IGI Logo

Demand in the key export markets to improve…

* Apex Frozen Foods Ltd. (Apex) is a South India (Andhra Pradesh) based exporter of processed shrimps with a capacity of 34,240MT.

* We downgrade our rating to Accumulate with a revised target price of Rs. 255, factoring in the subdued demand in the major markets like USA. 

* In Q3FY24, revenue dropped by 34% YoY due to decreased total volumes (-26% YoY) and realisation (-11% YoY) despite the EU market showing a volume growth of ~50%YoY. 

* Drop in global shrimp prices along with deterioration in the product mix due to lower share of USA impacted realisation. Operating profit declined by 33%YoY. 

* Inventory surplus situation in the key export markets is expected to ease, which will support demand. Apex is currently waiting for the approval of the RTE (ready-to-eat) products for the EU market.

* We reduce our volume assumptions, factoring in the current demand slowdown. We expect revenue/PAT to grow at 17%/58% respectively over FY24-26E. We roll forward to FY26E EPS and value Apex at 14X FY26E EPS.

Weakness in US market take a toll on revenue.

Q3FY24 revenue declined by 34% YoY due to de-growth in both volumes and realisation. Total volumes declined by 26%YoY mainly due to demand weakness in the major markets. This is mainly attributed to the drop in sales to retail or supermarket customers due to excess inventory situation, which is expected to ease going forward. The company has taken steps regarding setting up a wholly owned subsidiary in U.S.A, mainly to support logistics and market development. However, volumes in EU market improved by ~50%YoY. The drop in global shrimp prices along with lower RTE product mix impacted realisation. Going forward, expected demand pick up in the USA markets will help to improve product mix and recover realisation. Further, any additional duty (anti-dumping duty) by the US on countries like Ecuador will also aid volumes.

Poor product mix and lower volumes impact margin recovery.

EBITDA de-grew by 33%YoY due to lower volume and margins. EBITDA margin recovery was impacted (5.7% vs 7.7% QoQ) due to deterioration in the product mix which is mainly due to lower share of USA, the major contributor of RTE products. At the same time, the share of EU in the overall sales mix increased to 36% in Q3FY24 (30% in 9MFY24 from 17% last year) which is mainly RTC (ready-to-cook) products, resulting in lower realizations and margins compared to RTE products. The company is awaiting approval of RTE products for EU market, for which the capacity has already been expanded to 10,000MT. The recent disruption in the Red sea is impacting the shipments and the freight costs have started to increase by ~20-30% as per the company. This will limit margin improvement. Export incentive for Q3FY24 was Rs. 7.8cr compared to Rs. 10.1cr YoY.

Valuation & Outlook

We expect the current excess inventory situation in the major markets to ease going forward and improve demand. Also, the GoI has a strong focus to support the industry and targets to double exports to Rs. 1 lakh crore. We roll forward to FY26E EPS and value Apex at a P/E of 14x to arrive at a target price of Rs. 255, and downgrade to Accumulate rating.

For More Geojit Financial Services Ltd Disclaimer https://www.geojit.com/disclaimer 

SEBI Registration Number: INH200000345