Apex Frozen Foods Limited (APEX) Earnings Call Transcript & Summary

INR 129 crores. Okay. Sir, last question from my side. About the Chinese market, in-between at least in December, there was a fear going around in the industry that many shipments which have gone to the Chinese market, they were refused and the discount on the prices were asked by the Chinese importers and indeed exporters because they don't have a presence in the domestic market as a domestic back office in China. They were posed to take these cuts, haircuts, you can call them on their absolute value per container. Is that -- was that -- was there any [ shoot ] to that? And how is the situation now?

Well, that situation was there. But, of course, our company, as you know, we are presence in the Chinese market, even though it is in the low -- around very low percentage. But we didn't have much of an impact because of that. But yes, our company also did give a little bit of discounts in [indiscernible] shipments, but majority of the shipments were done without any discounts. And subsequently, the business has resumed to normalcy. And currently, the Chinese importers are continuing to buy at the current market prices without any issues or problems with regard to receiving of shipments and paying of payments as far as -- over the past -- since January or towards the end of December, there has not been any issue actually. The issue which you are referring to is more pertaining to the middle of Q3 and early part of Q3, which was a fact. But our company did not get much affected with regard to the customers with whom we are dealing with.

[Operator Instructions] Next question is from the line of Ronak from Equirus Securities.

Sir, my specific question is regarding the -- you have said that the farm gate prices are increasing, whereas we can see that the international prices are still weak. So can you give some guidance on the gross margins in upcoming 1 or 2 quarters or in mid- to long-term, how you are seeing that? Any ballpark number, sir?

Actually, the farm gate prices have increased from a very low -- when it went to a very low pricing towards the end of Q3 and early part of Q4, but that has stabilized. So we -- what we meant was that the pricing of the -- farm gate pricing was not significantly increasing based on -- I mean, of course, there is a difference -- margin difference between what the international pricing is on some products. So this is the time where it makes sense for companies like us to focus more on definitely, our game plan of doing more of value-added products definitely helps us out because doing commodity products doesn't really support with these increased farm gate prices. But definitely, they have increased from a low to -- from a very low point, which they have gone to. And now they have stabilized to a level that they're very enthusiastic prices for the farmers also to go for good seeding. With regard to gross margins, specifically, we don't expect it to be significantly dropping. And compared to our earlier quarters, and it is going to maintain around the same levels.

Okay, sir. Got it. And sir, second question is regarding -- sir, in latest budget, the government has announced some policies. So are we seeing any specific benefits which can be flown in to the [ business ] of our company?

Well, the budget announcement is, of course, specifically were mainly for duty concessions with regard to import of inputs, both at the hatchery and feed industry, shrimp feed industry. So definitely, those benefits will impact in the costing of -- in a positive manner, it should be affecting, to that extent. It is not that all the inputs which are used in the hatchery and the feed sector, even though we are not into the feed, but on a general basis, it's not that all the inputs are imported. So it's not that the reduction in duties will have a major impact, but definitely to that extent of the usage of those feeds or sorry, the fish meal [indiscernible], which is imported from overseas to the extent of their usage, definitely, it will help in reducing the cost of the feed and seed, and we are quite positive that it is -- it will definitely help the primary producers going forward. But as we -- as I mentioned, it is not that most of -- all the costs involved in the hatchery in the feed are not at a concession. It's only the imported inputs, which are, of course, of a minor percentage. Definitely that much impact will be shown for sure in the -- we are positive of that point as they take effect. And as the newer consignments of such inputs make into the country, definitely, it will help in reduction of cost and thereby such cost savings, unless there is any other adverse effects, but any such cost savings, basically, we are hopeful will be passed on to the primary producers or farmers, and they will benefit out of that. And thereby reduce, we can remain competitive in the global market when such costings are passed on to the customers and consumers thereafter definitely.

[Operator Instructions] Next question is from the line of Varun Ghia from Dimensional Securities.

Sir, I have 2 questions. One is, if you could provide some guidance on the utilization levels for the next year given the overall demand scenario? And secondly, if you could provide a makeup of revenues customer-wise, like from restaurants, retail chains and distributors?

Yes. Sure. With regard to the utilization part of next year, as we are nearing completion of our addition of our Ready-to-Eat line -- sorry, ready-to-cooking line towards the end of this month, and we are starting our trial production towards the end of this month, and we'll be taking it up more aggressively in March. We are -- currently for the 9 months, of course, we have utilized 47% of our capacity -- total capacity. But the thing is now with this added line, we are quite positive that we will be focused more on Ready-to-Eat products, and we will be utilizing at a much higher rate of the Ready-to-Eat capacity of 10,000 metric tons, which will be completely available from the middle or rather, let us say, for the entire -- from the -- beginning of the financial year FY '24. So we are quite positive of utilizing them. And our focus will be to increase the utilization more in the Ready-to-Eat and higher value products, even if it is at the cost of a reduction in capacity utilization of Ready-to-Cook so that we can, not only look at revenue, earnings at the company, but also the margin retaining, as well as expansion and margin growth. So we are quite positive, and we are looking -- we are also very aggressive about the upcoming crop. So definitely, we are positive with regard to the capacity utilization, which will be not just split. Of course, U.S.A. will remain our major market to support such capacity utilization. But however, we will significantly be increasing our other market shares, too, EU, as well as other markets, not just China and other markets also. So we are quite positive about it with regard to these changes, which are being done in our infrastructure within our 2 facilities, main facilities, as well as the supply side scenario. Of course, completely supported by the customers -- our existing customers, as well as new customers, which we are bringing them on-board from other markets, too, which we are expecting them to conduct business with us within the next 1 to 2 months, which we are quite positive. So overall, Ready-to-Eat, we are very confident that we will be looking at between 50% to 60% minimum in the first 6 months. And thereby, we want to push it up to 75% of utilization on Ready-to-Eat alone for FY '24, especially. We are quite positive on that. So even as I mentioned, even if it is at lesser utilization of Ready-to-Cook because in the whole interest of the company, we feel we should utilize more of the Ready-to-Eat. So that is on that part. But with regard to your second question was also on the...

Makeup of revenues customer-wise?

Customer-wise, major -- of course, major market share was from the U.S., as you know. But within both retail and food service, currently, we are -- in this year, FY '23, we have been having a split between both retail and food service customers, food service, mainly restaurant chains, of course, through their distributors. It was almost half and half. This is mainly in the U.S. market. But in the EU market, the business what we do to the EU, majority has been retail, almost 70% has been retail. I think around 30%, 35% only has been with food service in the EU market. But in the U.S., it was half -- around 50% divided. And this year, we feel we are confident based on the inputs what we got so far from our customers that we will be able to increase our retail business much further this year. So we are -- of course, we wouldn't -- we don't -- we are not prioritizing one over the other, but definitely, we are putting in our efforts to improvise the overall volumes spread between the retail channels, as well as the restaurants -- I mean, sorry, food service sector also. So we are doing our efforts to increase on both sides. But on the EU side, we are somehow more positive or more inclined towards retail. As you know, in markets like China, it's all commodity-based, there is -- it mostly goes into distribution. But the U.S., we are putting in efforts for both. So we are -- maybe for some parts of the year, depending on the seasonal consumption, retail could be much higher. But during summer when the sales are more -- through the restaurants, food service also picks up. But overall, it is split between both of them for us, for our company, specifically.

Okay. And by when do you see the EBITDA margins going back to the 11%, 12%, 12% plus?

Well, as we have -- as we increase our production capacity, utilization of our production capacity, and as we see the demand also picking up, especially -- and we are pretty confident that the inventories, which have been definitely high in number as the destination, and as they are being consumed, we are quite positive for the summer -- upcoming summer. Definitely, we are expecting prices to be more stable. Of course, even though the product supply is also there, but mainly the inventories as they ease out, I think we expect another 3 to 4 months. But the summer of U.S.A. and European markets definitely is a good -- will give a boost for sure for the consumption in general, and we are expecting demand also to pick up. So thereby, as the pricing also goes up and since we are -- our company specifically focused on the Ready-to-Eat and higher-value products, we are pretty confident in the middle of next year, we should be able to do it as we push more of those products, especially. So we are expecting that. And as we focus more on that, I'm pretty confident we can maintain it on the overall average margins, like you said. But it depends how much -- how soon we are able to move most of our share through Ready-to-Eat and more through value-added higher-value products more towards the middle of the next year.

[Operator Instructions] The next question is from the line of [ Bala Murali ], an individual investor.

Sir, I would like to ask a question regarding this Ready-to-Eat segment. So this quarter there has been a significant drop in the volume.

Mr. Bala Murali, may I request you to speak through the handset, please.

Yes. Regarding the Ready-to-Eat segment. In this quarter, we have seen a significant drop in the volume, sir. So going forward, how it will be and how -- even the upcoming [indiscernible] coming? So is it possible to increase the volumes?

No. Yes. In this quarter, the Ready-to-Eat volume was mainly reduced, which I had -- we had explained to the earlier callers also is mainly because of the shutting down of the capacity of the company for a period towards the end of Q3, as well as part of Q4 because we were expanding our lines of the Ready-to-Eat. We cannot be running the existing facility while the expansion was happening, so because of safety norms and to maintain hygiene in the production. So we had to shut it down, and that is one of the reasons why we could not really produce Ready-to-Eat products in a significant manner in Q3, but we see it definitely increasing now in Q4 as things got all set up. And definitely, it will be increasing from Q4 and Q5, we should be doing much more than what we did -- sorry, I'm very sorry, Q1 of FY '24, we are very confident that we are going through much more production than what we did in Q1 of FY '23 for sure. So we are going to increase utilizing both the total capacity of 10,000 metric tons when it is available fully -- completely available towards the -- in the month -- from the month of March FY '23.

A small follow-up on that, sir. So, in the beginning of the Q4, the existing capacity was under down. So is it operational now?

Yes, it is. Now it is operational. As I said, towards the end of Q3 and beginning of Q4, we have had to do partial shutdown as the new capacity was being installed. So that definitely created a handicap for some period with regard to Ready-to-Eat production. That is one of the primary reasons where our Ready-to-Eat products sales and even before that, the production also got a little bit handicapped. But that's been restored. And this year and -- sorry, this quarter, we are getting it back to normalcy. Now it is restored. And towards the end of this quarter in March, we'll have the entire capacity by 5,000 plus 5,000, 10,000 available completely.

That's very helpful, sir. And one more thing, could you please quantify the margins for the Ready-to-Eat and Ready-to-Cook, what could be the difference? Or if we can provide individual margins, would be very helpful.

No, yes. But on an average, we look at it approximately in a normal case, it will be between -- anywhere between $0.50 to $1 per kilo. But in a subdued demand, even if it comes down, it is around $0.25 to $0.30 per kilo minimum difference will be there between Ready-to-Cook and Ready-to-Eat. So at any given point of time, we have around $0.50 per kilo difference on an average because it includes multiple sizes, but on an average, if you see as a general thumb rule $0.50 per kilo additional margin would be there.

And one more thing on the import duty, which was reduced on feed raw material. So it is mainly beneficial and it will be absorbed with the primary producers and it's beneficial to them. Is it -- we can also have any benefits from that by having some...

When it is benefiting the primary producer, it is definitely encouraging them to look at good farming and also increasing the production, hopefully, and that definitely helps the company also in one way so that we could have a stable supply situation.

And regarding the supply, sir, as I see on the ground, most of the primary producers have aborted farming recently because of these lower prices of shrimp and higher feed cost. How is it now on ground?

The farm prices were stabilized. They have increased, the farm prices are very encouraging to the farmers, and they have been stocking good for the past 45 days. They are continuing to stock even as we speak. So -- and from all across all states, not just Andhra Pradesh, but Orissa, Bengal, everywhere they have been doing it. And as I said, the pricing is -- current pricing is very stable and it has been encouraging for the primary producers or the farmers to go for stocking.

And lastly, on this incremental revenue from this 5,000 tonne additional capacity of Ready-to-Cook. Could you please give any guidance on that?

The incremental revenue for -- as a -- [Audio Gap]

Sir, can you hear us?

Yes, sorry. Hello?

Yes, sir. Go ahead.

Yes. So the increase in revenue with regard to that, if we utilize the 50% of the additional capacity, approximately that gives us additional around INR 200 crores of revenue on export sales alone, if we are utilizing in the first year. And thereafter, it is going to be picked up much higher for sure. But we see an incremental revenue of minimum of INR 200 crores only to that aspect.

[Operator Instructions] The next question is from the line of Lokesh Maru from Nippon India Mutual Fund.

I wanted to understand from you the trajectory for farm gate prices on one hand and the realizations in the U.S. on the other hand, as in, if you could provide some trajectory for last 3, 4 months, how things have been panning out on this pricing front for maybe as an example, it could be 60 pieces per kg for that category of shrimps? Could you help with some numbers to understand what was the scenario back in August? How it turned out? What was the bottom of these prices on farm gate side and the realizations and maybe anywhere in October and eventually now where they are? It would just help to understand the scenario a bit.

Yes. On the -- I think specifically on -- like on the specific sizes which you said of how the pricing moved on with regard to the raw material over the past 3 to 4 months and as well as the sale prices. I think we would provide that information off-line, if that's okay. We'll compile it and provide and also we'll make it available along with the -- in the transcript, if that's okay. We'll provide it to you off-line.

Sure, sir. Another question is on viability. So there is -- on the farmer side, there is this aspect of prices moving input costs for them moving up. So from here on forward but like there is a basic understanding that once the point is that, there is a stickiness of a farmer to stick to producing shrimp [ in central ]. So going forward, how do you see the industry panning out? What are the levers which could play out to make this ecosystem sustainable, right, in long term rather than -- so realizations, like we see historical realizations, they are quite sticky at $9, $10 range, right? It's only once in some 4, 5 years I didn't see that going up due to some unforeseen supply side event, right? So if realizations are the same and input costs to go up in a way like feed players keep -- could increase prices due to their input prices and so on. How do you see the industry stabilizing in medium-term, short-term? And what will drive this industry towards a sustainable growth path in long-term in your opinion? Yes.

First thing is, not every cost at the farm is attributed to feed and feed cost alone on the collection side, on the raw material side because there are also costs related to land lease, electricity costs. And last but not the least, one of the major factors, which plays a role in the cost of production at the farm is also disease because if the survivability of the shrimp -- the product in the pond is low, naturally the cost would accordingly be going up on a per kilo basis, whereas if the survivability is reasonable or it is good as per expectations, definitely, the cost of production is much lower. Even in increased feed costs, for example, since you mentioned feed. Now, as I mentioned to few other callers about the indirect benefit which the farmers get is in the reduction of those duties of the inputs, even though those inputs are not the major components in the feed manufacturing or the seed manufacturing, they are part of many inputs. Definitely, that cost could be passed on subject to overall conditions, they could be passed on and cost reduction could be foreseen among the farmers as the new reduced price inputs -- the newer inputs coming to the country. That is one part. The main part is land lease has increased significantly over the past few years. And also, as I said, as the survivability reduces or the mortality increases because of disease, that plays a very key role. And currently, of course, the [ govern ] body, which are also very focused on this sector are also looking at the business management and disease control programs. Hopefully, they yield some results, if not in the short term, but at least medium term and thereby, giving us some guaranteed results -- means, guaranteed crops were -- with the expected survivability is being maintained definitely brings down our cost of production at the farm level, thereby, keeping India's shrimp products to be more competitive across the world. And at the same time, getting to your question about $9 to $10 on an average, that has also got to do with how much of products we are doing of the lower value or rather lower value means it made in the lower sizes. It made in the small sizes. It can also be the type of products. If our company's production was dominated by at least 20% to say commodity markets, I don't want to mention any specific case in that commodity markets where the low product value is very low. It wouldn't even have been $9 to $10, it would have been even much lower, the average value. So it depends on how much we are doing. That technically plays a role. So on the costing front, as I said, the major factor, which plays that the production level is also survivability and not just the feed, but also electricity, which is there, lease rate which is there, land lease rates, they all play a role. And added to all this, finally, if the survivability doesn't happen, definitely, it increases the cost of production to the farmer beyond INR 250, INR 300 per kilo. I'm just giving an average number. But typically, if the farm is targeted for a cost of production of around INR 200 to INR 250 and in a market scenario where the pricing is INR 300 to INR 350 or -- then definitely that margin also is maintained at the primary producers' level, and it is -- it will be continue to be encouraging for them to continue production because it is definitely a worthwhile activity for them when they get good results. So that is the situation with regard to the supply side. Now, with regard to our products, as I mentioned, with regard to the products what the company produces, how much percentage we are able to diversify more into higher value, definitely increases our sort of $9 to $10, it could also be increasing it to $10 to $11 per kilo, $11 to $12 per kilo, depends on how much percentage of our production or how much percentage of our sales is being focused in that direction definitely. And even, as I said, if we continue to have our main focus on commodity, it will even come down to $8 or $8.5 on an average. But the more we do, definitely, we are going to increase our average realization price for sure to make it higher. So that is both on the supply side, it is a costing, which is greatly influenced by the survivability -- or sorry, or mortality of the shrimp in the pond primarily because of disease. And, of course, government is also focused on those aspects. And on the sales side on the market -- on our sales side for our company and also it is mainly dependent on the -- how much volumes of higher-value products, which we are producing, which we have been advocating since many years. We have been telling the more we give a push for such products, the better it should be for us for any company as such.

So the new crop, which farmers have gone for in January, the expectation basically is for survivability to go up. Is that the farmers would have thought lesser per square meter? That is the expectation going forward, right?

That was the expectation when they were planning to stock. But we heard mixed news. We didn't hear everybody reducing their stocking number. We have heard mixed news from different areas. Some of them, they felt very encouraged with the increased raw material pricing and they just went ahead with their older practices we heard. We also heard some areas definitely have made a huge correction in the amount of stocking which they were doing in their ponds, and they reduced their stockings and thereby, their idea is to grow to larger sizes, and rather have low biomass and lesser risk and lesser cost, thereby, lesser cost and thereby, have a better survivability. But yes, it depends on area, different areas, even in one state or one district, the strategies are different for different farmers. That's why I said we have had mixed news received -- I mean, different types of -- some changed their strategy, some went ahead with their older methods of farming, they did not change their strategy. So it is a different scenario. So we should see how each one of them is -- because weather also plays a good role. Typically, around this year, it is -- the weather gets hotter, but warm rather, but it is different now. So we should see they are having good growth so far. The feedback that we received so far. And of course, there are some more -- good number of farmers who are still continuing to stock. So we should see how they will be treated with the weather, especially in the month of March and April, we should see how it goes then.

Thank you. Sir, the line for the participant dropped. [Operator Instructions] Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Karuturi for closing comments.

Yes. Thank you. Thank you, one and all, for making it to our quarterly call of Q3 FY '23 and 9 months FY '23. And for any other queries, please definitely direct your e-mails to ir@apexfrozenfoods.com. And also you may always reach out to Stellar IR Advisors. Thank you very much and have a good day. Thank you.

Thank you very much. On behalf of Apex Frozen Foods Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.