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The reopening of markets provides a positive sign...

Apex Frozen Foods Ltd (Apex) is an integrated producer and exporter of processed shrimps in Andhra Pradesh with own capacity of 29,240MT.

* We maintain Buy rating with a revised Target of Rs.350, due to gradual recovery in volumes, improving outlook and attractive valuation.

* Q4FY21 revenue grew by 29%YoY (+16%QoQ & -1%YoY for FY21) supported by recovery in volumes & firm shrimp realisation.

* EBITDA grew by 42%YoY and EBITDA margin improved by 90bps YoY to 10.4% supported by volumes and better product mix despite reduction in export incentive.

* Margins are likely to improve further on the back of higher contribution from ready-to-eat products. Apex has recently added capacity of 20,000MT out of which 5000MT is for ready-to-eat.

* Expect gradual improvement in volumes given the re-opening of restaurants in export markets, easing of transport situation, and better supply while strong prices & rupee depreciation will support realisation.

* Currently, the stock trades at 9x 1Yr Fwd P/E (2Yr Avg=14x). We value the stock at 9X FY23E EPS, factoring the current uncertain situation.

Healthy volumes in challenging conditions

Q4FY21 revenue grew by 29% YoY aided by recovery in volumes along with firm realisation despite reduction in export incentive. In export markets, demand from restaurants & catering saw a sharp contraction which was partly compensated by higher demand from retail segment.

Now, with re-opening of institutional segment, demand is likely to pick up. Export prices have also improved recently supported by better demand. The ramp in the utilization of the newly added capacity along with higher contribution of value-added products will support future growth. We expect revenue to grow at 34% CAGR over FY21-23E.

Margin improves on better product mix and firm export prices.

EBITDA margin improved by 90bps YoY to 10.4% (6.9% QoQ) aided by better volumes, improvement in product mix, firm realisation, and lower staff expenses. However, other expenses continued to be on higher side mainly on account of higher shipping cost. Increase in working capital on account of higher than normal level of inventory is adding to interest cost while higher depreciation due to commissioning of new plant and lower other income resulted in PAT de-growth of 8%YoY.

Now, with gradual ease in transport situation, other expenses will normalise gradually. The company will continue to benefit from the backward integration (Hatchery) and from the discontinuation of the leased plants due to addition of own capacity (by 20,000MT). The shrimp export prices are also witnessing improvement supported by recent pick up in demand and to compensate higher freight cost. Ramp up in ready-to-eat products will improve realisation and margin further going forward.

Valuation & Outlook

Expect gradual improvement in demand given re-opening of restaurants & caterings in export markets, easing of transport situation, and better supply while strong prices & rupee depreciation will support realisation. The stock currently trades at 10x 1Yr Fwd P/E (2Yr Avg=14x). We value at 9x on FY23E EPS considering current uncertain situation in the short-term, arrived at a Target of Rs.350, and maintain Buy rating.

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