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DFM stock merits a buy recommendation

BusinessDFM stock merits a buy recommendation

Delhi-based DFM Foods ltd, which sells packaged snacks under the Crax and Natkhat brands has entered into a pact with US-based private equity firm Advent International Corporation, wherein the latter will acquire 67.9% equity stake in the company for around Rs 851 crores in an all cash deal. Apart from the above acquisition, Advent International Corp is also launching an open offer for an additional 26% equity stake of DFM Foods ltd, which is around 1.30 crore shares at a price of Rs 249.50 per share. Assuming full acceptance of the offer the total consideration payable by the acquirer in accordance with the Takeover Regulations will be around Rs 326 crores.

According to research firms, India’s savoury snacks market is currently estimated at around Rs 33,000 crores while the biscuits market is another Rs 36,000 crores. The savoury snack market is expected to grow at a massive 22% over the next few years on the back of growing middle class population, rising urbanisation, lifestyle changes, local availability of snacks in small package sizes and regional tastes. DFM Foods is engaged in the business of manufacturing, selling and marketing of packaged snack foods. Corn Rings and Wheat Puffs products are sold under the Crax and Natkhat brand names respectively.

The company posted a relatively better top line financial performance for the FY 2019 on the back of new product launches and relatively soft base quarter. Gross margins and EBIDA margins also improved due to efficient purchasing of raw materials and operating leverage respectively. While the company has been adding new capacities, the key challenge for DFM Foods has been that it has largely been limited to northern India with 75% of the sales. Hence, the new acquirers will definitely give a blueprint of their capacity expansion plans in the future to improve the volume growth across the country. The DFM Foods stock has been consolidating at Rs 250 levels for the last 6-7 months and with reasonable valuations and expected strong revenue visibility in the next few quarters, the DFM stock merits a buy recommendation. Medium-term investment in the DFM stock at the current market price of
Rs 245 can deliver a 30% appreciation for patient investors. The benchmark indices ended with decent gains on Friday led by buying in industry heavyweights such as Infosys, HDFC, Hindustan Unilever, ICICI Bank and Bharti Airtel. Additionally, positive global cues also boosted the investor sentiment. The 30 share benchmark index Sensex closed the trading at 38127 levels up by 246 points while the NSE Nifty was at 11305 levels up by 70 points. The stock markets are going to be moving sideways during the next few weeks as Q2 results are going to be under par from most of the corporates.

Currently, it looks like the performance is very much concentrated with only a few stocks which are aiding the breadth and momentum of the market. In spite of various reform measures taken by the government, analysts are expecting markets to be range bound till Diwali.

Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.

 

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