Apex Frozen Foods has entered the primary market on Tuesday, 22^nd August 2017, with a public issue of upto 87 lakh equity shares of Rs. 10 each, comprising a fresh issue of upto 72.50 lakh equity shares and an offer for sale (OFS) of upto 14.5 lakh equity shares by promoters, both in the price band of Rs. 171 to Rs. 175 per share. Representing 27.84% of the post issue paid-up share capital, at the upper end, total issue size is Rs. 152 crore, of which, OFS portion is Rs. 25 crore. Issue will close on Thursday, 24^th August and listing is expected on 4^th September, in the T2T segment.

Apex Frozen Foods is an integrated producer and exporter of frozen shrimp, with an aggregate shrimp processing capacity of 15,240 MTPA (9,240 MTPA housed under own processing facility at Kakinada, Andhra Pradesh while balance 6,000 MTPA capacity in-sourced from Royale Marine Impex Pvt. Ltd. at Bapatla, Andhra Pradesh). Of this 6,000 MTPA, 3,000 MTPA capacity was increased wef April 2017(till FY17, only 3,000 MTPA capacity was in-sourced). Company has a diversified customer base of food companies, retail chains, restaurants and club stores across US, UK and EU, selling under third-party brands as well as own brands (Bay fresh, Bay Harvest and BayPremium).

Of the total fresh issue proceeds of Rs. 127 crore, it plans to invest Rs. 90 crore to set-up new shrimp processing unit of 20,000 MTPA capacity at East Godavari District (Andhra Pradesh), to augment its total shrimp processing capacity by 125% to 35,240 MTPA. Rs. 8.5 crore has already been invested on this capex, which is expected to come on stream in FY19, as entire capex on expansion will be used till FY18, as per the RHP.

Coming on to financials, over FY14-FY17, revenue has grown at a slow and steady pace of 11% while PAT growth has been stringer at 22% CAGR. FY17 revenue of Rs. 699 crore was up 16% YoY, while EBITDA jumped 23% YoY to Rs. 56 crore (EBITDA margin 8.0%) from Rs. 46 crore (EBITDA margin 7.5%) in FY16. FY17 PAT was placed at Rs. 24.4 crore, up 27% YoY, yielding net margin of 3.5% and EPS of Rs. 10.17.

As on 31-3-17, company’s equity stood at Rs. 24 crore (FV Rs. 10) with net worth of Rs. 97 crore, resulting in BVPS of Rs. 40. The balance-sheet is quite leveraged with total debt of Rs. 106 crore and net debt also high at Rs. 102 crore, resulting in Net Debt/Equity of 1:1. Promoter holding, now at 99.90%, will contract to 72.08% post IPO.

At the upper end of the price band of Rs. 175, company will have Market Cap of Rs. 547 crore and EV of Rs. 650 crore. On estimated FY18 PAT of Rs. 32 crore (assuming 32% PAT growth as additional 3,000 MTPA capacity insourced from April 2017), the PE multiple works out to 15x on current year earnings, and 17x on historic FY17 earnings. On estimated FY18 EBITDA of Rs. 70 crore, EV/EBITDA multiple is 9.3x, which was 11.6x for FY17. When additional 20,000 MTPA capacity, to be funded from IPO proceeds, comes on board (likely in FY19), financial growth will improve drastically.

Larger peer Avanti Feeds, having shrimp feed capacity of 4,25,000 MTPA and shrimp processing capacity of 20,000 MT, clocked turnover of over Rs. 2,600 crore in FY17 (4x of Apex), posting superlative growth (30% on topline and 43% on bottomline in FY17) even on this large base, with superior margin profile (23% EBITDA margin in Q1FY18, 13% in FY17), having presence across India’s east and west coast, and RoE of over 40%. On a debt free balance sheet, despite ruling close to its 52 week high, Avanti Feeds has market cap is Rs. 8,750 crore, which leads to PE and EV/EBITDA multiples of 18x and 11x respectively, based on FY18E. On the other hand, Apex, with mid-single digit EBITDA margins, leveraged balance sheet, and smaller size of operations, is pricing its IPO at similar valuation multiples.

Smaller listed peer player Waterbase, having shrimp feed capacity of 1,10,000 MTPA and shrimp processing capacity of 4,000 MTPA, turnover of Rs. 332 crore in FY17 (approx. half of Apex), with FY17 EBITDA more than tripling to Rs. 25 crore, on a stronger balance sheet (only short term debt, with net debt to equity ratio of 0.2:1), diversification into domestic retail through brand ‘Fresh Catch’ and plans for further diversification into hatcheries and farm care products, is currently ruling at PE of 25x on estimated FY18 EPS and EV/EBITDA of 13x.

In comparison, Apex’s presence will be limited to East Coast, even post expansion, subjecting it to geographical concentration risks, as business is heavily dependent on rains and spread of diseases. Moreover, being a primary market offering, Apex has not left much on the table for prospective investors by pricing IPO very tightly.

However, although valuations are not adding much attractiveness, Apex Frozen has its own merits, given steady growth in financials, planned expansion (more than doubling capacity) and sector growth trajectory. Also, since Q1 is a seasonally strong quarter for the business (both Avanti and Waterbase having reported healthy margin expansion and robust bottomline growth for Q1FY18), stock performance should steadily head north over a period of time. 

In a nutshell, while valuations are not very attractive, high debt remaining a concern and seasonal nature of business are the key concerns, one can apply in the IPO only with a long term view, on account to handsome rise in processing capacities. 

Disclosure: No Interest.