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.
Read Also: Apex Frozen Foods IPO Review: Frozen delight
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.
Apex Frozen Foods IPO Rating: BUY
Opinion: This IPO offering is rated BUY. Investors can invest with a 2 year perspective.
Read JainMatrix Investments’ full report on Apex Frozen Foods IPO rating here