Hello Sir,

Hope you are doing well.

Here's an investment tip for you - It's a good time to look at stocks where currently there's demand pressure and the stocks have corrected sharply, but the company has already expanded capacity and no major CAPEX is lined up for the next few years.

Remember, this investing tip is for those with investment horizon of 3-4 years or more.

Coming back to the subject of this mail, today, we would like to bring to your notice Apex Frozen foods and share notes from its Q3 FY 23 con-call.

Since the last few years the Shrimp industry hasn't done very well and the stocks are down 60-70% from their 2017 highs.

In general, we like looking at companies which have done well in the past but currently going through a tough phase as a lot of times one can get good companies at cheaper valuations in such scenarios.

 

Before that, some good news for medium-long term investors

Individual investor participation in shares dropped to 34 months low in Jan'23. Google trends - Multibagger chart also indicating low investor interest

To know why this is good news if your investment horizon is 3-4 years - Click HERE

 

Apex Frozen Foods - Notes from Q3 FY 23 con-call

 

- General Points

  • The total shrimp sales in 9M FY'23 grew by 6% year-on-year to 10,193 metric tons, while the average realization grew by 10% year-on-year to Rs 798 per kilo
  • Within these sales for the nine months, our Ready-to-Eat segment registered a growth of 20% on a year-on-year basis from 1,912 metric tons in 9M of FY'22 to 2,305 metric tons in 9M of FY'23
  • Ready-to-Eat product share increased to 23% versus 20% with an upward trend, thereby validating our decision to expand the Ready-to-Eat capacity from 5,000 metric tons per annum to 10,000 metric tons per annum at our new processing plant
  • In Q3 FY'23, shrimp sales grew by 1% year-on-year on account of winter demand in key markets of U.S.A. and EU and supply constraints in specific sizes
  • Profitability was impacted on account of higher raw material costs, even as global shrimp prices were tapering off, as well as, as I mentioned, some of the higher cost inventories, which was there in earlier quarters

- Demand side

  • On the demand front, demand from our major markets continues to be subdued due to inflationary pressures that are being witnessed across the world and in developed markets
  • In specific with regard to the US markets, the inflationary pressures have caused a blip in demand as a general increase in costs has meant that some of it had to be passed on to the customers
  • However, Ready-to-Eat and Ready-to-Cook frozen shrimp as a category is growing
  • Specifically, about the US market and also our current status with regard to the retail chains, we have been getting positive responses already as they are looking for newer orders, for newer product requirements for which they are currently negotiating with us so that we can fill in the requirements for the upcoming quarters
  • With regard to the EU market, the business in the EU has been very steady. And in fact, we have improved on that front with our volumes, which we have picked up with EU. And we are very confident that we will be continuing to grow our EU market share in a much aggressive manner
  • We are still awaiting for the approval of the Ready-to-Eat products for the EU market as the status remains the same as it was for the past 3 years
  • Positive sign, of course, is that the EU health authorities have visited India, and we are hoping that now they are going to decide about approving newer facilities out of India in the next 1 to 2 months
  • With regard to the Chinese market, which was around 3% of our sales, with the opening up of the Chinese economy and the removal of a lot of COVID-related restrictions, we definitely see a revival in demand, and it is going to pick up much better over the next couple of quarters

- Supply side

  • We had challenges in procuring specific sizes of shrimp to meet our orders. This situation seems to be easing to a certain extent
  • We are hoping that the harvesting of the stock that has been sown in this season, the seed, which has been sown in the season will further add to the availability of desired sizes for our key markets from March 2023. Till then farm gate prices do continue to remain firm on the back of lower supply
  • With regard to the first crop, we have had basically all the farmers very enthusiastic with regard to their pricing, the farm gate pricing being very stable. And so, they have been stocking the field in a very aggressive manner, not only just in Andhra Pradesh, this time because of the areas in West Bengal and Orissa which did not go for second crop in the calendar year 2022, have also gone for an early first crop this year in 2023 compared to the earlier years
  • So all put together, the crop, stocking-wise, it has definitely been in a very good way by all the farmers because they are encouraged by the stable pricing, which is there, not only in the state of Andhra Pradesh, but across India

- Difference between Ready to Eat and Ready to cook

  • At any given point of time, we have around $0.50 per kilo difference on an average because it includes multiple sizes, but on an average, if you see as a general thumb rule $0.50 per kilo additional margin would be there

- RTE capacity

  • We are very confident that we would be utilizing the minimum of 5,000 metric tons from the US market alone, apart from that it will be split between the US and other markets, too

- Capacity Utilization

  • Currently for the nine months, we have utilized almost 47% of our total capacity
  • Our focus will be to increase the utilization more in the Ready-to-Eat and higher value products, even if it is at the cost of a reduction in capacity utilization of Ready-to-Cook so that we can, not only look at revenue, earnings of the company, but also the margin retaining, as well as expansion and margin growth
  • Overall, Ready-to-Eat, we are very confident that we will be looking at between 50% to 60% minimum in the first 6 months. And thereby, we want to push it up to 75% of utilization on Ready-to-Eat alone for FY '24

- Balance sheet

  • We have strengthened our balance sheet by reducing debt by almost Rs 43 crores in nine months FY'23 to Rs 122 crores as of 31st December 2023, which includes Rs 2 crores of long-term and Rs 120 crores of short-term borrowing

- Going forward

  • We believe that we have culminated the capability, building phase with the installation of the machinery of the additional 5,000 metric tons per annum, which is regarding the Ready-to-Eat
  • With no major capex lined up, the return ratios are likely to improve as it has in the nine months of the current financial year
  • We also have had some setbacks with regard to the higher priced inventories also along with the higher priced raw material, which we did mention, which was primarily sold in the Q3 of FY'23

(End)

 

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Disclaimer: This is not a recommendation to buy/sell Apex Frozen Foods. These notes are as announced by the companies on exchanges and only for the purpose of information and education.

 

Best Regards,

Ekansh Mittal
Research Analyst
Web: https://www.katalystwealth.com/

 

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