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Muted demand, revival expects as inflation pressure eases

Apex Frozen Foods Ltd. (Apex) is a South India (Andhra Pradesh) based integrated producer and exporter of processed shrimps with a capacity of 29,240MT.

* We revise our target price to Rs. 250 (from Rs. 364 earlier) to account for weak demand and higher cost but maintain an Accumulate rating due to recent sharp correction in stock price.

* In Q3FY23, revenue growth was flat YoY due to muted volumes and a lack of specific size raw materials.

* Margins were impacted by higher raw material costs along with decline in export prices, but rupee depreciation aided stable realization YoY.

* Margins are expected to improve with more value-added products, as Apex has expanded Ready-to-Eat (RTE) capacity to 10,000MT from 5,000MT and expects commercial productions in Q4FY23.

* Stable farm gate prices support supply, while easing inflationary pressure will improve demand. Apex is currently waiting for

the approval of the RTE products for the European market.

* We reduce our volume assumptions and expect Revenue/PAT to grow at 15%/45% respectively over FY22-24E. We value Apex at 10X (3yr. Avg) FY24E EPS

Flat volume growth due to muted demand in key markets

Q3FY23 revenue declined by 1% YoY due to muted demand in key export markets such as USA and EU along with supply shortage of specific size raw materials, while realization was flat YoY. Rupee depreciation supported realization though the export price in dollar declined. As inflationary pressures ease, demand in key export markets is expected to normalise. Future growth will be supported by an increase in the newly added capacity as well as a greater contribution of value-added products. The company is waiting for the approval of the RTE products from the new capacity for the European market. Currently, Europe contributes only 18% of total revenue. We expect revenue growth of 15% CAGR over FY22E-24E.

Focus on value-added products to improve margin

Gross margin declined to 24.9% from 26.8% QoQ/ 31.6%YoY. EBITDA margin declined to 1.1% Vs 4.1% QoQ and 8%YoY. Including export incentive, EBITDA margin would be 5.6% (vs. 8% YoY). The company has considered export incentive as part of other income since Q1FY23 (earlier as part of revenue) and export incentive improved to Rs.10cr Vs. Rs. 5cr YoY (Rs.35.8cr in 9MFY23). The company will continue to benefit from the backward integration (hatchery). Volumes are expected normalise as the inflationary pressure eases. This, along with the ramp up in newly added RTE capacity (5,000MT, expanded to 10,000MT and commercial production is expected in Q4FY23) will improve margin going forward. The share of value-added products improved to ~23% Vs 20% YoY

Valuation & Outlook

We expect the demand in key export markets to normalise as the inflationary pressure eases and the supply side concerns on raw materials are expected to be taken care of by the upcoming harvest season given stable farm-gate prices for farmers. Expect earnings to grow at 45% CAGR over FY22-24E. Apex currently trades at 9x 1Yr Fwd P/E. We value at 10x (3Yr Avg=10x) on FY24E EPS with a target price of Rs. 250, and maintain Accumulate rating.

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