Stock Review: ADF Foods

 

ADF Foods' valuations look attractive. Investors looking for defensive stocks can consider the company

 

MUMBAI-BASED ADF Foods is a small-sized fast moving consumer goods company engaged into the production of ethnic Indian food. It sells foodstuffs like meal accompaniments, ready-to-eat foods under various brands such as Ashoka, Camel, Aeroplane, Khansaama and Soul. It is one of the most profitable companies in its product categories. With the acquisition of an American foods company and proposed roll-out of new brands in the domestic market, the company holds a promise for growth.

BUSINESS:

ADF Foods earns over 95% of its revenue from exports. It sells packaged Indian food to non-Indians and Indians staying abroad. It markets its products predominantly in the Middle East, the US, Europe and Australia.

   The company is also into contract manufacturing of private labels for retailers and multinational companies in the US. It earns 35% of its revenues from this business, which has a gross margin of 30-35%.

   ADF Foods had built the brand, Mother's Recipe, and sold it in 2002 due to cash constraints. In a bid to grab a pie in the fastgrowing Indian processed foods industry, the company is now test marketing its products under the brand name 'The Soul' in Mumbai and Pune before launching it nationally.

   In November 2010, ADF acquired US-based foods company Elena Foods. At a turnover of $9 million for 2009, Elena Foods is engaged in manufacturing ethnic Mexican food. ADF acquired loss-making Elena at a valuation of $5 million, a little over half its annual turnover.

   Growth Opportunities    Through Elena Foods, ADF will make inroads in the processed foods industry in the US. Elena makes and markets protein-based Mexican foods in the natural and organic category. ADF is scouting for another similar acquisition in the US. The launch of its new brand, Soul, in India is going to help the company participate in the growing processed foods industry here.

FINANCIALS:

ADF Foods is a cash-rich, zero debt company with consistent dividend payout. Its net sales have grown at a compound annual growth rate of 12% in the past five fiscals. However, its profit has grown at a much faster rate of 55% during the same period.

   Two months after acquiring Elena, ADF has already managed to stop its cash losses. It expects Elena's sales during the period November 2010 to March 2011 to stand at $4 million. The company has earned revenues of 100 crore in FY10. It is expected to close the fiscal year 2011 at revenues of 130 crore. It intends to become an 500-crore company in the next five years. Though historically the company's revenue has grown at a slow pace, the rate is likely to pick up. However, operating margin may continue to see downward pressure due to increased investment in brands and rising raw material prices.

VALUATIONS:

The company is valued at a little over one-time its sales of the last 12 months. Its stock trades at seven times its trailing 12-month earnings. These valuations look attractive for a branded business. Investors looking for the defensive space can consider this company which holds a promise.