This Small Cap Packaged Food Co.'s Q1 Revenue Grew 37% YoY, Likely To Surge 12%, Rated Accumulate

Geojit, a leading brokerage firm, in its recent report on Apex Frozen Foods Ltd (Apex) has given the Accumulate rating to the stock of the company with a target price of Rs 364 apiece. Considering the brokerage estimated target price, the stock of the company is likely to surge 12% in 12 months.

Apex Frozen Foods Ltd (Apex) is a South India (Andhra Pradesh) based integrated producer and exporter of processed shrimps with a capacity of 29,240MT. Varroc Engineering is a small-cap auto components & equipment company having a market capitalization of Rs 5,303.22 crore.

In Q1FY23, the company's revenue grew by 37%YoY (3yr. CAGR of 1.4%). Improved availability of raw materials & shipping containers aided volume growth of 15%YoY, while realization grew by 19%YoY.

Stock Outlook

On 29 August, the stock of the company closed at Rs 325.20 apiece, the current market price. The 52-week low of the stock is Rs 260 recorded on 21 June 2022 and the 52-week high is Rs 365 apiece recorded on 8 August 2022. respectively.

Returns over the past 5 years

In the past 1 week, the stock gained nearly 4.35%/, whereas, in the past 1 month, it slid roughly 1.53%. In the past 3 months, it gave a 27.23% of positive return. In the past 1 and 3 years, the stock has surged 23.7% and 65.54%, respectively. It was listed on the stock exchange on 04 September 2017. Since then, it has surged by 53.32%. 

Improved availability of shipping containers aided volumes

Q1FY23 revenue grew by 37% YoY (3Yr CAGR of 1.4%). Volumes grew by 15% YoY supported by improved availability of both raw material & shipping container, while realization grew by 19%YoY aided by improved product mix, and rupee depreciation. The demand in export market has improved with re-opening of restaurants & caterings segment which had seen a sharp contraction during lockdown period. Higher export prices are on account of better demand, better product mix, and partially compensate for higher freight charge. Ramp-up in the newly added capacity along with higher contribution of value-added products will support future growth. We expect revenue growth of 22% CAGR over FY22E-24E.

Focus on value-added products to improve margin

Gross margin improved by 190bps YoY to 32.3% due to improved product mix, strong realization, and higher volumes. EBITDA margin improved to 5.1% Vs 4.1% YoY. The company has considered export incentive (Rs.13.7cr Vs. Rs. 6cr YoY) as part of other income in Q1FY23 (earlier as part of revenue). So, including export incentive, EBITDA margin would be 9.1% (7.9%QoQ). We believe the higher freight rates to gradually normalize as the container shortage issue is stabilized. The company will continue to benefit from the backward integration (hatchery). Shrimp export prices improved strongly to $10.4 Vs $9.1 per kg YoY. Ramp up in newly added ready-to-eat (RTE) capacity (5,000MT, expanding to 10,000MT by end of FY23) and receipt of export incentive under new scheme (RoDTEP) will improve margin going forward. The share of value-added products improved to 25% Vs 21% YoY.

Valuation & Outlook

Commenting on the valuation of the stock, Geojit said, "We believe the higher freight rates to normalise as the issue of shortages in shipping containers is stabilised. Industry demand outlook has improved given the re-opening of restaurants & caterings in export markets, along with strong shrimp export/farmgate prices. Expect Revenue/PAT to grow at 23%/73% over FY22-24E. Apex currently trades at 11x 1Yr Fwd P/E. We value at 10x (3Yr Avg=16x) on FY24E EPS considering the current higher freight costs and arrived at a Target Price of Rs. 364, downgrade to Accumulate rating due to limited upside."

Disclaimer

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