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Profitability recovers, aided by growth in realisation

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.355, factoring recovery in profitability, improving outlook and attractive valuation.

* Q2FY22 revenue grew by 2%YoY (+20%QoQ) supported by improvement in shrimp export prices. Volumes de-grew by 3.5% YoY due to current issues in sea transport but grew by 9%QoQ.

* EBITDA de-grew by 14%YoY and EBITDA margin declined by 250bps YoY to 13.7% due to higher export expenses and drop in export incentive but grew by 970bps QoQ from 4.1%.

* Margin impact is temporary and likely to recover when the container shortage issue gets normalized and will improve further with higher contribution from the ready-to-eat products.

* Industry outlook has improved given the re-opening of restaurants in export markets along with stable demand from retail customers and strong shrimp export prices.

* Currently, the stock trades at 11x 1Yr Fwd P/E (3Yr Avg=16x). We value the stock at 11X FY23E EPS, factoring the current logistic issues.

Current marine logistic issues impacted volumes

Q2FY22 revenue grew by 2% YoY (+20%QoQ) despite current sea transport issues aided by improvement in realisation (~6%YoY). Volumes de-grew by 3.5%YoY partially impacted by the non-availability of shipping containers which we believe is temporary. In export markets, demand is picking up with re-opening of restaurants & Caterings segments which had seen a sharp contraction during lockdown period. Export prices have also improved supported by better demand, better product mix and partially compensate for higher freight charge. Ramp-up in the newly added capacity along with higher contribution of value-added products will support future growth. We expect revenue growth of 24% CAGR over FY21-23E.

Margin recovers sequentially despite higher freight costs

EBITDA margin improved sequentially by 970bps to 13.7% on higher realisation but declined by 250bps YoY on account of higher shipping freight rates due to shortage of containers and drop in export incentive. We believe the shortage issue is temporary and stabilize in the coming quarters which will normalise margin as well as volumes. 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). Hatchery sales were at Rs.3cr in the quarter. The shrimp export prices improved strongly supported by recent pick-up in demand, improved product mix (21% in Q2FY22 Vs 15% in FY21) and partially compensate for higher freight cost. Ramp up in ready-to-eat products (5,000MT out of 20,000MT new capacity is readyto-eat) and receipt of export incentive under new scheme (RoDTEP) will improve margin going forward.

Valuation & Outlook

We believe the current issue of shortage in shipping containers is temporary and industry outlook has improved given the re-opening of restaurants & caterings in export markets along with strong shrmp export prices. Apex currently trades at 11x 1Yr Fwd P/E (3Yr Avg=16x). We value at 11x on FY23E EPS considering current uncertain situation in the short-term, arrived at a revised Target of Rs.355, and maintain Buy rating.

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