be able to share that. But as I said before, we continue to look at all opportunities. And as the opportunities come to us through a proper management decision metrics, we decide whether it's worth going for or not. But as of now, I won't be able to share anything on this.
[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.Sir, we have one more question came in the queue from the line of Lakshminarayanan from Tunga Investments.
A couple of questions. I joined the call a bit late. So I see that the new management has been there for the last couple of years, right? So in terms of your distribution, how the distribution has been rejigged? Can you just give some qualitative as well as quantitative comments in terms of what's your modern trade versus re-trade, and how do you manage to keep the net working capital as negative even given these changes, right? So I think that would be my first question.
Yes. So in terms of overall distribution systems, we have largely 4 channels. One is retail sales. The other is wholesale and the third is over distribution. And fourth is, actually, we club it together, but technically, as they evolve, there's 2 channels, e-commerce and modern-trade. So emerging channels as you would call it. So emerging channels continues to grow at a faster pace than our core members. And therefore, it will increase in stages. But as of now, it's still nascent and initial in nature, but it continues to grow, and we've invested in that over the last 1.5 years.Between these 3 channels of retail, wholesale, and rural, our single biggest focus has been retail, both from a weighted distribution perspective and numeric distribution perspective. And our entire efforts are around investing in capability around building and stabilizing retail routes that give enough extraction to make the whole system viable. So that's the primary approach around how we build our distribution network.
[Technical Difficulty] products even deep down in Bangalore --
There was an audio loss, sir. Please repeat your question, Mr. Lakshminarayanan.
Is it clear now?
Yes.
So I'm just trying to understand it a little more because even in places deep down in south like Bangalore, your presence is there in modern format and also in the normal Kirana stores, right? And despite that, you actually have negative working capital. So what is the -- I mean, how do you manage it given that there is too much of crowded space, especially in the far-out markets like Bangalore, et cetera, right? So just to understand that a bit.
So I won't be able to share [Indiscernible] but all I can say is in monetary e-commerce there are multiple channels and there are some channels that wants credit and some channels that want cash. Now I'm not aware of your particular concern you said, but we do a mix of the 2. So in our modern trade approach, there is a cash and carry and there is -- cash and carry means on cash from our side and on credit also. So it kind of works and therefore been able to kind of overall manage this.
Got it, sir. And in terms of institutional sales or sales near the entertainment zones, et cetera, right, so what's the broad mix of institutional channel for you?
So the emerging channel itself is a combination of modern trade, e-commerce and institutional sales. And as I said, it's very nascent, and we have invested in this over the next -- last 2 years. And as we build it forward -- though I won't be able to tell you the sales within the 3, but they are a combination of all 3. So we have presence in all the 3 spaces of emerging channels.
Got it. In terms of the price point orientation, right, I see that at least in the biscuit category, there is a movement towards higher price points, right? And at some point in time, we had as an industry and also in particular, for us, we are largely in the INR 5 packaging. What is your take? Is it -- are we moving towards the higher packets? And has that meaningfully changed for you? Any color on that?
So we won't be able to share the salience of large pack versus small pack. But as I said, we initiated into this big over the last 2 years. And that space has continued to grow faster than our INR 4 pack. But as planned, our INR 5 continues to be -- we are in the space of affordable snacking. And for the Indian consumer, it's a mix of overall snacking and all the way up to occasional snacking. So we want to play that entire beta, therefore both will remain relevant to us in the immediate to medium term.
And you're not seeing as an industry moving towards leading the INR 5 price point. Is that something which you're still not...
We didn't understand your question. Can you repeat that?
So the INR 5 price point, the saliency of that, is it still prominent or is it waning out?
It's a core business, and it continues to be our core business.
Got it. And any inputs on the supply chain, how you are minimizing -- I mean how are you taking the efficiencies there at a national level or at a regional level? Any thoughts on that?
As part of our overall cost management program, we look at efficiencies at an operating level and also efficiency at a network level. So as and when something between the CMS, the plant and everything else that comes up, if it comes up, as a management we view that and we take appropriate decisions when required. But as a cost management program, we do look at operating efficiencies and network efficiencies.
So just to summarize, what are the 3 top strategic priorities for you for the next 5 years?
So I said that the 4 pillars of our growth, right, will continue to be driving accelerated growth and be relevant to the consumer as to what the consumer is asking, which we believe is our core portfolio primarily even as we build other areas. So that's our first priority. The second priority is while we do that, we need to sustain profitability, and that has to be through the system, whether it's operating efficiencies or there is network efficiency or anything else. And as we do that, it has to be built around a fully embedded cost management program, which we are doing.And the third one is, as it will scale, one of the biggest things that we need to be really concerned about is sustaining this and that has to revolve around our talent and having the right talent in place to make this happen. And fourth one is to make it all work together as one system, it has to be one enabled IT technology platform where all these things come together. So these 4 and around them everything is built is the way I would put it for me as management.
I mean I was just looking at something like, okay, in this region, you want to actually become bigger or this is how we want your product placements to be, right? I was looking at a little more quantitative there. If you can just help me, it would be wonderful.
So I said this before, our region launches are core, and it continues to be our single biggest priorities. Even as we work on our expansion plans as and when we believe we need to be put in place. And similarly, our core business continues to be up rising even as you look at opportunities like potato chips and as we experiment price in that space. So our core continues to up rising within geography or categories or products.
The next question is from the line of [ Arpit Sikka from HCL Capital. ]
If you could provide an update on the delisting process, where we reached, what milestones we crossed and what lies ahead?
So the update on the delisting is we are currently waiting for an approval from the stock exchanges from NSE and BSE. The same is awaited. Once that comes post approval from the stock exchanges, a detailed public announcement in the newspaper and letter of offer will be dispatched to shareholders within the 2 working days of the detailed public announcement, the DPA. Post that, upon receipt of the DPA, the Board, our statutory Board will form a committee of independent directors to provide their opinion on delisting. And lastly, after that, the bidding period shall start not later than 7 working days from the date of the detailed public announcement and shall remain open to 5 working days.
And the time line when the stock exchange approval will be received?
So we don't have an update or any timeline in terms of Exchange. It's up to them and as to by when they'll approve it. So once they approve it, and we do a DPA, then the entire process will take a total of 7 days.
The next question is from the line of Nidhi Babaria from Envision Capital.
My question has been answered.
The next question is from the line of Kunal Patel from Equilligence Capital.
Sir, if I look at our investments since you took over the management, our employee expenses went up -- was roughly INR 50 crores, that has gone up to roughly around INR 80 crores, INR 90 crores now. Other expenses have gone up from plus INR 100-odd crores to roughly around INR 180 crore, INR 190-odd crores now, also our investments in GTM and A&P spend. So if I sum up all the incremental expenses that we have done and what we'll do over the next couple of years, it would roughly be -- roughly amount to roughly around INR 300 crore, INR 400-odd crores. So unless we as a company don't do top line of, say, INR 1,300 crores to INR 1,500-odd crores, it does not make sense to do such kind of expense. So what is your thought process on the same, if you can just help me understand the rationale behind everything unless -- and of course, I don't want any quantitative answers because that we have heard over the last 1 or 2 years in all the AGMs and on the con call. So what is the payback time that you're looking at with all the investments that you are doing? It is quite intriguing that we are spending so much of money and we don't see ourselves growing more than 25%, 30% for next 3, 4, 5 years.
Yes. So I'll just comment on 2 parts to your question. One is this significant portion of the money that you're talking about are actually in the other expense line, which is variable in nature. So that's not something you should actually be looking at. But our investments, which are fixed in terms of advertising and people are deliberate and part of investment plan, and they will continue in that space. And it is in line with our current plans and ambitions. So these are 2 parts to your question. I will not be able to give you any guidance or any information on how those will pan out in the future.
No, I'm not asking about the guidance, like I'm more looking towards your thought process on the payback that you are spending. So for example, what variable cost you're talking about in 2019, '20, at INR 500 crores of top line, our other expenses was close to INR 100 crores. So that was 20%. But this year, when we are looking at INR 620 crores, INR 630 crore, INR 650-odd crores of top line, we are already at INR 180 or INR 190 crores. So I'm not sure -- and that has not helped us in increasing our gross margins significantly. It was always around 38%, 39%. So the numbers are not adding up there unless you are spending money or investing money for the growth. Also, I mean, if you can just help us understand the payback period that you're looking at, I'm sure you -- I mean given the history of the con call, you don't talk about numbers, I understand. But at the same time, we, as investors, if we don't get any hand of the numbers, it's very difficult for us to stay invested. So I'm just trying to understand the numbers here.
So let me just say it this way, is that the horizon which we look at is what was discussed earlier, a normal business planning investment cycle is in the rate of 3 to 5 years. So that's the kind of investment cycle that normally any company would set and we are similar in that nature. So investments are built in a manner where that's all I can say right of over a 3 to 5-year horizon, considering those in mind. Having said it, in terms of variable -- or in terms of margins, I would slightly differ with your view that our margins are at 40%-plus levels higher than what we acquired it at and this is after -- and on the back of even with the relined commodity pricing, almost a 30% increase on all commodities literally from what we have acquired. So just wanted to be careful there and correct you on the margin. So therefore, the significant improvement in margins on the back of a 30% in commodities after becoming benign. So that's what it is that. On the advertising and the people investments, I continue to maintain that it is in line with the investment -- in line with what we had anticipated.
[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to the management for closing comments.
Thanks a lot, everybody, for keeping the interest into our company. We are undergoing a delisting process. As part of that process, just the queries, it's already -- the details of that are uploaded on our website. Please do reach out on the website to check. And there's always company secretary, you can write to him, Raju, who will respond to any of your queries further in this. Thanks a lot, once again, and see you again soon.
Ladies and gentlemen, on behalf of Systematix Institutional Equities, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.