Upcoming US Expansion Will Position 'Truly Indian' Brand For Future Success

Key Takeaways

• Strategic U.S. expansion and modern trade in India could drive significant future revenue growth for ADF Foods.
  
• Capacity expansion and branding investments aim to double revenue and improve margins, indicating strong potential earnings growth.
  
• Increased brand investment and U.S. market expansion could strain margins and growth, with freight costs and PLI policy uncertainties posing additional risks.

Catalysts

Engages in the manufacture and sale of various food products in India and internationally.

• The strategic expansion into the U.S. market for the Truly Indian brand, with listings in major retailers like Whole Foods and Stop & Shop, is expected to drive significant future revenue growth.
  
• Ongoing investments in ADF Soul and Truly Indian brands, including branding and senior management hiring, are aimed at enhancing market penetration, which should support future revenue growth and potentially improve net margins.
  
• The company's plan to expand into modern trade channels for ADF Soul in India in the latter half of FY '25, alongside existing e-commerce efforts, suggests potential for increased revenue and improved earnings.
  
• The advancement of the Surat Greenfield Phase 1 expansion, expected to support new and existing frozen food lines, indicates increased production capacity, which can result in higher future revenues.
  
• The company's commitment to doubling revenue by FY '27 and achieving high-teens margins, supported by capacity expansion and strategic investments, points to anticipated substantial growth in earnings.

ADF Foods Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ADF Foods's revenue will grow by 20.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.0% today to 13.8% in 3 years time.
• Analysts expect earnings to reach ₹1.4 billion (and earnings per share of ₹12.56) by about February 2028, up from ₹793.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.2x on those 2028 earnings, down from 37.0x today. This future PE is greater than the current PE for the IN Food industry at 22.4x.
• Analysts expect the number of shares outstanding to decline by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

ADF Foods Future Earnings Per Share Growth

Risks

• Increased investment in brand building and senior-level hiring has led to a slight decline in EBITDA margins, impacting net margins and overall earnings in the short term.
  
• Rising and fluctuating freight costs, although expected to decrease, have added pressure on operating expenses, which could affect net margins and earnings if not stabilized.
  
• Capacity utilization is currently at 70-75%, suggesting that without timely completion and successful integration of the planned capacity expansions, revenue growth targets might face delays, affecting future revenue projections.
  
• The expansion into the U.S. market for the Truly Indian brand is at an early stage, and any setbacks in market acceptance or distribution network expansion could adversely impact anticipated revenue growth.
  
• The company’s reliance on PLI (Production Linked Incentive) income as part of operating income could result in fluctuating revenues and profit stability if policy changes or delays in incentives occur.

Valuation

• The analysts have a consensus price target of ₹243.0 for ADF Foods based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹10.0 billion, earnings will come to ₹1.4 billion, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹266.9, the analyst price target of ₹243.0 is 9.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.