18th June 2008

ADF Foods Limited – Investment analysis

Market capitalization: Rs. 760 million. Stock Exchange: Bombay Stock Exchange. Cur price: Rs. 43.00
Pro forma valuation based on the financial results for the period Analyst: Dhananjayan.J,
ended 31st March 2008. dhanan12@yahoo.com

 Price ratio Business: ADF Foods Ltd manufactures

Price to earnings 9.3x and distributes Indian cuisine. The
Price to free cash flow 21.6x company supplies its products to food
Price to tangible book value 1.0x retailers located in India and elsewhere
 Enterprise value ratio throughout the world.
EV/Sale 0.8x
EV/EBITDA 4.0x Investment highlights
EV/EBIT 5.5x
EV/(EBITDA-Net capex) 8.3x 1. Recent insider buying’s. In the
 Debt and interest coverage month of March 2008, when
Net debt/EBITDA – (0.4)x – net cash market went down
EBIT/Interest expense 4.8x considerably, we found there
 Yield ratio were some insiders buying
Dividend yield 4.7% this stock from the open
Earnings yield 9.2% market.
Notional FCF1 yield 4.1%
 Operating margin 2. The company has net cash
EBITDA 19.2% balance of Rs. 745 lakhs. This
EBIT 13.8% gives the effective price for
EBT 11.2% the stock as Rs. 35.75 against
Net income 8.4% Rs. 43.00.
Organic sales growth 13%
3. Both top and bottom line has
 CAPEX Vs. Depreciation: Capital expenditure is more than considerable growth rate and
Depreciation. Company is expanding its factory in Nashik and
Nadiad. Also it has planned to set up a factory in Surat for which also improvement in operating
the company is searching for suitable land. So for the next two margin.
years capital expenditure would be more than depreciation.
(Please refer MS Excel enclosed). 4. Potential growth opportunities
in European countries like UK
where NRI population is more.
Other unexplored areas are
Middle East, Australia, and Canada where company has presence.

5. Company has well recognizable brands like Camel, Aeroplane and Ashoka. In addition to
that, it is also developing another brand called “Khansaama”. All these brands are popular in
UK not in India.

Peer group comparison:

Based on the nature of business and market capitalization of ADF Ltd, we believe that the comparable
public companies are Kohinoor Foods Ltd and Himalya International Ltd. Unfortunately we don’t have the
full consolidated report of Kohinoor Foods Ltd. Also it is very big in terms of market capitalization. Hence
we believe that Himalya International Ltd is the exact comparable for the underlying stock.
 Himalya Kohinoor Foods
International Ltd Ltd
Price earnings 7.7 8.0
Price to notional FCF1 9.6
Price to tangible book value 1.3
EV/Sales 1.5
EV/EBITDA 5.3
EV/EBIT 6.2
EV/(EBITDA- Net Capex) 7.1
Net Debt / EBITDA 1.2
EBIT / Interest expense 6.1
Dividend yield 0.0% 1.1%
Earnings yield 13.0% 12.4%
Notional FCF1 yield 10.4%

We believe comparing EV ratios will make sense as the underlying business has net cash balance in their
Balance Sheet. We believe that ADF Ltd is comparatively undervalued than Himalya Foods Ltd.

Industry outlook & Company’s position

Based on the management opinion in MD & A of annual report March 2008, Indian food processing
industry has good future lying ahead. India being the 2nd largest food producers after China, Indian ethnic
goods always have very good demand in Western world. This is evident from the fact that the company
can grow its top line for the last two consecutive years by more than 10% as well as improve its margin
considerably. Uniqueness in Indian ethnic foods like pickles, chutney, spices, etc is the edge the company
has over its competitors. The confidence of management on their industrial position can be seen by their
expansions of factory in Nasik and Nadiad.

Risks
1. Currency risk: 96% of top line is earned through exports. So when rupee appreciates against US
dollar, company may lose substantially both in terms of top and bottom line.
2. Weather: Most of the raw materials used by ADF are agricultural products. If Indian weather
condition is adverse, it would affect the business severely.
3. Inflation: As a global scenario, rise in crude oil price would affect the cost of living in the country.
This would impact the price of agricultural products severely. This would affect the 8% domestic
sales.
4. Stock market risk: The trading volume of the stock is historically low except in last fortnight.

Conclusion
Based on enterprise value ratios of its peers, we believe that the company can be valued at Rs. 60/- per
share that gives a margin of safety of about 39% to its current market price.

Note:
I own 60 shares of this company. I bought this stock at Rs. 34.50 in the recent market fall.