Shrimp. Shrimp.Boom.Boom

The shrimp fever is catching pace.

After a lull period of approximately one and a half years, the market seems to be in recovery mode aided by higher demand in the USA and the European Union. Shrimp prices have risen by approximately 13-17% which bodes well for integrated model companies like Apex Frozen Foods.

Apex deals in two varieties of shrimps namely L.Vannamei and Penaeus Monodon more popularly known as White leg & Black tiger shrimp.  The company has a processing capacity of 29,240 MTPA, 1800 acres of farmland, and a breeding capacity of 1.2 to 1.4 billion SPF seeds. The company clocked volumes of 13,051 MT in FY19. The newly opened plant in Ragampeeta, Andhra Pradesh commenced operations in November and is currently producing for non-USA and EU markets as key approvals are awaited ( Expected by December end). This provides future revenue visibility. The company derives approximately 80% of revenue from the US market and its end customers include some of the biggest names in the retailing industry such as Walmart, Kroger, and Sysco. The management believes that optimum utilization of installed capacities, value-added ready-to-eat products, and foray into new markets of China, Canada, and the Middle East will be key drivers of growth going forward. The long term growth drivers include rising per capita consumption of shrimp ( 15 kg in 1995 to 21 kg in 2015-17), higher protein content, rapid urbanization, improving cold storage facilities, etc.

Taking into account global macros, India seems to be a big beneficiary of the rising shrimp demand and the ongoing trade dispute between China and USA which is the largest consumer of shrimp. Duties imposed on China have made Indian exports more competitive and viable in the US market. Indian exports of value-added products to the US registered a YoY growth of 40% in FY18. Apex Frozen Foods has been recognized as a Four Star Export house by the Government of India.

The Indian shrimp industry has risen to prominence in recent times. In 2009, India commanded a 6% share in global exports which in 2019 increased to 23%, making it the world's largest shrimp exporting nation, gaining market share from other major producers such as Indonesia, Vietnam and Thailand.

What is interesting that shoots of recovery were visible in Q2 results where the EBITDA margin expanded by 410 bps YoY and 830 bp QoQ on a 5.4% and 21.4% revenue growth respectively.  Improvement in realizations, savings in storage & processing cost, backward integration benefits, and a stable currency contributed to the margin expansion. The founding promoter of the company Mr.K.Murthy is a seasoned veteran in the fishing industry with 35 years of experience. Hence, management execution capabilities also played a big role in achieving economies of scale. Promoters own a whopping 72.6% stake in the company which reflects management confidence in the path going foward. The debt level of the company stands at a reasonable 0.3 times down from 0.9x in FY17.  The return ratios, ROE, and ROCE seem to have bottomed out and will trend upwards starting this fiscal.

The company came up with its IPO in late 2017 at an issue price of ₹175 and the stock reached all-time highs of ₹840, a whopping 480 % return in that year itself. It was during this time the shrimp prices peaked. Since then the stock has given up much of its gains and is currently trading around 250 levels. My full-year EPS estimate for the company is ₹24 (5% +-). Revenue and net profits are estimated to grow at a CAGR of 20% over FY19-21 going by the most conservative estimates. Hence the stock looks reasonably priced at CMP and investors should consider buying it in a staggered manner for the long term.

Note - This is not a stock recommendation. Consult your financial advisor before making any investment decision

By Mudit Bhura