Apex Frozen Foods IPO Rating: Buy with 2 year perspective – JainMatrix

August 21, 2017

Apex Frozen Foods IPO, which opens for subscription tomorrow, has received a positive recommendation from JainMatrix Investments. In its report, which is available further down the page, the Bangalore-based research firm has outlined its reasons for positive Apex Frozen Foods IPO rating. Included among other factors is the strong grey market activity which translates into a premium of nearly INR25 per share or 14% over the IPO price band of INR171 – 175 per share. Here are some quick points from the research report.

Positives for Apex Frozen Foods IPO

Valuations based on peer group analysis look attractive.
With this IPO, Apex will get funds for a capacity expansion of 216% of processing facilities. Margin expansion can come from scale increase, VAP and backward integration into farming.

The Govt. particularly AP is supporting the aquaculture industry, providing growth and employment.
Shrimp exports are expected to continue their high growth over the next 5 years with massive global market potential and the increasing focus on healthy food consumption in developed economies.
The unofficial/ grey market premium for this IPO is in the range of Rs. 25. This is a positive.

Risks and Negatives for Apex Frozen Foods IPO

The current shareholders are dominated by the promoter and promoter family. Other IPOs have had PE participation as investors, but not Apex. Senior executives & directors too are dominated by them. For Apex to grow well over the years it will need to hire and develop professional managers.
The top two Promoters compensation has been high over the last 3 years. See Fig 2d. However at 22.2% of PAT for FY17 it is not excessive.

Production capacity utilization has declined slightly each of the last two years indicating operations may not be running as efficiently as they should.
While Apex was able to grow exports by 20% in FY16 in a down year, it is concerning that exports grew at only 3.82% in FY17 when overall shrimp industry exports grew at 16.2%.
Shrimp prices have seen volatile swings that can adversely affect Apex and the industry.

India has benefited from disease affecting shrimp production of Vietnam, Thailand, Indonesia, and China. As these countries emerge from the problem, they make take back market share from India.
The cultivation of shrimp is highly dependent on climactic conditions such as rain, and any sharp variation – excess as well as insufficient rains, will affect shrimp farming. It is also disease prone.
USA under President Trump is making an effort to lower trade deficits by raising tariffs on imports. This could squeeze margins for Indian exporters. U.S. has a trade deficit with regards to shrimp.

After many years of weakening, the INR gained against the USD by 7% in the last 10 months (from Rs 68.5 to 63.7). Our view is that it will be in 60-65 range in the next one year. This will affect Apex.

Overall Opinion and Recommendation

Shrimp exports is a sunrise industry with a small base, ample global and India markets, opportunities for value addition and branding. The environment is also conducive with govt. support.
Apex revenues and earnings have grown substantially over the last 5 years as the company added processing capacity, exports and backward integration into shrimp farming.

The IPO will enable Apex to more than double shrimp processing capability. This is a good opportunity as current capacity utilization is in the 80-90% range. With the exports focus, demand may not be a constraint, so Apex should be able to grow fast after new capacity commissioning.
Promoters and management are industry veterans with experience handling the business.
The main risks are high Promoter compensation and strengthening of INR against USD.