Apex Frozen Foods IPO – Go for it!

IPO Rating – 62 (Excellent Investment)*

About the issue
Apex Frozen Foods Ltd. is coming with an IPO comprising of fresh issue of shares and offer for sale (OFS) to raise around Rs 148.77-152.25 crore. It is going to raise between Rs 123.97-126.87 crore by issuing 72,50,000 shares. While under OFS, promoters will offer 14,50,000 equity shares with face value of Rs 10 per share. The lot size consists of minimum of 80 shares. The issue will remain open from August 22 to August 24, 2017 with price band of Rs 171-175 per share. The company will be listed on both BSE and NSE.

Purpose of the issue
The proceeds of the Offer for Sale will be received by the Selling Shareholders and the company will not receive any proceeds from the OFS. Company plans to utilise the net proceeds from the fresh issue towards setting up a new shrimp processing unit with a proposed capacity of 20,000 MTPA at East Godavari District, Andhra Pradesh and other general corporate purposes.

Company Background
Apex Frozen Foods is a producer and exporter of aquaculture products. It supplies ready-to-cook products to a diversified customer base consisting of food companies, retail chains, restaurants, club stores and distributors of USA, UK and various other European countries. It sells variants of processed Vannamei shrimp (White shrimp) through its brands like Bay Fresh, Bay Harvest and Bay Premium. Its integrated operations include hatchery, farming, pre-processing, processing and exporting of aquaculture products.

This is an Andhra Pradesh based company with its processing facility located at Kakinada. It has capacity to process 9,240 MTPA of finished products. Another processing facility to process 3,000 MTPA of finished products is operated by it which is owned by Royale Marine Impex Private Limited located at Bapatla. The processing facilities are supplemented by cold storage facilities located at Kakinada and Bapatla.

Company’s total cultivable shrimp farming land as on date is 1,337.69 acres with 105.78 acres of owned land and 1,231.91 acres of leased land.

Industry Outlook
In terms of absolute seafood consumption, Asia ranks highest, followed by Europe and Africa. China, Indonesia and India are the top three seafood consuming nations accounting for 48% of total consumption. As per Crisil’s research report, global seafood consumption is expected to continue its growth trajectory, registering 2.5-3.0% CAGR between 2015-16 and 2020-21, to reach 170-175 million tonne.

China, India, Indonesia, and Vietnam are the key countries that have contributed to the growth of aquaculture production in Asia. These countries together account for 88% of total aquaculture production from Asia. In India, the production has grown by 5-6% over last five years. India’s share in global aquaculture production is expected to continue to grow. Favourable government policies for setting up aquaculture farms, depreciation of the Indian rupee, and spread of white spot disease in aquaculture farms in south-east Asia (one of the major producers of aquaculture products, especially shrimps) have helped India gain market share. By 2020, we expect India’s share in aquaculture exports to reach 10-12%.

After the government’s decision to allow cultivation of vannamei shrimp in 2009, aquaculture production in India has grown rapidly. It is easy to cultivate and commands high demand in the international market. Hence, farmers are investing heavily on expansion and development of new farms for its domestication.

Risk Factors
Aquaculture is an environment sensitive industry. Shrimps are vulnerable to diseases and viruses. Also, extreme natural weather conditions leading to drought or floods can affect this business. Soya DOC is a major raw material required for production of shrimp feed. The changes in global prices of Soya can affect the margin levels of the company.

Financial Performance

Company’s revenue has grown at a CAGR of 29.10% and PAT grew by 26.89% over last five years. The debt-equity ratio of the company for FY17 was 1.14x. The company paid dividend of Rs 1 per share for the first time in FY17. We expect the company would pay dividends every year if it continues to generate profits on consistent basis.

Valuation and Peer comparison
On the upper price band of Rs 175 with EPS of Rs 10.17 for FY17, company’s P/E ratio works out at 17.21x. The listed peers we have taken for comparison are Avanti Feeds Ltd., The Waterbase Ltd. and Zeal Aqua Ltd. We can see that Apex Frozen Foods is available at attractive valuations.



Our view
Company has shown strong growth in revenue and profitability on consistent basis. Valuations are also attractive as compared with its peers. Shrimp business is growing in India and company has high potential to expand its customer base outside India through exports. Vannamei shrimp’s demand would be growing in the upcoming years which would augur well for the company. We see the company would give decent returns on medium and long-term basis. We advise investors to SUBSCRIBE for this IPO.

 
*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment