Detailed research on ADF Foods Limited

Summary

Favourable industry dynamics and strong financial position are expected to act as principal growth enablers for ADF Foods Limited. Demand for healthy and high-quality food continues to increase as Indians adopt healthier lifestyles and eating habits. As a result, demand for the company’s products should increase.

ADF Foods Limited

ADF Foods Limited has been categorised as a partner in kitchen as focus of the company is on making mealtimes easy, quick and delicious with support of its sauces, pickles, pastes, chutneys, meal kits, etc. Brand family of the company includes international cuisines, from Italian to Mexican. With passage of time, just one retail outlet evolved and the company is now globally known as ADF Foods Limited. Be it frozen foods, salted, sweet & savoury pickles or a range of ethnic sauces, products of the company are relished by consumers globally.

Since the company has been categorised as a leading food distribution company for ethnic foods, focus of the company is on bringing authentic taste of home to food lovers across 55 countries, with more than 400 products throughout 8 brands. From packaging to product development, the company has always prioritised consumer’s tastes and preferences – so that consumers can make great food with ease whenever there is a requirement.

Business model of ADF Foods Limited

ADF Foods Limited is a global leader in manufacture, sale and distribution of packaged and frozen Indian foods. Initially, the company used to sell specialty dried fruits out of small retail outlet situated in Flora Fountain also referred as ‘Hutatma Chowk.’ Fast forward to next 9 decades, the company was successful in building sophisticated manufacturing units and distribution networks and it expanded into dozens of categories. The company launched 8 different brands.

Today, ADF Foods Limited has been categorised as world’s biggest food processing companies, and its product basket includes condiments, pastes, ready-to-cook and ready-to-eat products. The company manufactures and distributes a range of traditional ethnic Indian, spicy Mexican, and exotic Mediterranean foods.

Track record of management

Mr. Bimal Thakkar: He is a Chairman, Managing Director and CEO of ADF Foods Limited. His experience spans across 35 years in domestic and export food industry. He has played an instrumental role in developing brands and new products, catering to new markets, international acquisitions, developing subsidiary companies in UK and USA.

Mrs. Deepa Harris: She is an Independent Director of the company, with more than 30 years of experience in high-end luxury hospitality category. She is an Independent Director of PVR Limited, Jubilant Foodworks, Prozone Intu Properties, Taj Safaris, Concept Hospitality and TCPL Packaging.

Mr. Chandir Gidwani: Mr. Chandir Gidwani is the company’s Independent Director with more than 45 years of experience in financial services. He is Chairman Emeritus & Founder of Centrum Capital Ltd and is a member of industry associations including FICCI, CII, etc.

Mr. Ravinder Jain: Mr. Ravinder Jain is Independent Director of ADF Foods Limited. His experience spans across 45+ years in business management. He is Ex - MD of Shaw Wallace, MD of Millennium Alcobev and oversees business operations of McDowell and Co.

Financial performance of ADF Foods Limited

ADF Foods Limited was able to report its highest standalone annual revenue, EBITDA and PAT together with strong expansion in EBITDA and PAT margin in FY23. Standalone revenue for FY23 came in at INR353.34 crore, exhibiting a growth of 17% year-over-year whereas a revenue of INR450.29 crore was seen on a consolidated basis, indicating 7% increase in comparison to previous year. Further, profit before tax came in at INR80.76 crore on standalone basis, which exhibits remarkable growth of 44% as compared to previous financial year and, on consolidated basis, PBT was INR75.46 crore, exhibiting growth of 16% in comparison to previous year.

EBITDA on a standalone basis was INR86.89 crore, which was 39% up year-over-year. Standalone EBITDA and PAT margins of the company for FY23 were 23.91% and 16.51%, respectively. ADF Foods Limited is well-positioned at bottom end of multi-decade growth curve. The company continues to make investments that should help the company in doubling its branded business over 3 years. Such investments are expected to be majorly financed with help of cash on its books or earnings.

More specifically, the company saw 55% of its revenues and 62% of its EBITDA over last 2 quarters, exhibiting that momentum improved as year progressed. The company appears to be optimistic that sustained distribution focus should make Agency Distribution segment PAT-positive during FY24. It plans to launch food products within India, starting through e-commerce and modern trade formats. Later on, the company will use this experience to extend to general trade. The company plans to improve its base from India’s focused retail points in US to larger US food service market. To execute this, the company appointed a business head. Plans are there to use cash on books in acquisition of brands complementary to present portfolio.

Industry analysis

Size of global ethnic food market came in at US$38,731.43 million in 2021, and should be able to compound at ~8.33% to touch US$62,179.99 million by 2027 between 2022-2027. This growth is expected to stem from higher cross-border immigration: for opportunities related to job, environmental concerns, educational opportunities, family reunification, etc. India has been categorised as world’s largest emigrant population (i.e., 4.7 crore Indians live overseas).

Ready-to-eat food has now been categorised as most dynamic components of global food market in past couple years. Significant uptick in convenience trends, and higher demand for specific meal solutions supported in creating increased demand for ready-to-eat food. Ready-to-eat industry has been perceived as one-stop shop for on-go customers as this industry offers everything from sweets to snacks and meals. Global ready-to-eat market should be able to grow from $107.87 billion in 2022 to $1471.94 billion in 2028.

E-commerce makes up for less than ~5% of total retail sales in country’s packaged foods industry, which is expected to change. Indian online grocery market was pegged at US$3.95 billion in FY21 and this should compound at ~33% to touch US$26.63 billion by FY27. This growth is expected to stem from consumer preferences, a rise in disposable incomes, new market entrants and healthy marketing strategies.

Future prospects of ADF Foods Limited

The company initiated its greenfield project in Surat, Gujarat, with budgeted capital outlay of INR60 crore in Phase I. Therefore, focus is there on increasing capacities. The company’s objective is to increase its distribution network in key markets by dealing directly with retailers through servicing product needs from depots, warehouses and channel distribution. Collectively, these efforts are expected to help in moderating intermediary costs.

Its 2 warehouses in US offer combined leasehold area of 1 lac square feet. Step-down subsidiary of the company, Vibrant Foods New Jersey LLC, which was set up in September, 2021, acted as distribution entity in US. This company delivered strong performance in FY23, fetching a revenue of INR67.06 crore. Distribution segment of the company saw good offtake during FY23 and supplemented its overall business, making a contribution of INR88 crores revenue. It added new products of principals: Patanjali and Unilever in product basket.

On operational side, it completed debottlenecking at current plants in Nadiad and Nashik during FY23. It made capex of INR5 crores, which should be able to fetch potential revenue of INR30 crores. Greenfield expansion in Surat should be completed in ~18 months from breaking ground, which should occur in 2Q24. Growth will expand its frozen food capacity and unlock next leg of growth.

Shareholding pattern of ADF Foods Limited

ADF Foods Limited has ~36.5% holdings coming from its promoters, while FIIs make up ~9.46% by end of June 2023. FIIs have increased their holdings in the company, as in March 2023, they collectively held ~9.38%. This increase is a positive sign and showcases confidence of overseas investors in India’s food market and in ADF Foods Limited.

Public shareholders and DIIs make up ~46.12% and 7.91%, respectively by end of June 2023. Holdings from DIIs have increased too from ~7.88% in March 2023.

Risks

Exposure to intense competition and vulnerability to fluctuations in raw material prices are some risks ADF Foods Limited should monitor. ADF Group has presence in processed and ethnic food segments. With a large portion of its revenues coming from exports (~99%), the company is required to compete not only with packaged food manufacturers which are present in other Asian countries, but with renowned domestic players including such as ITC, MTR, Haldiram, Bikaji, etc. Therefore, the company should focus on strategies which can ensure sustenance of revenue growth.

Key raw materials consist of agro-based products including vegetables, mangoes, chillies, edible oil, etc. Since raw material prices tend to be largely dependent on inflation, monsoon, and policies by government, ADF Foods Limited can see sharp fluctuations, which can impact its profits.

Valuation and investment rationale

Stock of ADF Foods Limited continues to trade at ~41.8x FY23 EPS, which is at a deep discount to sectoral average of ~52.34x. Therefore, these levels hint that investors can consider going long on this stock.

Growth in stock price is expected to be supported by established brands and its market position as an exporter of ethnic Indian food and strong financial risk profile. ADF group has strong and diversified product profile and it has several established brands. Focus of the company is on growing exports in North America, Europe, UK, Middle East, and several other APAC markets.

The company’s flagship brand Ashoka exceeded INR200 crores in revenue in FY23 and compounded at ~33.2% in previous 2 years. To help brand growth, it increased marketing spend significantly. This included a range of channels like digital, television advertising, sampling, in-store promotions, etc. Such efforts supported the company in improving its brand awareness and in capturing larger market share.